Should You Charge More For Your Product?

My partner Seth Levine has an outstanding post up today about the freemium model.  It’s titled Pricing models, the freemium myth and why you may not be charging enough for your product and is worth going and reading right now.

He covers a bunch of stuff, nicely divided into the following topics:

  • Beware of too many pricing tiers.
  • Have a clear delineation between product tiers.
  • How about overlay features that you charge by the drink for?
  • Be careful what you put a tariff on.
  • The freemium myth.
  • Don’t be afraid to charge for your product.
  • Beware the long “trial period”.

Seth has become “the pricing model guy” at Foundry Group – we’ve been dragging him into every pricing conversation whenever they come up.

I have one counterintuitive thing to add – it’s often easier to raise prices early on than lower them.  While many pricing curves assume a decay curve toward lower prices over time, early in the life of your business you should consider gradually raising prices until you hit a natural price ceiling.  Grandfather your early customers into the old pricing for a period of time (three months to a year) – they’ll feel like they’ve gotten a great deal for being an early adopter. Don’t forget to thank your early customers for their support.

Interestingly, this is the opposite of some very popular (and successful) pricing strategies, such as Apple’s for the iPod and the iPhone.  High early prices for premium demand followed by steady price reductions over time as new products are introduced.  If you are an established premium provider of a high demand product, especially for a physical good (e.g. a phone) vs. a digital good (e.g. software), this approach makes sense, both from a manufacturing supply perspective as well as a volume manufacturing perspective.  But, if you are a digital good, you have a lot more variable manufacturing capacity (as long as you know how to quickly scale) and more margin to play with (ahem – usually 99.9%.)

Seth makes an important balancing point that you shouldn’t start out with too low a price point.  This is especially true if you aren’t willing to raise prices to their natural ceiling over time.  But, if you have no idea where to start, and have the courage to increase price quickly as you find early demand, consider a relatively low price point “guess” and then move it up until you find a ceiling.

  • deckerton

    What are the (non-obvious) indicators of a ceiling?

    • http://www.feld.com Brad Feld

      The most obvious one is that you start having existing customers drop off (churn). But that assumes enough time has passed for their grandfathered accounts to move to the new price point.

      Another one is that your cost for customer acquisition begins to climb meaningfully. While this could be a function of several things, one of the indicators is price point.

  • http://twitter.com/Deckerton @Deckerton

    Pricing relative to a change in CAC is a great idea. With feedback from yourself and Seth, I might be able to crack this nut! Gracias.

  • PhilSugar

    I was thinking about this on Friday and posted some thoughts at http://www.justanentrepreneur.com

    I think one of the biggest challenges is trying to increase price as time goes on.

    I'm not saying you can't start off with people using "fewer units" of your service like Salesforce but raising prices when you are established is tough.

  • http://twitter.com/Roger_Tee @Roger_Tee

    Brad, Thanks for pointing out Seth's blog post on this and then adding your comments.

    We have through trial and error arrived at some of the same insights Seth and you share but not some of the others (Short trial periods).

    I think all the free/freemium services of the last 10 years have created an amazing pricing opportunity for entrepreneurs where an online service can separate itself from the competition and get traction by actually being significantly MORE expensive, even WAY more expensive. But it requires something form the entrepreneur they may not be comfortable with. More on that below.

    Chris Anderson in his book "FREE: The Future of a Radical Price" I think is projecting "FREE" to continue when in fact it is a local phenomenon and that right now we are hitting an inflection point back toward "You Get What You Pay For".

    His core mistake in his "FREE" book is in not recognizing some fundamental universal laws. The "No Free lunch" law (2nd law of Thermo) and the "Time is Money" law (Hawking's unidirectional 'Arrow' of time). The "Free" effect, economically speaking, is a very local phenomenon that cannot extrapolate or scale broadly as a true basis for economic stability. In a "mathematical model of economics" sense Free is a "local slope" in the curve that taken farther hit's an inflection point in the "economic model of the internet exploration curve" we are traveling on.

    The key to true success with a startup in this new local area of the curve we are entering context is understanding what your paying customers care about and what they need help with and then doing something that directly meets that need. Hmmm. Sounds like a place we've been before. ;-)

    The core issue for ALL small/medium businesses today is they are overwhelmed and "under-timed" (Not enough time in the day) trying to survive a strategic reduction in consumption by consumer's from the materialism ("Walmartism") of the 90s/00s.

    NONE of the businesses you want to sell a SaaS service to have the problem of "not having enough logins to cool new, Freemium SaaS services with cutesy-pie names".

    We have a business solution we were initially thinking of offering at $49/month as a self-service, SaaS solution for businesses and hoping to move up in price over time with features. That was not working and we found ourselves lost in the clutter of options businesses had to choose from. So we decided to change the basis of competition from "features to service" from "ease of use of a SAAS Technology tool" to "we run the tool for you and deliver you the results and the bill so it's really easy for you to pay us".

    So we made this change and we moved the initial baseline price to 10X of $49 that, yes thats' right 10X ($499/month) Since we have actually had way more success in getting serious customer interest and we may move the price up even further. The key was in recognizing SMB businesses desperately want the simplicity of a "soup to nuts" bundle of product+services that result in a full outsourcing of various core business functions.

    Most of them actually HATE technology-centric, SAAS products that have more cool then results.

    When you offer a "soup to nuts", "we'll do it all for you" solution it immediately translates in a small business owners mind as "a time saving way to ease my mind and help me put the fire in my hair out."

    The challenge to doing a startup like this is the management challenge of scaling a 'full service" SaaS solutions model. Fortunately my team and I have a lot of big company experience building and leveraging VAR(Value added Reseller) programs that deliver both product and personalized "soup to nuts" services around the product.

    The hype-filled days of "Build a cool online service that goes viral on it's own" are I think are pretty much over now. Now the real, hard, grungy work of actually understanding a business customer and serving their core needs is back. Thank goodness.

    R

  • Gary Whitehill

    I would argue that the way in which you price your product is also a function of the type of sales model (B2C vs B2B) and the strategic plan for sales (ie do you have a sales team, is top-tier customer service a priority, etc).

    • http://www.feld.com Brad Feld

      Yup!

  • http://twitter.com/manukumar @manukumar

    Loved Seth's post. It is a great complement to my recent post on Revenue Development (http://k9.vc/revedev) – building something people want and are wiling to pay for.

  • http://graduatetutor.com/ senith @ mba tutor

    Thanks for the post Brad. Takes guts to increase prices when you see things work well. Worth the risk as you can always drop back if results show you went too far.

  • http://twitter.com/richandcom @richandcom

    Good topic. Let us offer experience from another direction. Context: Our clients offer high-value expert advice and professional services/IP. We get them clients.

    This reminds us also of the idea: "Money isn't the most important thing, but it's the easiest to talk about."

    A common mistake we see is gross underpricing. This can lead to a vicious-cycle.

    Underpricing is often a symptom of bad marketing. Without s steady flow of prospects there is a tendency to take whatever comes at whatever price they'll pay. This then leads to overwork and under pay which eventually means the services degrades or goes away. A "wasting" pricing strategy, so to speak.

    Another challenge in the current market is getting access to premium offerings and products. What if you want to pay for the best?

    Selling cheap is a sales and transactional strategy. A business strategy is finding a market that will pay what the offering costs along with a profit. Part of the reason we question "free." "Free" may be (may) an OK sales strategy, not a business strategy.

    Finally, time, not money, is the limited (and perishable) commodity. You may fool other people (your clients?) — don't fool yourself.