💵 Pricing

Updated at 2013-06-14 23:12

This note is about pricing goods and services. Related to monetization and B2B pricing. When you have your monetization model planned, you have to decide the price.

Don't ask the consumers what they would pay. They will tell you how much they want to pay. Not how much they would be willing to pay.

Price of a product has nothing to do with what it costs to produce. Price is based on supply and demand. To understand supply, figure out the alternatives of the product. To understand demand, figure out the benefits of the product and what needs it satisfies. The benefits of a product can be different for each customer. More about this in product notes.

Price is all about value-to-price-ratio. Your sales copy should target to show the great value the product gives. If you make your product appear more valuable for the customer, you can increase the price. You should always deliver the promised value in the end.

Price Skimming = price is higher to emphasize product quality and lowered later before competition enters the market. Penetration Pricing = price is lower to open new markets and attract new customers.

Pricing has no uniform formula. Good price vs. bad price depends how well the price serves the aims of the firm.

High price will reduce the total size of your customer base. Low price will lower the expectations of quality.

Pricing is mainly balancing between buyer volume and product price. You need to find the optimal spot to maximize your monthly revenue. But you may counter this is by offering different plans or products for different customer types, although that is not always possible. E.g. GitHub offers individual and enterprise accounts but there is not Reddit Gold Membership of enterprises.

Mainstream Hit:         low price, high volume, simple
Normal Product:         low price, low volume
Enterprise:             high price, low volume, complex

Enterprise Hit:         high price, high volume

In digital sales, price sets expectation on how your sales works. Low cost products are usually self-service systems where you register yourself and with no or minimal support. High cost products are usually negotiated, tailored and offer full support or consultants.

Software are generally ridiculously under-priced. Your software costs less than 10% of cheapest full-time employee and the software probably gets a lot more done. This is because people do not generally see how much value a software can bring.

User experiences is hard to replicate. If you have unique and well thought user experience, you can increase your price with ease.

You probably will not survive by offering only a single product. Consider if you can split your planned master product into many separate ones.

Start pricing as early as possible. Preferably as soon as you get minimal viable product launched:

  • Modern customers are used to "betas" and "preorders".
  • Paying customers are best form of validation.
  • Paying customers promote your product forward.
  • Paying customers will motive the whole development team.
  • Paying customers attract investors.
  • Low revenue may freeze the development.
  • Low revenue may cause you to partially sell the company way too soon or way too cheap.

Pricing is never final. You can and will change your pricing later. But do not screw existing customers. While testing prices, work in small increments e.g. 2%.

Avoid giving discounts. Prefer giving additional stuff for free.

Removing dollar sign from price tags makes it appear cheaper. Avoid doing on the web because context does not tell what currency it is.

Print prices in a smaller font makes them appear cheaper. Small font means small price.

Stating that that the price is cheap works. If your product or service costs less than average, state it.

# bad
a $5 fee
# good
a small $5 fee

Nine is a magic number and avoid the zero. $39 beats $34 and $44 in sales. Customers that will not pay $2000 might pay $2118.

Include the original price on sale. Show pre-sale next to the new price e.g. "regular $48, SALE $39".

Scarcity boosts sales if done right. People value a cookie in two cookie jar more than a cookie in ten cookie jar. Same with time limit but less powerful, available today only. Will backfire if customers notice you are using scarcity tactics, thus scarcity is really hard to utilize in digital distribution.

Never offer unlimited plans. Unlimited plans never work in practice.

Use premium programs and memberships. Giving customers labels or ranks will increase their spending while not affecting non-labelled customers. Offer something extra for your special members.

Price Anchoring

$20 jeans that cost $20 might feel good to buy, but $60 jeans that cost $20 feel event better. Even if they are the exactly same jeans.

Nothing is cheap or expensive by itself. Things become cheap or expensive only when compared to something.

$39 book is not bad compared to $79 book with the equal value.
$2,000 wristwatch sells better next to a similar $12,000 wristwatch.

Include high prices you are not expecting general users to buy. Those that see great value in your product, or those that have more money than they can spend, may buy it. Of course, offer something extra in that package.

Consider changing the price perception. Especially if you need to charge more than your competition. Fishy, but works if nothing more can be done to lower the price.

# bad
$1000 / year.
# good
$1000 / month.

# bad
$365 / year.
# good
$1 / day.

Use design and colors to say your product is expensive if it is. You are once again changing the price perception e.g. buying beer in store vs bar.

Never ask different prices for the same product from different customers. You will be in trouble. You can ask different price for different products that do exactly the same thing though.


Consider offering 3 packages/plans per product/service. Middle option is the one you want users to buy while third price is overpriced and first one is to cut support costs. Avoid having over 5 options.

  1. Bottom: Only seemingly less functionality than the normal option but do not offer customer support to this tier. Basic customers will avoid taking this but there are those people that always take the cheapest one and those are the users that see least value in your product. They will call your support more than all other customer combined and just badmouth your product.
  2. Normal: The price you want users to pay. Should have noticeably more value than bottom, so that value outweights the cost, but not too much.
  3. Contrast: Some people buy this always, much more expensive and make it truly more useful. Make them feel privileged.

Present all the options clearly. Show what the differences with naming and showing comparisons. Provide external site for full comparison chart. Make it totally clear what each type of user should buy.

Team Size 5, Team Size 15, Team Size Unlimited

Starter, Professional, Team, Business.

You can also offer the fourth: Enterprise. Again make truly more useful for companies. Should cost around eight times the Contrast price.

You can optimize your bracketing based on customer distribution. For example, if your support costs are rising, you can increase price of normal package and reduce price of bottom so more customer go to bottom tier.

Study: Subscription

What would you buy of the following?

OPTION SETS PRICE % THAT SELECTED ----------------------------------------------------------- a. web subscription $59 68% c. web and print subscription $125 32%

a. web subscription $59 16% b. print subscription $125 0% c. web and print subscription $125 84%

Study: Trip

You win a free flight trip, which one do you choose?

OPTION SETS % THAT SELECTED ----------------------------------------------------------- a. Free trip to Paris 50% b. Free trip to Rome 50%

a. Free trip to Paris with breakfast 70% b. Free trip to Paris without breakfast 10% c. Free trip to Rome with breakfast 20%

Study: Beer

OPTION SETS PRICE SELECTED TOTAL PROFIT 10 CUSTOMERS ------------------------------------------------------------------------- a. Premium Beer $2.50 80% $23.6 b. Bargain Beer $1.80 20%

a. Premium Beer $2.50 20% $19.4 b. Bargain Beer $1.80 80% c. Cheap Beer $1.60 0%

a. Organic Premium Beer $3.40 10% $25.2 b. Premium Beer $2.50 80% c. Bargain Beer $1.80 10%

Case: Digital Pigeon

OPTION SELECTED --------------------------------

Layout with all plans side by side.

Free 73.50% Basic Trial 16.20% Professional Trial 7.30% Teams Trials 3.00%

Total Conversion rate 32.90%

Layout with free plan under all others and with smaller font.

Free 48.80% Basic Trial 28.80% Professional Trial 19.40% Teams Trials 3.00%

Total Conversion rate 29.50%