How to price something | Hacker News Reader

How to price something

37signals.com

96 pointsmh_59 comments

(I knew this philosophy degree would come in handy)

The author may not know it, but part of this article is describing something occasionally known as the judgement-action gap. It's a point in psychology/philosophy typically brought up in moral reasoning, specifically because there's very often a massive discrepancy between what people say they will do and what they end up doing in any moral situation.[1] This is no doubt true for saying they would pay X for Y.

I think the judgement-action gap is an extremely important thing to remember at all times, especially in the realms of business deals. If a commitment isn't on paper, it's not really a commitment. (Money counts as paper, too.)

Alas while I think the gap is a neat principle, I'd rather read an article just on that principle than one titled "How to price something" that culminates in the advice "make up a price, actually sell it and see." If that's all the advice you have, then even asking for people's opinions of what they'd pay for it is more useful than a 100% arbitrary number. It seems odd the article would offer no real solutions.

~~~~~~~~~~~~~~~~~~~~~~~

Hey! Wait a minute!

I hate to be the typical HN cynic but the last line reveals that this is not an article at all but a thinly veiled advertisement.

While the article doesn't actually say how to effectively price something, I had no idea what Basecamp Breeze is and now I do. 37 signals blog, you've got us again![2]

[1] My favorite example of this, though a bit dour, is "the only moral abortion is my abortion", a long list of stories of people who are morally opposed to abortions, yet still getting them: http://www.prochoiceactionnetwork-canada.org/articles/anti-t...

[2] I'm always surprised that 37signals posts get upvoted extremely quickly, seemingly regardless of content. It's not a bad thing per se, just a surprising thing.

Yeah. 37signals seems to have nailed the Startup Porn genre, and the hive mind eats it up.

And: if that's what qualifies as thinly-viled advertising...

Indeed, this article's quality is nowhere near e.g. what Joel Spolsky wrote on that topic:

http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...

Another really good piece on pricing is:

http://neildavidson.com/download/dont-just-roll-the-dice/

By @neildavidson

Also one thing that occurs to me. One real problem with a question of "would you pay $x for ___" is that it is usually way to abstract. It's not just a judgement/action gap issue, it's an issue where the individual does not have enough information to even make an informed judgement.

BTW, I do often start by asking "would you pay $x for ___ instead of paying $y for ____ or would you pay $y for ___ instead of paying $x for ____?" There is still a judgement/action gap issue there, but in my experience it tends to lead to more interesting discussions about value propositions and the simple yes or no is less interesting than the rest.

This one is quite the useless fluff piece. Not a single mention of even covering your hard costs. Just guess, be wrong, and try it out. Gee, thanks. Obviously I'm not in the subset of HN that finds "pull a number out of your ass, rinse, repeat" to be worth submitting and upvoting. Isn't the reason to ask about pricing to avoid this kind of crude guesswork in the first place?

If you want something of more substance, read this: http://www.joelonsoftware.com/articles/CamelsandRubberDuckie... Ultimately, you'll still have to pick a number and try it out but at least you can do so somewhat intelligently.

"Not a single mention of even covering your hard costs."

I didn't include that because that's fundamental. That's a given. If you don't know that you need to cover your costs to stay in business, then no advice is going to help you.

But also, remember... The market doesn't give a shit about your costs. So sometimes it's wise to start from the price and then build your business around that.

Because if you're price is too high because you're costs are too high, you're in trouble regardless of how you come up with a price.

Right. So your updated advice is that you must cover your costs since it's fundamental; a given. But wait... nobody cares about costs, so skip that fundamental given thing, pick some arbitrary number, and build your business around said arbitrary number.

Had your blog post been "How we arrived at Breeze's price", I would have nothing to say as you would be describing your rationale for arbitrarily drawing a number out of a hat and charging that. However, your blog post is titled "How to price something" and from that viewpoint the advice is lacking.

Your magic is over. Did you read the thread? People found out. Well, first those security holes in RoR, now those useless blog posts, you already peaked. Did you consider selling? I'd buy your product line and brand for, say, 5,000 EUR (provided we split the due diligence costs). Deal?

