Ask HN: Cost-based pricing for hosted web-apps? | Hacker News Reader

Ask HN: Cost-based pricing for hosted web-apps?

5 pointsordinaryman5 comments

Given that..

- building software is getting easier and cheaper [1],

- one can reach a larger segment of small businesses and easily win them over with affordable pricing [2],

- mapping your cost model (based on cpu, bandwidth and storage) to a different pricing model (users, records) is a difficult problem to get right [3].

As software developers, why should we frown-upon or try to avoid cost-based pricing for hosted web apps ?

[1] Enabled by services like Google App Engine..

http://code.google.com/appengine/docs/billing.html

[2] Being low-cost is one of the best options available for start-ups..

Start by writing software for smaller companies, because it's easier to sell to them. ...if you want to win through better technology, aim at smaller customers.

They're the more strategically valuable part of the market anyway. In technology, the low end always eats the high end. It's easier to make an inexpensive product more powerful than to make a powerful product cheaper. So the products that start as cheap, simple options tend to gradually grow more powerful till, like water rising in a room, they squash the "high-end" products against the ceiling.

From : http://www.paulgraham.com/start.html

[3] My thoughts about this mismatch, blogged in "Why freemium pricing model for CRM / Online databases needs to change"..

http://rrajkumar.wordpress.com/2010/10/13/why-freemium-pricing-model-for-crm-online-databases-needs-to-change/

You should not price based on costs because:

a) customers do not care what your costs are, they care what their perceived value is.

b) costs are cratering, to the point where costs at the margin are so small it is difficult to measure without counting out picodollars (don't use picodollars!)

c) low prices do not necessarily make customer acquisition easier -- prices are a signal (of quality and probable business continuity among other things)

d) businesses have care thresholds for money and all numbers under a particular threshold are identical. If for a certain group of customers the care threshold is $50 / month, picking any price below $49 is insane.

e) pathological customers are disproportionately attracted to the cheap options

f) if you compete on price, you're forever at the mercy of anyone who is either more efficient at cost structure than you or anyone who is stupid and willing to burn money going after your market

Low prices sending out wrong signals, price-thresholds and attracting pathological customers are surely important concerns which I have to think more about.

Thanks for your insight, Patrick.

// By the way, I had requested Patrick to share his thoughts and he was quick post to them here. Though I thanked him by mail and up-voted his answer at once, just wanted to mention a word here, about his quick response.

We don't frown on cost-based pricing for web apps.

We frown on cost-based pricing for anything.

Pricing and cost are almost unrelated. Things are priced what they cost when they are plucked out of the ground, put on a truck, warehoused, and then delivered to the customer. Add any other step (say, "cooking") and cost no longer has anything to do with price.

This is not some web 2.0 thing. It's a fundamental principle of business.

Your question, as I read it, isn't crazy. It suggests, "if one way I can differentiate myself from my competitors is by being smarter and thriftier, shouldn't I be able to use that to differentiate my business through price?" The problem is that your cost should already be below the noise floor, and most nonzero prices incur the same hostility from customers --- so reducing your competitor's price point by 20% or even 50% might not help your business; it could even hurt.

I agree that things stop being a commodity, when art gets involved. But this art can also be factored in as a cost - like say the difference in costs relating to hiring a chef and a simple cook. This cost can also be factored in when arriving upon a price.

Depending on whether one wants to not go hungry (or) have some decent enough food (or) experience dinner, they can choose a category of food and price point.

So at last, price = cost + profit is still valid.

Unlike in cooking, the effort put in to creating software is one-time effort, whether you do it for a single person as a professional service (or) if you can make it generic enough for reuse (or) with if can be built with multi-tenant capability, along with online customization features. The talent level differs for each kind of deliverable, but it can at last be factored in as a cost.

This cost is becoming relatively much lesser, when compared to the recurring costs required to keep the software running on a hosted platform.

So, why not just price the software apps based on what really is a major cost factor and in terms of those cost-units (resource used), instead of trying to fit in a model which is not very natural (in terms of number of users, number of records - which is hard to do right, without over-charging most users), was what I liked to be discussed.

"price = cost + profit" is a tautology.

Reply on news.ycombinator.com