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I've recently the post on the question: Subscription Pricing Starting Strategy: start high and lower, or start low and raise? , and I also read the articles and comments for:

I'm working with a friend that's providing a web application to small businesses and entrepreneurs. The initial thought was to start at a low price because this particular business owner wanted to make it affordable for everyone (not to please everyone, just make it affordable for most people). I used to think that was a good idea. Now, after a few voracious reading sessions, I'm starting to get mixed opinions. Partly because I didn't consider things like customer support and the TYPE of people it attracted. So, I have 3 questions:

1) What are the advantages and disadvantages of pricing a monthly subscription low, and then pricing it high?

2) What would you say is the "sweet spot" that still attracts customers, but doesn't attract the cheap ones. I realize this question is very subjective, and you probably need more background on what this business does... at the moment, the business owner isn't sure yet (all in planning), I'm just curious on any two cents you might have (eg. $99/month typically deters most cheap-folk)... although, I'm not sure this is answerable.

3) I'm a fan of simplicity and I advised that 1 price with 1 plan is a good idea... but maybe a 3 or 5-tiered approach is better. What are your thoughts on 1 plan versus 3 or 5?

Thanks -

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4 Answers

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Good advice above. Here are some more data points for you to consider:

  1. Pro/Cons of the low to high approach: Logisitcally you then need to keep track of what teir people are on when they sign up, you need to monitor your pricing and change it regularly, and you are forced to add value as you increase rates (which may or may not play nicely with your development schedule). We always tried to keep our pricing static for at least a 12 month period, and this worked well for us. Customers are generally comfortable with an annual pricing review.

  2. Sweet Spot: Be sure to price on the value you provide not the cost you incur to develop. I.e. if you save me time and $100/month, then the service with worth at least $100/month, even if it only costs you $0.10 to provide. I'm not saying to take advantage of your customers, rather I'm saying be sure to look at things through the right lense. If you provide a lot of value and charge too little, you'll price yourself out of the market on the low side. Here are a couple of barriers that we've found pose psychological barriers to people:

    • $9/month (less than $10 and people don't even blink)
    • $19/month (people seemed willing to spend < $20 on an experiment)
    • $49/month (1-5 ppl companies seemed ok with < $50 if value is provided)
    • $83/month (this was less than $1000/yr, which seemed to be a psychological point)
    • $99/month (for mid-sized companies, $100 seems to be a threshold for impulse purchases)
    • $400/month (this is just under $5000/yr, which also seemed to be a psychological limit)
    • $890/month (we found anything over $900 got rounded up in customers minds, less than $900 was rounded down)

  3. Single vs. multiple levels: Go with multiple levels. you need to let people self-select, and this is an easy way to increase your purchase price. You'd be surprised how often people enter a transaction with a number in mind - if you have a package that matches the number, then you'll make the sale. Be too low or two high, and they'll leave your site. People like being right, so help accomodate that inclination by offering a package at a price point they were expecting (and may have already told their boss).

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Thanks Joseph. I liked what you said most in your second point... the one on adding value. I guess I do know that, but it's good to be reminded of it (that idea sometimes gets lost when I tend to overthink things). Your breakdown on the difference price points is also very helpful. I've often been asking questions that indirectly relate to all of those price points. With this particular business, I tend to think it's hard to correlate the value in dollar cost, but I'll talk with my buddy and put some more thought into that. Your single vs. multiple levels is also very helpful. Thanks a lot! – Matt Dec 22 '09 at 5:00
Glad they were useful! Please keep in mind, though, that my post comes from my own experience and doesn't represent a broad sample set. My information is all based on my previous startup work with B2B SaaS intended for small-mid size companies. – Joseph Fung Dec 22 '09 at 13:55
I'm not sure you can justify charging me $100 per month if you save me $100 - there's no gain to me. If the service is a pure cost-saving alternative (i.e. there are no other benefits), then I think the price should be somewhere between 20% and 50% of the saving. – Denis Hennessy Dec 22 '09 at 21:40
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Denis - I didn't suggest charge $100 if the only benefit is $100 savings. My comment was intended "if you save them $100 plus some time" then the value is at least $100. Perhaps I should have better clarified. Matt - Denis's comment is correct. Yes, base the price on the value, but be sure that there's a key difference. A good rule of thumb is a "10x" difference. I.e. a 10x saving in time, or a 10x saving in cost. So, if the only value is $100 flat, then the price should be $10 (I'd argue that the 20% or 50% Denis described isn't enough to change people's behaviour). – Joseph Fung Dec 22 '09 at 23:11
Interesting, thanks for bringing this up Denis. Very valid point. Joseph, thanks for the rule of thumb tip. I think this is very noteworthy. I like the idea of 10x... I'm the kind of person who wants to make sure there is no question that it is worth it for the price I'm charging. – Matt Dec 25 '09 at 22:05
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Initially, it's very hard to tell what the "sweet spot" pricing for the product is since every market is different. If you are selling to individuals, $99/mo is pricy, when selling to big businesses it's very cheap. You do know approximately what your fixed and variable costs and you want to make sure those are comfortably covered.

