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Setting a Price, The Black Art Of

We are setting the price of our product in a relatively new market. No one really knows how much things should cost. Competing products average about $2 or $3, however, in our rapidly changing microcosm, our product is momentarily much much much better. We have gotten a lot of extremely positive feedback along the lines of "Nothing competes with x."

These are impulse purchases. As a consumer I feel little difference between spending $3 or $6. Both seem like very small amounts of money.

However, as a entrepneur, there is a huge difference to my company between $3 and $6. That is, if most consumers are as ambivalant about prices in this range as I am.

I have collected statistics on the competition and their prices, and I just don't feel any smarter. They are different products. And different businesses-- many are VC funded and so are likely to be more interested in establishing a branded presence in the market instead of generating cash flow.

Somewhere there is an arty magical space where we maximize profit. How do you guys find it for your products? Right now I am going on a gut feeling, but prefer to have more science or other people's experiences involved.

anonymous
Thursday, June 19, 2003

If the other products in your market are already established then they are probably selling at or close to the equilibrium price so if you think yours will sell because of higher quality then I would raise the price a bit.

Dave B.
Thursday, June 19, 2003

Why don't you experiment with different pricing?

Amazon does it, too.

John K.
Thursday, June 19, 2003

This is why marketing (as a profession) exists.  You need someone with a marketing background.  They'll do the research and find the optimum pricing point.

too tired too lazy
Thursday, June 19, 2003

We are a micro-company and don't have the resources to consult with a marketing person.

The Amazon/DHL/etc price fluctuation system is cool. Unfortunately, our distribution channel can't do that.

Have any of you other software entrepreneur's figured this out?

Is there anything better than what they did on the Hudsucker Proxy?

anonymous
Thursday, June 19, 2003

In my biased opinion, you can't make it without a marketing person. That person doesn't have to be full time, but without real honest-to-god marketing going on, you'll likely never make any inroads against existing products.

Brad Wilson (dotnetguy.techieswithcats.com)
Thursday, June 19, 2003

Here's an expert in software pricing:
http://www.softwarepricing.com/index.cfm

I don't know enough of your product to tell, but one good way to measure elasticity of demand is to set a high "suggested price" and then experiment with different discounts to see how they affect demand. If your price point is really $3-$6, you're probably planning to be selling millions, in which case it should be really, really easy to divide up the world with different discount offers and see which ones result in the highest profit. (PS elasticity of demand is a term from economics. A highly elastic demand means that people will keep buying your product even if you raise the price a lot. An inelastic demand means that if you raise the price by a tiny amount your market disappears.)

Don't forget that prices send messages, too. Most people think Perforce is the most capable source code control system on the market. How much of that is due to their high price point? A lot, I think. People think Photoshop is better than Jasc or Corel, because it costs so much more, but frankly I think they're all about equivalent.

We're facing a similar problem with CityDesk. The availability of a $79 "home edition" reduces people's perception of the value of the product. So they perceive the $349 professional edition as being overpriced. I suspect that if we eliminated the $79 option we would make a lot more money.

And, yes, this IS rocket science. Entire businesses have been formed based on creative price points for commodity products (the Starbucks $5 coffee comes to mind)

Joel Spolsky
Thursday, June 19, 2003

That CityDesk example is probably true. Also the fact that you use the word "blog" in your literature. Depending on your market, you probably could've set the price point at $1,000 per license and made decent money.

Though the $350 price point allowed me to expense it - it made it under the $500 amount that requires senior management approval (this was just after the dotcom bust).

I also think the silly picture of the people hovering over the computer on the homepage yells "stock photography" a little too loudly... Remember, the people buying your products are web people, they know stock photography when they see it.

