February 9, 2020

How to find an effective pricing strategy

Channing Allen @channingallen

I asked several founders how they'd settled on their pricing plans, and virtually none of them told me they'd stuck with the same plan from the beginning.

It can be useful to learn from your own mistakes but it's also quite nice to learn from the mistakes of others! Check out the pricing experiments that helped these founders up their sales below.

👤 Jason Grishkoff, creator of SubmitHub ($55,000/mo)

To understand the pricing, you need to understand the model. In my case, musicians submit their music to bloggers, who get paid to give a response. I knew I wanted something along the lines of "$1 per response," but I also knew that bulk purchases should have discounts.

I played with the idea of profit sharing: the blogs that responded the most got the biggest share of the pie. But that overcomplicated things. As did trying to calculate an "average cost" of credits purchased on the site.

So instead I decided that I'd fix the cost of what the bloggers were paid at $0.50 and take the hit on any discounts that I applied to larger packages/fees/whatever. The mix actually ended up working quite well, and at this point the profit split is somewhere along the lines of what Apple/iTunes has: 70/30.

As for the package prices, I initially put them in as "filler" values and then just ended up launching the site with them. They seemed to work. Sort of goes with my whole ethos of not overthinking things and just doing. :)

👤 John Doherty, founder of Credo ($32,000/mo)

Pricing is one of the hardest things to get right, especially in a B2B niche. I've been through quite a few pricing schemes — pure commission, self-serve, high-touch sales, monthly contracts, and where I am now with two offerings. One is an annual subscription fee that is low-touch and low-maintenance, and another is a higher monthly fee which gets way more conversions.

I decided on the current model, which works best, by trial and error. The real kicker was that I realized that those paying me more were happier. When I spoke with my best customers, I realized that they were willing to pay me a lot more than they were to get better service. So I raised my prices, and my revenue almost doubled.

I do wish I had done more customer research ahead of launching pricing so I would not have had to change pricing so much. That has led to a lot of confusion and a lot more work. I'd recommend looking at how much your competitors charge, and figuring out if that makes sense for you. Don't make being "cheaper" your value proposition because then you'll only get the cheap customers.

👤 Jack Slingerland, creator of Kernl ($1,300/mo)

Kernl's pricing strategy at the beginning was to undercut my nearest competitor. As I learned more about pricing strategy and understood my customers better, I split my offerings into several different groups.

About a year and half ago I raised Kernl's prices after reading this article by Patrick McKenzie. I was scared that I was going to lose out on customers and signups, but I grandfathered my existing users into their old plans and made the jump. Turns out I had nothing to be scared of. I should have increased prices earlier! Signups and conversions didn't slow down at all.

Things aren't quite perfect yet. I think I've gone too far with the number of plans that Kernl has and it sometimes confuses customers. Ideally, I would like to get this down to one low-cost plan and then one high-priced plan that customers can grow into.

👤 Dmitry Belyaev, founder of Frontloops (acquired 2019)

My product is a learning course so I basically couldn't use any pricing strategies other than one-time payments for it. The trickiest part was to find out the best price that would be acceptable for users but not too cheap.

That's when I came up with idea of comparing the price to buying something in real life which is a part of your daily routine. My initial plan was to keep the price within the 5-15 euro range, so I compared it to buying two coffees and I got a number of 8 euros in my head. I also built a demo version of the paid lesson for the course with the option to upgrade the plan at any time.

By the time I launched on Product Hunt I decided to change my tactics a bit. I prepared a discount for the first couple of days after launching, and I also decided to raise the default price as I got some opinions from other people saying, "Wow, 8 euros is really cheap for a learning course." Therefore, I ended up having 6 euros as a discounted price and 10 euros as the default price.

I read a quote one day that said: "If no one complains about your product price, it's too cheap." I wouldn't say that's true for 100% of situations, but that helped me to see the topic from another perspective. You should never underestimate your work and efforts you put into developing it, but also always have a reason for setting your price. Don't just go for a random number. Check out other similar products, measure your product value and build your strategy on that.

