

Ask HN: Cost-based pricing for hosted web-apps? - ordinaryman

Given that..<p>- building software is getting easier and cheaper [1],<p>- one can reach a larger segment of small businesses and easily win them over with affordable pricing [2],<p>- mapping your cost model (based on cpu, bandwidth and storage) to a different pricing model (users, records) is a difficult problem to get right [3].<p>As software developers, why should we frown-upon or try to avoid cost-based pricing for hosted web apps ?<p>[1] Enabled by services like Google App Engine..<p>http://code.google.com/appengine/docs/billing.html<p>[2] Being low-cost is one of the best options available for start-ups..<p><i>Start by writing software for smaller companies, because it's easier to sell to them. ...if you want to win through better technology, aim at smaller customers.<p>They're the more strategically valuable part of the market anyway. In technology, the low end always eats the high end. It's easier to make an inexpensive product more powerful than to make a powerful product cheaper. So the products that start as cheap, simple options tend to gradually grow more powerful till, like water rising in a room, they squash the "high-end" products against the ceiling.</i><p>From : http://www.paulgraham.com/start.html<p>[3] My thoughts about this mismatch, blogged in "Why freemium pricing model for CRM / Online databases needs to change"..<p>http://rrajkumar.wordpress.com/2010/10/13/why-freemium-pricing-model-for-crm-online-databases-needs-to-change/
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patio11
You should not price based on costs because:

a) customers do not care what your costs are, they care what their perceived
value is.

b) costs are cratering, to the point where costs at the margin are so small it
is difficult to measure without counting out picodollars ( _don't use
picodollars!_ )

c) low prices do not necessarily make customer acquisition easier -- prices
are a signal (of quality and probable business continuity among other things)

d) businesses have care thresholds for money and all numbers under a
particular threshold are identical. If for a certain group of customers the
care threshold is $50 / month, picking any price below $49 is insane.

e) pathological customers are disproportionately attracted to the cheap
options

f) if you compete on price, you're forever at the mercy of anyone who is
either more efficient at cost structure than you or anyone who is stupid and
willing to burn money going after your market

~~~
ordinaryman
Low prices sending out wrong signals, price-thresholds and attracting
pathological customers are surely important concerns which I have to think
more about.

Thanks for your insight, Patrick.

// By the way, I had requested Patrick to share his thoughts and he was quick
post to them here. Though I thanked him by mail and up-voted his answer at
once, just wanted to mention a word here, about his quick response.

------
tptacek
We don't frown on cost-based pricing for web apps.

We frown on cost-based pricing for _anything_.

Pricing and cost are almost unrelated. Things are priced what they cost when
they are plucked out of the ground, put on a truck, warehoused, and then
delivered to the customer. Add _any other step_ (say, "cooking") and cost no
longer has anything to do with price.

This is not some web 2.0 thing. It's a fundamental principle of business.

Your question, as I read it, isn't crazy. It suggests, "if one way I can
differentiate myself from my competitors is by being smarter and thriftier,
shouldn't I be able to use that to differentiate my business through price?"
The problem is that your cost should already be below the noise floor, and
most nonzero prices incur the same hostility from customers --- so reducing
your competitor's price point by 20% or even 50% might not help your business;
it could even hurt.

~~~
ordinaryman
I agree that things stop being a commodity, when art gets involved. But this
art can also be factored in as a cost - like say the difference in costs
relating to hiring a chef and a simple cook. This cost can also be factored in
when arriving upon a price.

Depending on whether one wants to not go hungry (or) have some decent enough
food (or) _experience_ dinner, they can choose a category of food and price
point.

So at last, price = cost + profit is still valid.

Unlike in cooking, the effort put in to creating software is one-time effort,
whether you do it for a single person as a professional service (or) if you
can make it generic enough for reuse (or) with if can be built with multi-
tenant capability, along with online customization features. The talent level
differs for each kind of deliverable, but it can at last be factored in as a
cost.

This cost is becoming relatively much lesser, when compared to the recurring
costs required to keep the software running on a hosted platform.

So, why not just price the software apps based on what really is a major cost
factor and in terms of those cost-units (resource used), instead of trying to
fit in a model which is not very natural (in terms of number of users, number
of records - which is hard to do right, without over-charging most users), was
what I liked to be discussed.

~~~
tptacek
"price = cost + profit" is a tautology.