My favorite example of pricing is 12 Ghosts. A dozen utilities for $12, and for $24 you get more than two dozen utilities. Brilliant. Who can turn down a dollar a utility? They're small little programs that do pretty neat stuff, but not so powerful that you expect to pay a lot of money for them. ( http://www.12ghosts.com )

On the opposite side of the coin is Spinrite5 ( http://grc.com/spinrite.htm ). A 97kb download that costs $89. Yeesh. Also what it does is voodoo - who knows if that defrag utility really does what it says it does?

Why not find a good selling utility either in the same category or a related category that you think your product is like and price accordingly.

CityDesk, for example, can be compared to Dreamweaver or Photoshop, and it's price bears that out, and that's (as a customer) how I think of it.

Also think of your customers. I tend to think there are 3 levels:

- individual buyers who buy a bunch of $20-100 products and the rare $500 product (but mostly downloads them off kazaa)
- small shops that buy the $500 products (and probably downlaods a few off kazaa)
- giant corporations that buy the $5,000 products.

It's all a matter of scale.

Is your product a hammer, pickup truck, or backhoe?

www.MarkTAW.com
Friday, June 20, 2003

Or…

The company I’m working for has this price system: the software is for free, the service license is 100K and up a year.

coresi
Friday, June 20, 2003

Definately a bulldozer.

www.MarkTAW.com
Friday, June 20, 2003

I don't know if the nature of your product allows to discriminate prices selling different versions of it, thus eliminating certain features in the cheaper version.

The usual approach for this is to create three different versions: begginer/basic, standard/pro and premium/enterprise. The reason to not offer to is that people are afraid of going extremes, giving them the opportunity to buy a standard version indicates him they haven't spent too much or too few.

Logically the difficult thing is to identify the key features for each version, and that requires good knowledge of the domain you are targeting. Then the pricing plan might go as:

- Beginner/basic: $3-$4
- Standard/pro: $5-$6
- Premium/Enterprise: $9-$12 (There are some people that only feel good when they believe they have the best of all, play with that and give the impression that your best version i something very valuable, as Joel indicated).

Of course allow your customers to spend more on you creating easy paths to upgrade for a reasonable cost if they like your product and want all the features.

And remember, select the features of each version wisely. Identify the target for each one and include the features that make the product useful and valuable for the amount you are going to charge, otherwise they will be not very happy with your product.

Hope it has helped.

Antonio J. Estrada

Antonio J. Estrada
Friday, June 20, 2003

This is a very interesting article on pricing I read a while ago:

http://www.fastcompany.com/online/68/pricing.html

Phoenix
Friday, June 20, 2003

What is your marginal production cost? In other words: What is the difference in margin you would have between 2$ and 3$.
If your total cost per item is 1$ then you would have to have an estimated doubleling of sales at the 2$ pricepoint vs the 3$ pricepoint? If your costs are 1.95$ per item, you better hope to sell 20 times more at 2$ vs 3$.

Just me (Sir to you)
Friday, June 20, 2003

you could do it the old fashioned way.

Hold your customers upside down, and shake them for all they have. Add 10% to that figure, and you have your price. :-]

tapiwa
Friday, June 20, 2003

Seriously though,  it is virtually impossible to develop an effective pricing strategy or indeed a competitive strategy without knowing the value of your product to your potential customers.

You could do the cost + x%, which is more difficult where the marginal cost of production is close to zero.

You can find out what your products are worth to your customers. Different customers will have differnet value propositions, so you will in effect be deriving the DEMAND curve for you product. (there should be texts online on derving the demand curve for a product).

Throw in your supply curve, which should be easy, and you will have price point.  The trick is to find the sweet spot where you make the most money, not where you sell the most widgets.

tapiwa
Friday, June 20, 2003

>"A highly elastic demand means that people will keep buying your product even if you raise the price a lot. An inelastic demand means that if you raise the price by a tiny amount your market disappears."

Shouldn't that be the other way around?  The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price.  So with a very elastic demand, the quantity changes a lot with a small change in price, and with a very inelastic demand the quantity changes little with a large change in price.

