How much to charge for your Web App?
creately.com
creately.com
On the other hand, in terms of discovering what users will pay for Creately, the experiment was a failure. By essentially structuring the system as "donate us money", you prime the users to think "Hmm, even $1 is being generous to them. I'm a big spender... I'll go as high as $3." That is, ahem, an insane price point for any service.
You have to convince someone to dig out their credit card to pay you money. There is essentially no differentiation between $3 and $9 at that point, since neither amount is an appreciable amount of money to working professionals. (Students are another case. Since they're going to complain long and loudly about being made to pay, and are going to do their level best to steal your service anyhow, I think you can quite rationally make the decision just not seek their custom. Alternatively, you can segment your plans such that one which is free but helps your marketing meets their needs.) There are tremendous advantages to the business, however, from moving from $3 to $9. (Revenues net of Paypal fees just increased by a factor of four.)
Note that $9 is still VERY VERY cheap. The fully loaded cost of a professional exceeds that for every ten minutes. Also, if you look at any SAAS business they'll tend to tell you the same thing: the most expensive plan, which is typically bought by employed professionals spending other people's money, brings in more revenue than any other plan. This has been mentioned by Wufoo in interviews, it was true of DropSend when they published their numbers, and I know it to be true of three other companies who have not given me explicit permission to make the fact known.
Additionally, as Creately noticed, the kind of people who are attracted by "This only costs a buck!" are the worst customers in the known universe. They cause hugely disproportionate loads on your support resources, and feel entitled to do so because they're Paying Good Money For This, Damn It. They tend to churn like crazy. They'll fail at the most trivial of tasks (like typing in their credit card details) and then blame you for it. (When you spend a buck on something, if something goes wrong it is the merchants fault, the lazy bum. When you spend hundreds on something, you darn well check to make sure it went through alright.)
Actually, I'd venture to say that the distinction between the two is shrinking, and will continue to do so in the future.
Now computers are so ubiquitous and powerful that people pay for "virtual" things all the time. They pay to download that song off of iTunes. They pay to download that iPhone app. Hell, they pay for "land" in Second Life and "money" in Farmville.
I'm curious how the same individual might value a subscription to "trendy $100 jeans...as a service", both in utility and price? I think it's been tried with luxury handbags for about $50/month, but I'm too lazy to look up what happened to that business (and my battery is at 3% so I can't look right now).
Seems to have been re-branded as Avelle.
$20'ish - el cheapo house brands at Target, Walmart, etc.
<$50'ish - Gap, Levi Strauss
<$100'ish - Lucky
<$200'ish - Diesel, Seven for All Mankind
~$500 - Prada, etc.
If you think about what Avelle provides (LHaaS), it's a way for women to accessorize themselves for a big night out in a way far outside of their typical budget. That super-trendy, $1000 Fendi bag won't lend itself well to everyday usage for most people. Those $200 jeans, on the other hand, cannot and will not be worn for that Big Event.
Imagine you're going to a cocktail party with a bunch of big-time politicos. If you're a woman, you might rent that Fendi bag from Avelle. No one in their right mind would say to themselves, 'hey, I'll go rent some trendy jeans for tonight's black tie event.'
A serious online competitor to those god-awful tux rental shops could be cool, though.
There are several reasons for this:
Micropayment services tend to be wallet oriented, pre-paid and therefore there exists no direct relationship between the merchant and the customer. This relationship is a very important component for the merchant.
Micropayment services tend to suffer from a chicken-and-the-egg issue, if not enough sites use a common system then why would a consumer put their money in to that particular wallet.
To date, in spite of many 10's of millions of investment money sunk in micropayment systems there has never been a clear winner, the minimum charge seems to be stuck at roughly $.80 which is way too high to qualify as a micropayment, and a merchant would only see a very small fraction of that.
To really function a micropayment system would have to be able to seamlessly charge sub-cent amounts and put the majority of that in to the hands of the merchant within two weeks of incurring the charge.
+ It is economical as low as 3 cents an action.
+ It solved the "Customers hate to make micropurchasing decisions" by moving the payment from the end-user to a business which gets to automate the micropurchasing.
+ The micropurchases are actually billed macro-scale, so it works on top of our existing payment infrastructure without too many hassles.
+ You can deploy it anywhere in the world for trivial levels of integration work. (That won't maximize income by a long shot, but you'll start accruing earnings with a quick copy/paste.)
+ It is almost totally resistant to "steal the content and repost to avoid the pay wall"... well, when it doesn't pay for people to steal the content, but that is another discussion altogether...
You are probably right that adwords / adsense obviates the need for many micropayments, but to truly become a micropayment worthy system there would have to be a much larger degree of transparency.
Basically right now you have to assume the middle man isn't taking advantage of your not knowing how much is being paid for your inventory and that is a thing that people are not happy about in general.
The end user doesn't fork any dosh, and you don't get anything unless you're get a slice of a corporate adwords referreral program.
