Decision Making Around Pricing
March 21st, 2018
Pricing decisions are multi-faceted (your product has an infinite number of potential pricing scheme and price points) and each part of the decision is susceptible to bike shedding.
Having been through four pricing shifts at Sentry, I wanted to share ideas on how to approach this discussion.
Explicitly Identify the Goal
You don’t want your pricing conversation to devolve into rearranging the deck chairs on the Titanic. If you’re discussing a pricing change, you do it to grow revenue.
If you’re even having this discussion, it means your product isn’t a commodity where prices dictated by the market. This means customers aren’t coming to you because of price alone, so the marginal customers gained by lowering prices almost never makes up for the loss in per-customer revenue (we absolutely found this to be the case at Sentry).
Thus, companies almost never proactively lower prices unless they’re trying to grab marketshare. This same reasoning is why patio11 is so fond of advising SaaS businesses charge more. Obvious truths make for the best advice.
For instance, goals might be:
- The right plan should be obvious.
- The price points should make sense to customers.
- Businesses should pay more than hobbyists.
Who are your users?
This naturally leads into feature segmentation. Before Sentry, I associated feature segmentation with the worst of Salesforce-style plans, making the product as unuseable as possible to free or lower plan users. In fact, it allows a business to provide a reasonable product at an affordable price point to its smaller customers, while still making money off its deeper-pocketed customers. Once you clearly defined your user segments, plans will tend to become much more obvious.
The Marketshare Fallacy
“Let’s drop prices to gain marketshare!”
Consumer internet companies often rely on powerful network effects. The B2B segment rarely has the same benefits. Of course, word-of-mouth and becoming an “industry standard” are useful (see Salesfore), but they don’t build the same moat that social networks (Facebook, Instagram) or marketplaces (Google, eBay, Uber) have by virtue of their majority share.
It’s easy to understand whether marketshare matter to you: Does having a majority market share improve the core product value? If not, spending exhorbiant amount of money today in the hopes of raising prices after you win the market devolves into the old joke:
Two business partners are chatting and one says, “We’re losing money on very sale.” The other one responds, “We’ll make it up on volume!”.
Atlassian and its wonderfully successful expansion model has firmly “cheapium” alongside the “freemium” strategy. I can confidently say Dropbox and GitHub do not treat their “Plus” and “Personal” plans, respectively, as the future of their revenue. Just as the free tier of grows marketshare and incentivizes adoption, these cheap plans are means of retaining and engaging your free users. Giving away too much on your free tier has the dual problem of increasing your infrastructure costs and decreasing your paid conversion rates. A “cheap” tier helps you segment the obstinately free and the willing-to-pay users…and also collect their credit cards in the process. Upgrading a user is much easier than converting one.
Dropbox’s “business plan” is 150% more. GitHub’s is 200% more. The future of their companies will depend on continuing to build more features (or entire new products) and create value to drive your target user segments into most expensive plans.