How much to charge for your Web App?

http://creately.com/blog/experience/how-much-to-charge-for-your-online-service/

by chanux • 17 years ago

68 36 17 years ago

patio113• 17 years ago

I'm torn. On the one hand, it clearly succeeded as a publicity stunt.

On the other hand, in terms of discovering what users will pay for Creately, the experiment was a failure. By essentially structuring the system as "donate us money", you prime the users to think "Hmm, even $1 is being generous to them. I'm a big spender... I'll go as high as $3." That is, ahem, an insane price point for any service.

You have to convince someone to dig out their credit card to pay you money. There is essentially no differentiation between $3 and $9 at that point, since neither amount is an appreciable amount of money to working professionals. (Students are another case. Since they're going to complain long and loudly about being made to pay, and are going to do their level best to steal your service anyhow, I think you can quite rationally make the decision just not seek their custom. Alternatively, you can segment your plans such that one which is free but helps your marketing meets their needs.) There are tremendous advantages to the business, however, from moving from $3 to $9. (Revenues net of Paypal fees just increased by a factor of four.)

Note that $9 is still VERY VERY cheap. The fully loaded cost of a professional exceeds that for every ten minutes. Also, if you look at any SAAS business they'll tend to tell you the same thing: the most expensive plan, which is typically bought by employed professionals spending other people's money, brings in more revenue than any other plan. This has been mentioned by Wufoo in interviews, it was true of DropSend when they published their numbers, and I know it to be true of three other companies who have not given me explicit permission to make the fact known.

Additionally, as Creately noticed, the kind of people who are attracted by "This only costs a buck!" are the worst customers in the known universe. They cause hugely disproportionate loads on your support resources, and feel entitled to do so because they're Paying Good Money For This, Damn It. They tend to churn like crazy. They'll fail at the most trivial of tasks (like typing in their credit card details) and then blame you for it. (When you spend a buck on something, if something goes wrong it is the merchants fault, the lazy bum. When you spend hundreds on something, you darn well check to make sure it went through alright.)

thegeekster• 17 years ago

Perhaps now that we are moving into an age of micropayments the smaller dollar amounts have regained their separation. i.e. a buck vs a fiver.

patio113• 17 years ago

I understand how someone typing a blog post on their $2,000 Mac while listening to music on their $300 iPod could perhaps think that we are moving into a new age of micropayments because he paid $1 for a fart app on the the $600 iPhone in the pocket of his $100 jeans, but I don't agree with him.

jacquesm7• 17 years ago

Micropayments have been implemented many times in the past but to date nobody has really made a go of it.

There are several reasons for this:

Micropayment services tend to be wallet oriented, pre-paid and therefore there exists no direct relationship between the merchant and the customer. This relationship is a very important component for the merchant.

Micropayment services tend to suffer from a chicken-and-the-egg issue, if not enough sites use a common system then why would a consumer put their money in to that particular wallet.

To date, in spite of many 10's of millions of investment money sunk in micropayment systems there has never been a clear winner, the minimum charge seems to be stuck at roughly $.80 which is way too high to qualify as a micropayment, and a merchant would only see a very small fraction of that.

To really function a micropayment system would have to be able to seamlessly charge sub-cent amounts and put the majority of that in to the hands of the merchant within two weeks of incurring the charge.

k7d• 17 years ago

I tend to agree that this is useless in terms of figuring out the right price point. It may also have a kind of psychological devaluation effect on the service.

As a publicity stunt, it makes sense. Although it would make much more sense for an already well known entity to stir things up a bit (just like Radiohead did with their album).

jacquesm7• 17 years ago

The payment method matters a lot too, paypal and credit cards are for practical purposes unusable for services under $2 / month, you'd have to charge for a year in one go, and annual renewal rates are terrible, they're much worse than $5 / month because people will no longer remember what that charge was for and they'll cancel, or worse, they'll charge back and it'll cost you more than you made in the whole year ($25 chargeback penalty, even if it isn't your fault), not to mention a hit on your chargeback record which could at some point cost you your merchant account (usually a 1.5% limit on chargebacks).

$10 (or $9.95) is where the game really starts, less than that is really only to get people to subscribe for trial purposes for 3-10 days with an automatic up-sell to the full rate if they don't cancel.

That's a tried-and-true scheme and it is good for a very large portion of all online revenues on services.

The biggest problem - and you address that somewhat in your last paragraph - is that people that pay $1 feel just as entitled (or even more in some cases) to your premium support time, because, after all they are now a paying member, they intend to get their moneys' worth.

On a $1 charge you can afford support on roughly 1 in 50 customers, it had better be a very quick to resolve issue.

prakster• 17 years ago

Did you consider "Free" as ONE OF the amounts in the field? That could conceivably have given you the extent of the gap between "Free" and "Paid" for your product. You could have used the data to figure out your the correct price points.

