What's your formula for pricing your product?
Do you have any logic into how much you decide to charge your customers?
I'd love to hear approaches (no matter how simple or complicated!) plus any useful resources would be very helpful!
#ask-ih
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Maybe one of my fave practical recipes for pricing is from a talk that @patio11 gave at BaconBizConf in 2014.
The video isn't technically public, but I co-produced the conference so what the hell I'll share it here cuz I <3 this community:
https://www.youtube.com/watch?v=exc8JncCLN8
There is a single rule I read somewhere and it makes sense at least for Subscription based software. "If your customers are not complaining you are charging too low"
I'm going through this exercise right now. The way I set my initial price points was to follow the advice of "charge twice as much as what you think it's worth" for the simple reasons that the common knowledge is that developers tend to underprice their own work and that it is supposedly easier to reduce price later on than to increase it.
So far this strategy did not work for me, from my metrics it looks like people are turned off by the current pricing page. This could just be that the pricing plans are somewhat unclear (I am selling kind of a weird abstraction of neural networks and communicating that is difficult), it could also be the prices themselves.
So now I'm running some surveys in the Van Westendorp style on reddit.com/r/samplesize in order to figure out where the important price points are. Here is the guide I am following:
https://apollonsky.me/how-to-van-westendorp-analysis-excel/
I only have ~15 responses so far, but they are definitely pointing to the fact that my pricing is a bit too high right now. I've also received written feedback that the plans are a little unclear, so I'll be working on that as well!
My strategy is to start with a lower price and then raise it gradually until I hit the ceiling.
Otherwise it's hard to know in the beginning whether the reason for low conversion is too high price or bad marketing. But if you set a lower price you can be sure the price is not the reason.
That said, there's also a theory that says that if your price is way too low, people might now want to buy because they would be suspicious of the extremely low price. So don't go unreasonably low. To mitigate this, you could try Early Bird pricing where your target price would still show up, but it would be crossed out and the Early Bird price would be next to it.
Good question!
When it comes to branded consumer goods and games etc, this approach doesn't work.
But for most B2B/B2C software, there are 2 important components to choosing an initial range of pricing for your product (you'll never get it exactly right without a lot of trial and error).
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#1: Cost-Based (The lower bound of your pricing range)...
Simply put, you have to charge more than it costs you to acquire, service and support a customer over their lifetime.
If you're selling a subscription product or SaaS, your costs will be more up front and the revenue will come more evenly over the customer lifetime.
So a good rule of thumb is to set a price that allows you to recoup the 'customer cost' within 3-6 months.
This is the absolute lowest your pricing should be.
It's also really difficult to know what these costs will be in the early days. And founders are normally too optimistic. I recommend 1.5x-ing whatever you think the number will be (and you'll still probably be too low).
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#2: Value-Based (The upper bound of your pricing range)...
It's easy to work out the maximum possible price.
First, you have to work out how much value you create for a customer (in SaaS, per month).
Secondly, you need to work out how much of that value a customer realises you generate for them each month (== perceived value).
And finally, you need to account for risk...
After all's said and done, you can expect to accept somewhere between 10-80% of the perceived value as the price they pay you for the product.
The less risk and the more direct/tangible the value, the closer you'll get to 80%.
For your first few customers and a normal SaaS product, anything over 20% is pretty damn good.
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So in most cases, your pricing should be somewhere between the lower bound (#1) and the upper bound (#2).
I recommend starting off trying for the higher bound, and giving up/pivoting if you can't achieve the lower bound.
In some rare cases where you have direct competition which you haven't differentiated yourself from, the upper bound isn't dictated by #2, but by the price of the competition.
You almost certainly don't want to be in a market where you have a competitor providing the exact same value to the same customer base as you though anyway. So just steer clear of that completely!
I've written about this before on IH.
One additional piece is that I like to start with low prices and launch very early. Then, as I improve or extend the product, I gradually increase the prices. Alchemist Camp, for example, costs about double now what it did when I launched the paid service a year ago. The price may go up further in the future if it becomes more than just content, too.
