One of the biggest lessons I've learned as a VC in the past few years is that pricing really has to be aligned with and proportional to the value your product provides. If someone gets $100 of value per seat and you charge $15/seat, that's great. If you charge $15/seat for a product that creates value per gigabyte, people start gaming the system. E.g. they'll buy one seat for their company and ask that person to be the proxy user for your product. Or if you charge $10/GB and people get $20/GB of value of the first few gigabytes and then $5/GB of value after that, you're going to run into problems.
So figure out how users perceive and quantify your value to themselves, and then try to come up with a simple pricing scheme that captures 10-25% of that value. That way every time someone pays you $1, they get $4-$10 of value, and that's a no brainer purchase.
Getting pricing right has a huge ROI across the board. Good pricing improves margins, reduces sales friction, and creates happier customers.
I've been working on a pricing project using a methodology largely influenced by Nagle's work. The premise is that it's possible to learn what customers value before pricing something and for the price to be optimized around customer value, and perceived value. It feels much more promising than other pricing projects I've been involved with. This podcast gives an overview of some of the thinking here: https://impactpricing.com/podcast/ep46-alan-albert-why-much-...
that nagle book was taught in my MBA pricing class. small but surprisingly dense and thorough. there's a lot more to pricing than just value pricing vs. cost-plus.
This doesn’t just apply to tech. Take healthcare, where the value created is per patient healed (oversimplified) but the pricing is per item/staff time used. Once again, people game the system, in this case by doing excess charges (see any itemized hospital bill to a private party). The U.S. government’s Center for Medicare has been trying to align the pricing model with the value created by paying flat rates for each type of surgery or illness treated. It seems to work pretty well.
Aligning value with payment is critical to success in any business.
I am slightly ashamed to say that I was one of those people who gamed Dropboxs packrat feature to store close to 10 TB of data on a 1 TB premium plan. I'll concede that they grandfathered that feature for longer than I thought they would, and am still a (somewhat) happy Dropbox subscriber, but those were good times indeed.
If someone gets $100 of value per seat, and you charge $15, why is that great? Are you leaving money on the table or facing competition? And shouldn’t you react strategically to either situation?
My problem with this advice of testing your pricing strategy is how to communicate this to actual customers. Maybe this isn't a thing in Europe or USA; but in third-world countries a change in the price it is important and something your customers want to know.
If I set my prices higher, I can't change it for my current customers. They will get mad. So I ahve to create a full logic on the backend for customers created after X date, etc. It is a mess.
If I set my prices lower (i.e., display lower prices on landing page, etc), my current customers will get mad at me if I don't change them for them too ("Why I am paying more than the price you are saying this costs?"), etc.
So for me, this strategy of A/B testing prices, find the right price, etc, has been always too complicated to implement. When I tried, I end up adding more problems to me to deal with, and at the end I couldn't analyze the trends I wanted it.
One trick you can use is to figure out a set of product parameters that you can tweak into new combinations to create lots of pricing plans. They may be effectively identical to previous ones as far as your cost and engineering are concerned, but different enough that customers don’t feel someone is getting a different price for the same thing.
E.g. your previous “Medium Starter” plan included 10 foobags and up to 1.5 zoffobytes of data for a price of $19. Your new “Basic Plus” plan includes 15 foobags and 1.2 zoffobytes for $25.
I didnt buy a robot vacuum because of this. There was a crazy amount of different ones from the same company with different pricings. Maybe it is better now. But usually I want a product which fulfills my supposed needs for a reasonable price. Too many different products (especially from the same vendor) give me the certainty no matter which one I choose one or the other criterium will fail.
The advice is more applicable to SaaS products where users can easily switch between plans, and creating new combinations of the product parameters is free.
Assuming you don’t overdo it, having multiple plans for different types of users can actually help customers feel more confident that your company has the experience to understand their needs.
Maintaining that book of past prices, who is on them, the discounts they negotiated, the feature formulation they had - its a nightmarish web of complexity even at large SaaS vendors.
I really can't imagine why. This seems like one of those self contained problems where some PricingService and a DB returns a number and deals with all the complexity internally. That seems like the logical place where you'd do A/B testing of prices and the like.
One of the companies I worked for got acquired. The CTO of the bigger company decided to personally lead a large rewrite, including:
• replacing our Wordpress blog with something custom written, including building our own database migrator (you could manually data entry our few blog posts by copy and paste)
• Replace our Google Sheets based asset tracking with an overengineered backend. The frontend was never built due to a lack of FE and design resources and everyone continued to use Google Sheets.
• choose to delete some old sections of our app that still used jQuery, angering vocal customers.
What you're missing is thaton the sales side of things, most of these price discount or variation are only really included in the quotes and not on the crm itself.
This is primarily (imho) because most companies (whether SaaS or other) start their CRM journey with the basics and only end up with some sort of CPQ or quote to cash at a later stage.
The article hits its stride at paragraph 14, where they talk about the importance of "value-based pricing" rather than "cost-based pricing."
