Notes on pricing software
Pricing was, unexpectedly, one of the most interesting topics I worked on at my last startup. Here are some things I've learned:
1. Design the product around the price
This comes from Madhavan Ramanujam's book Monetizing Innovation. The idea is to do price discovery before anything else, and then use the price as a parameter for the scope of the product.
From the book:
"Price is more than just a dollar figure; it is an indication of what the customer wants—and how much they want it. It is the single most critical factor in determining whether a product makes money, yet it is an afterthought, a last-minute consideration made after a product is developed. It is so much of an afterthought that companies frequently call us [his pricing consultancy] and say, 'We built a product—oops, now we need your help in pricing it.'... The most successful product innovators we know start by determining what the customer values and what they are willing to pay, and then they design the products around these inputs and have a clear monetization strategy that they follow through with." (pp. 8-9)
2. Sell to businesses
Building consumer products (i.e., products sold to individuals generally outside their work) can be fun, but the main obstacle is that the average person doesn't have a lot of disposable income to spend on software. This is why so many consumer products are free and then monetize via ads. The tricky thing with this is that monetizing via ads typically requires scale – think Meta or Google – so you need your consumer product to go viral. That's really tough to do, like capturing lightning in a bottle.
On the other hand, building B2B products (i.e., business-to-business) can be easier because companies not only have larger budgets in general, but also have budget already allocated to software subscriptions specifically. Asking a consumer to pay $200/mo for something is a huge ask, whereas many businesses wouldn't bat an eye.
3. Price your B2B product under the "approval bar"
At my last startup, we found that most employees with a company card didn't need to get approval for purchases under $5k/yr.
Patrick McKenzie found something similar in his experience selling to enterprises:
"Because the whole [procurement] rigamarole costs several hundred dollars in employee salary to approve any [purchase order], most internal Purchasing Departments have a few enumerated exceptions. One is an upper limit on expenses a worker or low-level manager can approve on their own authority without ceremony, generally by putting them on a corporate credit card. This limit is customarily $500 or $1,000. The greatest hack the software industry came up with in the last twenty years is monthly billing, because it lets you sell a four-figure product for $499 a month, evading the internal purchasing controls which hamper your users from getting their work done. This is why substantially every SaaS business should have a plan priced between $250 and $499 a month, because corporate employees will expense it on the card. It is not their money so it doesn't matter whether it is $99, $250, or $499 a month, as all those figures are literally rounding error to this customer, which is why they don't bother controlling for purchases that small. Accordingly, you should price to the high end of that range."
What I'm doing
My subscription data product is now entering a private beta. On the second day of building it, I had friendly price discovery calls with a few people who represented my target customer. From those conversations, I realized (1) companies that were strategically interested in the data I'd organized would pay for it, and (2) a price point of around $250/mo would be reasonable.
Since it's just me building it, and my costs are low (excluding my time, maybe $50/mo), I took that to mean that I could run a private beta with around a dozen customers and be off to a decent start. This meant that I could do things that didn't scale, e.g., manually running crawls until recently and offering to partner closely with private beta customers to build out the platform.
Eventually, I'll probably raise this price to around $400/mo or $4k/yr to stay under that $5k/yr approval bar. But we'll find out when we do price validation before general availability.