Must reads for any startup are Jeff Nolan’s “The Myth of Freemium and Related Pricing Topics” and VC Seth Levine’s “Pricing models, the freemium myth and why you may not be charging enough for your product.”
Some high points from these two gentlemen as well as my own experiences:
– Think of Freemiums and Low Prices as Marketing. Like any other Marketing program, there needs to be a discernible ROI. You can’t lose money on every unit and make it up in volume. Ultimately, your sales and marketing costs have to wind up being a small part of the revenue you receive from each customer. Don’t mis-state that ratio by failing to include the unnaturally low price (or no price in the case of a freemium) you are charging.
– I agree totally with Jeff Nolan who says it is just as hard to lower as to raise prices. Seth is in the conventional (easier to lower) camp, but customers feel cheated if you slam the price down. They think you’ve been overcharging and wonder if they were suckers to trust you. OTOH, my experience raising prices has been much better. Customers understand that an early stage startup can’t charge as much as a later stage. One of my mentors calls it “Earning the right to charge your product’s true value.” That’s a good way to think about it.
– As Jeff and Seth allude to, pricing works better when it is aligned with value. The more value you recieve, the more you should pay. The exception is for large up-front transactions, which are often discounted.
– In addition to aligning price with value, think about how to align it with expense. If you’ve succeeded in aligning all three–price, value, and cost of delivery, it’s unlikely anyone will game your pricing and it will be much easier to understand and accept.
– Simple is always better. Love the examples of Heroku and Base Camp that are given. Keep in mind that not everyone in your organization is necessarily aligned with the desire to keep it simple. Complexity gives Sales room to manuever and add their value through negotiation. You have to think about whether it is better for your business to undergo that friction (i.e. how often does Sales negotiate to the better) or is it better to be transparent and easy for customers. When in doubt, err on the side of the customer.
– Unbundling and tiering needs to be aligned in such a way that every customer doesn’t need the separate line item. If everyone needs it, you’ve needlessly complicated things. If the great majority need it, you’ve needlessly complicated things. If less than half need it, you may be on to something.
– It’s a beautiful thing to outflank the competition with a qualitatively different pricing model. Qualitative means your pricing isn’t just cheaper, but it works differently. Keep in mind the admonition about aligning price, value, and expenses before attempting this. I’ll give as an example Helpstream’s pricing for a SaaS Social CRM product. Every player in that market except Helpstream wanted to charge for their customer’s customers. We only charged for our customer’s employees who were on the system. We told our customer’s we couldn’t see penalizing them for successfully building communities of their own customers and they loved it. We were able to do this because we could deliver the service for about 5 cents a year per customer’s customer. It took some unique architecture to pull that off, but it was a powerful competitive weapon.
– I disagree with Seth Levine about cutting the trial period from 30 days to 14 days. That really depends on the product and customers. Get a good sense of how long it should take them to evaluate your product, get all the ducks in a row on their side to make a purchase, and then use that figure, whatever it turns out to be. Getting all the players in an org to agree on a Social CRM system in 14 days was never going to happen for Helpstream.
Be sure to check the links at the top. Lots more good material in all 4 blog posts!
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- Can “Freemium” Be Profitable? MailChimp Data Says It Can (nytimes.com)
- Pricing models, the freemium myth and why you may not be charging enough for your product (sethlevine.com)
- Is “Free” the Right Price for Your Product? (readwriteweb.com)