

Ask HN: The Price is Right.. or is it? - mdoyle

Hi, I am relatively new to HN and really like the quality commentary that the community provides. So here's my first question.<p>I realise this question may have already been asked, but we are launching a new product which will be the first product we are attempting to monetise. Ideally we want customers paying for the service on a monthly basis. Our first question was simply 'how much should we charge per month' which now feels rather naive without making other considerations. We have therefore started discussing pricing strategy.<p>I am particularly interested in how other HN'ers have tackled the launch of their product in respect of pricing. Has it been a gut feel type of thing, or have you invested a significant amount of time in creating a pricing strategy and, for example, related the price of the service to the cost of the infrastructure and the expected number of customers? Thanks in advance for your thoughts, suggestions or otherwise.
======
petervandijck
Not knowing what the product is, you should charge 19.99$/m.

6$/m is too low for almost all products, you won't be able to effectively
acquire customers with that. Remember, once someone gets to the point where
they pull out their credit card, the difference between 6$ and 9.99 or even
19.99/m is almost negligable (although there is a difference between 9.99 and
19.99, although2 mostly you'll do better with 19.99).

Charge 19.99/month. It will give you breathing room to put Google ads, to pay
referral fees (what's the word?), to experiment with temporary lower prices
etc. If you charge 6$/m, you're stuck with a too low price and no breathing
room whatsoever to acquire customers. Many startuppers underestimate the cost
of acquiring customers - you don't just get them for free, most of the time.

ps: in most cases (unless you sell hosting or something, and even then) the
price of the service has NO relation to the cost of the infrastructure and the
expected number of customers. It is instead related mostly to the cost of
acquiring new customers, which is likely going to be somewhere between 20 and
80$ per customer.

If it costs you, say, 40$ to acquire a paying customer, and they stay an
average of 3 months, you need to charge X/month to be making money.

At the same time, there are psychological limits on what people are willing to
pay. 9.99, 19.99, 39.99, 79.99 etc. Charge 8.99, for example, and you might as
well charge 9.99, since you'll get exactly the same amount of customers
(probably).

Seriously. Charge 19.99$/m.

Once you experiment (later) with lower prices, you'll likely see it makes no
difference in conversion.

Charge 19.99$/m.

~~~
sz
Do you have data to support this?

~~~
petervandijck
Not on my harddrive, but yes, it comes from experience with a bunch of actual
products, actually selling.

------
michael_dorfman
Here's a free e-book, called "Don't Just Roll The Dice", which covers a lot of
the basic issues:

<http://www.neildavidson.com/dontjustrollthedice.html>

~~~
mdoyle
thank you, will take a look

------
JangoSteve
It's hard to give specific advice without specific information about your
product, but here's the process I've used when pricing RateMyStudentRental.com
for schools, and LeadNuke for businesses (note that my experience is primarily
with B2B pricing).

    
    
      1. Who is your target market? How much money do they have?
    
      2. How much value do you create for them? <== This is IMPORTANT
    
      --once you've set your price based on the above, continue to steps 3 and 4--
    
      3. How much to related/competing products charge?
    
      4. How much would you need to charge to be sustainable?
    

A few notes on these... The second step is by far the most important, but also
the hardest. It's not about how much value _you_ think you create, it's how
much _they_ think you create. Often, the simplest most trivial features end up
creating the greatest benefits to the users. This can be difficult to grasp
for anyone close to the product. In fact, this is the very reason you should
start out pricing HIGH, higher than you're comfortable with, and refine the
price from there.

Also, I try to set a price based on steps 1 and 2, before continuing on to 3
and 4, because 3 and 4 are really refining and validation steps. Step 3 is a
good check to make sure you're in the right ballpark. If not, you need to go
back and check your assumptions and figure out why it is you're so far off
from the competition (although being far off is not a bad thing, just make
sure you know why). Often, the very reason your price is so different from
competition is because your step 4 may be vastly different (or wrong).

Step 4 is hard to do until you have a good idea of what your customer
acquisition costs are, which is why it's also done _after_ you set a price.
The fact that you have 200 FREE users means you still know nothing of CAC.
Step 4 is a very important validator of your business in general. If the
amount you determine for step 4 is higher than the price you came up with,
what you have is a problem, not a viable business.

Of course, my own process is a little more involved than this, and usually
requires a lot more refinement (none of these steps are meant to be done just
once).

Hell, maybe a good place to start would be asking some of your free users if
they'd still use it if you increased the price to $X.

That being said, two of my favorite stories about pricing are the interview
with Steve Blank called "It’s very easy to underprice your product" [1], and
Jaques's recent post, "Double your price! (and no, I'm not kidding)" [2].

[1] <http://venturehacks.com/articles/pricing>

[2]
[http://jacquesmattheij.com/Double+your+price+(and+no,+Im+not...](http://jacquesmattheij.com/Double+your+price+\(and+no,+Im+not+kidding\))

------
Revisor
I can heartily recommend the book The Strategy and Tactics of Pricing

<http://www.amazon.com/gp/product/0136106811/>

It's pretty expensive as far as books go, but very much worth it. It not only
explains how to set a price, but also how to set different prices across
segments, how to calculate/estimate value your product is worth to your
customers, how to price differently over time (honoring the changing business
cycle) and how to react to competition (a very short summary: add value,
target more segments, don't go into a price war and instead force the others
out of it by restructuring your offer or by adding "threats" ("we'll match the
best price" etc.)).