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Maybe if the Newscorp paywall takes hold (the egg in chicken'n'egg) then Newscorp could institute a micropayment service 3rd party people (us/we) could use.
Newscorp might like a 0.1% tariff on all micropayments, and if there is one person who could take on Visa/Mastercard it is Rupert Murdoch
As a publicity stunt, it makes sense. Although it would make much more sense for an already well known entity to stir things up a bit (just like Radiohead did with their album).
$10 (or $9.95) is where the game really starts, less than that is really only to get people to subscribe for trial purposes for 3-10 days with an automatic up-sell to the full rate if they don't cancel.
That's a tried-and-true scheme and it is good for a very large portion of all online revenues on services.
The biggest problem - and you address that somewhat in your last paragraph - is that people that pay $1 feel just as entitled (or even more in some cases) to your premium support time, because, after all they are now a paying member, they intend to get their moneys' worth.
On a $1 charge you can afford support on roughly 1 in 50 customers, it had better be a very quick to resolve issue.
I'm sure most hackers in this discussion have heard of the famous article by Fred Wilson 3 years ago, but here it is anyway: http://redeye.firstround.com/2007/03/the_first_penny.html
For a once-off purchase, I totally agree. For a subscription, there's a big difference there.
I know not everyone's like me but I tend to calculate the annual price for subscriptions I have. So even though I almost never use it now, paying $1.99 to the Problogger forum is no big deal. But $9.99? That'd be a $23.88 vs $119.88 - a pretty wide gap. There are lots of things I wouldn't spend $9.99 a month on something that I'd spend $4.99 a month on.. a flowcharting app might well be one of those things.
He looked at what we were doing and he said 'double your price'.
I laughed at him, and said no way, people will cancel in droves, if more than half cancel it'll be a net loss.
Sales went up.
We basically doubled our income overnight.
The really interesting thing about the whole affair I think is that our retention became much better, and that's the hardest figure to tune in any online service.
If you give me your daily signups and your charge rate I can basically tell you what your annual turnover will be when I have the first week of statistics. It's scary how predictable that is.
Say n is your number of signups per day, your retention is 'industry average' (3 months or so for most consumer stuff, 12 months for b2b) and you charge 22.95, then for a consumer product you will make roughly (say 10 signups / day average across a month) 10 * 90 * 22.95 / month after 3 months of ramping up, for a b2b product you'll make 10 * 365 * 22.95 per month after 12 months of ramping up.
The retention is very important because it determines how far you can grow, a 1 month increase in retention in the above (b2c) scheme is 33% more turnover, but retention is the hardest of all the variables to get under control.
It is related to customer satisfaction, card expiry, product life cycle and so on, the signup rate is only affected by the quality of your marketing and your presentation.
edit:
When people launch a for-pay service and they see their first stats they usually think that the income is going to grow unbounded, but every product has a life-cycle and you really need to factor that in to get any realistic amounts.
This mistake is also present in the business plans of many start-ups, you have to assume some upper limit to the life cycle of a customer to get realistic figures.
It is usually a safe bet to plug the industry averages (3, respective 12 months for b2c or b2b) in, you may be a bit better but usually not much unless you have a very addictive/compelling product.
It is also good practice to over-deliver by a bit compared to your plans, if you have investors it keeps them happy.
Changing prices is always tricky, the above story tells you that my judgment on this subject is as faulty as can be so you probably should take my advice with a grain of salt (or a pound).
If I were to do something like this again I would do a 7 day a/b test and see how the signup rate is affected before taking the plunge. Even that is not simple to pull off because it would mean somehow isolating users from the two groups from each other long enough that you wouldn't influence the outcome of the test.
The big lesson for me from all this is that price elasticity is a non-linear entity.
What happened to the existing users when you doubled the price? Did your cancellations go up? Or did you freeze the price for the old users?
Most chose to lock in, and a very small number of them still have that rate even 3 years later.
We have fewer members now but that is due to other reasons.
Cancellations for the locked in accounts went down because those people thought they were getting a very good rate and knew that if they canceled and would sign up again it would be at the new rate.
At the time our retention was 3 months, so within 3 months the larger portion of the accounts were being charged at the new rate.
* Generate a random price in the acceptable range (but don't tell the user about it)
* Let the user know that you made up a price and let him enter what he would pay
* If the user entered a higher price than the random one he gets the product, otherwise he doesn't
Of course this only works if you keep the user from trying to do this multiple times, for example by offering an invite-only system and giving every invitee only one chance.
When fair is defined as "pay what you want", how do you define unfair?
If your app gets the job done better than visio for a company why shouldn't they pay you a comparable amount?
This works in software too. For instance, Gmail and Amazon Web Services pull prices down on webmail and cloud services respectfully.
If the competition's strength is excellent service for more, provide no service for less. I know it sounds weird, but it has often worked. In a maturing market, many pragmatic and conservative customers will prefer the cheaper, simpler packaged product. The key is that you cut prices by far less than the actual cost of service of the premium competition, so you can make more profit across a wider base of customers.