I'm sure most hackers in this discussion have heard of the famous article by Fred Wilson 3 years ago, but here it is anyway: http://redeye.firstround.com/2007/03/the_first_penny.html

petercooper• 17 years ago

For a once-off purchase, I totally agree. For a subscription, there's a big difference there.

I know not everyone's like me but I tend to calculate the annual price for subscriptions I have. So even though I almost never use it now, paying $1.99 to the Problogger forum is no big deal. But $9.99? That'd be a $23.88 vs $119.88 - a pretty wide gap. There are lots of things I wouldn't spend $9.99 a month on something that I'd spend $4.99 a month on.. a flowcharting app might well be one of those things.

ohashi5• 17 years ago

What if this were done iteratively? As they add more features to the premium, one could try creating different tiers with higher and higher starting points, you could then really start to see and breakdown where different segment's fall in the value scale. Anyone that paid more than the next tier, automatically gets in(can donate more if they want)? I am sure this would lead to too many plans (would probably need a moving bar to keep the numbers of plans reasonable).

robryan2• 17 years ago

Given the prices listed of comparable products if they deliver more value than there competition they should be charging at in the same range.

If your app gets the job done better than visio for a company why shouldn't they pay you a comparable amount?

trevelyan• 17 years ago

Because you are working to put the competition out of business?

piotrSikora• 17 years ago

But, in my humble opinion, fighting with lower price isn't good option (for anyone, in the long run). You should fight with features and/or better quality.

jacquesm7• 17 years ago

I have a funny story about this subject. A while ago when we were charging $9.95 per month for the site and I felt pretty good (several thousand members) I was visiting someone that also runs a large for pay website.

He looked at what we were doing and he said 'double your price'.

I laughed at him, and said no way, people will cancel in droves, if more than half cancel it'll be a net loss.

Sales went up.

We basically doubled our income overnight.

jules2• 17 years ago

Wow. Did you get complaints from existing customers?

jacquesm7• 17 years ago

No, the opposite, they made sure that their credit cards were updated well in time for fear of losing the good rates.

The really interesting thing about the whole affair I think is that our retention became much better, and that's the hardest figure to tune in any online service.

If you give me your daily signups and your charge rate I can basically tell you what your annual turnover will be when I have the first week of statistics. It's scary how predictable that is.

Say n is your number of signups per day, your retention is 'industry average' (3 months or so for most consumer stuff, 12 months for b2b) and you charge 22.95, then for a consumer product you will make roughly (say 10 signups / day average across a month) 10 * 90 * 22.95 / month after 3 months of ramping up, for a b2b product you'll make 10 * 365 * 22.95 per month after 12 months of ramping up.

The retention is very important because it determines how far you can grow, a 1 month increase in retention in the above (b2c) scheme is 33% more turnover, but retention is the hardest of all the variables to get under control.

It is related to customer satisfaction, card expiry, product life cycle and so on, the signup rate is only affected by the quality of your marketing and your presentation.

edit:

When people launch a for-pay service and they see their first stats they usually think that the income is going to grow unbounded, but every product has a life-cycle and you really need to factor that in to get any realistic amounts.

This mistake is also present in the business plans of many start-ups, you have to assume some upper limit to the life cycle of a customer to get realistic figures.

It is usually a safe bet to plug the industry averages (3, respective 12 months for b2c or b2b) in, you may be a bit better but usually not much unless you have a very addictive/compelling product.

It is also good practice to over-deliver by a bit compared to your plans, if you have investors it keeps them happy.

chandika• 17 years ago

Gotta try it with my service as well. One thing keeping us back from pushing it further up is the current, lower pricing.

What happened to the existing users when you doubled the price? Did your cancellations go up? Or did you freeze the price for the old users?

jacquesm7• 17 years ago

We gave them the option to lock in their account or to wait for expiry of their card and then get charged the new amount.

Most chose to lock in, and a very small number of them still have that rate even 3 years later.

We have fewer members now but that is due to other reasons.

Cancellations for the locked in accounts went down because those people thought they were getting a very good rate and knew that if they canceled and would sign up again it would be at the new rate.

At the time our retention was 3 months, so within 3 months the larger portion of the accounts were being charged at the new rate.

ciex• 17 years ago

I found the following approach very interesting:

* Generate a random price in the acceptable range (but don't tell the user about it)

* Let the user know that you made up a price and let him enter what he would pay

* If the user entered a higher price than the random one he gets the product, otherwise he doesn't

Of course this only works if you keep the user from trying to do this multiple times, for example by offering an invite-only system and giving every invitee only one chance.

gcheong• 17 years ago

"The PWYW scheme did a good job in helping us gather invaluable data on our customers, but may not be sustainable over a long run. This is due in part to the fact that although we ask people to be Fair, not everyone is."

When fair is defined as "pay what you want", how do you define unfair?

How much to charge for your Web App?

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