Am I charging too much? Will I regret trying to charge this much, or should I have been charging more right from the start? If you’ve asked yourself questions like these, believe me, you’re not alone. Everyone who has started a business or launched a product has asked themselves the same questions. And almost all of us made at least some of the same mistakes, so don’t sweat that too much either.
Now, I am going to explain how to price a service or product so that it doesn’t leave you out of pocket (we did that the first time around!). At the end of this post, you should feel like you’re ready to put a number on your product.
But before we go on, there are two things I want to say really loud and really clear:
- The bad news. There is no magic bullet. There is no hard, fast and certain rule that will always work, every time. There are rules of thumb, guidelines and experience, but no magic formula. But you knew that already, right?
- The good news. Dozens of makers just like you have been in exactly this situation and are now running successful businesses and seeing their vision generate a profit. In fact, some of them have even been kind enough to share with us what they have learned along the way. You just might be surprised!
Having got that out of the way, let’s look at how to build a pricing strategy. We basically need to know three things to create a winning pricing strategy.
Pricing your product according to your costs?
I know – but the reality is, pretty much everyone gets this wrong because we don’t actually know how to figure out costs when we start out. (We didn’t, I can promise you that!)
Don’t give your first answer as your final answer. Instead, sit down with a pen and a calculator and add up the real total cost.
Don’t forget that you have to pay taxes, you pay a percentage on transactions through online payment providers, and remember to note down server costs, software licenses, office space, expenses, taxes, fees, salaries – everything.
Don’t forget free accounts or trial that you are giving away to attract potential customers – sometimes a freemium product can be a be a double-edged sword.
When you’re done, look over the list and see what’s missing. Nine times out of 10 it’s you. Even if you’re not paying yourself a salary while you’re bootstrapping, your time is still worth money. You’re spending it blogging and posting to social media, communicating with clients, or doing research. That’s an expense, so cost out your time and add that to your total costs.
You still don’t have the pricing strategy in place, but now you have a starting point. Even getting this far is more than we did on our first round of pricing.
Maybe that’s why our first round of pricing for Quaderno was a horrible failure. We didn’t carry out any of the steps in this guide – the first time. We set our price point on what we thought our clients would be willing to pay. With no data to support it. We based our whole pricing strategy on a kind of vague feeling, and that turned out to be an expensive mistake.
What is your product worth to your customer?
Your customers don’t care about your costs. People don’t pay the cost of a new iPhone because they sympathise with what Apple went through to make it, and they won’t buy your product because you worked hard on it. It’s all about WIIFM – What’s In It For Me? What value does your product supply? That’s what your customers are paying for. Never for a second should you think that your costs are the basis of your pricing – they’re just something you need to know before you figure it out.
It sounds strange, but the value of your product can change depending on who’s using it. Knowing what your product can do and who it can help should set you up to successfully price your product, and figuring out who exactly is paying for your product is the way to:
- Increase the price-per-unit of your product. You know why your customers need your product, so you know how much they’re likely to be willing to pay for it.
- Optimise your revenue by designing in pricing tiers, allowing you to target more than one subgroup of customers more precisely.
A great example of quantifiable value is supplied by Andrew Culver over at Churnbuster. Churnbuster addresses one of the key money sieves in ecommerce, failed payments, in this case through Stripe. Andrew knows just what his product is worth to his customers.
Andrew uses a mix of price points to appeal to different groups of customers with different needs, but he’s not shy about talking about value, or about charging for it. And neither should you be.
Figuring out how much value you provide isn’t always easy, though, so product makers tend to stick to industry standard rates when pricing their products plus the cost of producing them.
An Ideal Pricing Strategy On The First Attempt? No
One of the biggest mistakes we made in our early days was to have just one pricing tier. That makes accounting way easier, especially if you have no money to count. It’s not great in terms of conversion, and in fact it was a really poor business decision on our part, so why did we do it? Because we took for granted that we only had one kind of potential user.
Having a really successful pricing strategy is difficult partly because you need to segment your audience – which means understanding them. They don’t all have the same needs, and they aren’t all willing to pay the same.
Let’s take a look how Buffer did it. Their ‘Awesome Plan’ – that’s the name of their basic plan, priced $10, and the most subscribed one by far according to their open revenue dashboard – was their only plan until just a few months ago.
Suppose Buffer has two clients. One is blogger who wants to measure how many times his tweets are clicked, or check which post got most views on WordPress. The other is a digital marketing pro for a big corporation. He’s channeling thousands of dollars, the work of several employees, and the future of his company’s products, through his hands every day. Understandably he’s called on to show some pretty sophisticated data to demonstrate ROI and measure strategy success. These two people have wildly different needs and wildly different budgets.
Same price for everyone? Makes absolutely no sense.
And – I guess – that’s what took them to build Buffer for Businesses. Same basic product, but now with different features within different pricing tiers. Boom, revenue peak.
We also a tiered pricing on Quaderno, but we start with the highest price first. Why? Because it’s more likely that people end up somewhere in the middle, as you can read in this interesting article about pricing page design.
What Others (Smarter Than Us) Have To Say
Some weeks ago I emailed 4 founders, entrepreneurs with tons of experience on the software business, and asked them what advice they would give to anyone starting out building a pricing strategy.
Charge more. The overwhelming problem with most pricing which founders (particularly engineers) start with it is that it is too low. You’d be surprised in B2B how finding the right customer and speaking the right language can make a difference of, literally, 1000X in the price you can charge. Even before you’re that sophisticated, at least throw a $249 or $499 a month plan into the mix and see if anyone buys it, perhaps justifying it with XYZ *plus* 2 hours of your time in getting set up. It doesn’t take too many of these to really move the needle. Patrick McKenzie / Kalzumeus
Ask potential customers if they would be willing to pay $X for what you plan to offer. Always ask about a specific amount and observe their reaction. Adjust X up and down as you talk to new people, essentially performing a real-life split test. Once you’ve gathered as much data as possible from potential customers and your competitors take your best guess and run with it. You can change pricing later (I’ve done it several times). Just be sure to grandfather in your existing customers to your old pricing since anything else will feel to them like a bait and switch. Rob Walling / Drip
I think pricing is inextricably linked to the audience, market, product, i.e. positioning of the company. A price point of $10/mo or $1000/mo could both be valid for a similar product if the audience, expectations, and market are different. Jason Cohen / WP Engine
Our tendency is always to price products too low. Whatever you’re planning on pricing your product at, multiply it by two and test out that price. If a few members of your audience start complaining about the price being too high, you know you’ve found the perfect price point. Ryan Delk / Gumroad
Just one sincere advice. Stop reading and start doing. The best way to find the best pricing strategy is by testing and getting wrong.
Want feedback about your pricing strategy? Please reach out (contact info below). I’ll be glad to help you out!
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.