Why the choice of software pricing matters
Besides helping people, the purpose of any business project is to make money… We are not starting from too far off, by the way. The price and its particulars will translate directly into success and revenue, or lack thereof. The cost of the product will also determine the company’s market position, whether it can survive or stay afloat while fighting with competitors over user-thrown lifelines (of green dollars). A unique offer and excellent product quality are not enough. When a startup’s pricing strategy is off-key, the company will fail, no matter how desirable its product is.
How do you choose a sound product pricing strategy? The Purrweb team has looked into this question and would like to share its observations.
What influences software pricing
So, you have coded up a solution. It might be a convenient video streaming service, a recruitment platform, or something else. Now for the pricing model and a tag number as close as possible to prospective customers’ highest willing expenditure — but not exceeding it. Here are some things that influence software pricing, which will give you a notion of the absolute minimum price and its opposite excess.
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- Overhead. What it costs to keep the product supported every month.
- Time. Following up on changes in the economy and inflation and updating prices (up).
- Risks. After any release, even of a hot product, some current customers might depart.
- Outside forces. These include competition and how competitors’ pricing choices skew and ripple the market.
All in all, a competitive pricing strategy should begin with a detailed examination of the market. Some more preliminaries should follow.
Preparing to choose a pricing model
- Decide on the goal of development. Besides cash, the company may also aim at attracting new clientele or strengthening its position in the market niche.
- Analyze demand elasticity. Study the pool of potential customers and find out how much to ask of them so that they pay all that they will without running away.
- Calculate self-cost and whether it can be depressed. Look for the optimal product price at the lowest possible development cost. Whether the cost of making the product can be pushed down lower in the future will depend on your ability to decrease maintenance and other overhead expenses as time goes by.
- Study competitors’ prices. This will help with understanding what amount of money consumers may be willing to spend just as well on software from other developers — a useful bit of information for marketing, because it allows singling out your product’s unique features to emphasize and get the audience interested in your startup by lowering some of their prices.
What software pricing models exist?
You contemplated the scene and decided to go ahead and choose your startup’s pricing strategy. At your service stand several well-tried options for products with different characteristics and audiences. We gathered the most popular product pricing strategies and outlined their advantages and drawbacks.
Flat rate
You provide the product at one, unchangeable price. Users pay once for an app and download it or pay for access to a service. This software pricing model is not as widespread now as it used to be, but some companies still employ it. A flat rate does not have to stay fixed forever — you might as well raise it if you add new functions to the solution. Under this model updates are usually free only for a certain time; users have to pay for them after the gratis period.
👍🏻 The upside of this model is mainly that it is simple and easy for users to understand. Bring money, get stuff. Customers are relieved that they will have to commit to studying the deal only once and readily get to looking at its features and checkout.
👎🏻 The downside is that it is difficult to tune the price to different categories of buyers. If the price is chosen to be appropriate for small businesses, big corporations may look elsewhere, and vice versa. Customers decide whether to buy the product, and you cannot offer them more options.
🤔 Suitable for…
Services rarely use this model, but you can see flat rates sometimes from application developers, e.g. makers of image editors, mobile device games, tourist guides, antiviruses, and multimedia players. The Guitar Rig Pro is a popular example. This program makes it possible to process guitar sound on the computer in real time, adding all kinds of effects, distortions, amplifications, and settings. It is available for a one-time payment of $199.
Services that do use this model usually go for a “hybrid” type — a subscription flat rate. Take Basecamp, a popular enterprise-managing software. By signing up for $99, the price of the all-inclusive Basecamp Business plan, users get the whole set of functions and can connect any number of projects and users, commission-free.
This payment model became a staple of the startup behind the program, and the company advertises its payment plan at every opportunity, which has propped it up to an enduring market success. Still, we recommend being careful with flat rates, because for marketing purposes there is just not much room to maneuver.
Per User
This product pricing strategy is much more common. Essentially, a user subscribes to a plan and uses System X personally for so much money. If anyone else connects, the price goes up.
👍🏻The upsides are the same as with flat rate, there is no doubt as to what one is buying, plus revenue for the company increases as more users flock in, and it is easy to predict what payout to expect. This way of pricing products is understandable for customers and startups alike.
