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Don't just roll the dice – Software pricing guide (2012) [pdf] (neildavidson.com)
483 points by MatthewBF 7 days ago | hide | past | web | favorite | 61 comments





> I can tell you that nothing we have ever done at Fog Creek has increased our revenue more than releasing a new version with more features. Nothing. The flow to our bottom line from new versions with new features is absolutely undeniable. It's like gravity. When we tried Google ads, when we implemented various affiliate schemes, or when an article about FogBugz appears in the press, we could barely see the effect on the bottom line

For early-stage startups that are not well-known, press can definitely have a bigger impact than more features. For me, coverage in The Atlantic led to an interview on NPR, which led to tons new customers and a long-term benefit of being able to say we’d been covered by these two outlets. It helped with customer acquisition and award competitions, and would undoubtedly help with fundraising as well.

1: http://www.theatlantic.com/technology/archive/2016/05/a-bett...

2: http://thetakeaway.org/story/eureka-moment-makes-reading-eas...


>I can tell you that nothing we have ever done at Fog Creek has increased our revenue more than releasing a new version with more features.

That may be true for Joe Spolsky. But he is one of the highest profile software people in the world. The 99.9999% of us who are less famous should probably spend more time on marketing.


For the rest of us, simply releasing update after update works to grow organically. Lots of things look for the "new update" signal.

Even the big guys. I moved from sublime to VSCode just because the relentless updates spelled the writing on the wall.

Yes but at some point your feature updates will lead to bloat and maintenance issues. There is a problem with accumulating features before getting customers too. You will not know which ones are actually wanted and which you should have cut. But of course any feature will have some users so removing them afterwards will lead to complaints.

In my case publishing a relatively unknown app, any kind of press obliterates the increase in customers due to features.

I guess 80% of my revenue was made on days of and immediately following press releases.


You don't have to release new features. Customers (at least mine) appreciate tightening up current features almost as much.

I never tried the press release route, sounds like you had good success with it?


There is also quite a gap between what current users want (mostly no surprises and stable software) and what new users think they want (more features, I believe many have the mindset "it does all this but I really want X before I commit").

And of course journalists only want new releases and new large features. Which is why getting features is usually only feasible on launch.


Depends on definition of success :) My app is not very successful in that it brings in only a few k$ per year.

However it has been featured here and there and these features were always massive spikes.


Reaper goes this way. They have regular updates with fixes and the rare huge new feature like the notation editor.

You are likely right. Yet I wonder if

a) Fog Creek had that high a profile when they put that advice into practice, and if not...

b) The people that Fog Creek had such a high profile among included its prospective/repeat customers (as opposed to just non-customer fellow software developers.)


I believe Fog Creek had (at the time of writing this) already been in both situations at various points. Joel wasn't famous at the start.

But the context of this statement isn't really related to fresh startups. it's aimed at software companies... presumably with existing customers and revenue.

And yes, it's true that there are lots of exceptions at any level... a big press score or whatnot. The underlying point is solid though, imo. Most software companies best strategy is to make more/better software for their customers to buy/use. Shiny, big, spiky "tactical wins" are neither necessary nor sufficient. They just loom large in our narration of events.


a) Yes. Joel had a very well written blog that was very popular with developers (I miss your blog Joel!).

b) Yes. Back then his customers were developers.


I recently asked someone who helped Fog Creek with sales-y stuff about this quote.

He said it had to be taken with the fact that Joel Spolsky's blog in its heyday had a tremendous amount of traffic from developers. He implied that it doesn't universally hold true.


Sounds like you asked a marketing/sales guy this question, and you got a marketing/sales guy answer.

I think the answer is pretty clear. If you already have a channel to customers you can focus on the product. If not, increasing reach can be much more beneficial.

That can work for others too. Maybe building an audience via a blog can be worth more than paid advertising, depending on the target audience.


You can interpret "new version with more features" as Product. Basically, he's saying that Product trumps Marcom.

If you're making small utility software, the "friction" aspect becomes extremely important, on BOTH sides.

