It's easy to underprice your product (2009) | Hacker News Reader

It's easy to underprice your product (2009)

venturehacks.com

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Sorta related: when I was 22 or so, a friend and I sold some software to a school district.

We were young, poor engineers with no idea how sales worked. When they asked what the price was, we picked a nice round number that sounded appealing to us.

"$100,000."

Our counterparty may have actually laughed at us. "I can't just write two twenty-somethings a cheque for $100,000."

Oh, shit. They're on to us. They're gonna bargain hard, and we're going to have to lop off tens of thousands of dollars.

"But what I can do is write you a $10,000 cheque for a 1-day training session, a $15,000 cheque for installation support, a $10,000 cheque for 1 year of maintenance and a $65,000 cheque for a perpetual 5,000 seat license. Does that work for you?"

It did. To do this day, I'm pretty sure we sold the government $100,000 of services because two high-up administrators were incapable of working out their interpersonal issues. Instead, they used our software as a go-between. Absurd.

In the government, and large organizations as well, there is often a large pot of money that is 'use it or lose it'. In fact, overspending can often justify need for larger budgets next year around and underspending can make you look bad as someone who doesn't know how to forecast their requirements better. It is diametrically opposite to how thoughtful people budget for themselves or their homes and leads to things that make no sense at a logical level 'save resources, etc' but makes perfect sense at another level, 'grow my empire'.

I've seen this even in relatively small private orgs (1000ish) - if you don't spend your budget, then next years +/- across the board spending change will be applied to the lower number you spent rather than what you forecast originally.

Org bloat & empire building is highly incentivized, and insulates you from the bad times. If you can get all your work done with 60% of the staff, then when you are forced to kick out your bottom performers annually.. it's easy to find some. If you are basically operating lean or at the redline, you need to fight the fight hard every time the axeman comes.

I don't think the system CAN accept a refund.

We were virtualizing 150 computers into a VM environment and I asked what was going to happen to the hardware replacement budget for the machines that were virtualized. I got a lot of Hem and Hawing and they said something like 'we can throw it at workstations or training or something.'

I remember talking to someone who had done a postdoc in Japan and he said that their labs had computers that had been budgeted as a consumable. At the end of a year some admin guy came with a small hammer and smashed the machines to make sure they were 'consumed'.

a part of it is also trying to avoid decision-makers cheaping out; eg you've been given a budget for social programs, it's your duty to use all of it and provide the impact that was expected. you can apply that logic to a lot of things - why are you building a 2 billion dollar metro when we budgeted for a 3 billion one? what corners are you cutting?

When I was 15 I made a scriptable screen automation tool. I gave it away for free on one of the forums I frequented, and people actually downloaded it. I was amazed. A couple days later a guy contacts me and asks me how much I'd charge to add a feature. At that point I was just thankful that anyone was actually using this thing I had made, but I couldn't pass up the chance to become a "professional" and make my very first sell, so I told him $60.

I've always been nervous about disappointing people, and I was extremely worried he'd scuff at my offer and maybe even stop using my program. Instead he was very kind and offered to pay up front. I made the feature and sent it to him.

A couple of days passed, and he messaged me again to tell me that he just wired me another $60 and that he didn't want anything for them. He just figured my price was too low, and that I really deserved more. That was a wonderful experience in how product can be worth so much more to the person receiving it than the one creating it. For me it was just a fun little project for a weekend, but for him it was genuinely useful and something he could not have created himself.

It's also a fun thing to be able to say. I once under priced a product so heavily the buyer took pity on me and offered more.

>I once under priced a product so heavily the buyer took pity on me and offered more.

I once got a "we're going to bump your offer salary to be more in line with the other devs" and that was a pretty similar feeling

But that one makes more sense from their pov, because you'd find out sooner or later.

100k to solve or deflect interpersonal issues is sometimes worth it, too. One never knows when a lawsuit can pop up. :-)

These stories are wonderful:

Excerpts:

> “And she realized… she left money on the table.”

