Pricing Your Product

One of the biggest lessons I've learned as a VC in the past few years is that pricing really has to be aligned with and proportional to the value your product provides. If someone gets $100 of value per seat and you charge $15/seat, that's great. If you charge $15/seat for a product that creates value per gigabyte, people start gaming the system. E.g. they'll buy one seat for their company and ask that person to be the proxy user for your product. Or if you charge $10/GB and people get $20/GB of value of the first few gigabytes and then $5/GB of value after that, you're going to run into problems.

So figure out how users perceive and quantify your value to themselves, and then try to come up with a simple pricing scheme that captures 10-25% of that value. That way every time someone pays you $1, they get $4-$10 of value, and that's a no brainer purchase.

Getting pricing right has a huge ROI across the board. Good pricing improves margins, reduces sales friction, and creates happier customers.

The best book that I've read on pricing is Monetizing Innovation: https://www.amazon.com/Monetizing-Innovation-Companies-Desig...

My problem with this advice of testing your pricing strategy is how to communicate this to actual customers. Maybe this isn't a thing in Europe or USA; but in third-world countries a change in the price it is important and something your customers want to know.

If I set my prices higher, I can't change it for my current customers. They will get mad. So I ahve to create a full logic on the backend for customers created after X date, etc. It is a mess.

If I set my prices lower (i.e., display lower prices on landing page, etc), my current customers will get mad at me if I don't change them for them too ("Why I am paying more than the price you are saying this costs?"), etc.

So for me, this strategy of A/B testing prices, find the right price, etc, has been always too complicated to implement. When I tried, I end up adding more problems to me to deal with, and at the end I couldn't analyze the trends I wanted it.

The article hits its stride at paragraph 14, where they talk about the importance of "value-based pricing" rather than "cost-based pricing."

My wake-up moment came in 2013 or so, when I was pricing the digital version of a long-ago print book I'd written. ("Merchants of Debt"). I knew that it kept finding a niche audience among investment bankers and people who want to be investment bankers.

E-book prices were dropping, and I wanted to get full value from my best customers without seeming out of step with the market. After all, most finance types can afford to be price-insensitive, but they still want to feel like they're getting good value. The solution was to create an unabridged edition for $9.99, and a condensed edition (about 40% of the content) for $3.99. Truth is, the condensed edition gets very few orders. But the fact that it exists makes it much easier for serious buyers to pay up for the full edition.

Knowing the customer's frame of mind -- which usually is quite nuanced -- is the key. Especially when, as the Sequoia folks point out, the marginal cost of another digital copy is always very close to zero.

Pricing is HARD. I launched a SaaS in 2016 with a 100eur per month recurring plan. only 5 signups in two years. Then around 2018 someone wrote me "that's incredibly cheap. why?" So, I doubled it to 200eur per month. Today there are 60 recurring plans at 200 per month, and only 3 @100(grandfathered plans from the early days.)

Clients tend to think that if something seems too cheap, something is wrong with it.

> Natera recently brought to market a non-invasive pre-natal test that can detect Down syndrome and other conditions in a mother’s blood. Previously, testing for these conditions required a risky procedure that extracted tissue from the fetus. Other non-invasive tests aren’t as comprehensive.

> Because Natera's test is better than its competitors' products, the company charges more.

> “Premium pricing communicates a premium product,” says Matthew Rabinowitz, the company’s CEO.

Is this normal in the USA? Talking of "premium offerings" in the context of healthcare seems sickening to me. Premium hospital beds with high speed broadband, alrighty, but premium healthcare itself? I understand that one needs to recoup R&D costs a few times over for it to be worth the risk, but that's simply cost price (risk * R&D cost / unit count * unit cost) and not a "premium product". This isn't a non-essential premium Ferrari, it could help a lot of people. Is it just me who finds this a really weird example?

Value-based pricing is the worst societal invention. Imagine a medicine can be made from simple ingredients, but you discovered a recipe by accident. It's very valuable since it might save lives, so the value is high, the cost is low and you can reap the benefit on the mere basis that you discovered something by accident. You also need to make sure that no one "gets it", so do not educate people, just milk them - and in the worst case, mislead them, work against any threat "knowledge" would pose.

Mundus vult decipi, ergo decipiatur.

Imagine a world, where progress and invention would be something shared and done not out of greed but out of ability and ultimately generosity that would add to the grace of our race.

Instead we celebrate greed, as if we were a bunch of apes.

My fear is that human society needs to reach new lows before we actually have the chance to see our own potential (and then it might be too late, anyway).

It's insightful to learn that in their guide on pricing Sequoia cites Phil Libin, then-CEO of Sequoia-backed Evernote, who was later kicked out exactly because the company struggled to find the right pricing model.

How ironic given that it's biggest winners in its portfolio are companies that never sold anything (at least not initially), Linkedin and Instagram for example.

This is a helpful article and I would add to the general "value-based" pricing discussion:

Price is limited by perceived differential value.

So if there's value that the buyer doesn't perceive, it doesn't count. (Often, there's value that the buyer perceives and you don't in the SaaS world.)

If there's perceived value, but you charge $1000 and someone else offers the same perceived value for $100, it's going to be hard going.

This feeds back into understanding your customer subsegment really well. In the example above, perhaps the general market thinks you are at -$900, but for your niche, there are some critical aspects that make it worth much more.

Another corollary is to offer different price points, all aligned with how the buyer perceives value, such that you're happy with whatever choice they make.

A better title might be "Pricing Your Service" since the overwhleming majority of examples cited are services, not products.

When it comes to pricing I relate it with Jobs to be Done. Pain, desire to progress and willingness to pay as a prime lever.

Whatever pain you are solving, if customers have no money they are not going to buy the product.

If customer has no desire to progress, they will stick with existing software even your product will make like 100X better.

Good read, emphasizes an importance of figuring out a customer-perceived value of your product.

Sidenote: reading it was very much painful on eyes, at least on my phone screen. That thin font looks almost like a watermark. Maybe it'd be better on a laptop screen.

ICYMI (Was on the front page most of the day 2 weeks ago):

Once you figure out general price, here's a good guide to Pricing Plans

https://capitalandgrowth.org/answers/Article/3169972/The-Def...

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