👤 Dan Ni, founder of Scraper API ($163,000/mo)

I read a lot about pricing before launching Scraper API. Two resources that I found particularly helpful were Patrick Mackenzie's excellent article on pricing low-touch SaaS and the Price Intelligently eBook.

I started out by looking at prices for competing products and pricing slightly below that. I would definitely do that again, as competitor pricing is a great way of getting a ballpark idea of what customers would be willing to pay for your product.

We have monthly plans at five different price points: free, $20, $80, $200, and $400. The only pricing change we have made is to add overage pricing, which I highly recommend for API products, because at the end of the day, customers are going to run into API limits. When that happens, you can either turn off their API access, automatically bump them up to the next higher-priced plan, or charge them a variable amount based on how much they go over their plan limits. The variable charge seems like the fairest way to handle overages, and it was actually much easier to implement than I thought it would be with Stripe.

In the coming weeks, I plan to test out an annual plan with a discount to entice customers to pay more upfront.

👤 Thiago Obaid, creator of Proposeful ($400/mo)

In the last two years we've had a lot of fun experimenting with pricing in our proposal management SaaS, Proposeful, and much of what we learned is not what you'd expect.

In the beginning, we went completely against regular advice and started without a free trial or a free plan. We had to first validate if there were companies willing to pay for what we offered. We understood that if people truly felt the pain and tried our product, they might end up not buying because Proposeful wasn't very polished yet, and we might mistake that for the market not being willing to pay.

We closed a few clients this way. After we were confident we had a great product, we launched a free plan. Common sense says that freemium's intent is to convert users from the free plan to the paid one, but we realized our free and paid plans catered to different profiles. So our free users became a way for us to build a community and gain reach while learning how to improve our product for larger businesses with more complex needs and a willingness to pay.

We never would've gotten where we are today if we had not taken risks with prices. We tried charging from $2 to $400 a month, with monthly and annual plans, just to see what happened and how that changed our users' perception. That allowed us to determine the most revenue we could get from them, which is essential in scaling your business. So don't be afraid to experiment and try counterintuitive things for new clients, especially if you're small.

👤 Philip Thomas, co-founder of Moonlight ($55,000/mo)

The pricing strategy for Moonlight, our hiring marketplace for developers, has stayed the same since the beginning. Developers set their hourly rate, and we take a 15% processing fee. Invoices are sent to clients weekly, based on the hours worked.

Moonlight succeeds when our users get what they want. Our core KPI is measuring net revenue per week. (You can read more about it here.) Our pricing model and KPI aligns us directly with the success of our users. On one side, we have contractors who want to make money, so we succeed when they bill hours. On the other side, we have clients who want to hire quality developers, so we succeed if we can provide them with people they want to continue working with.

Why no subscription? Many people have advised us to figure out a subscription model. This sounds great on paper, but we have yet to find a subscription model that continues to align us with our core mission and users. Without VC investment, we have to find product-market fit to survive. While our processing fee model is not a guarantee of stability, it allows us to be flexible and quickly see how our product and marketing changes affect our core KPI. This weekly reality check is what keeps us accountable to users and business goals.

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  1. 2

    That's a ton of great advice, love the different perspectives in here.

    I think the most important thing to realize is that your pricing doesn't have to stay forever like it is right now.

    Your product improves, you learn better about what your customers actually want and sometimes you can even approach higher paying customers at a later stage.

    So, don't overthink your pricing now, but change it as you go.

  2. 1

    That's a really great collection of advice, thank you. I just put up my pricing plan and it is a study of how similar products price themselves. I think pricing is going to change a lot so I'm not over-thinking about it yet, I like to listen to more signals (what customers are asking) first.

  3. 1

    Are there any B2C businesses out there that can share their pricing strategy? I'd like to to subscription based pricing but it can take some convincing when your competitors are all free with ads. I refuse to display ads that involve user tracking, so that makes most of them a no go.

  4. 1

    @channingallen how do you conduct these interviews? Are they via phones calls.

    I am trying to do something similar but people seem hi give super short anwsers over text

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