The Pricing Problem

by Pascal Rettig posted Oct 15, 2010

We've been thinking about the price points for Webiva for a while now, and gotten different advice from different people. Pricing software is a funny thing. The marginal cost of software is negligible compared to the upfront costs.

The perennial free market go to - the invisible hand of supply and demand - makes little sense. Downloadable or SaaS software effectively has an unlimited supply. We must instead fall back onto solely a Price vs. Demand graph, which shows a smooth curve of increasing demand as price decreases.

That idea is, of course, also complete nonsense. As discussion with other entrepreneurs and the excellent book Predictably Irrational demonstrated - the price of a good isn't always correlated negatively with it's demand. Higher cost and perceived value have often have a positive correlation. The first pages of the seminal book Influence: The Psychology of Persuasion tell a story of a assistant who misread their boss's scrawled note to halve the price of some jewelry that wasn't selling and had instead doubled the price. When the boss got back from vacation, she was surprised to see that jewelry that wasn't selling had sold just fine at 2x the price. A higher cost can actually result in a higher demand for your product,  resulting in a feedback loop in the middle of your pricing strategy.

So What's a SaaS provider to do? If you've got competitors, they've most likely already set the "perceived value" price point in your customers mind. You'll most likely need to price it in line with what they are charging. If you're the 'Cadillac' of the space - you'll need to up the price so that people know you're better. If you can make the argument that you're leaner than your competitor, i.e. solve a smaller problem but solve it better, then you can charge less without looking like the dime-store equivalent (See Basecamp). Underpricing your competitor, while it sounds like a good strategy, often begs the question as to why your product costs less (and go ahead and try to explain "0 marginal cost" to people). This is one piece of feedback we've gotten time and time again in discussion with potential customers and other entrepreneurs (This doesn't apply if the space your startup is in has been commoditized - then price is the go to decision maker)

However, of all the pieces of advice I've gotten, there's only been one that's been the most consistent: don't fret too much, you can always change it.

Interestingly enough, I think that's the one piece of advice that I believe is categorically not true. Or only marginally true but with a big asterisk.

True, you have some leeway with pricing, but not as much as you think. The Chargify flareup from Monday made that pretty clear.

Many people (Webiva included) are pretty put off with the changes Chargify made to their pricing announcement (effectively moving us from paying them $0 to $1200 a year) We're put off enough that we're going to extend our open-source Shop module with recurring billing instead of sticking with a recurring provider. We learned our lesson building an important piece of our revenue infrastructure on someone else's beta API. Regardless of what they do next, the cat's out of the bag, they've done it once after all and they can do it again (They did respond quickly in the aftermath, and have added a bootstrapping plan, but for us the decision's been made)

Here's the thing: I personally don't think there's anything wrong with a company changing their pricing. We were put off, but that doesn't mean I blame them. They, better than anyone else, know what they need to do to survive and thrive as a startup. Most likely their previous model just wasn't generating revenue in a sustainable form. The sudden change, however, and lack of grandfathering in existing users, makes it strikingly clear what's theirs and what's yours.

There are difficulties changing your pricing at any end of the spectrum:

Once your price is set, you've set a jumping off point in your users' minds. This is something that can act as a benefit - Apple, for example, plays the price point game very intentionally and quite perfectly  - but if you don't take this into consideration when pricing your startup's product you're going end up annoying a lot of people and angering your early adopter base, whom you most need to be Earlyvangelist's about your product. Ballpark your pricing strategy correctly, otherwise you might end up with metaphorical Internet torches and pitchforks running up the hill.