Preoccupations Over Pricing

Using growth as an excuse for not putting a price on a product or a service is just denying the inevitable, a lack of a business model.  So you can wait, raise a bunch of money, and then figure out how to monetize.  Hopefully you’ll then make enough to have justified the investment.  But let’s assume that for the time being you don’t have a business that is fundable, how long are you going to give away your product before you find out if people really value it?

Too many founders tell me how many users they have, which is fine.  Its great to know that people are willing to help test out your product.  But then when I ask them how much those users would be willing to pay for their product I get blank stares. The founders have no idea, and worse yet they are afraid to ask their users for a price point.   Why?  Because they’re afraid of getting rejected.  Well I hate to break it to you but that’s kinda what entrepreneurship is about, getting rejected, and testing whether what you’ve built is actually a value to someone else.

I’m going to leave aside the case of advertising being the primary monetization scheme, it works for content driven sites, but if you’re building a product that you think delivers clear value you should be able to come up with a price point that is appealing to customers.  (Sidebar: if you do have a content site and drive up enough traffic checkout iSocket as one method to monetizing.)

So let’s get back to the notion of building products that deliver clear value, and asking people to pay for their usage.  While you  might not yet have unlocked what that clear value is, pricing a product is just like product development, it requires that you have a series of conversations with potential customers and iterate.  Over the past 3 years of running BizeeBee I’ve changed our pricing at least a handful of times.  I usually do it when we add new features, products, or when I think something isn’t clear to a customer.  I’ve also run a lot of pricing experiments like sending people who were on a free plan invoices just so they’d have to respond to me, and after I’ve calmed them down and reassured them, I can have a 5 minute conversation to pick their brain on why they aren’t converting to paying customers!  Don’t be afraid of pissing people off, especially if they’re not paying to use your service.

There are other founders who have been in business longer than I have that have also played around with pricing.  I really enjoyed this post by the one of MailChimp’s founders, Ben Chestnut, mostly because he talks about how MailChimp delayed adopting freemium until it made sense for them, and focused on profitability first.

Pricing Model

Ideally you’d work bottoms up starting with cost structure and then factoring in margins to figuring out pricing.  But for a new product or service you cannot go through that exercise just yet, because as you increase your customer base, the cost of servicing them will go up.  So you’ll just have to get used to having new costs structures periodically, and re-evaluating your pricing.

Before you even begin the conversation with a user you need to do the following:

  1. Figure out if your product is a point tool i.e. used once or occasionally.
  2. Figure out if your product is embedded into the everyday life of a customer.

The reason I bring up these two cases is because it will help you to decide whether you need to ask users to pay right away or over a longer time period.  If you’ve got a single use case product ask for money right away, because you won’t have any control of its usage after it leaves your business.  If you think your product will be used continually and its more of a service, then you can offer a subscription model.

I’m not going to get into the length of trial periods in this post.  All I’ll say is, you need to experiment with those too!  What I am for is to consistently convey the value proposition in marketing messages, and then make sure they first interaction they have with the product coincides with that marketing message.  Hard to do, but necessary to increase conversions from free to pay.

Figure out Substitutions and Competitors’ Pricing

  1. If your product is displacing an existing product or behavior, ask your users: What are they currently using as products, and the price points of those products?   
  2. Next tackle the pain associated with its usage.  How much time does it take to use the product?  (Including: setup time, training, tech support, and customer service calls.)
  3. Are there certain features of the existing products that they cannot live without? (If there are features, then you won’t be able to sell them on your product unless its a completely different value proposition, or your features are better than your competitors.)

I don’t believe you can compete on price, ever. You have to compete on the values you’re offering.  I say this because I’ve lost customers to my competitor and my competitor has lost customers to me.  In both instances it had nothing to do with price, and everything to do with the values we were offering.  Customers who came to us wanted simplicity.  Customer we lost wanted a comprehensive product, that we are still in the process of building, which is fine.  You can fool customers with lower pricing, but you’ll either go out of business if you’re underselling your value proposition or your customers will be unhappy with a low price/low quality product.

How to Set an Anchor

So if you identify that users find your product to be of value then you can put an anchor price.  Here are a few suggestions for how you can come up with an anchor price:

  • Figure out what the ROI of your product is, and how much that is worth to your users.  e.g. Are you delivering new customers to them, or helping them save an existing one?  What is that customer worth to them?  Are you saving them time?  What is their time worth to them?  Or are you offering them an experience (e.g. entertainment value)?
  • Figure out their price point sensitivity based on their persona.  Are they someone who cares about luxury and convenience?  Or are they really sticklers about a budget?

For these two you should be able to figure out a range of pricing.  One thing I will note about placing an anchor is that if you do ever want to change it you’ll have to deal with  magnitude.  For example, increasing a $30 product by $5 is feasible, but trying to increase it by $30 will be seen as doubling.  Same thing with a $120 product, increasing it by $25 to $50 is doable, but when you hit $200 once again its seen as doubling.

Finally, don’t wait too long to enforce pricing.  What you don’t want is for people to get used to your product, and then start to poke holes in it once you do introduce pricing.  Get them to tell you what value they see it in from day 1.  If there isn’t enough value, then either you’ll need to find a new base of customers or build more value into the product.

Just like I tell the yogis I do business with, you’re in business to exchange values, not to give them away.  So don’t be afraid to set a price, and change it periodically, after all it’s not set in stone!

Still wondering how to price your product, and want some hands-on help? Then check out our Lean Product Development Course Learn more!

Enhanced by Zemanta
Share on reddit
Share on LinkedIn
Bookmark this on Digg

  1. Pingback: Cost of a Customer | Femgineer

  2. Tamra Johnson 22 January, 2013 at 6:37 pm

    Great pointers on setting price. This is also important when you are selling services (your expertise) – you need to set a price point that reflects the value you are bringing, and not feel bad for charging for your time and expertise!

Leave a Comment