When it comes to pricing a webapp, we seem to spend lot more time and resources on fine-tuning activities over getting it roughly right. Pricing your product is much more than deciding between rounded vs. square corners for your pricing page, whether to end price with 9 and whether you should list monthly/yearly price. In fact if you are considering pricing only as part of your pricing page design it is already too late. As a start-up you are hard pressed for time and resources, you are constantly prioritizing, focusing on your pricing strategy is inseparably tied to your overall product strategy and hence falls in the super-important task bucket.
There is no easy solution for pricing and no one size that fits all. I do not have all the right answers for defining a universal pricing strategy, but I present a roadmap for defining an effective pricing strategy for your webapp.
Where do we start for pricing?
You are building an amazing product. It is truly innovative. But where do you start to define its pricing? Start by answering the question that Clayton Christensen posed, “What job do I want my customers to hire my product for?”. Note the level of control you have with this question as opposed to asking, “What job will customers hire my product for?”. The latter question is passive and lets someone else decide what to do with your product and the former is more active, letting you decide which job you want to go for.
What if there is nothing like my product that customers are using today?
If customers are going to hire your product some other product has to lose its job. It need not be another competitor’s product, it can even be a substitute. For example, Intuit defined their competition as pen and paper. If you cannot think of one, then there may really be no market for your product. You may try hard to write your own job description but research done in this area recommends that you are better off applying for jobs that customers are already hiring for rather than creating a whole new job.
I found the job I like, now what?
Narrowing down the answer to above question helps you answer, “What are they paying for the job now?” This is your customer’s reference price and also the starting point for your price. When a customer is paying less than $10,000 currently, you cannot go with a product with a price of $1MM. But based on your unique value add you have the flexibility to charge higher than their current reference price. If your customers are not paying anything for the job now, their Reference Price is $0. You can either re-position your product and apply for a job they are currently paying for or make the conversation about the incremental value your product adds and price it to get a fair share of that value-add. That said, please read the previous two points again.
Why stop with just one price?
Not all of your customers are alike and definitely not all would want to hire your product at one common price. In the presence of uncertainties about customer preferences and their willingness to pay, offering multiple versions of your product at different price-points is better than offering just a single version at one price. Big companies spend $100,000+ to do rigorous segmentation analysis to define their versions and price points. While you could hire me1 for half as much to do such work, Hal Varian (Economics Professor at my alma mater and Chief Economist at Google) gives us the poorman’s versioning rule: “Practice Goldilocks pricing – offer three versions of your product and your customers will most likely choose the middle version2”. Even if you are not building all the versions from day one, the versioning hooks and modularity must be built in so it is easy for you to pivot.
What about marketing strategy?
By answering the last four questions you are practicing three key components of marketing strategy, Segmentation, Targeting and Positioning. You defined the segments by finding those with a need you believe your product can serve, you targeted them with different versions and you positioned your product in the minds of the target segment. That is marketing strategy.
What about my pricing page?
Setting your price is different from the presenting the prices in your pricing page. Unlike a sales call, you or your rep is not there when the customer makes the purchase. Make it very easy and painless for the customers to give their money. Getting the pricing page is important but if your overall pricing and versioning strategy is wrong, no amount of A/B testing or design changes will help you overcome the initial mistake. There are two pricing page tactics I recommend,
- Nudge your customers: Nudging is applying many of consumer behavior tactics so your customers pick the version that is most advantageous to you. The most common visual nudge is highlighting one of the versions as the most popular version (Conformity bias).
- Categorize your product benefits: When you present customers with options they incur significant cognitive cost in understanding the value differences and selecting the one that fits their needs. When listing product benefits do not list every possible feature and whether or not is supported across the versions. Use categorizations and list just the benefit categories that are most relevant to the job your customers are hiring for. Offer drill-down if customers want to look under each category.
As I sign off most of my posts, “If one price is good, two are better”, and if you add Varian’s findings, “If one price is good, in most cases three are better”.
- Note 1: Did you notice which job I positioned my services for and how I set your reference price?
- Note 2: This claim comes with qualifiers and it depends on the version design. If the lowest priced version gives away too much at low price, then the middle option will not be the attractive one.