> And Sandy gulped and picked the biggest number she thought anybody would ever rationally pay. And said, “$75,000”. And she said all the buyer did was write down $75,000.

> And she realized, shit, she left money on the table. Sandy Kurtzig was awesome. And she said, “Per year.”

> And the buyer wrote down, “Per year.”

> And she went, oh, crap what else? She said, “There’s maintenance.”

> He said, “How much?”

> “25 percent per year.”

> And he said, “That’s too much.”

> She said, “15 percent.”

> And he said, “OK.”

> [Ed: This is called “flinch pricing.”]

----

> They said, how much is it?

> And I was about to go, “$75,000…” And Gina goes, “Shut up I’m the salesperson.” She said, “A million dollars.”

> ... And the guy looks at Gina and said, “Gina you’re out of your mind. We don’t pay more than $675,000.”

> And Gina said, “All right. We’ll let you have it for $675,000.” ... “But that’s for the base module. What other ones would you like?”

One great piece of pricing advice I received was that you can price the product based on the seniority of the person in the room. If you're meeting with a mid-level manager of a medium-sized company, you shouldn't go crazy with the pricing. But if a senior executive is in the meeting, you can tell the deal is important enough for him/her to spend time on it, and you can price accordingly.

This doesn't override other more concrete considerations, but when you're trying to price software (zero marginal cost) made by a startup (often no direct competitors/comparabales), it can be a useful factor.

I would argue for the reverse: transparency in pricing and don’t try to haggle up depending on the business/person you have in front.

The point of the article is that it's very difficult to have an objective transparent answer. Client and seller are guessing the value, so trying to remain as loe as possible is just bad practice.

That makes sense for mature businesses, but for a startup getting its first customers, or its first customers in a particular sector, you have no idea what your price should be. Should it be $10k per year, or $10k per month? Unless you're pricing on a cost-plus basis, you have no idea what the right order of magnitude is.

This is a great insight.

In Enterprise sales, the speed of sales at a given price often varies by pay grade.

If you want individual teams at large companies to be able to purchase the software, it needs to be at a certain price point.

If the software only makes sense at levels higher up, the price point increases accordingly.

Also, the higher you go up in the company, the longer a deal can take. Thus, price should reflect this as well.

For example, if your software is of the nature that it requires approval of CEOs at large companies, your pricing will need to reflect the extra overhead -- e.g. the time and hand holding it takes to close the deal.

That's why lower prices and faster onboarding is so valuable.

Ideally you want your software to be adoptable at grassroots levels within a company.

This reduces sales overhead and makes lower prices feasible. It's a feedback loop in both directions.

So hire devs when they are young, and salesmen when they're old ... ?

I think this is a very "of its era" kind of story. Computer systems were looked at as magic boxes back then and there was no easy way of doing research on competitive products. Hell there might not even be a competitive product. If you did any of that now or didn't research your market. You could easily sink your startup. The software industry is pretty mature now and people are more savvy on figuring out what feels right. Not saying that engineers don't still under price their products. But as an engineer I would do your research and find something that fits within the market because thats what your customer is going to be doing.

I don't know if I agree, this was just 2009. Google, Twitter, YouTube all already existed and I'd been doing web dev work for 10 years at that point. I think tech is still the black box it's always been - just look at how many people are buying things because it says 'AI' in the name right now. If they really had the knowledge of how things worked , they would know better than to pay for that.

My first real software job, I asked how much do we charge for this thing? Sales guy told me it was $50k. I was like, what? This thing isn't worth 50k. Sales man replied "It's not what it's worth, it's what they'll pay."

Never forgot it.

And what they'll pay is always negotiable, especially in enterprise sales where you would see $50k type prices.

Why is enterprise software expensive? Because enterprise support is expensive.

It always starts out easy "We want this thing X to do Y, we probably won't use it that much"

Which turns into

"X has our entire enterprise down" and you're like WTF, how can that be, and they are like "Well it worked so good we turned it into a main line of business app and didn't tell you" then "oh yea, can we get 24/7 support on it now" which turns into "The support people we talk to need to understand their shit because this is hitting a database and API endpoint pretty damned hard"

Then all of a sudden that $50k goes nowhere unless you're selling that shit again and again to keep up with your internal costs of making sure they are working.