I wrote a small tool that simplifies a single yet extremely annoying task (because I got sick of performing the task manually).

I offered it free for personal use, with clear notices that you need to pay to use it at work, and a way to contact me for a business license. I sold one license. Several other users e-mailed me to thank me for the useful tool, including some who indicated they were using the tool at work.

I could have added more aggressive nagging, or stringent enforcement (e.g. some form of online activation that blocks you if you're coming from a known corporate IP).

I could also have decided to make the tool available 100% for free under an open-source license.

The lessons I learned from this were:

- if you offer a free-for-personal-use version, business users will only pay if the hassle of going through the payment process is lower than the hassle of using the free version illegally; I suspect a nag screen will only be enough if it's really frequent, and will probably annoy your "free" users a lot.

- the effort required to write any form of license enforcement, or to set up and maintain easy ways for someone to pay for your software (e.g. credit card) is often not worth it

--> If it's a small thing, do the world a favor, and just make it free. The money you'll earn may not be worth the additional time and hassle you'll have to put in to earn it (not just for the additional code or sales setup, but also dealing with payments and customer inquiries, taxes/legal stuff, ...).


I built a small utility as well, and I'm using a somewhat unique payment model.

It's free and open-source on GitHub. You can download the source code and build it yourself with Xcode.

https://github.com/pkamb/powerkey

I also provide a $5 built app available to purchase via Gumroad, code-signed with my Apple developer account and ready for immediate use without Xcode with no scary macOS warnings:

https://gumroad.com/l/powerkey

I found that this model works really well for small projects where you want some of the benefits of open source and don't want to deal with upgrades or nag screens.

It would be even better if GitHub built some "paid release" features into their product, in addition to their Patreon-style Sponsors feature.


This is one of the things I can't stand about MacOS. I feel like every little thing my OS should be doing for me I have to pay for. $5 to remap my power key? No thanks. I also can't believe there aren't window tiling shortcuts either.

It's not just having to pay that's the problem. I like the ability to reinstall my OS whenever I feel like. This adds another step to setting up my machine and is extra work to automate.


Companies will only pay if they're forced to pay and are aware that they have to pay in the first place. That means you better have a nagging screen and better make it very clear that commercial usage requires a paid license.

For desktop software, I'd suggest to detect if the system has a proxy configured, that's a good hint whether it's a corporate computer.


Is true? Can you just run unlicensed tools at your work?

Many people can, and especially in smaller companies (but not only) its not unusual to see unlicensed software. A really well-known example is TeamViewer, who've been balancing the line between "don't break legitimate free users" and "catch companies using it"

Paying is the easy part. Getting a company to approve and reimburse a purchase is usually the blocker. That's why for most companies small purchases aren't worth the hassel.

Very small purchases often go on credit cards and get auto-approved. $20 (recurring monthly even) is likely to be under the “even needs a receipt” threshold.

> with clear notices that you need to pay to use it at work, and a way to contact me for a business license

But that’s probably one of the least user-friendly purchasing funnels you can possibly have. I think there’s some more basic lessons to learn about sales conversions before getting to those other conclusions you reached.


Of course, I'm aware of that. That's why I mentioned the friction on both sides (including mine) was relevant.

Setting up a "better" funnel would have cost me much more time, spent on stuff I didn't really enjoy doing, with no guarantee that I'd ever make enough money to give me a reasonable reward for that additional work. (Which would be more than the work that went into the tool.)

Maybe it would have worked and hundreds or thousands of people would have given me $5 or $10. Maybe the resulting support load would have been worth it. But again, I'd have to somehow make the free version less useful to have a decent chance on that. In retrospect, I regret not making the tool free from the beginning.


Why is making payment so hard in this world age. Doesn’t stripe make online payments super easy nowadays?

Making payment is not hard if you want the money to come from a human. If you want the money to come from a company, your hurdle is the expense approval and reimbursement process. This is not technical (and serves to try to protect the company from fraud so isn’t going to go away).

This article I think comes very close but never answers the central question here: how to find the price that generates maximum revenue.

