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I'm curious if there's any research / suggestions around pricing models - specifically offering more choice vs keeping it simple.

Ie., I plan of offering a Software as a Service model, and charging a simple fee of $x per user per month. I chose this pricing model to keep things simple.

Alternatively, I could make the model more complex, adding a tiered structure, differentiating on a couple of key features.

Eg:

Small - 5 projects - $10 per month Medium - 10 projects - $15 per month Large - 20 projects - $20 per month Whopping - No limit - $30 per month

This may give the user the feeling of more choice.

I'm not sure which model is likely to attract more users - simpler vs choice? Any suggestions?

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4 Answers

You should read Don't Just Roll The Dice. It's a great book that I recommend. And Camels and Rubber Duckies, also a great reading, which can be complemented with Price as Signal.

Now, to answer your question, choice is typically better because it maximizes your income. And this is also good for your users, because if you go, e.g. $15 per month for all users, some will think that it is too expensive because they actually don't need to have more than 3 projects nor use the advanced features you're providing, so why pay for stuff not being used (with no value for those users). On the other hand, some will think that it's cheap, and you could sell to those users at $30.

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+1. It's not really about "choice" as much as it's allowing customers to minimize cost (i.e. not paying for features they don't want) yet maximizing revenue (e.g. some people will pay less for less, others will pay more for more, and this way you get both.) – Jason Apr 26 '10 at 14:12

As a general philosophy, I think of requiring the user to make more decisions as an extra demand on the user. You're forcing them to think and make a choice; some users will probably drop out at this point. On the other hand, your incentive for offering more plans is to segment your market. Your product might be worth $100/month to your dedicated users (group A), but only $10/month for smaller or casual ones (group B). Ideally, you'd want to charge $100/month to group A and $10/month for group B. Picking just one number, e.g. $20/month, means that you're leaving money on the table for group A and probably not capturing group B (too expensive).

The trick is to find a way of offering plans that best approximate the ideal. However, people in group A aren't going to pay $100/month if they can get away with $10/month, so you need to find out what differentiates group A and group B. Does group A require some extra management features? Do they have higher volumes?

Forcing choices is bad, except where it helps you segment more intelligently. Research what your user group is like, then try to give them the minimum number of choices that approximately charges them correctly.

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A potential hybrid approach is to accept signup and free trial with no commitment to a package (simple), but then get the user to commit to one later on (segmentation). This reduces signup friction and confusion, and lets the customer make their decision when they have learnt more about your application and what they need from it.

Pay per usage models may also be relevant to you, e.g. a flat $5 per project if that is how you wish to segment.

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If you're dealing with multi-users, your customer is probably a business. A single price/user/month may be easier for you, but to them it is just more costly. They will probably want to negotiate a price if they like your app. Just make sure you can put a billing system in place to handle pricing tiers. It's best to avoid billing complaints. I've seen many sites indicate custom pricing for large numbers of users.

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