STARTUPS

Sales Tales: how to Fix the Right Price for your Software

Today’s Tale: once you have Agreed your First Sale then Pricing is all about the Journey to Reaching your Business Objectives

by Stephen Allott, Venture Partner, Seedcamp Sales Tales.

Thanks to Omar Pera and Jens Munch.

Today’s Sales Tale (episode 16 in the Sales Tales series) gives you just one point to take away and it’s a point I haven’t seen much mentioned elsewhere.

The point is that you can change your pricing over time.

Price level over time. Image by the author

Not only can you change your pricing but it can often be smart to change it as your company grows.

And don’t get too hung up on the detail in the early days. If you build a big business, the optimisations can come later.

There is a long list of of pricing design dimensions ranging from simple to complex and from pricing high to pricing low. With many dimensions in between. To illustrate the key point, let’s look at the price high / price low decision over time.

Which pricing strategy you choose will depend on your business goal. For software, clear market leadership (say 60% market share) is often a good goal. Pricing low will expand the market and help you win dominant share but it may take a while to make profits. Pricing high may enable short term profits which can fund growth.

There are 4 possibilities for pricing high / pricing low over time. When would each make sense for your start-up?

1. Start high and stay high can make sense when demand is inelastic, your product creates large customer value and barriers to entry are high. “Elastic demand” means demand grows as price falls and demand falls as prices increase.“Inelastic demand” means demand does not grow as price falls and so on.
2. Start high and go low can make sense when demand is elastic, your product creates large customer value and barriers to entry are low.
3. Start low and stay low can make sense when demand is elastic, your product creates only modest customer value and barriers to entry are low.
4. Start low and then go high can make sense when demand is inelastic, your product creates modest customer value and barriers to entry are high. I used this strategy with Netcool at Micromuse. We priced at 10% of the level of the incumbents in the early years but increased prices by 10x to 50x as we became dominant. There were only a finite number of potential customers so we had to raise prices to expand the addressable market.

The point I want you to take away is the optimal price can change over time.

SOME HELPFUL DETAILS

How much should you sweat the detail of your pricing plan in the early days?

When winning new customers is the main driver of value, keep your pricing plan simple and attractive to reduce friction in the buying process. With SaaS software you can change your pricing approach with ease later on. With my product Netcool we charged per module rather than per user. The simplicity shortened sales cycles.

Should you publish your prices? Yes if your price positioning is a key part of your product market strategy, it can make sense to publish. You could be the price cutter in which case advertise your prices. Or you can be the most expensive and be making a virtue of that as a quality signal. Again, it could make sense to advertise your price levels.

If on the other hand you have a smaller universe of B2B customers where you create varying amounts of value, you may want to “price discriminate” or charge each customer what you think you can get away with. Customer specific discounting is the order of the day here.

Working with Neil Davidson at Redgate Software taught me many elements of their wisdom. Selling B2B2C is a great way to build usage in large accounts. Redgate make SQL Server developer tools. Their entry level price of around $200 can be expensed by an individual as it is below many expense approval thresholds. Credit card purchases can be instant sales cycles. Be conscious of corporate approval thresholds.

Using bundles to raise prices is an optimisation to employ once you are established. You can raise A.R.P.U. by up to 10x using bundling. The Redgate SQL Server Toolbelt is a good example of successful bundling.

Much of the pricing literature is about how to charge more and get away with it. Small price increases can enable large increases in profitability. Another optimisation for when you are established.

The main lesson for consumers is this. When a product’s quality is hard to assess, that’s when savvy marketers tend to set prices at a high level to signal that they are selling high-quality items. This is when you should take the time to do research and try to understand what contributes to quality so that you can buy the item with the best value instead of the most expensive one. Am grateful to Utpal Dholakia Ph.D. for this insight.

THE PRICING LITERATURE — “READ ALL ABOUT IT”

Which of the many excellent software pricing guides should you look at?

1. Neil Davidson’s good book runs to 60 pages. He calls it “usefully short ”. You can download it for free.

2. Jake Saper’s lecture at Stanford is very good.

3. Sequoia have their point of view.

Lots of material comes up if you put the title of this Sales Tale into the Medium search box or into Google.

Whether you already have a pricing plan and are now considering whether to change or whether you are deciding on your pricing for the the first time, learning this subject is worth it.

Is there a set of rules that will tell you the optimal pricing approach to achieve your goal? You could think of a price setting expert system. Put in your goal, your situation and other relevant data and out pops the optimal pricing plan. I have not found one.

This Sales Tale is not attempting to explain pricing in a 6 minute read nor introduce you to the terminology nor provide a universal pricing tool. You should read for yourself about the economics of supply and demand, demand elasticity, the huge variety of software pricing structures and how to game human psychology by clever bundle comparisons.

Pricing is a subject where most people have an opinion and change can be implemented instantly but it’s a big subject.

So when you read the pricing literature, do bear in mind that you can and probably should evolve your pricing over time. And that the seizing of market leadership over time may be the value maximising goal rather than maximising revenue right now.

This Sales Tale is the 16th Episode in the Sales Tales Series.