Pricing a new product
“What price do we charge?” That question brings up endless debate. If you have a business partner, you probably argue about it. I know we did at Inkling.
This is an answer to: How did you choose your pricing model?
There’s a lot of great advice. Things like using split testing to experiment with different prices. Or an interesting psychological principle called anchoring that can occur when you have multiple price points. But here are a few thoughts on pricing that have been helpful to me.
1. Pay for your own product.
This is the most important. It’s simply to take dogfooding to the next level. Dogfooding is the act of using your own product. So I don’t just use the product I create. I also take out my credit card and pay for it like everyone else.
You might think that’s a trivial detail. It might even seem silly, since I have to pay credit card processing fees just to charge my own card, when I could use my software for free. But something awesome occurs when you get as close as possible to what an actual customer feels while paying.
I picked up this habit a few years ago, when I built Tgethr, a collaboration tool. It started with a few pricing tiers including a $100/month plan. I was the first one to put in my credit card.
Because of my heavy usage, I fell into the $100 plan. But after a couple months, I’d watch the $100 charges on my credit card statement and it felt like I was spending an awful lot, especially compared to other charges I was making. Therefore, we changed the plans to offer more storage and features at lower price points so I could fit into a $25/month plan. That felt a lot better to me as a customer.
I was the very first person to take my credit card and start paying for Draft, my most recent software project to help people write better. Just like everyone else: I get $3.99 charged to my card each month. I get the email receipts. I have to deal with my credit card expiring. I have to spend $5 to get my own blog post edited by my own staff.
Draft’s pricing is where it is because it’s what I feel comfortable paying as a customer.
2. Create “nagware”.
I’m impressed with Sublime Text’s pricing model. Sublime is a popular text editor. You can use the application unrestricted without paying, at the cost of the occasional reminder to purchase a license. Sublime’s developer doesn’t have to fear a certain feature, which could convince someone to buy a license, will go unnoticed because it’s behind a paywall.
With Draft, instead of spending the time worrying about price tiers, I do what Sublime does. I let people use Draft for free. If they keep using it, they’ll get occasional reminders via an Intercom pop-up message to support the product with a subscription plan.
3. Just decide something. It’s temporary.
Pricing decisions aren’t permanent. As I look at the software services I get the most value from, they’ve all changed their pricing: Netflix, Indinero, Shopify, Intercom.
Tgethr got new prices as I learned how us customers used the product. Draft goes through changes too. I knew I wanted to have a $5 copy-editing service. But I also needed a more expensive tier so that users can pay for more thorough edits. I took a stab and charged $10 for 45 minutes of editing.
It turned out to be popular. Too popular. Demand started to eclipse my ability to supply the service. So I recently had to increase the $10 plan to $15. No big deal. I made sure the price change was noted inline with the payment buttons. I even emailed the first customers using the new $15 price point to make sure they weren’t surprised.
4. Price in reverse.
wrong: build something and then figure out how much you can charge. right: choose your desired price, then figure out how to justify it.— Amy Hoy (@amyhoy) March 5, 2012
You might have thought you could charge $20 for an ebook you were going to sell with advertising. But if you work backwards with some common rules of thumb (1.5% conversion rates, 12 month customer lifetime, etc.), you might see that you’ll be spending $100 a month just to make $24 at your original price. You’re going to have to charge a lot more than $20, and you’ll have to figure out how to justify the higher price. (e.g. Creating a course or software instead of just an ebook.) Read more about this technique.
P.S. I’d love to meet you on Twitter: here.
Or read other advice on choosing your pricing model at Startup Edition.