~~~
imp
Wow, I'm surprised that a book on pricing is so expensive. Since they're the
experts, perhaps they think that all books would be more profitable if they
were priced higher. I wonder if many books are priced lower because they hope
to get on a bestseller list.

~~~
sethg
If the advice in _that particular book_ is correct, then any entrepreneur who
spends $100 on it will recoup the cost fairly soon.

If the buyer is a college student rather than an entrepreneur, well, the cover
price is comparable to the price of other college textbooks. Textbook
publishers can get away with charging a lot because students have to buy
whatever the professor says to buy, and because once they’re borrowing tens of
thousands of dollars for tuition and living expenses, students will not balk
at a few more kilobucks for their books.

~~~
jules
You are correct. Most of my physics books are at least 2 times as expensive as
that book :(

------
rakkhi
Some really great advice in this post, I am going through the same thing
trying to price my security application SaaS, have settled on £20/month at the
moment.

It is currently in development and I would love some feedback on the
frontpage: <http://db.tt/LHjMnwy>

I actually started with costs and considering it is all on Amazon
infrastructure and I am outsourcing development offshore the costs are pretty
low. I had not fully calcuated the cost of customer aquisition though so that
is something I will need to do. Thus far I was working on £10k / year on
advertising which consisted of Google adwords, social media and niche print
advertising market mix. I was also going to promote it directly via
presentations to my contacts but I had not priced that time as I can do that
while still doing my consulting role (at least initially, and if it goes well
I can hire some sales guys).

I am concerned about what glenngillen says regarding the perception issue.
Security products are expensive: e.g a few competitors such as Archer
(<http://bit.ly/9Z7Xyq>), RSAM (<http://bit.ly/cSjzDz>) and riskwatch
(<http://bit.ly/bhlzYY>) are well over $10K per year for most companies.

If I price at £20/m is it too low and will it be percieved as "cheap" and non
"enterprise" or will I be able to undercut the competition and appeal to the
smaller merchants who still needs security software for PCI-DSS level 1 and 2
compliance?

~~~
igrekel
There may be other problems with being too cheap.

Sometimes there is a minimal cost threshold for something to be a project in
large companies. If it is not an "official" project, it will lag.

Another aspect of pricing too low is that if the manager in a large company
paid a lot of money for something, they'll put pressure on the organization to
use it. If it was cheap, they won't put as much pressure. In large companies,
most employees have a lot of inertia in their way of working so that extra
pressure might be beneficial.

Finally, its always easier to lower the price than to increase it.

~~~
rakkhi
totally agree with that last point.

With it not being an "official project" I would actually prefer this. My
experiance with espeically with pure security projects (as opposed to security
piggybacking on other projects to get what they want) trying to get a business
case for a project is really tough. So getting project approval,
prioritization, resources all rolling is a very hard and time consuming
process.

I want this app to be something anyone in a IT security department can just
subscribe and use straight away. If it gets a shadow IT following and the
orgainzation really likes it I can get then sell a gold or platinum
customization piece which will be a proper project with procurement and
contracts involved and consulting time from my company

Your third point - I really don't want people to be preasured to use this
because of the investment, the users then grow to hate the product and that is
no good for anyone.

------
rjb
Dharmesh Shah touched on this at Startup Bootcamp last year and expands on
what petervandijck discusses. Effectively, there is a financial benefit (based
on longevity) and financial cost (acquisition) to pricing, and the goal is to
make the two overlap as little as possible. I highly recommend watching his
talk:

[http://onstartups.com/tabid/3339/bid/11042/Dharmesh-On-
Start...](http://onstartups.com/tabid/3339/bid/11042/Dharmesh-On-Startup-
Marketing-Video-From-MIT-Startup-Bootcamp.aspx)

------
glenngillen
Would be worth updating the topic to be prefixed with "Ask HN: " so people
know it's a discussion.