Of course, which is why the typical enterprise prices are large to begin with.

Salesman was right, but keep in mind that what it's worth to them is always going to be more than they'll pay. Otherwise, there would be no point.

Not entierely related, but I remember hearing the Ceo of Warby Parker explaining that when they were selling glasses for less than 100$ (because it cost them very little and wanted to offer a low cost pair), no one was buying, since there is an unspoken bias - paying 20$ for them made clients feel like they were low quality, even if they were just as good.

So they raised it to about 100$ a pair and boom! Massive sales, become a huge player in the market.

If your stuff sells cheap, it's thought of as cheap. Branding is a part of the price!

And I switched from WP to Eye Buy Direct...

This is known as a Veblen good.

https://en.wikipedia.org/wiki/Veblen_good

I disagree. $95 glasses are not a luxury good. I think this might have more to do with the relative saturation of the glasses market at each price point, where there was not enough offer for a midrange product before Warby Parker stepped in.

Interesting to read this after yesterday's post about Silicon Valley companies strategically subsidizing their costs to undercut the competition and gain market share[1]. Maybe overpricing is a winning strategy in the enterprise world, but shareholders would probably rather see a larger customer base than a few high paying contracts.

[1]: https://www.businessinsider.com/venture-capital-big-tech-ant...

This is much earlier than 2009 (the original). I remember listening to it as a podcast around 2004 or so. In any event, it's a great learning experience and I still think of it from time to time.

You don't by any chance know where I can listen to this podcast? I tried to track it down to no avail. The links to the mp3 from the OP just send me to a 404.

mp3 via archive.org: https://web.archive.org/web/20130310140729/https://ventureha...

Thanks! ^_^

Some businesses are strangely irrational about overpricing. Occasionally I've seen something that was obviously much more expensive than the T&M required, but much less expensive than what it would replace and the company balks because "It doesn't cost you anywhere near that to make it."

That's the exception rather than the rule though.

I used to work for a small company that sold a device for $400 which had a Bill of Materials cost of about $20. Nearest competitor sold theirs for around $900 and looked slick. Ours was housed in (I kid you not) a Radio Shack blue plastic box.

One day I got a call from a plant foreman needing a replacement and asking the price so he could get Procurement to order it. His reaction was "that little box is $400??!! Whatever, can you Overnight two of them, we're down right now."

Value and price are two very different things!

On the flip side, as the business owner of a what I'd call an "affordable luxury" product (about $45 for a hand-blown whisky and spirits glass), its also easy to overprice the product.

The most difficult thing is finding the balance and compromise in pricing because some customers will happily pay double the cost, but many won't.

My product is very expensive to make and my margins are not great, but this price gets me the most market saturation in a very important growth stage (business is only 2 years old) while still keeping the business profitable

I was managing Accenture as a strategic partner and in one meeting we were discussing solutions for a division of Siemens. I represented the third largest ent Software company at that time.

The Accenture EMEA head asked the room what can we offer to solve X.

before I could answer, of my engineers stepped up and said Product X

MD. How much does it cost? Engineer: $50000 per year

MD turns to me and says. What do you have that costs $1M or more.

Accenture made $2 for every $1 of our SW. They had no interest in selling solutions that didn’t move their and our goals.

My wife is an allied health professional who opened her own business. She serves a fairly high end clientele. Thankfully a friend pointed this out and said she needed to keep increasing the price until they as a group push back and her wait list goes down (her wait list is measured in months and has a very high conversion rate). She has increased her price by 6x in the last few years. And the wait list keeps getting longer.

I did a project for an event company that was to gamify a basketball and baseball speed pitch system (LEDs, Score Count, Radar, Etc).

I sent them a text with a price for the project and they wrote back "How much for baseball?". It was worth two times as much at that point.

Sorry, I don't understand your story.

This includes yourself.

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