On Pricing Strategy

https://news.ycombinator.com/item?id=42238

by rrival • 19 years ago

7 15 19 years ago

news.ycombinator.com

I'm working on a business model that requires charging something for a web-based service (not consulting/nothing hourly). I've never known where to begin the process of arriving at the 'right' price. Clearly, there are marketing/customer perception implications to:

1) providing something on a free trial basis initially 2) increasing the cost of a service later 3) charging too little and being deemed insignificant "How could $5/month give me that much value?" 4) charging too much and being seen as a ripoff, leaving room for others to step in.

I know it's easy enough to arrive at or at least be aware of a market price (median/average) if there's enough competition in the space to do a back-of-napkin statistical analysis. I'm not sure how that carries over into concepts with a 'first mover' advantage, or markets where competition is light.

I know there must be theory relevant to this (probably volumes). Can anyone recommend a place to start? How have you dealt with pricing your startup's services?

epi0Bauqu2• 19 years ago

It's all about getting inside your target customers' heads and dissecting their buying decisions. Only then can you hit upon the right strategy. When you have drastically different buyer profiles, then you segment the market. In other words, you need to first answer questions like is this an impulse buy, is this a comparison buy, is it personal or company money being used, etc.

My last startup charged for a web-based service. It was a consumer impulse buy and so we tried to keep the price down for that reason. When we got enough size, we ran statistical tests to figure out the best price point in terms of maximization of profits.

I also have had experience selling an online book. As you suggest, sometimes the demand curve is not a straight line and raising the price can increase volume because prices can of course influence perceived value. I raised it from $9.99 to $24.99 and that is exactly what happened--increased volume.

nanijoe• 19 years ago

Completely Off topic here...I visited your personal website, and all I can say is 'Wow' . Plenty of useful info...keep up the good work!! BTW You think groupomatic will be a better meetup.com? Or are you trying for something different?

epi0Bauqu2• 19 years ago

Thanks. I'm glad you found my person site useful. I have a lot more I am planning to write and have already half-written. I just got distracted with groupomatic.

No, I am not trying something different with groupomatic. You hit on the head. I am trying to be a better meetup.com. I imagine it will be a slow, long haul, but it doesn't hurt to be free :). I tried to start out as simple as possible and not just copy all their functionality. In so doing I've already made several departures, errr improvements imo, e.g. group scheduling, no forced site registration, group specific handles, etc.

boris• 19 years ago

You are approaching this problem from a wrong side. First you need to determine how much your service is worth to the customers, in monetary terms. Then you can base your price on that. Normally you would divide your service benefits into two parts: "commodity" and "unique". You would charge what it costs you to provide it for the commodity part and how much it is worth to the customer for the "unique" part.

Also note that educating the customer about the value (in monetary terms) that they will receive by using your service is the key to make this strategy work.

theremora• 19 years ago

Pick a price you think is right. (It is random sometimes. Intel said how about $80 for the 8080 chip). get feedback. Sometimes raising the price increases market share ie... wine. For a web service there are no cost of goods or product costs to use as a basis and then add 100% margin. Unless you are going to turn off all your potential customers at once, which is unlikely, just do it and iterate.seems like it would be easier to lower price than raise it.

yubrew2• 19 years ago

I have dealt with this problem before. Even if you are a first mover, you will still have indirect competitors, and customers used to paying a certain price and buying at a certain frequency. Talk to your customers, find out how they are consuming, and position your product accordingly.

Really Basic Example: A skype based cell phone should be priced similarly to comparable phones, with a premium because skype is cheaper than other cell phone plans.

For web products, one trick I learned is to use Google Adwords with different prices and features listed, and observe CTR.

tneidt• 19 years ago

Bottom line...something is worth what someone is willing to pay for it. It is better to initially price too high than too low. It is easy to lower a price but extremely hard to increase it. Go high and be willing to negotiate.

palish• 19 years ago

It might work if you pick out a price you think you'd pay for it, mark it up by 100%, and slowly decrease it over time.

myoung8• 19 years ago

1. Go out and tell your customers "I have this product, it does X, Y, & Z" (make sure you use the present tense).

2. Tell them it costs $D

3. Observe

4. Change D as necessary

5. Repeat until the reaction you consistently get is "Wow! That's awesome, what's your website, I'm going to buy it when I get home."

Market research is the best way to figure prices out. Alternatively, as yubrew said, comparables works. Think outside the box when you're trying to come up with indirect competitors. We are building a subscription-based web app, but an alternative to our service could be a book. That books costs a certain amount of money. Thus, we can charge at least that amount, plus a premium because, well, our service is a lot better.

yubrew2• 19 years ago

I would like to add that "3. Observe" can get complicated. Initially, the metric to "Observe" should be how many people buy it. Then you can look at total revenues generated at $D price, total sales generated per customer at $D price, etc.

rrival• 19 years ago

Ahh right, I think I remember reading a blog post about pricing strategy for ebooks marketed on ClickBank that explored this. Very interesting.

Thank you (all) for the comments - this is remarkably informative.

sbraford• 19 years ago

Here's a good one by Joel: http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...

ph0rque• 19 years ago

To add to all the extremely good suggestions here: try out 3[1] prices in parallel: set up different websites pointing to the same content, just use different css's. Then go with the one that works best.

1. 3 is an arbitrary number; pick whatever works for you.

rokhayakebe• 19 years ago

IF your customers are the everyday internet consumers then forget charging, unless you want to turn into a call center.

On Pricing Strategy

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