Would you increase prices for your old customers? Or just for the new ones?
I've never increased prices for existing customers. I know some people argue that if the value of the service goes up you should, but I prefer to reward the people who take a gamble on me or my products.
I'm one of those "let's change pricing every few months" types and have been all over the map until maybe the last year or so.
What was really hard with my DaaS is that my only point of differentiation on my plans was the number of requests I offered. I played around with this a ton, but realized that my dedication to making the system extremely developer friendly, I was shooting myself in the foot by making it easier to pull more data with less requests.
That eventually let me down the path of building features that would help differentiate the plans outside of the number of monthly requests.
Original pricing was a bit all over the place, because I was doing sales on my formerly free customers as I moved to a paid tier. The pricing was around 100$ a year, depending on the customer.
I was happy to wiggle a bit because I was definitely putting people in a lurch by taking the free service to be a paid service.
That original pricing was based on what another competitor in the space was charging. 100$ for 1 country. My value add was that you can access all countries that I supported for the same price (with only a small increase to the available requests over the course of a year).
From there, I just toyed with pricing based on how many sign ups I was receiving on the different plans. My logic has been "if the majority of people are signing up for the most expensive plan, then it's too inexpensive and rates should be raised".
I've raised rates a few times, settling a while back on a 20/200 and 35/350 pricing plans. Given the nature of data and how I don't really want customers that come in, take all of my data, then cancel after one month, I've since dropped monthly entirely (this is as of last week, so no real evidence of that). Considering most of my customers sign up for yearly, I doubt I'll see a ton of impact.
I'm cool with short term customers going elsewhere. This is kind of the ironic part of having competitors attempting to race to the bottom on "affordable" pricing. It's affordable to the customers, but never for you. When my pricing was at it's lowest, support was at it's highest. Rarely a day went by that a couple of bucks a month customer asked me for "more" for their money.
All that said, last year, I went in the opposite direction and LOWERED rates for a month or so, to see what that would look like. Theory was that either I'll be flooded with a ton of new customers or things would continual to convert the same (albeit at less revenue).
Turns out my gut was correct that no much would change other than the amount of money being transacted. I got some new customers, a lot of them were complete pains (back to the "it's never cheap enough").
Speaking of lower plans, way back in the day I did experiment with a 1-2$ "personal" tier. What I realized there was that a TON of people were using such a low cost check out as a way to verify stolen credit cards. Also, "personal" vs "commercial" usage is kind of a joke, there are bad actors out there that have no problem claiming they are using something for personal use when in fact they are using it in a commercial capacity.
As of last week, I ventured slightly back into offering a lower priced tier, [re-]introducing a 100$/year tier. The different now is that there are a ton of limits on which data and features can be accessed. This also expanded back into having 3 tiers again (leaving the previous two tiers as is on price, and massaging the feature sets a bit).
I doubt I've gotten it right, but at the end of the day, my conversions from free to paid have always been steady regardless of the change in pricing. Along the way the features have expanded to allow me to show more value between pricing tiers.
If I get a flood of people signing up for my cheapest tier, I'll probably be raising rates sooner than later again (potentially doubling the rate across the board).
OH, should probably mention that I do grandfather all of my customers in on their pricing tier, and have done some of them a courtesy to give them more monthly requests to marry up better with the current plan offerings (because at the end of the day, I feel like some of the plans were way too restrictive, and there's a gap in people's understanding of their own usage).
Something else worth mentioning in this novella is that I have ventured down the "unlimited requests" route a few times. Thing is, if you give people unlimited, you run out of ways to potentially upsell them in the future. The whole idea of "unlimited" falls in line with running a "lifetime" deal, where you end up with customers that expect every new feature because there is this perceived value in the verbiage.
At this point, unlimited is set aside exclusively for my enterprise customers that are willing to pay a premium for SLAs and direct access to engineering resources and such.
I'm at the moment investing how to charge my service. I'm not sure if I should charge businesses or customers?