Pricing is hard

I’ve been talking to a friend about pricing a new product and figuring out what to charge, especially when you are first launching, is hard. Really hard. It feels like you are just putting out a guess and hoping it works.

As I thought through the pricing I wanted to share some of my thoughts on it, and what I would do if I was launching a new product today. Much of what follows should be looked at through the lens of a brand new product.

Before even thinking about pricing I’d want to have a pretty good idea on what my expenses are. Without that how do you know where your break-even point is? You don’t, and you are just guessing. Watch any business show on TV and the first thing anyone wants to know is what it costs for a single item. It should be the same with your product. How expensive is a single customer.

Once I had this I would try to figure out how I could fairly price my product. If it’s B2B how can I charge a fair price to a small business, and a fair price to a company of 500? Usually this is done with different plan levels, and a good differentiator is the number of users. To take common pricing terms a single user might be $9 a month, 5 users might be $49, 25 users $129, etc.

This is a simple way of segmenting your customers and also easier on your codebase because you aren’t putting feature flags on a million different things. It’s one code base, everyone gets the same features.

Of course, users are just one way of doing it, there are tons of others. Just remember to have your packages on simple things that are easy to understand. As a buyer I want to know instantly what package I would need.

Out of all the pricing models, I think the two I dislike the most are charging for things I can’t control. For instance, if you are a selling a SaaS CMS and billing based on views or podcast hosting charging by downloads. In either case, the actual amount is outside my control, and I don’t want to have to go create a spreadsheet to see if I’ll fit within a specific plan. Plus neither has any bearing on if I’m successful. I feel like the product creators think income is related to these, but I’m not sure that is the case. It’s never been that way for me.

The second model I don’t like is one price for everyone. Basecamp does this and charges $99 a month. I’m a small business and $1,188 a year is substantial. Where a company with 50 employees and 7 figures of revenue this is nothing more than a rounding error. As a true small business, I get screwed every year.

Like I said in the beginning pricing is hard and there is no right or wrong way to do it. In my opinion, when you launch your first product it’s better to undercharge and make just a little profit than to overcharge and not get any customers. It’s always easier to raise prices than to reduce them, and once you’ve turned someone off it’ll be very hard to get them back.

Think of a new launch getting featured on Product Hunt. Thousands of people will be hitting your site finding out about your creation, if the price is too high, in relation to the market, there is a big probability you’ve lost a lot of really good customers, and you’ll probably never get them back to the site again.

I’ll say it again, pricing is hard and I think all we can do is use our best guess and gut instinct to figure out where to start.