T. Norman
Friday, June 20, 2003

Us perforce users like perforce because it works
and has a good feature set. I've yet to see anyone
say it walks on water. The price is a bit high.
For my personal needs i would look elsehwere.
But when you have hundreds of people depending
on something it's no that bad.

valraven
Friday, June 20, 2003

>> "A 97kb download that costs $89."

I don't think you can judge a softwares product's price by it's size.  Quality maybe, but not price.


Friday, June 20, 2003

It is difficult to give you any direct suggestions, but here is a little food for thought.

The pricing of the product is not something done in isolation, but it is just one of the element of your "product equation" and needs to be an extension of your product strategy.

I strongly suggest you buy the "crossing the chasm" series to get a sense of the fundamentals of software market evolution.  The best investment you'll make.

In a nutshell, in software markets you will use pricing based on the current lifecycle fo the market itself (not of your product).  You need to understand if you are selling to visionnaries, early adopters, main market or to laggards.  As the market evolves from one state to the other, you will have to adapt your product offering, pricing, channel and positioning at every inflection point between the states.

In main markets (which is where you might be, I am not sure) you need to factor the competition and price to support your positioning.  The major relationship to your pricing is your product's differentiation vs the other products and the current market leaders.  The more diffenrenciated you are, the more you can ask for it ( assuming that you created a differentiator that generates additional value to your target customer.  If not, what the heck were you thinking?).

In short, there is an analytical process to get to pricing, it's not voodoo.  You make assumptions using a model of the market that drives your product strategy, which includes your pricing strategy, and you validate your model and  adapt it as you get results.  The idea to try out in specific sub-segments makes sense.

By the way, this is one of the things that a product manager does for a living, you might consider involving one at some point, it's usually a good investment.

"Product Strategy for High-Tech Companies" is another good choice of reading if you are managing your product strategy.

The last thing you want to do is have a technology or sales driven product company...it usually doesn't work well.  Product companies need to be market-driven.

Hope this helps...

Claude Remillard
Friday, June 20, 2003

>> "A 97kb download that costs $89."
>
> I don't think you can judge a softwares product's price by
> it's size.  Quality maybe, but not price.

Well, the author was advertising it's size as a selling point "it's written in assembly language."

I agree that size != quality, but this is often people's perception. Software sold on a CD-RW is more valuable than software sold on a floppy disc. MS Office is good because it's a kitchen sink application, and you'll never run into a situation where you'll need it can't do what you want. (or so the thinking goes)

Maybe for Steve Gibson's market, 97k is something he can advertise as a positive, but for the world at large, I suspect bigger = better.

www.MarkTAW.com
Friday, June 20, 2003

You know this whole price thing has been bugging me for a while.  A few quarters ago, I wanted to order a software product to help me build some in-house utilities.  The company I wanted to buy from offered a very nice set of products which met my needs.  One of the products was an add-in for Excel, and another one was basically a class library that duplicated the functionality, but outside Excel.

My real need was for the class library, but it was very costly.  I tried to talk with one of the salespeople to see if I could negotiate a reduced price, but no luck.  I eventually settled on the Excel version, which cost less than I was willing to spend for the functionality, and made due with it.

This got me to thinking about how this pricing system works.  Basically, by refusing to take what I was offering, that company left a chunk of money on the table that they could have had.  Also, by letting me walk away with their Excel version for less than I was willing to pay, they also missed an opportunity to make some money.

If you think about this a while, you can see that by setting a fixed price for your product, you are missing the opportunity to get money from anyone willing to pay less, because they won't buy.  You are also missing the opportunity to get more money from folks that are willing to pay more by taking this approach.  In other words, you are boiling your market down to a single representative, average customer.  And it is very costly.  Here's a contrived example:

A product you want 20 bucks for
50 clients only willing to pay 10 bucks
10 clients willing to pay 20 bucks
50 clients willing to pay 40 dollars

If you go ahead with the 20 dollar price policy, you get the following returns from your clients:

The 10 dollar crowd contributes nothing,
The 20 dollar group contributes (10 * 20) = $200
The 40 dollar segment contributes (50 * 20) = $1000

You get a total of $1200 for your product.