He Wrote, "No one ever went broke making a profit." I am pretty sure this covers your concerns about covering your costs.

No it doesn't cover it. If you're building a trivial software app in a week which costs beer money to get going and maintain via a cheap hosted service, then sure... you should just visit random.org and generate a number from 1 to 100 and charge that (per month, year, one-time, or whatever) because who cares.

But let's say you're building a non-trivial product and you've hired 4 engineers to work alongside you for 3 months to get the product off the ground to the point where you can start bringing customers onboard and billing them. These engineers come with a fully loaded cost of, say, $100K/year each. Maybe you're bootstrapping this venture via savings plus a second mortgage on your home to get to that stage and that's $100K you'll need to pay back to the bank plus interest.

As you bring paying clients onboard, you're going to need to hire support staff. What ratio of clients to support staff do you figure you will need? You will also need to ramp up your server instances to handle the load. Maybe you'll need to hire a full-time DBA. What is your marketing outlay for acquiring new customers and what's the conversion rate so that you can calculate your cost per acquisition? Do you have a sense of the lifetime value of each customer? Can you guesstimate the CPA and LTV to within a small multiple based on asking people in your network who are familiar with comparable services?

How do you factor initial sunk cost into the price? What sort of payback period on your second mortgage should you go with so that you're spreading out the costs over time rather than front-loading it all? How should you factor for continued growth, contingency situations, insurance, office space, potential legal risks, and a whole host of other factors to ensure that you actually are making a profit? There is a science to arriving at a price and having a certain amount of confidence that the price you chose will result in a profit. Saying "pick a number and ensure you're making a profit" does not help anybody in calculating whether there is profit to be had.

I am pretty sure all your calculations are covered by the word "Profit"...His point about testing prices is very sound. How you arrive at what prices to test, obviously requires more insight than picking a number out of your hat.

In that case, the entirety of the article, including the title, can be replaced with four words: "Try multiple profitable prices."

As an article titled "How to price something", I'm pointing out why it doesn't deliver.

I completely agree. These 37signal posts that are popping up on HN are just ridiculous fluff buzzword-laden crap that are simply advertisements and blogspam. It's annoying to see them on the front page over and over again, and while I'm no conspiracy theorist, the accusations of an upvoting ring sound plausible to me.

Various pricing schemes:

  Price what everyone else is charging ($5, $10, $20 per month)
  Price according to value (you're saving people 200 labor hours per year, price it 
    at 200 * hourly wage)
  Price at the ideal price (good luck finding it, and if customers catch wind 
    you're playing a/b games with them, barricade your doors)
  Price discriminate (create different pricing options for basically the 
    same product with different features and attributes, maybe based on amount 
    of use, maybe based on premium features)

Another real world tactic: create competitors or offbranded versions of the same service. This can help support your branded cost by allowing unbranded seemingly less good products be sold at lower prices to price discriminating consumers. It can let you sell to two groups of customers as well, including those customers your competitors might steal. It can make your entire market seem that much more of a real thing since now there seem to be competitors in it. In can drive up barriers to entry since there are competitors, and since you have the various pricing schemes already covered.

The article mentions that you can't ask people how much something costs, what matters is their behavior. And that's true. But I think you can ask people to compare products and services with known prices to your new product. Do you pay for Evernote at $5 per month and Spotify at $10 per month? If you could only pay for one at $7 per month, which one would you pay for? If you could only pay for Evernote at $5 per month, or my new site that does X at $5 per month which would you pay for? And you can do A/B testing on those prices.

Warning: this post is an ad for an email list service.

Secondly: how do they get away with charging people for an email list service? Is this for an Apple-like cult of Basecamp users?

It's $10 dollars, at this point you should be wondering how Starbucks can charge $2 for coffee. Or how Double Bubble can fleece kids for a whole 25 cents for some gum that probably costs less than a cent.

The reason why they can charge it, is because I'd rather pay anyone $2 for coffee than have to lug around a coffee maker.

Did you know that if you drive to a rest stop in Washington State they will give you FREE coffee?

I'm a geek. I can get most any kind of server set up if I set my mind to it. My clients often pay me reasonably large sums of money to do things just like that.

I'd never use an email list service. The fact that I don't know how to set one up is enough of a mental block that I don't really need one.

