(Note: cofounder responsible for pricing decisions many times.)
The closest thing to a "methodology" I've found is asking these four questions and having the users generate their own pricing curve [1]:
Here's a real set of curves this process generated for me recently: http://imgur.com/lPKLk53 ($ values redacted)
The four questions are:
1. At what price would you consider [the product/service] to be so expensive that you would not consider buying it?
2. At what price would you consider [the product/service] to be priced so low that you would feel the quality couldn’t be very good?
3. At what price would you consider [the product/service] starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?
4. At what price would you consider [the product/service] to be a bargain—a great buy for the money?
Require a specific $ amount as the answer to each question.
Take ~100 users, ask them all four of these questions, and then compile the results. You really have to do this on a subset of your own qualified potential customers to get any meaningful data.
The neat thing about this is that this creates a price sensitivity curve without anchoring the interviewee with any prior numeric values.
At the end of the day, it's still a gut call about where to place your price point relative to the user's alternatives, and testing is encouraged, but these four questions are a decent start.
It's been consistently shown that what people say they'll do regarding pricing and what they actually do are not correlated.
Rather than asking people, if you can, try just changing the prices and see how customer acquisition changes.
I sell a program online to consumers, so for a while I tried several experiments in pricing, including a "pay what you want". Structure. Eventually I settled on a price that's about half what the highest accepted price was ($10) and the typically "pay what you want" price ($1). Right now I sell for $4 (perpetually listed as 50% off of $8), which brings in about as much revenue as the $10 price. The advantage, though, is that it gets in the hands of more people, so there's a higher potential for word-of-mouth advertising.
So, I would say, if you're in the position to do so, experiment with the prices in the real world and look at how purchasing behavior changes.
>it gets in the hands of more people, so there's a higher potential for word-of-mouth advertising
This is a very good point and something I haven't considered.
On the flip side, depending on your type of product, I think more customers could lead to an increase in support burden to the point where it is costing you more than the amount of extra dollars you get from the additional amount of customers.
Isn't that quite dishonest? I'm fairly sure this is illegal in at least the UK, so I'd assume in plenty other EU countries too. Are you in the US? Is this practice legal there?
>Isn't that quite dishonest? I'm fairly sure this is illegal in at least the UK, so I'd assume in plenty other EU countries too. Are you in the US? Is this practice legal there?
That's weird, are people in the UK not able to see through marketing gimmicks?
Apparently most of us can't, or it wouldn't be worth using them. ;)
Really you could consider it a subset of truth in advertising law though. How can it be a 50% discount if it's never been sold at full price for a significant amount of time?
Basically what happened is that I did sell it for $8, then I did a 50% sale and saw an increase in sales. I did the sale on and off a few times then just got lazy and didn't get around to removing the sale flag from the website for a while and eventually I just decided that most people only buy it once, so from their perspective it's on sale now. It also saved the effort of remembering to switch the pricing back and forth every few weeks.
and yet we dont care when Manning tech books always have a discount someway somehow. there's almost always a deal of the day. just have patience. I know it's not technically perpetual but it has the same effect.
Joseph A Bank was sued for perpetual sales [1]. The case was dismissed for defects in the plaintiff's case unrelated to the legal theory (they couldn't produce receipts of their supposed purchases), but of course even an unsuccessful lawsuit of this nature could bankrupt a startup.
Of course, without deep pockets, a startup is also unlikely to be targeted for this.
> Rather than asking people, if you can, try just changing the prices and see how customer acquisition changes.
This is essentially the best advice you can get.
IF you have to be safe because you're e.g. in Germany and you can't just change other peoples contracts after they signed up. Just keep the old contract/subscription types and then offer them a migration path sometime in the future.
> IF you have to be safe because you're e.g. in Germany and you can't just change other peoples contracts after they signed up.
Isn't it the very nature of contracts that you cannot change them unilaterally? I'd be very surprised if there are places where you can legally do that, and I wouldn't call such a thing "contract".
You can change prices for new customers while keeping the old price for existing customers. Though if it's a price drop, you might want to lower for the existing ones too.
Eh? So if I told you I had two products A and B and I showed them to potential customers who on average said they would pay $100 for A and $10,000 for B, you wouldn't be willing to bet that when I actually take them to market B would end up retailing for more?
You just compared two (purely hypothetical) things someone said they'd do, you didn't address what @Osiris was talking about, which is the discrepancy between talk and action. The comment is correct, there is a lot of evidence out there that people do not pay what they say, that actions and talk do not correlate very well. So it would be interesting if you had some counter evidence to back your rebuttal, because theories based on logic alone rarely survive contact with actual human behavior.
I second this. I always start my service for free, and tell them at some point I'm going to charge pricing, but the first 100 users don't have to pay EVER.
After I get ~50 - ~300 users, I tell them I'm going to set pricing. I usually do this with a pop up or email. They then have a drop down with "how much would you be willing to pay monthly for this service"
Usually you get some range, say $5/month to $100/month. I usually pick one standard deviation above the average. So in this case, let's call that $60/month.
Then, I usually will A/B test pricing by changing it month by month with "sales" so my current customers don't get too angry.
I've done this three times on my products and several times for others. Thus far, it's worked very well. You don't always want to capture the most customers to make the most profit. This method has you start at the top of what people would be willing to pay and work down.