👎🏻The downside is that many users can and will share their logins to access the program together for the price of one, plus companies may become discouraged if they have to pay for individual subscriptions of every member of numerous staff.
🤔 Suitable for…
This payment option makes sense for startups that have a service potentially attractive not only to consumers but to the larger B2B as well — for instance, something that will find candidates for recruitment, keep resume databases, let employers correspond with candidates, and include email integration. Such a website would be convenient for small companies with only one HR manager and those with entire HR departments. This model would be a good choice for a startup pricing strategy.
An example: HelpScout, a service for optimizing customer support. Payment plans of different scales are available: Standard costs $20 per user/month, which includes reporting, automation and integration for support teams; Plus costs $35 and has extended features and big-team reporting. There is also an individual service option for teams of more than 25 people.
Freemium
This software pricing strategy is popular among online services, usually, they begin with a few days of full-featured access so that users can appreciate what they’ll be losing unless they subscribe. Yandex Music, for instance, offers a two-month trial period and comes in for money afterwards. Or the solution may be free at the basic level, but its plugins, options, and updates may be hiding behind a paywall. Slack, Dropbox, and several others work this way. Access may be free up to a certain volume of data, like Google Drive, where 15 GB of cloud storage is pro bono, but extra space will cost you.
👍🏻The upsides are obvious. Users can try out the product, see if they like it, and get used to it. A demo version of this type helps promote the service and attract customers.
👎🏻The downsides are also real. This system may depress revenue because there is always a percentage of clients who will not pay — they cancel the subscription before the end of the free period and don’t want to buy bells and whistles. With this software pricing model, the costs of paid services need to cover the freebooter overhead. The prices may exceed what customers are willing to pay, and giving free access to valuable features naturally discourages people from paying for updates or service extensions.
🤔 Suitable for…
Freemium is a smart startup pricing strategy for getting a foot in the door in a competitive market. The best bet in that case is to lure in an audience with the most attractive offer possible and flatten the learning and buying curve for them. If you have an interactive educational platform, it will be hard to convince would-be customers to part with their money without giving them a taste, and that is what free access does — builds a client base. Massive online services regularly rely on this competitive pricing strategy.
Take the case of Jivo, which promises companies convenient communication with customers over chat. Almost all of the main functions (multilingual chat, reporting, integration, agent apps, round-the-clock support) are offered free of charge.
Service/Function Charge
This is also a widespread startup pricing strategy, where price categories match the scope of functionality. Users can choose from among several payment plans; the more complex and powerful the features, the higher the price.
👍🏻 The upside is that this way, the company behind the product can adapt itself to any customer group, segment the audience clearly, and offer the right options to the right people. When you have a service that may be useful to consumers as well as enterprises, it makes sense to contain the functions you deem sufficient for the former in a cheaper payment plan and upsell the corporate crowd, hopefully, to match their different needs.
👎🏻The downside is that you may misjudge the bundles and end up offering what the customer doesn’t want or for the wrong price; also not everyone likes scrutinizing a long list of possibly insidious payment plans.
🤔 Suitable for…
A startup with a product that has many different functions that can be kept on different degrees of power and complexity should use this product pricing model.
For example, look at Renderforest, a service for pictorial content creation: clips, design elements, and logotypes. The website offers 5 use plans for various categories of clients, from home users to corporations.
The bottom options, Free, Lite, and Amateur, are intended for visual designers and other private users. At these access levels, users get a limited choice of tools, and their clip creation is also restricted. Small-time customers get the basics they require for a modest price. Professionals can subscribe to Pro and Agency, which video and music creation options are more expansive and a vast content database also opens up. The highest-tier plan, Agency, permits getting reseller licenses.
Commission-based
This product pricing strategy has been embraced by online exchanges and marketplaces of all sorts. Vendors put up advertisements about their products and services, and the website charges a commission for every purchase — a percentage or a fixed fee. The commission may be due from the vendor, the buyer, or both.
