Ask 37signals: How did you come up with pricing for your products?(37signals.com)
37signals.com
Ask 37signals: How did you come up with pricing for your products?
http://www.37signals.com/svn/posts/1287-ask-37signals-how-did-you-come-up-with-pricing-for-your-products
17 comments
Their "intuition" and the "feels right" works because they design for people like themselves. They can put themselves in their customers' shoes and they actually fit! Sort of like how Jobs only would release a product he'd enjoy using. If the same 37s people made some other product like break pads or investment banking advice, their cavalier attitude would cause them to fail.
Good point, I should have added that its smart people with good intuition and a passion for what they do.
The first time I charged for a web service the hard part was getting over the guilty feeling that I was charging for something that cost me almost nothing. That's definitely not the case of course. I had to develop it, support it, pay for hosting, etc. Still, it takes a bit of strength initially to begin charging money for little more than adding a few rows to your database.
From the inside it's really easy to undervalue what you're doing. It's a big mistake too, because if you're solving a hard problem for someone they really don't mind trading money for it.
I think 37 signals emphasis on creating products you can charge for is their very best advice. Paul Graham didn't go for eyeballs with Viaweb -- he charged something like $300/mo for an online store application.
Working on a product that makes money is entirely different from working on a free one. In a thousand little ways. As a business I definitely prefer charging users directly and probably won't ever try to create another free (to users) business again.
From the inside it's really easy to undervalue what you're doing. It's a big mistake too, because if you're solving a hard problem for someone they really don't mind trading money for it.
I think 37 signals emphasis on creating products you can charge for is their very best advice. Paul Graham didn't go for eyeballs with Viaweb -- he charged something like $300/mo for an online store application.
Working on a product that makes money is entirely different from working on a free one. In a thousand little ways. As a business I definitely prefer charging users directly and probably won't ever try to create another free (to users) business again.
> the hard part was getting over the guilty feeling that I was charging for something that cost me almost nothing.
Yes! Coming from the world of open source software... that's something that doesn't fit into my mentality. Other people in this thread are talking about how the 37s people were probably able to envision paying X $ for something themselves. I would have trouble with that - there are few things I pay for online besides domain names and hosting.
So how did it work out for you?
Yes! Coming from the world of open source software... that's something that doesn't fit into my mentality. Other people in this thread are talking about how the 37s people were probably able to envision paying X $ for something themselves. I would have trouble with that - there are few things I pay for online besides domain names and hosting.
So how did it work out for you?
> "I was charging for something that cost me almost nothing"
Don't charge based on your (marginal) cost; charge based on the value you are delivering to your customer.
Don't charge based on your (marginal) cost; charge based on the value you are delivering to your customer.
...which is another way of saying "Charge based on what customer is willing to pay". (Not that there's anything wrong with that.)
I think its just from their experience as customers elsewhere.
For me — $10 for a simple service seems a little pricey, $9 is basically $10 still, $8 is still a a tiny bit high — but $7 is the sweet spot! Same goes for higher prices too — I like $37 rather than $40. I'd think less about paying $17 for a service than $20, $19 or even $15!
Not sure why, maybe its because the $7 on the end becomes my focus:- its still technically pocket change — but also in the higher end out of 10...and I think about it more than the $30?
(plus if your picking smart numbers for prices, check out the "common" exchange rate people think of without checking. For me, I think of a dollar being worth £0.50p, so $37 is around £18.50, when in fact its over £21; for some it may not make a difference, but for others, the extra few pounds to nudge it over £20 may be enough for them to pick a slightly cheaper plan. And I would imagine a similar thing happens with the euro and other popular currencies also.)
For me — $10 for a simple service seems a little pricey, $9 is basically $10 still, $8 is still a a tiny bit high — but $7 is the sweet spot! Same goes for higher prices too — I like $37 rather than $40. I'd think less about paying $17 for a service than $20, $19 or even $15!
Not sure why, maybe its because the $7 on the end becomes my focus:- its still technically pocket change — but also in the higher end out of 10...and I think about it more than the $30?
(plus if your picking smart numbers for prices, check out the "common" exchange rate people think of without checking. For me, I think of a dollar being worth £0.50p, so $37 is around £18.50, when in fact its over £21; for some it may not make a difference, but for others, the extra few pounds to nudge it over £20 may be enough for them to pick a slightly cheaper plan. And I would imagine a similar thing happens with the euro and other popular currencies also.)
7 isn't a bad number - and it seems to have worked with getting the bailout passed. 700 Billion feels closer/is easy to report as "Half a billion". 800 Billion would have been rounded to "One Trillion" - a (slightly) scarier number. It's very much the same problem, though at a different scale & with different decision makers - in the case of the bailout, the target audience was Congress with a nod to the media. In any case - to bring this back around to the original post - the lesson here is to know (or be) your audience and to understand the sacrifices they'll make for the value you offer.
Numerous psychology studies have found that .97 is the new .99 - you're already used to rounding .99 up to $1 but not $.97
I've noticed some stores use the cent amount to indicate other things about the price like what kind of discount has been applied. So for example .97 might mean it's on sale, and .95 might mean it's on clearance.
Yes, numerous, with the case here being that the number is zero.
37 guys write great fiction but let's look at reality. Their pricing is cost prohibitive for truly small teams. If I were to use them as a "productivity suite" for, say, a one-two person team (the lowest possible pricing combo) it would set me back $804/year.