Plus, you start with a user base for free that share you with their friends. Seriously, this has been the best way to jump start the business.
Sales is a great idea for testing, but how do you make a sale to increase price? My current customers know the price. Word of mouth customers know it too.
For your scenario, you need to start at a higher price point, no?
That's a good approach overall. Thanks for sharing. There are a couple of problems with sales however:
1. In a way they address a different psychological need for people. It's about getting a good deal or a discount over the "normal" price, rather than considering the price itself... So you're testing different things that in some way conflict.
2. Over time, if people see there's always a sale, they might hold-off from buying?
3. It just gives a slightly "cheap" reputation (think shared hosting as a rather extreme example that comes to mind, or any site that always has tons of coupons on coupon-hunting sites).
That's a great methodology! But you do you avoid your customers lowballing their numbers since they know you're using the information to set the price they will eventually pay?
Back in the early days of Zapier I remember we always made explicit our grandfathering clause for users who gave pricing feedback. Same for any eventual pricing changes
I just released a product recently which HUGELY undercuts the competition. I was able to build it cheaply, over the course of a couple of years, and as a result I never took investment or hired anyone, so I can offer the product at incredibly low rates (compared to the competition).
My worry is that I may be pricing it so low, that I'm actually scaring off potential customers. This is an enterprise product, so they're used to seeing massive licensing fees. I initially thought that offering it at the lowest price I could afford, would mean I would garner the most customers, but now I'm starting to wonder if that's true... I have no experience pricing things, and I'm really considering putting out a survey to existing customers.
Note that you don't want to maximize customers, you want to maximize revenue. So even if hugely undercutting your competition gets you the most customers, you may still want to raise prices. If doubling your prices doesn't produce half as many customers (e.g. because you're still undercutting your competition) then you want to double your prices to make more money.
So yes, worry about scaring off potential customers with a price too low, but don't worry about scaring customers with a price that's too high, unless you scare off proportionally more than you increase the price. The way you describe it sounds like you could make way more money by raising your prices.
This link [1] has a good description of Sandy Kurtzig's "flinch" pricing method with Enterprise customers (I believe she was the first female startup founder to IPO her company). Her book, "CEO" about her startup journey is a good read, it was one of the first books I read that got me interested in business.
I just wanted to say that be careful about lowering your price just because you can. You should charge a price that maximizes your profit. Don't charge low just because you can, unless you have a reason (company philosophy, growth, etc.). Business usually exists to maximize profit. If you are priced a lot lower than your competition, double check whether your price is too low.
If not scaring them away, you might just be leaving money on the table for no good reason. Enterprise customers aren't as price sensitive as consumers or smb.
How long is your sales cycle from visitor to paid? If less than 1-2 months, just play around double the price for a month and see what happens.
Having run and advised numerous companies over years, increasing prices is one of the best decisions a startup can do. In 90% of cases there are no ill effects and just increased income which helps buld a better product. Profitability FTW.
I was once told by a former Seattle based executive that the best way for a startup to price their product was to take what they thought it should be worth and then add a couple of zeros to the end.
There's a school of thought that says that you should only achieve a certain percentage of sales. So if you're getting 90% of deals then you might be pricing too low, and if you're not getting anything then obviously too high. But if you're making 10% of sales and your selling for 100x more than your guess at the price then you're likely doing well.
Genuinely asking: Have you experimented with asking people to guess the price for the product? (Wondering if that is a simpler and better question to ask the users.)
Very sensible approach. My question would be: does this product make more sense as a recurring subscription or a one-time cost? Perhaps so many things are subscription based now that it is hardly a question, though.
You might consider a different tactic, one where you ask whether they would feel X is a fair price for the product. This can help eliminate bias in responses.
Conjoint analysis is also a common approach. It requires less specific answers from customers about price points, which people are often unwilling to share.
If you can get enough solid survey responses, conjoint is ideal, but won't give you a lot in terms of a price elasticity curve. That's not necessarily a problem, but I'd recommend a combination of MaxDiff (baby conjoint) and Van Westendorp. Used in tandem you'll get some solid footing on packaging preferences, value props for positioning, and ultimately price elasticity.
The closest thing to a "methodology" I've found is asking these four questions and having the users generate their own pricing curve [1]:
Here's a real set of curves this process generated for me recently: http://imgur.com/lPKLk53 ($ values redacted)
The four questions are:
1. At what price would you consider [the product/service] to be so expensive that you would not consider buying it?
2. At what price would you consider [the product/service] to be priced so low that you would feel the quality couldn’t be very good?
3. At what price would you consider [the product/service] starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?
4. At what price would you consider [the product/service] to be a bargain—a great buy for the money?
Require a specific $ amount as the answer to each question.
Take ~100 users, ask them all four of these questions, and then compile the results. You really have to do this on a subset of your own qualified potential customers to get any meaningful data.
The neat thing about this is that this creates a price sensitivity curve without anchoring the interviewee with any prior numeric values.
At the end of the day, it's still a gut call about where to place your price point relative to the user's alternatives, and testing is encouraged, but these four questions are a decent start.
[1] https://en.wikipedia.org/wiki/Van_Westendorp%27s_Price_Sensi...