But Breeze would just work. All I have to do is put in my CC number, I could do that in my sleep without a context switch. Or if I'm really lazy, I can forward the link to my EA with a note to "pay these guys" and I'm done.

Just because we could use another service with only 5 minutes of work doesn't mean we will. Context switches suck. 37signals knows that. That's why they work really hard to make sure their stuff just works.

[Side note: I just googled "email list service" to prove my point. I found http://www.mail-list.com/. There's like 16 steps before I get to actually, you know, send a freaking email. Andddddd I've already tabbed back over to HN because I just don't care anymore.]

Interesting that they chose $10 for breeze, when Google groups is free

:-)

What are the key differences between the two services?

I found myself asking the same question, and then found http://basecamp.com/breeze/compare. It seems that they're offering easier set-up in return for the $10.

The pictures helpfully clarify that Google Groups has a couple of extra dropdowns and a captcha to complete before sending your email whereas the 37signals minimalist credit card form has um... a couple of dropdowns and a long number to copy accurately.

Not to mention the processes are exaggerated, and outright deceptive.

Funny, why do we need to spend multiple steps "signing in" to Yahoo Groups, and not Breeze? Because, sorry, 37signals, the opening page for Basecamp Breeze is not "Create A List".

But I guess you need to exaggerate for effect (this is the same company that defended Apple against the "sequences shortened" lawsuits).

Oh, and "(1)", "(2)", "Create" on the Breeze create a list page...

Except that's not what the page looks like, is it? (https://breeze123.com/signup)

"(1), (2), (3), (4), 'Create'"... that's more accurate.

So... "look how many steps our competitors take, for their free offering. Ours is less steps (because we'll bundle several of them onto each page), so pay us $10 for that convenience, DHH needs a new supercar!" - sorry, I couldn't resist the snark, but this "marketing" is dishonest. And the blog entry as much so. In fact, I could sum it up largely as:

1) throw dart 2) if target hit, great, if target missed, retry step 1

I'm a developer and I dislike Google Groups. Do you know any normal people who use it? I haven't looked at Breeze but assume it would be worth $10 to most people who require that functionality.

A lot of my non technical friends use Google Groups. Other than a few extra drop downs during set-up, it seems to me that there's literally no functional difference in the two services.

I don't know how they can blatantly lie and tell buyers that they're better off with their $10/month service over the free Google Groups, but they seem to be getting away with it. Because they're 37 Signals and everything else they make is amazing.

I believe the price is $10, one-time (not $10/month).

Allow me to recommend the free ebook that I found massively useful on this exact topic.

"Don't just roll the dice" by Neil Davidson

http://neildavidson.com/download/dont-just-roll-the-dice/

Completely agree. Neil's a really smart and experienced software CEO (Red Gate Software in Cambridge, UK) and I thought he had a lot of interesting/useful stuff to say in that book.

If you are already selling, here's a piece of actionable advice if you want to test whether a user will pay more for your software than you are currently selling it at - Advertise the software at the higher price point, then when the user buys it charge them at your current price point. This is good on a number of levels:

- You have data points that tell you users will pay more for your software (to the point of giving you their credit card details)

- The users will think they are getting a bargain when they realise they've been charged at a lower price point.

- You can probably perform this test in <5 minutes by tweaking your advertised price in HTML and deploying to live.

I'm curious - is it ok to charge people different amounts for the same product? Is it morally ok? Is it even legal?

Yes, yes, and yes. So long as you do not discriminate on a "protected category" like race, gender or sexual orientation.

The classic example that everyone brings up is airlines. If you have 3 random people sitting in the same section of the same airplane, odds are that they paid 2, and maybe 3 different prices for the same exact ride. And if one of them didn't want to stay the weekend before coming back, that one certainly paid more.

If this still bothers you, consider someone at a swap meet, bargaining with everyone who walks up. Each person gets a different price for the same product, depending on how well they negotiate, how you're feeling, etc. It is no different.

A set price is a convenience, no more, no less. And if you have one, and are successful, you'll eventually run into a large company that hires people whose entire job is to change those prices for themselves. Oh sure, they'll wrap it up in nice phrases like "do you support volume discounts" but at its heart it is the same as the swap meet.

