Three Steps to Finding Your Product's Price

25 April 2014 by Mathias Meyer

Once you've figured out what kind of product you want to create, the biggest hurdle to get it in front of customers is finding the right price.

How much you should charge for something can be a paralyzing question, keeping you from either shipping or making you offer your product for free longer than is healthy. Remember, you should charge even for a beta product.

It took us months to settle on a price for Travis CI, and it was a grueling process at times. We didn't know what to base our price on, and we didn't know what to charge.

Here's what helped us figure out what to price.

Narrow down your target audience

Ideally, this has happened before you even start thinking about the price. Finding an audience for your products is an important step, and it requires research. We like getting lost in what Amy Hoy calls the idea quicksand, without making sure something is ready to pay for what we're trying to build.

In the widest sense, Travis CI's target audience are developers. We narrowed it down further by focusing on people using GitHub as well.

While our open source platform is free for everyone, our product had a slightly different focus. We narrowed it down further to businesses.

That allowed setting a higher price than if we were to focus on serving all kinds of developers.

Don't get me wrong, we'd love to do that eventually, but narrowing down our initial product audience allowed us to validate the product quickly and ramp up revenue to a point where we can focus on possibly starting to sell the product to individuals as well.

Ignore your instincts, focus on value instead

Your gut will tell you silly things like asking yourself "How much would I pay for this?" or "No one will pay X amount for this." or "Lower price equals more customers, right?"

Those things are really silly, and your gut is a liar.

Products, especially the ones targeting businesses, focus on either reducing a pain or burden, or at giving a customer better means to make more money with their business.

That in turn means your product has a value to these businesses. While you may never be able to fully evaluate how much exactly your product saves your customers, you can get an idea when you're familiar with their business. This requires research as well, so it helps choosing an audience you're already familiar with. It's the one reason why I like focussing on building tools for developers.

Developer tools speed up parts of a team's workflow by removing either an operational overhead or by automating something that the team would otherwise spend tedious amounts of time on.

That time can be put into numbers, even just with rough calculations.

Values goes further than just thinking about these numbers, but they give you an idea on where to put your price.

If your product frees up 10 hours every month that a team can spend on their core business, you have an idea of what you can charge given a normal price for a developer hour.

If your product allows someone to learn a new technology quicker than having to scrape together a bunch of resources, tutorials and articles from the interweb, you probably saved that person some time with your product.

That's where you can start getting to a better price than what your gut is telling you. Focussing on value gives you another benefit, you can drive your marketing based on what your product does for your customers rather than just its features.

Charge more than you're comfortable with

Amy Hoy put it very succinctly. Once you've narrowed in on a price, double it.

Back when I launched the Riak Handbook I originally had much grander ideas in my head. I set out to write the NoSQL Handbook, a hands-on guide covering five different NoSQL databases.

My initial price ideas were to charge $12 for the final product and $9 during the beta.

If you ask me now, I have no idea what I was thinking. My mind was anchored by what publishers charge for their books, and by what some fellow self-publishers charge for theirs.

I eventually decided to cut a smaller book from the bigger version to have something to ship. I decided to publish the Riak Handbook, clocking in at 120 pages of content focussed on practical Riak usage. The NoSQL Handbook would follow later.

Rather than charge $12 for the Riak Handbook, I doubled the price to $24. Later, I figured that $29 is a much more appealing number. The book sold 1500 copies so far, making much more money overall than if I'd have sold it for $12.

Hold on, you say. Surely, cutting the price in half would get more people to buy it, yes?

To make the same revenue the book made with a price of $29, it would've needed to sell more than 3600 copies, close to 150% more.

Charging less doesn't mean you'll get more customers, it just means that your profit margins per customer are much smaller.

For Travis CI, we applied similar thinking, and we spent time calculating margins. We even got advice from someone who wanted to invest in us to not charge less than $99 per month.

We settled on that number, but eventually raised it even further.

The beauty about charging more now is that you can always charge less later (though you should really charge more). You can always introduce versions of products for people who want to pay less by reducing the scope of features.

Charging more than we're comfortable with is frightening, we fear someone saying no to the price.

But what really matters is not the people saying no, it's the people who say yes, the people who are willing to pay what you ask for.

Fewer customers at a higher price means getting to sustainable revenue levels faster.

Read, read, read

Pricing is a broad topic, and I've only scratched the surface. Things get much more interesting when you get into the realms of anchoring, using free as a means to sell, upsells, cross-sells, and all that jazz.

A few books helped me greatly to figure out pricing, or at least to get better at it, and I wholeheartedly recommend you read them too:

If you're interested in learning how to find audiences, building, marketing and pricing products, I highly recommend Amy Hoy's 30x500 class.

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