I have a hypothesis that price tolerance follows Pareto distribution, i.e. the function of the number of people willing to pay any given price for the same product must have the same shape as the overall wealth distribution among your customers. Therefore it should be theoretically possible to find your peak price that yields maximum revenue in the following three steps: (1) take measurements at several different price points (A/B test) (2) find the Pareto parameters for your customers (3) solve the differential and find the peak.

The same in a bit more detail:

https://medium.com/@hovm/finding-the-max-revenue-price-mark-...


I think it depends on your context. If the alternative to buying your product is not buying your product, people may be willing to pay an amount proportional to their wealth; but if the alternative is a lower-priced competitor, the price they're willing to pay will be anchored.

Jeff Bezos is far wealthier than I am, but I don't think he would pay a million dollars for a hamburger.


I have a friend who used to be a hairdresser. Some of his customers flew across the Atlantic to Europe to get a haircut... maybe not a million dollars for a burger, but thousands for a haircut, and at least a few days spent.

> thousands for a haircut, and at least a few days spent.

This conclusion is sound if the schedule looks like fly out -> get haircut -> fly back.

If you do anything else while you're in Europe, then the travel cost is being amortized over everything you do. Maybe I was willing to pay a few thousand dollars for some Yarg cheese, and the haircut was a happy bonus.


I've heard about American people who take a plane only for eating something specific on Europe. The direct price might not be so much, but that's still on the thousands.

True but I think competition is already factored into the hypothesis as the lowest price nobody is willing to pay, which in case of a hamburger and given the competition could be only say $25. So you will be looking for a peak in the range say $10-25.

Reminds me of the articles that came out in 2016, where we --finally saw the first comprehensive Supply/Demand curve in the wild: http://freakonomics.com/podcast/uber-economists-dream/

>first comprehensive Supply/Demand curve in the wild

That's a huge claim.

Anyone doing dynamic price optimization is doing this, long before 2016.


Well, the guy has written textbooks on economics, you can take it up with him. :) From the interview:

LEVITT: The very first class you take when you go and enroll in economics — introductory economics — typically on the very first day they put a demand curve on the board. And like every other economics student, when I showed up my freshman year in school and saw that demand curve, I just accepted it. I said, “Well, they put it on the board; it must be real.” And I never questioned anything about demand curves. I always just thought of demand curves as something that exists, like buildings or trees. They have a sort of a physicality to them.

But then when I went to write my own textbook with Austan Goolsbee and Chad Syverson — now this is before Freakonomics, so maybe 13-15 years ago — I actually had to sit down and write about demand curves. And I thought for the first time, “what really is a demand curve?” And I thought to really bring it to life, I think I have to find one, I have to show one to the students.

And I looked around, and I realized that nobody ever had really actually estimated a demand curve. Obviously, we know what they are. We know how to put them on a board, but I literally could not find a good example where we could put it in a box in our textbook to say, “This is what a demand curve really looks like in the real world,” because someone went out and found it.

DUBNER: So you’re saying that the demand curve as it exists in economics and economic literature is kind of a fiction or an invention of economists to explain the rest of the transactions around it?

LEVITT: Exactly. It’s an artificial construct, which turns out to be incredibly valuable for organizing the world and knowing how to analyze problems. And in that sense, who really needs to see one or to find one? But I’m a very tangible person, and I thought, if I could really have an example of a demand curve maybe I could push up the learning of the students.

It took me, I don’t know, 15 years between when I took the beginning economics to when I wrote the textbook to actually think hard enough about demand curves to really understand them. I thought if I could show someone a real demand curve, I might help the students learn about it much faster.

...

LEVITT: Yeah, so we aren’t faking it. I think that’s the wrong way to think about it. What I’d really say is that we completely and totally understand what a demand curve is, but we’ve never seen one. I don’t know if it’s fair to make physics comparisons, but you can imagine something like in the old days when the models had figured out something about protons and electrons, but we hadn’t actually figured out how to literally see an electron. And we knew it had to be there from the theory and then it was just a matter of making the colliders go fast enough or whatever it takes to see an electron, and then it was confirmed that they were there. So, in economics, it’s even easier because it’s not that we have to wonder whether demand curves exist or not, because we know they exist because we define them and they’re there. But I wanted to touch one; I wanted to hold a demand curve, and I had never had a chance to do that until I took Uber and it suddenly occurred to me that here was a chance to hold a demand curve in my own hand.


