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

50 points by mdoyle ↗ HN
Hi, I am relatively new to HN and really like the quality commentary that the community provides. So here's my first question.

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.

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.

38 comments

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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.
DirtyAndy
This is just my opinion, but I don't see a price difference between $4 and $8. The biggest challenge is getting me to pay. If it is worth paying for then whether I am going to pay $4, $8 or $10 a month is pretty irrelevant to me. Making me put my hand in my pocket is the hard part. I always think $9.95 sounds like a good price for something on a monthly basis ($100 if you pay upfront for a year also sounds OK).

I'd start high and lower the price (A/B price testing?) as needed.

mdoyle
Reasonable comments. This - and the above - is the type of commentary I was hoping I would get. If I consider myself as a customer aswell, then am I likely to be swayed by a few dollars difference in a monthly subscription. Probably not. And anything less than $10 won't require too much consideration from me.
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.
percept
Is this B2B or B2C? The pricing just seems too low.

I think a problem many of us face is knowing when to take off the techie hat and put on the CEO hat. Don't price like a techie. ;)

mdoyle
B2C. "Don't price like a techie". Food for thought indeed.
percept
And I know B2C is harder, but to have to beat yourself up over an extra dollar or two just seems like a bad place to be as a businessperson (while enterprises dole out wheelbarrows of cash for unused products).
percept
How about offering them free accounts for a fixed period, like 3/6/12 months? That way you could reward their support without having to carry a bunch of free users in perpetuity. If they like your product they probably wouldn't mind paying for it, and this explicitly communicates the value you're offering.

Also, for any given product I'd expect a small group of very active testers, and a larger group of semi-active to inactive ones.

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 :(
all
I can second Nagle's book. They could charge its weight in gold, and it would still be worth every penny. Where Davidson's freebie gives you the lay of the land on pricing and talks a bit about some dynamics, Nagle's "Strategy and Tactics" covers the details in some depth. You learn how to deploy pricing as part of your marketing strategy. They not only back up their points with detailed examples, but they explain why the pricing worked (or didn't) as it did. Simply invaluable.

For the OP, I would also recommend "Blue Ocean Strategy": http://amzn.com/1591396190 . The authors address how to move beyond mere competition, and pricing is one of those ways.

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.
nwmcsween
If it's not directly measurable price it however you want. But if it is measurable say a vps provider good luck charging a premium, you'll be out of business once your cash flow runs out.
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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...

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?

maukdaddy
I see Archer's logo in your screenshot. If you are truly replacing some of Archer's functionality, then $20 might be too low ;)
rakkhi
It replaces some of Archers functionality in that 2 of the Archer modules are: risk management and threat management. However Archer is the rolls royce, it ties to be all Governace Risk and Compliance (GRC) to all people. It is also a lot broader than just security risks and can be used for all sorts of operational risks. And for that you pay the rolls royce price and companies where I have worked that have used it have need a team to support and develop/customize features and entire training courses to learn how to use it

My software enables users a lot simpler way of performing the risk assessment functionality focused on information security. It is designed to be really easy to use, turn-key with zero setup but still robust in the methedology, reporting and collaboration. You can also export to Archer if you have it.

That is what I'm wondering though... is $20 too low.. should I start at $100? I am talking to two MD's of large financials this week who maybe prospective clients and have agreed to mentor me so I will get their opinion on it also.

How much value do you think security risk assessment software that assists to cut your security costs by prioritizing investment where it makes a difference and helps you comply with regluation like PCI-DSS is worth to a customer? It is B2B only: target markets are large firms with large mobile security teams (30-100 in IT security) and smaller merchants that need to do risk assessments to comply with PCI-DSS Level 1 and 2

maukdaddy
I work with a customized Archer risk management module at work, so I'm pretty familiar with it. If you are targeting the enterprise/B2B market, they're going to laugh at $20.

In theory, PCI compliance is worth whatever revenue you bring in with credit cards, since being non-compliant theoretically means you could lose all of that revenue. That said, the typical model of security software is to charge as much as you possibly can. You're making a product that supposedly interfaces with Archer - who can easily charge $50k+ in renewal fees each year.

Enterprise customers usually equate higher $$$ with better functionality/more security. I say that with significant experience consulting and working for large enterprises. I'd thinking about charging significantly more, maybe even in the $499 range depending on the exact functionality of your product.

This is interesting, because I've recently been thinking a bout product ideas around the assessment process. Archer is WAY overkill for a lot of businesses, even some large businesses.

rakkhi
Thanks I really appricate your advice. Being familier with Archer and obviously the B2B Infosec / Risk market - if you were a buyer price would you pay for a SaaS security risk assessment software that is lot simpler to setup and use than Archer?
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.

phugoid
Feedback: The "Cancel anytime" as a feature seems out of place to me. Likewise for the Better than money back guarantee. It sets the wrong tone. I want this software to be so awesome it will be a privilege to be allowed to pay for it.

The log in box doesn't fit there in location or in style. It looks like it's a sub-point of FAQ right now. It draws the eye away.

The little screenshots all look like they come from different applications.

rakkhi
Thanks good feedback: yeah I was worried a bit about the perception of cancel anytime and better than money back gurantee. My thinking was following advice from Tim Ferris (fourhourworkweek.com) and reducing the buyer risk /buyer remorse issue. Even in B2B I know first hand there is a lot of buracracy in getting anything like a software purchase (even SaaS approved). I wanted people that liked the idea to be able to easily put it on a credit card and try it out without the risk - maybe a free 30 day trial is a better way to go with this

Ok will work on the login box.

The screenprints are placeholders for now, will be replaced with actual screenprints when the pages are finalized.

jlees
Quick gut reaction to your comments - yes, £20 is way too low, you can go up at least an order of magnitude if not all the way to £500. If you are targeting companies that are already paying staffs of 30-100 in IT security, even £500 is a drop in their budget. Find out what the maximum spend is before someone higher up the management chain has to approve it (often £5k or £20k) and chop a bit off ;)
rakkhi
Good idea, getting those number are not so easy but I will work my contacts. The key point was I wanted to tap into the shadow IT economy (http://rww.to/bQETAj), because even though maybe somone in IT security can approve below £5K at a big bank this would still need a purchase order, contract, procurement process etc especially if it is £500p/monnth. I wanted it to be something that if someone liked or heard about they could put on their credit card and start using.
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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://conversionvoodoo.com/blog/2010/06/one-simple-secret-f...

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...