Isn't this putting the cart before the horse? Why force pricing tiers such that it matches an abstract principle? If you have an e.g. [x, 10x] pair of plans, and a few percent of subscribers are on the 10x, the Pareto power law still holds. In fact, I've heard cases where it was beneficial to have a lower multiplier between tiers, so people feel at ease to upgrade. A 4x jump is a tough negotiating position to go after expansion revenue.
Seems a bit simplistic. I would be ready to bet that pricing also is set based on price sensitivity of the various customer personas that the business is serving, competitors pricing and expected margins. The Pareto pricing distribution is more a consequence of the distribution in size of the various customers than the pricing itself
> According to the Pareto distribution, 80% of your revenue will come from 20% of your users.
A distribution is something that is _observed_, it's not a law of nature that you can drop anywhere you want. At most you can normalize your sample according to an observed population distribution.
Otherwise I could state "according to the uniform distribution, you will get 10% of your revenue from 10% of your users".
It is of course an observation that holds almost always, like Zipf. But only for very large numbers. However, this bit
> But the remaining 20% (200)will buy that $40 package instead of $10.
Hasn't the author also heard about the Law That People Don't Pay For Nothing? You really need to offer something worthwhile for that 300% increase. If you take it away from your $10 tier, you may lose clients there. It's a balance, and for a starting business, a precarious one.
This is nonsense. The demand curve as a concept only deals with singular prices, and the slope of it is particular to a particular product.
The Pareto principle (80% of good thing x comes from 20% of input y) is over-used everywhere, this is the first time I've seen it applied to pricing. Funnily enough the first time I saw it wasn't in economics but in a human interaction course.
While the 4x multiple of pricing tiers might be a good idea, this article certainly doesn't make a good case for it.
> But if you add a $40/yr tier, 80% (800) of your clients would still only spend $10, earning you $8000. But the remaining 20% (200)will buy that $40 package instead of $10. This generates an extra $6000. By creating this second package, your yearly earnings go up 60% to $14,000 in ARR.
So 20 % of the user base now contribute 42 % of revenue. Also, why would everyone agree to pay 4x or 8x more than the original $10 ?
There's a lot of incorrect math in this article. It says 80% of your revenue will come from 20% of your users then suggests a hypothetical pricing change that results in 43% of your revenue coming from 20% of users.
It also says going from $10k in revenue to $14k is a 60% increase.
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[ 3.8 ms ] story [ 29.7 ms ] thread> According to the Pareto distribution, 80% of your revenue will come from 20% of your users.
A distribution is something that is _observed_, it's not a law of nature that you can drop anywhere you want. At most you can normalize your sample according to an observed population distribution.
Otherwise I could state "according to the uniform distribution, you will get 10% of your revenue from 10% of your users".
> But the remaining 20% (200)will buy that $40 package instead of $10.
Hasn't the author also heard about the Law That People Don't Pay For Nothing? You really need to offer something worthwhile for that 300% increase. If you take it away from your $10 tier, you may lose clients there. It's a balance, and for a starting business, a precarious one.
The Pareto principle (80% of good thing x comes from 20% of input y) is over-used everywhere, this is the first time I've seen it applied to pricing. Funnily enough the first time I saw it wasn't in economics but in a human interaction course.
While the 4x multiple of pricing tiers might be a good idea, this article certainly doesn't make a good case for it.
So 20 % of the user base now contribute 42 % of revenue. Also, why would everyone agree to pay 4x or 8x more than the original $10 ?
What does this rule say about street begging?
It also says going from $10k in revenue to $14k is a 60% increase.