As to your question, I'm facing the same problem. I've got a couple of hundred
free users who signed up to help beta testing, I think I'll allow them to keep
their free accounts as a thank you. Beyond that, I'm going start high and see
how it goes. The system is designed to allow certain features to be
enabled/disabled easily so I'll offer 3 different price options.

I think it is about finding that sweet spot on perceived value. I'd prefer to
have the product priced slightly on the higher side with fewer customers (but
roughly the same net revenue), that way I'm just as well off but with a lower
support requirement. Plus it gives me room to price-cut in the future.

And then there is always to option to try and split test pricing to see how
sensitive your prospective customers are to price adjustments.

Above all, I'd look at other successful companies like Apple and see how they
try and structure their products and prices in such a way to convince you that
you're actually getting a good deal.

Oh and of course, try and calculate what it costs you to provide the product
and support per signed up customer... and don't charge less than that ;)

~~~
mdoyle
I have updated the title. Rewarding the beta testers seems like a fair thing
to do. The banding we are thinking about is between $4 and $8 per month and we
would probably like to start at the $6 per month mark, or $5.95. We are not
particularly interested in out-pricing our competitor; we would like a steady
increase in market share. Thanks for the comments.

~~~
glenngillen
My only comment on that is partially based on personal experience, and
anecdotal evidence from end-users of some products I've developed for my own
clients.

Many, many, many years ago now I wrote one of the very early GUI HTML editors
while still a junior in high school. This predates Frontpage, Homesite, and
most commercial offerings from the major players so it was relatively
successful in terms of market share. It was shareware though, and fully
functional apart from the occasional annoying popup. A payment of $5 would
remove the popups. Over the course of a year I increased the price from $5 to
$10, and then to $15 dollars.

I can't remember the exact numbers, the the downloads per month were still in
the thousands but the number of people that had paid for the product since I
released it I could still count on one hand. That didn't bother me too much as
I built it for myself primarily, anything else I deemed a bonus.

Then one day I decided to up the price to $99, I figured zero people at $99
was just as profitable as zero people at $15. The next day I woke to find I'd
had at least 10 orders overnight, and the trend continued for quite a few
months until the product started to noticeably lag the new offerings from
Microsoft and Co.

It was a very early and valuable lesson, the price you put on a product
signals to your potential customer how valuable you think it is.

One of my most recent client sells a SaaS product that allows people to do
market research. It's not the cheapest in the market, but by no means
expensive. A large part of their customer base are consultant types who use
the tool for when doing work for their own clients. Many of them lament the
fact that there wasn't an "Enterprise" edition of the tool. No requirements
for additional features, it already meets their requirements, they just don't
want their clients thinking they can have access to the same tools for
$100/month.

For slightly different reasons, it was price guiding the perceived value of
the offering.

Just something worth considering. Obviously without knowing the product it's
hard to say what value I'd prescribe to it on a monthly basis.

~~~
mdoyle
A Good story and some good advice there. Thanks once again. I perceive certain
products in certain ways, in terms of the price guiding my judgement, e.g.
higher priced items being of better quality which doesn't always hold true of
course. Personally, I need to actually make use of a product which is higher
priced before actually making the decision to buy. This is why we will go with
the freemium model I think.

------
pontifier
Oh man, I always think about this scene in The Hudsucker Proxy when someone
talks about what to charge... not sure how applicable it is, but boy is it
entertaining. <http://www.youtube.com/watch?v=uLOAXDb6fps>

------
aresant
1) Research - What are the competitors doing? Can obviously give you an idea
of starting point.

2) Test - Use Google AdWords and split test to a landing page that advertises
the service w/only difference being price point.

eg - Write up a pair of ads with your value proposition and different price
points, see % click through.

You can't spend enough time on this step, very easy way to refine down to a
good starting point.

EG:

Online Bookkeeping Service For just $19.97 a month get access to professional
bookeepers.

v

Online Bookkeeping Service For just $29.97 a month get access to professional
bookeepers.

3) Tweak - Google "Price Elasticity Testing".

If you wind up charging more (or less) grandfather early users on the higher
price, or move them over to the new lower price immediately.

People reguarly leave this step out, but the difference between 24.97 vs.
29.97 may be the difference between exceptionally profitable and mediocre,
100% worth doing.

Detailed refining is tough to do without scale but should be one of your first
planned A/B tests.

<http://en.wikipedia.org/wiki/Price_elasticity_of_demand>

[http://economics.about.com/cs/micfrohelp/a/priceelasticity.h...](http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm)

[http://conversionvoodoo.com/blog/2010/06/one-simple-
secret-f...](http://conversionvoodoo.com/blog/2010/06/one-simple-secret-from-
an-1890-economist-nearly-doubles-website-profits/)