Thanks, those are great examples for one-off purchases. How about subscriptions to services?

I first encountered this business fact at a small Wall St company that provides access to analytics on a particular type of bond. The price for broker-dealers that issued such bonds was many times higher than for companies that might be trading them. Both types of companies got the exact same access to the exact same data, but the value of that data and the frequency that they were likely to use it was different so they had different prices.

If you want other examples, take a look at licensing for access to various services. For instance I would guess that universities pay less for the exact same Microsoft licenses than private businesses. And Microsoft is willing to grant discounts on those licenses to small startups, in the hope that once they are real companies they will pay top dollar.

But the master in this arena is Oracle. Monthly license fees are much, much higher for companies that are locked in to Oracle than for companies that aren't. This is why they do not quote a price to anyone - they want complete freedom to negotiate.

If you want to learn more about this, including negotiation strategies, I highly recommend Information Rules. It is about 15 years old, but still relevant and worthwhile. The key principle is lock-in. If a company is locked in, you can charge more. If a company is not locked in, you should give a break, and maximize their opportunities to get locked in. (Oracle is the master at this.)

quoting pg: "You've found market price when buyers complain but still pay."

Of course you can make up a number and try it. But what if your wrong, how do you properly handle increasing your price on existing customers? Also, how do you know if it would be better to increase the price and maybe get more per customer, or decrease and maybe get more customers? How do you test that?

> But what if your wrong, how do you properly handle increasing your price on existing customers?

I think "properly" is to go about it in a way that is fair to everyone. If you have a customer base who sees value in the service you are providing and the raise is within reason they should stick around. If it is a very disruptive price increase you can always grandfather customers in or give them a X-month run way.

>Also, how do you know if it would be better to increase the price and maybe get more per customer, or decrease and maybe get more customers? How do you test that?

Why not just A/B test your pricing structure? Unless your customers communicate in the same channels you have little risk in charging Customer A one price and Customer B a different price.

They go to your website, see price A, then they switch IP address and computer (e.g. they visit your website again with their phone) and see price B.

It is a sunny day and a among his other wares a street vendor is selling umbrellas for $11.99. After you pass his stand it begins to rain, and you return to the vendor. The umbrellas are now priced at $15.99.

I want to say patio11 addressed this, but I may be misattributing. In any case the advice I recall is to, if anyone notices or complains, offer them a direct link to the lower price, possibly accompanies by a 10$ off coupon. An apology about the mix-up is optional, as is bringing up the fact that you are the founder, and you're happy to chat with customers any time on how to improve the service.

You should probably also charge all customers the lower of the two test price points at the final checkout step (as mentioned by whyleyc in this thread). That should avoid most complaints.

For services the best thing to do is to start at what seems to be high (but not so outrageous that people label you a kook) and scale back as needed. Nobody will complain if next month's bill is smaller than this month's.

For actual shipped products things are much more difficult, if you price high and people buy but not enough people buy and you then lower the price "too soon", the early adopters will feel understandably pissed. See: Nintendo 3DS.

See also the price drop for the iPhone back in 2007 (33% drop 10 weeks after release [1]). Resulted in an open letter and apology from the CEO [2].

[1] http://pogue.blogs.nytimes.com/2007/09/06/the-iphone-price-d...

[2] http://www.apple.com/hotnews/openiphoneletter/

This was useless navel-fluff. Pricing is a sufficiently difficult task that entire books -- not short ebooks: fully dressed textbooks -- have been written about the topic. You can honest to god hire consultants with pricing laboratories to work out what to charge.

So I know next to nothing about this, and I've never shipped a product of my own, but why can't you just do something like:

1. Price it at price $X, record number of buys/month over a few months.

2. Price it at price $Y, record number of buys/month over a few months.

3. Now with the assumption that you have a linear demand curve, you can extrapolate the buys at any price, which would roughly follow the equation B = (X-Y)/(P1-P2) x P, where B is the number of buys and P is the price in dollars. Obviously this equation will only work (if at all) for values in a certain range.

4. You want to maximize B x P, which is the total money made per month. That is, assuming costs are always the same regardless of the number of sales.

