Pricing an online service
This in one of a series of posts that are a sort of “marketing diary” of our (attempt at) launching two new online services. The posts are put into context here.
In this post I articulate the reasoning that led us to define a pricing policy for our new online services. In order not to repeat mistakes made by others, I tried to become familiar with experiences, mistakes and successes from many sources – I give a short selection of references at the end. During this search, I have come to the conclusion that there is a simple and single principle, the “nobody cares about features” one, that every developer/marketer that comes to pricing software should keep clear in mind: this is probably the single original point of this post.
We got to define a pricing policy having already three years of experience and alternate success in selling software online; but this was a downloadable product, not an online service, and things are different. One point I got while thinking and researching about pricing is that “no price is an island”: the price of your online service is one aspect of a more general “pricing policy” that includes demo conditions, free licenses, refunds, segmentation (eventually), and other aspects.
I had got to some principles:
Transparency. Your prices and entire pricing policy should be public, clear and completely defined from the very beginning, from the very first moment your beta goes public. This because you must not keep any of your users and potential customers in a state of uncertainty. This way you may reduced the time it will take to make the first sales, which is a critical factor for your success.
Simplicity. Your price must be simple. Nobody wants to make complex reasonings when trying to understand costs. We’ll get back to this after stating the “nobody cares about features” principle, because its related to that.
Give refunds. Your worst enemy in sales is user’s fear, and anything that can lower that, should be welcome. A clear refund policy reassures evaluators, and do you want to keep unhappy users around? It’s not a good idea for an open, blogged about service.
Have only paid accounts. And then a choice we made is to have only paid accounts; a free online service, say ad-based, is a very complex undertaking, whose difficulty and implications for the users are easily underestimated. The mass audience that you must reach to make such choice profitable is rarely found. Another option that rarely works is the donation model. No, we want to give a refined, quality service, for real money.
Fixed these principles, we are still in the dark about how much we should price an account, say per month. You may start looking for a formula, well, there are two values that can be sort of determined:
Costs: you can determine how much development and maintenance costs, and what is the marginal cost, that is, the cost of activating and maintaning a new account.
Real worth: you can probably determine how much worth your service will be for your average customer, how many days of work and confusion it will save them, etc.
Well, now comes a fundamental realization: these two values are entirely, completely irrelevant for determining your service price; because you are looking at things from the wrong direction and/or with the wrong user model in mind. Consider the theme of my previous post about finding a pitch for your product (Get visitors to read and remember your home page):
The day you realize that nobody is interested in reading your product or service homepage because you love it, may be a bit depressing, but may also be the start of a re-design that will lead to more returning visitors.
Well, something similar holds for your pricing: in a competitive market, you simply can’t base yourself on what you believe your service is worth, or how much is costs, or the features you know it has, because nobody, absolutely nobody cares about that. Sad, but true. You have to set the price for the most direct and simple advantage the user can evidently and quickly see she /he will get.
You should never overestimate the will of an evaluator to carefully review your application: so you should surely put no limitation whatsoever in the service you are providing in the demo or free phase of the service; but then, this also influences your pricing, because if you are attempting what is called “segmentation”, based on limiting the features offered by different levels of pricing, you are sort of preparing a “nasty surprise” for those that want to turn from the full, complete demo to paying accounts: so I think this is a very bad idea. Developers love their products and their features, and (wrongly) assume that visitors to the presentation web site have the same drive; no, visitors drive has to be conquered, with the full power of your service, and also through simple and convenient pricing policies.
If you look at the typical policies of expanding software houses, these are often based on a flat, aggressive pricing policy; look today at how much more appeal has Apple’ OS simple pricing policy compared to the academic segmented prices of Microsoft’s OSs (and when Microsoft wanted to become a leader, it had the same policy as that of today’s Apple).
So the policy I support is to let the evaluators use the service in full, and give a single, simple price if they want to turn to a pay account. This is not what the marketing litterature suggests, but… things change, markets evolve, become more competitive, and also certain costs, like bandwidth, decrease.
Anyway, you may have noticed that we are still in the dark for fixing the price, as simple as it may be! Well, at least we’ve set the background principles, we can now look at similar successful software and services in similar fields; I’m not saying same fields as your service is a new, revolutionary idea, right? This also means that you won’t find many references to compare. At least you can be happy that with online services, all the piracy problems are over.
Another way to get an idea on price is to ask for opinions to your followers, or on The Business of Software, answers.onstartups.com, or Startuptodo. But only those who have a complete and clear picture of the entire pricing policy can take a decision; and I hope that will include you, in the end
For our two new services, we actually fixed the price through a session where the entire software house took part, and voted. So we fixed a price (39$/month) for both our services, with only a limitation for really huge customers.
We’ll see whether it works…
Don’t just roll the dice – A usefully short guide to software pricing – by Neil Davidson
Camels and Rubber Duckies – by Joel Spolsky
The Web Startup Success Guide – by Bob Walsh