In our case, we sell a SaaS application for which we bill monthly and our target is a very small/niche market with a few thousand potential clients.

When initially pricing our product I started low with the intent to raise prices for future customers. My reasoning was that since the software is new and has no users we need to have early adopters as soon as possible to get feedback and build a reputation in the industry.

Since the early adaptors were taking a chance with us they were rewarded with lower pricing. Furthermore, we offered customers an opportunity to "sponsor" features (e.g. pay us hourly to implement features specific to their needs). This helped with prioritization and made up for the discounted monthly fee with consulting revenue.

New customers are only aware of the "current" rates which we post on our site. I try to price our product so that we make a profit while making sure cost is not the critical factor when signing on new business. We have increased prices several times (for new customers only) and also added usage-based tiers to attract some of the smaller customers.

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Thanks for answering. I like that you keep those initial customers at the low price. With a web application, though, I'm not sure how to gauge "profits" ... since the web application can scale with more technology, but it's not very technology intensive, so little-to-nothing can do the trick. Because of that, nearly everything is profit, so we don't need to charge a lot (my thinking). Maybe I need to factor in personnel cost more. What I'm not sure of is if I should be concerned with the type of audience the low price point brings in. – Matt Dec 22 '09 at 0:53
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For us the biggest cost is staff followed by hosting. Both of those are variable -- the more customers the higher the cost. – Oleg Barshay Dec 22 '09 at 1:31
Good point, Thanks for sharing your experience, this really helps me gauge and think correctly for the future plans. :) – Matt Dec 22 '09 at 5:01
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There's a science to pricing, and it seems even when you find the right price, you still can't tell if it's the right price and may try to move it from there. For example, you might set your price as $49.99 a month, which is perfect, but then you decide to try $59.99 a month and you lose 40% of your customers.

As was pointed out in other answers, the first thing you need to do is determine what value you provide to your clients. The next thing you should do is determine if the value is obvious (for example, by removing an existing cost) or implicit (for example, increasing their business volume). If it's obvious, you can use it fully to price your product, but if it's implicit, you have to be a little more careful because your customers won't see the value right away.

That being said, even if you can show how your product provides $100 per month in value, and get the client to accept that fact, you shouldn't charge that much. If you take all the money they save by using their product, there's no incentive for them to continue using your product.

My rule of thumb would be to start at about 50% of the demonstrateable benefit, and work your way down until you find a point you're comfortable with. Anything over that, and some of your clients will become resentful of your cut, especially if the cost to you for providing is negligible. While most people accept that you have to earn a living, they don't like being ripped off.

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Just clarifying as it seems my comment wasn't clear. I intended it to mean "if you save them $100 plus some time" then the value is at least $100 and that's where you should start your calculation from I don't think a 50% discount in value is enough though. A good rule of thumb is a "10x" difference. i.e. a 10x saving in time, or a 10x saving in cost. So, if the only value is $100 flat, then the price should be $10. – Joseph Fung Dec 22 '09 at 23:15
Not disagreeing with you, just adding some food for thought. The exact number will vary depending on the nature of what's being provided, its scalability, long term savings, etc. While 10% might be reasonable for some, you might be able to go as high as 50%, especially if there's a significant cost to you to provide the savings. – Elie Dec 23 '09 at 1:17
up vote 1 down vote

A lot of people don't consider the price of providing support after the sale. Don't underestimate this. You might receive a lot of emails for support where people are asking all kinds of questions even questions whose answers are already in the FAQ just because it's easier for them to ask. You will find yourself spending too much time in the support area taking time away from product development.

So always offer a higher price with support option.

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