If you were flexible with your pricing, maybe working out a private deal with each customer, you could be getting:

(50 * 10) + (10 * 20) + (50 * 40) = $2700 - more than twice as much.

In the software business, almost all of this goes directly to the bottom line because it's basically free to produce each unit of product, after the code is written.

So, to me, it seems like the best approach, if you can figure out a way to pull it off, is to try to work each purchase individually with the goal being to find exactly what the product is worth to the customer.  If that number is greater than the variable costs associated with producing a unit of your product (i.e. greater than the cost of stamping out the CD or sending it over a download channel), then take the deal. Even if it only adds a dollar to your bottom line, it's still a dollar you wouldn't have otherwise.

Obviously, you'd have to have some way to make each product appear "unique" so that customer's don't get mad at your for charging them more than you charged someone else (even though they thought your product was more valuable than the other guy).  Also, above all, you'd need to fix it so that the customers aren't able to figure out what you are doing, or they'll all target the unit cost as what they are willing to pay, knowing you will take it.

You'd also have to have some pretty shrewd marketing people that could help you figure out how to know what a given customer is willing to pay for your product.  This would obviously inflate the cost and complexity of your distribution channel, too. I'm sure there's lots of other details that would have to be worked out.  But to double the size of your market and your revenues, it seems like something worth investigating.  For some products, it might be a snap to pull off.

Disclaimer:  I don't do marketing, don't know anything about it, and might be full of it.  I'd be interested in hearing what other people think, though.

no one special
Saturday, June 21, 2003

I would say that by having the Excel version, they made their sale. They're doing exactly what you said by having different versions available to you, and the fact is, they didn't lose your sale because you couldn't pay for the more expensive product, they made a sale for their less expensive product. I.e. That's what they used to catch customers who didn't want to buy their more expensive product.

Notice that there's an obvious difference in quality, so you know they're not selling the same thing repackaged or restricted.

www.MarkTAW.com
Saturday, June 21, 2003

If their goal was to get a sale, then they did succeed.  If they were trying to make as much money as they could, though, then they did lose out.  They got less for the Excel version than I was willing to pay for it because they offered it at a fixed price instead of trying to see how far I'd go. 

They also lost out because they could have sold me the class library for twice what they got for the Excel version.  If it only cost them the price of stamping out a CD and sending it to me, they basically got only half what they could have.  In addition I walked away satisfied, but not really happy - had to do more work than I needed to.

no one special
Saturday, June 21, 2003

ah, but the cost of customization (even just customizing the price) might have been more than the amount they lost on selling you the 'low grade excel' version instead of a 'low price control' version.

mb
Saturday, June 21, 2003

I also think the sales force required to analyze things on a case by case basis is overhead they probably don't have to deal with now. This product could be a programmer in his bedroom with a $15 web hosting account, and the product brings in a nice suppliment to his income, but would turn into a full time job if he put that much thought into pricing.

I did however think of some examples of multi tiered pricing for essentially the same product: Automobiles and Airlines.

Ford, Lincoln, Mercury and Mazda are all basically the same cars. Lincoln has extra appointments and charges more.

Airlines will gladly sell you the same ticket for $125 and $2,000 depending on when and where you buy it, the major factor being time.

Things like Soda and Web hosting can be bought for greatly varying prices if you're willing to buy "wholesale" - a 1 year contract may get you a 25% discount, and if you're buying from a reseller, they're getting it even cheaper, and so can you if you know where to go.

www.MarkTAW.com
Sunday, June 22, 2003

Joel, Don't be too attached to the CityDesk vision,
put everything into FogBugs.  Maybe expand from there
into a "state of product" web-site for customers
that a manager could update and maintain.  Or
something like that.

mp
Wednesday, June 25, 2003

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