The two samples aren't independent, and you can't really isolate other effects (e.g., maybe people buy more in summer for the product at hand?)

Secondly, demand curves in practise aren't that fluid. Plus you want to capture consumer surplus. And and and...

Spolsky wrote a post on it once, it has a good and accessible introduction to the concepts, it's called 'Camels and rubber duckies'.

Demand curves sadly are notoriously nonlinear:

  -If priced low, more will buy... unless it's TOO low, then the product is junk
  -If price high, fewer will buy... unless it is VERY high, then the product
    must be a luxury item, hand-crafted out of artisan materials!

And demand will vary with seasons, holidays, work schedules, school schedules, the stock market, the phase of the moon, the price of tea in China, etc.

Fortunately you can get around time-based fluctuations with A/B testing. There are theories about how to learn the demand curve (see Van Westendorp's price sensitivity meter), but they are theories only.

A good question with an unfortunate answer: the demand curve is a curve, not a line, and it's a curve that changes shape when measured. If you test at $100 and then at $50, what you're testing isn't the demand at $50, it's the demand for a $100 product that has been discounted for some reason to $50. Some will wonder why it apparently wasn't worth $100. They'll be less likely to buy, even for $50. Others will wonder if the $50 is temporary and jump on the deal. Which group will be bigger? How would you know? If you restore the price to $100, you'll be testing the demand for a product that is now better known than when it was originally $100, so it should sell more than before, but many of those new people will think of it as a $50 product with a jacked-up price. They'll regret not having bought it when it was $50 and not want to feel like suckers paying $100 now. So your demand at $100 won't equal your previous demand at $100, and you won't be sure what the "real" demand is, even at the numbers you've tested, much less at numbers you haven't.

Even if a genie granted your wish and gave you today's demand curve, it would soon change shape the way prices in the stock market move around. If you could predict the future shape of your demand curve, you could just go into fulltime investing in the stock market and make a killing.

I hope this helps make it clear why you can't make it clear.

This reminds me of the "Tracer Bullets" tip from The Pragmatic Programmer. The idea being that tests help you see where the code should go and how far off you are, so that you can aim a little better and try again.

This is just tracer-bullet pricing.

How to price something: - Based on your competitors' offering & pricing. Higher price can indicate higher quality. You also don't want to spark a race to the bottom. - Based on what you want your revenue & costs to be. Not relevant to your customer, but very relevant to your company. - Through testing different price points. It's generally easier to start high and go lower than the other way around.

I've heard starting with a high price can be useful. Its easier to lower prices than raise them. Your early customers are more committed. You can perfect things more easily with a small number of users.

And its easier to figure out the impact of price changes with multiple price changes, which are easier to do when you are going down.

Haha damnit I wish Jason had posted this a day sooner, as yesterday I created a few threads asking people how much they'd pay for a tool I haven't built yet.

How do you balance this with the principle of not building something people don't want/won't pay for?

Get them to buy in advance.

not a lot of actionable information in this post. very fluffy. reminds me this comment that a poster made yesterday.

http://news.ycombinator.com/item?id=5033493

I disagree. Though maybe there isn't all that much here (certainly nothing new/groundbreaking), I still think it's useful advice coming from somebody who knows what they're talking about. Maybe it doesn't deserve the all the upvotes/attention it receives, but that just goes to show you how important credibility is.

It was actionable for me. I just rethought how I was collecting feedback, which I was doing right before I saw the post.

Actually I found a lot of value in the HN comments to this post. Thanks to 37signals for inspiration!

lots of theories on price, but none seem to start with the more important question. WHO WILL PAY THE MOST FOR YOUR PRODUCT. If you sell a vitamin that improves eyesight, are you better off selling it to the mass public, or to hunters to improve their hobby, or perhaps to pilots to extend the life of their career. The value proposition here is vastly different...

Pricing a product should not start with what can I get away with charging, it should start with, WHO DOES THIS PRODUCT CREATE THE MOST VALUE FOR?!

This sounds a lot more rational to me than the entire blog post

Charge what the market will bear. Yes, I haven't answered the question.

Reply on news.ycombinator.com