A/B testing prices is an existing practice (though one that has the potential to upset customers, should they find out). You can also test different pricing hypothesis in different markets. But I think this is most common when there’s little competition in a market/segment. In a competitive market, you already have a lot of information to base pricing decisions on (what do my competitors charge, what are their margins, what pricing changes have they made in the past...)

Bear in mind that A/B testing of prices may not be legal in some countries/jurisdictions.

I've never seen any country have laws against giving targeted coupons/discount code to some customers.

Wow, thanks for this PDF. Can't believe this is freely available... IMO they could easily charge for this and I'd gladly pay...

I'd be glad to pay now that I've enjoyed reading it… but I'd almost certainly not have read it if I had had to pay first.

I like the approach taken (among others) by Matthew Butterick for Practical Typography [1]: I've enjoyed reading his book the same way and gladly paid for it /after/, as he asks, even though I would not have bought it at first.

[1] https://practicaltypography.com/


I think the author made enough money off co-founding Redgate Software that he probably doesn't need a few dollars off you.

I read it when it first came out. Its very good. Pricing is a surprisingly interesting and deep subject that is heavily intertwined with microeconomics and psychology.


This is a terrific guide overall and even provides guidance to develop your software pricing strategy beyond one common pitfall: assuming that you must charge one static price for all customers of your software.

In reality, different segments of your users have varying price sensitivities, which means the best practice is to charge the maximum price that each individual customer segment is willing to pay. Skip to the section on "Versioning" to read more about this.

Disclaimer: I run an API that helps businesses carry out versioning/dynamic pricing, https://modernpricing.com


I agree. Adding additional price points increased sales of one of products by 50% within a year (more long term): https://successfulsoftware.net/2013/02/28/how-i-increased-sa...

uBlock doesn't seem to like your site very much. I'd love to see your tool integrated with vendors such as Paddle or Gumroad. Would it make sense to make such an integration?

I think it would make great sense!

Currently, we automatically connect to Segment (https://segment.com/integrations/modern-pricing/) to make the integration easier. Additional integrations have been commonly requested thus far, but we are prioritizing open platforms to start.


So is your pricing dynamic too?

Yes, currently the pricing for each successful score changes by volume. $0.002 per score while under 1M scores per month, then $0.001 per score for scores beyond 1M per month.

Isn’t that just volume/tiered pricing?

Yup! Volume-based pricing is a simplistic way of charging different prices for different customer segments.

So you’re not using your service to price your product?

In that case you could just proxy requests via low income countries to get a cheaper service?

It can be possible. I created a Hong Kong Nintendo account and purchased Pokemon Shield through their Hong Kong online store. Mainly I did that to see if I could start playing before the US release time (it worked!), but I also ended up saving about $5.

That’s true but it’s also pretty easy these days to recognize non-residential IPs.

A helpful guide by Neil Davidson on how to develop a revenue model for your software business.

A few years ago , I had read a blog on a competitive pricing model told from the perspective of a drug dealer. It was amusing and also chock full of mathematical logic applied to competitive pricing. I haven't been able to find that article since then. Does anyone have a link to that blog?

I remember this as having had prominent discussions on HN in the past, but I searched and can't find them. Anyone?

Looked for a few minutes. My best guess is that if there was one, it was probably submit under a different link with an editorialized title. On Red Gate's site alone, there's at least a few copies, along with the one on Davidson's site and the other copy that used to be on his site.

Hi - the book is freely available from Neil Davidson's personal website at:

https://neildavidson.com/downloads/dont-just-roll-the-dice-2...

And from the Redgate Software website at:

https://www.red-gate.com/library/dont-just-roll-the-dice

Hope that helps.


Thanks :-)



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