My wake-up moment came in 2013 or so, when I was pricing the digital version of a long-ago print book I'd written. ("Merchants of Debt"). I knew that it kept finding a niche audience among investment bankers and people who want to be investment bankers.
E-book prices were dropping, and I wanted to get full value from my best customers without seeming out of step with the market. After all, most finance types can afford to be price-insensitive, but they still want to feel like they're getting good value. The solution was to create an unabridged edition for $9.99, and a condensed edition (about 40% of the content) for $3.99. Truth is, the condensed edition gets very few orders. But the fact that it exists makes it much easier for serious buyers to pay up for the full edition.
Knowing the customer's frame of mind -- which usually is quite nuanced -- is the key. Especially when, as the Sequoia folks point out, the marginal cost of another digital copy is always very close to zero.
I want to buy a board game. I've already decided I'm buying it but hey there is a deluxe version for a price I wasn't planning to pay... so yeah I buy it.
That tactic is called price anchoring and the reason it tends to work on a lot of people is because it relies on a cognitive bias called anchoring [1].
Interesting example. With board games I avoid the deluxe versions because they're often incompatible with expansions. Power Grid and Settlers of Catan come to mind.
Pricing is HARD. I launched a SaaS in 2016 with a 100eur per month recurring plan. only 5 signups in two years. Then around 2018 someone wrote me "that's incredibly cheap. why?" So, I doubled it to 200eur per month. Today there are 60 recurring plans at 200 per month, and only 3 @100(grandfathered plans from the early days.)
Clients tend to think that if something seems too cheap, something is wrong with it.
The product kept evolving too. (Updates, new features, etc)
I think people started to value it more once the price doubled. Most new features were in response to their feedback.
> Natera recently brought to market a non-invasive pre-natal test that can detect Down syndrome and other conditions in a mother’s blood. Previously, testing for these conditions required a risky procedure that extracted tissue from the fetus. Other non-invasive tests aren’t as comprehensive.
> Because Natera's test is better than its competitors' products, the company charges more.
> “Premium pricing communicates a premium product,” says Matthew Rabinowitz, the company’s CEO.
Is this normal in the USA? Talking of "premium offerings" in the context of healthcare seems sickening to me. Premium hospital beds with high speed broadband, alrighty, but premium healthcare itself? I understand that one needs to recoup R&D costs a few times over for it to be worth the risk, but that's simply cost price (risk * R&D cost / unit count * unit cost) and not a "premium product". This isn't a non-essential premium Ferrari, it could help a lot of people. Is it just me who finds this a really weird example?
>I understand that one needs to recoup R&D costs a few times over for it to be worth the risk, but that's simply cost price (risk * R&D cost / unit count * unit cost) and not a "premium product".
How are you going to attract top minds to do the R&D without paying them a premium? And investors need a premium to incentivize investing R&D, especially in the low probability of success field of biotech.
I don't agree with the way their CEO characterized it. He probably should have just said the pricing is commensurate with the costs involved in developing it or something, which include the opportunity cost of not using the funds to buy tech stocks.
That stuck out to me as well, but it makes sense as an incentive for companies to create better products. Why pour money into R&D to develop new products if you're restricted to charging existing prices? Might as well just develop the existing product and save on the R&D costs.
Bounties are a good way to solve this. Invent a new therapy? The government buys your patent for a sum proportional to the value created (not to the dollars invested) and releases it to the public domain.
> Is this normal in the USA? Talking of "premium offerings" in the context of healthcare seems sickening to me.
The whole US healthcare system is sickening.
Just related to corona:
1) ventilators have been used not to help patients, but to protect staff from aerosolization. The problem is that intubating and drugging somebody causes serious health problems in itself.
2) various hospitals and doctors are adding corona as a cause or factor to increase billings, whether it's related to corona or not.
What solution do you propose? Regulated pricing? That would remove the incentive, which would lead to far less innovation. It’s better to have these innovations at a high price than not at all.
Value-based pricing is the worst societal invention. Imagine a medicine can be made from simple ingredients, but you discovered a recipe by accident. It's very valuable since it might save lives, so the value is high, the cost is low and you can reap the benefit on the mere basis that you discovered something by accident. You also need to make sure that no one "gets it", so do not educate people, just milk them - and in the worst case, mislead them, work against any threat "knowledge" would pose.
Mundus vult decipi, ergo decipiatur.
Imagine a world, where progress and invention would be something shared and done not out of greed but out of ability and ultimately generosity that would add to the grace of our race.
Instead we celebrate greed, as if we were a bunch of apes.
My fear is that human society needs to reach new lows before we actually have the chance to see our own potential (and then it might be too late, anyway).
Value based pricing is not about obfuscating your product.
If you manage to get extra revenues because the market values what you have you can invest the surplus to more better products.
The point is, you shouldn't dictate what users value your product, let the users dictate it.
"Imagine a world, where progress and invention would be something shared and done not out of greed but out of ability and ultimately generosity that would add to the grace of our race."
The first gotcha there is figuring out what exactly is the grace of the race. Most entities that successfully employ these sort of mission statements are dictatorships and the like and I'm sure you didn't mean that.