Given that an individual freelancer is the most common scenario as far as their potential users, they are probably severely limiting their sales by setting their pricing the way it currently is. Personally, I subscribe to their backpack service only. I would like to use their other services but the high price tag keeps me from doing so.
Or how about this from their Highrise website:
Basic plan - 6 users - $24
Solo plan - 1 user - $29
Does that "feel right" to you?
Given that an individual freelancer is the most common scenario as far as their potential users, they are probably severely limiting their sales by setting their pricing the way it currently is. Personally, I subscribe to their backpack service only. I would like to use their other services but the high price tag keeps me from doing so.
Or how about this from their Highrise website:
Basic plan - 6 users - $24
Solo plan - 1 user - $29
Does that "feel right" to you?
No, it's really not prohibitive, though I suppose it depends on the team.
Take a 3-person team, each making $50k/yr (that's really low for consulting professionals, but hey-- let's aim low). Add burden/benefits/support costs and a fully loaded person is generally 2x-3x in cost. Let's say 2x (again, aiming low- maybe they pay for their own hardware/software/work from home and have modest benefits). That's $300k in employee cost per year. $70/mo is a drop in the bucket next to $25,000/mo in employee cost.
So I guess it depends on what kind of company and what "truly small" means for you. But if you're really talking about COMPANIES (with payroll, expenses, revenue, and a smidge of profit), they've priced it at "impulse buy" level where any shmoe with a biz credit card could thoughtlessly buy it.
If you're talking about "3 startup guys with no revenue living on rice and beans", then it's a different story... But that's such a tiny market that it's really not worth mentioning (or catering to).
Take a 3-person team, each making $50k/yr (that's really low for consulting professionals, but hey-- let's aim low). Add burden/benefits/support costs and a fully loaded person is generally 2x-3x in cost. Let's say 2x (again, aiming low- maybe they pay for their own hardware/software/work from home and have modest benefits). That's $300k in employee cost per year. $70/mo is a drop in the bucket next to $25,000/mo in employee cost.
So I guess it depends on what kind of company and what "truly small" means for you. But if you're really talking about COMPANIES (with payroll, expenses, revenue, and a smidge of profit), they've priced it at "impulse buy" level where any shmoe with a biz credit card could thoughtlessly buy it.
If you're talking about "3 startup guys with no revenue living on rice and beans", then it's a different story... But that's such a tiny market that it's really not worth mentioning (or catering to).
I've never "met" a company that does tech consulting that carries just 3 employees. You either have more people (developers, designers, infrastructure, sales, HR, etc) and so the shop will invariably go Microsoft or something similar where they own the data (and by no means allow an "impulse buy" when it comes to their precious rolodex), or you are talking a couple individual freelancers teaming up on a specific project.
Of course there are some bigger clients for whom $70/month is not a big deal but I was talking scale. Would you rather charge $70/month to a 1,000 clients or $25/month to 10,000?
(And let's please not make sophistic arguments about "3 startup guys with no revenue living on rice and beans". It doesn't make for good discussion when you pretend that I made an obviously ridiculous statement and then refute it).
Of course there are some bigger clients for whom $70/month is not a big deal but I was talking scale. Would you rather charge $70/month to a 1,000 clients or $25/month to 10,000?
(And let's please not make sophistic arguments about "3 startup guys with no revenue living on rice and beans". It doesn't make for good discussion when you pretend that I made an obviously ridiculous statement and then refute it).
FWIW, I ran a consulting shop for 8 years-- early in its life, we had 3 employees. Then 4. Then 5. Then (ultimately) 15. Happens all the time.
Can you show me a real business (with revenue and profit) with any employees who would be concerned about $70/mo? Or more importantly, the difference between $70 and the price that you think would be more appropriate?
The rice/beans argument wasn't sophistic-- it was an acknowledgment that yes, there are certainly tiny/new companies with little revenue/profit for whom $70 would "move the needle". 37Signals fails to capture these customers every day.
The 3-person example was aiming at the lowest end-- trying to show that even the tiniest business with profit and revenue would be silly to care about $70/mo if it helped their business be more efficient. The larger the team, the more ridiculous it sounds to say that 37s pricing is "prohibitive".
The $70:1000 customer vs. $25/10,000 is the crux-- Are there 9000 (90%) businesses/teams out there who would change their decision based on $45/mo? As a guy who has sold products and services to businesses for 14 years, my gut says no. It's all about the demand curve.
Great read on software pricing here, if you care to read it: http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...
Can you show me a real business (with revenue and profit) with any employees who would be concerned about $70/mo? Or more importantly, the difference between $70 and the price that you think would be more appropriate?
The rice/beans argument wasn't sophistic-- it was an acknowledgment that yes, there are certainly tiny/new companies with little revenue/profit for whom $70 would "move the needle". 37Signals fails to capture these customers every day.
The 3-person example was aiming at the lowest end-- trying to show that even the tiniest business with profit and revenue would be silly to care about $70/mo if it helped their business be more efficient. The larger the team, the more ridiculous it sounds to say that 37s pricing is "prohibitive".
The $70:1000 customer vs. $25/10,000 is the crux-- Are there 9000 (90%) businesses/teams out there who would change their decision based on $45/mo? As a guy who has sold products and services to businesses for 14 years, my gut says no. It's all about the demand curve.
Great read on software pricing here, if you care to read it: http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...
I was a little surprised the article didn't mention any of their competition. One strategy I've always admired is deliberately pricing products slightly above competitors.
But it's been wildly successful for them. I guess the point here is that all the kinds of management training you see in traditional companies pales in comparison to having smart people with great intuition running the show.