I think the first hurdle to get over is that world is complex and us people are not smart enough to handle all of that.
>Imagine a medicine can be made from simple ingredients, but you discovered a recipe by accident. It's very valuable since it might save lives, so the value is high, the cost is low and you can reap the benefit on the mere basis that you discovered something by accident. You also need to make sure that no one "gets it", so do not educate people, just milk them - and in the worst case, mislead them, work against any threat "knowledge" would pose.
Except that's not the world we live in. Effective medicines take billions of dollars, years of time from very smart people who have the option of choosing other careers, and still have an extremely high chance of failure. Imagining a world where all of that happens via charity is pointless.
There are consequences to an economy where the margin is fixed across all industry... just look at the free internet... since the you basically get paid for eyeballs, with no premium for providing more value (a visitor gives you the same per user price for ads no matter the quality of the content), there is a race for cheap content that appeals to the most number of people... you don't get investment in companies that provide high value, because you don't get more return for high value.
I understand the price signal and the process of price detection through the myriads of needs and abilities. That's all fine and actually great, as a relatively robust distributed system.
What I do not get is why keeping people in the dark is a cornerstone to many endeavours - value-based pricing just being an example of that.
Edit: maybe I spend too much time in the open source world and mistake it for some model setup for other parts of society that do not work like that at all.
> Because Natera's test [for pre-natal Down syndrome] is better than its competitors' products, the company charges more.
That is, instead of eliminating the older, more invasive diagnostic procedures and making the world a better place for all of humanity, Natera instead opted to charge extra for it (regardless of how much it actually costs to them) because they know people will pay more for it, and Sequoia is celebrating this and championing it as an example to be followed.
This is the kind of greedy capitalist bullshit that gets L'Internationale playing in my head.
It's insightful to learn that in their guide on pricing Sequoia cites Phil Libin, then-CEO of Sequoia-backed Evernote, who was later kicked out exactly because the company struggled to find the right pricing model.
How ironic given that it's biggest winners in its portfolio are companies that never sold anything (at least not initially), Linkedin and Instagram for example.
$250mil/year is 1/100th of what they eventually got acquired for. Linkedin was probably eventually making more than that, too (need to look) but I'd be surprised if revenue was the main reason for LI's success, probably more of a nice to have...
LinkedIn has constantly amazed me as far as how little they have done with their main asset, the professional social graph. That they don't offer paid products for hosted professional associations, or verified credentials, a CRM, or even intra-organization communication fascinates me. There are so many other examples of how you could make money with what they have, not even counting creepy ones.
This is a helpful article and I would add to the general "value-based" pricing discussion:
Price is limited by perceived differential value.
So if there's value that the buyer doesn't perceive, it doesn't count. (Often, there's value that the buyer perceives and you don't in the SaaS world.)
If there's perceived value, but you charge $1000 and someone else offers the same perceived value for $100, it's going to be hard going.
This feeds back into understanding your customer subsegment really well. In the example above, perhaps the general market thinks you are at -$900, but for your niche, there are some critical aspects that make it worth much more.
Another corollary is to offer different price points, all aligned with how the buyer perceives value, such that you're happy with whatever choice they make.
Good read, emphasizes an importance of figuring out a customer-perceived value of your product.
Sidenote: reading it was very much painful on eyes, at least on my phone screen. That thin font looks almost like a watermark. Maybe it'd be better on a laptop screen.
Could this be done for every thread? The comments that are only about the metadata rather than the content of the articles posted can be quite tiring to sift through.
You've been saying recently that HN is like a water cooler.
I feel like disabled people talking about how frustrating they find it when a well funded company makes accessibility mistakes are a useful part of that water cooler conversation.
I know some people find this meta discussion about website accessibility tedious, but perhaps those people should try to show a bit of insight into just how tedious disabled people find it to have to keep making this point, year after year.
I don't know a good solution. Those concerns are for sure legitimate, and at the same time it's tiresome when complaints about website formatting crop up often in threads. Especially because meta complaints show up about those complaints, and then meta meta, and so on.
Perhaps the solution is for people to express accessibility concerns to the proprietors of the websites in question, instead of to forums where the concerns are most likely not going to be seen by the people who would need to fix them.
It's useful to compare the desktop and mobile versions. On desktop it's nice. On mobile it's unreadable for many people - so much so that I think it'd be breaking some disability accessibility laws.
Correct me if I’m wrong but as of April 2020 there is no legal definition for what makes a website accessible. Seems like WCAG 2 is referenced in some court cases but is not a law.
So figure out how users perceive and quantify your value to themselves, and then try to come up with a simple pricing scheme that captures 10-25% of that value. That way every time someone pays you $1, they get $4-$10 of value, and that's a no brainer purchase.
Getting pricing right has a huge ROI across the board. Good pricing improves margins, reduces sales friction, and creates happier customers.
The best book that I've read on pricing is Monetizing Innovation: https://www.amazon.com/Monetizing-Innovation-Companies-Desig...