👍🏻The upside is complete transparency. Vendors know they will not lose any money except when they close a sale. They don’t have to guess what they will be charged for, and they see exactly what the site does for them. This arrangement attracts users, and the startup can grow and scale up at a good rate, with the income growing exponentially.
👎🏻The downside is that this model is tricky to implement. It is simple enough when applied to direct services, like photo sessions, but services that offer hotel booking or tutors struggle with billing because payments are made off-site. Besides, vendors may begin to link up with customers directly, to the detriment of the middleman.
🤔 Suitable for…
This is an appropriate model for marketplaces that cater to corporate clients and entrepreneurs, and it is ideal if the website’s value to users lies in the convenient purchasing of some articles, except when they are expensive (cars, etc.) or there is dense competition. If you are setting up your bazaar alongside others, be prepared to get the niche’s attention with more advantageous terms or special options.
Commissions are used, among many other places, on Fiverr, a freelancer search engine. Registration and advertising are free for freelancers, but the website charges 20% off every payment for services rendered.
Multilevel (differentiated)
The most popular model of software pricing is probably the multilevel kind. Most companies use this model which combines the features of some of the others. Customers can choose between a few plans with different functions and prices, per user. Often the plans are a triad of Cheap & Basic, Average & Sufficient, and Extravagant & Specialized (for masters in the field or companies with some particular demands).
👍🏻The upsides are obvious. The plans are made to match every customer category, and customers know just what to expect. The service flashes just the stuff to attract consumers on one level and megacorps on another, with everything in between. This product pricing strategy also permits customers to trade up in a staggered fashion, switching to a sufficiently advanced upgrade.
👎🏻The downsides are the reverse of the benefits. If the payment plans are unbalanced, unclear, or too numerous from a desire to scoop in irrelevant segments, then, prospective clients might skitter and choose some simpler, homelier competitor.
🤔 Suitable for…
Most services can benefit from plan differentiation, given that this system combines the features of other software pricing strategies. If your startup must introduce itself to an unfamiliar audience before going full monty, you can throw a free version in their direction and see who will want to buy an improved package so they can segment themselves up. For some products, it may be possible to tune the functions and make a few tiers for the same corporate user. It all depends on the product, but you get a good deal of leeway.
Consider Notion, a workspace for note-keeping, information management, task-setting, etc. The service comes in several versions, the cheapest package costs nothing at all but the paid plans give more tools and are connected separately for every customer.
The bottom two plans, Personal and Personal Pro, are intended for individuals. The free version is limited but sufficient for an introduction and to get users interested, perhaps enough to switch to Pro; the monthly and yearly plans are priced differently. The Team plan was created with businesses in mind. This version has plenty of tools, and monthly/yearly options are also available. Corporate leviathans can request an Enterprise plan whose cost is calculated on a case-by-case basis.
Model chosen. What’s next?
Supposing that you have decided on a startup pricing strategy and a price, the next step is to select a payment system that would be integrated into your product; this choice can influence your ultimate revenue, e.g. some services charge a commission. Here are a few examples of payment systems and their outstanding traits.
The most popular payment systems
Stripe deserves to be somewhere on top of our list. This international payment system is suitable for consumers and businesses alike, and of any size, from startups to the biggest enterprises. Stripe’s API is tuned for easy integration and tweaking to preference. The service lets users pay on their own website without having to link away. Numerous banking cards and wallets are supported, and currency conversions are free of charge.
We prefer this system at Purrweb, and use it for our projects; wait for details on this near the end.
Braintree is oriented especially toward startups and small companies, and it was the choice of some that have grown and reached great success: Airbnb, Github, and Heroku, to name a few. It is a secure and reliable service that handles both instant payments and subscriptions. Braintree would be a good choice for, say, per-user subscriptions with automatic renewal.
CloudPayments presents itself as a payment system for all online stores and services. Users only need to type into a simple form, and there is no need to go off-site to pay. A special feature handles payments from mobile devices, which makes the service especially convenient for app developers. Regular, automatic payments are supported, which is nice if you have decided on per-user or differentiated as your startup pricing model.
Chargebee is flexible and suits any software pricing strategy. It is touted as a solution so simple that startup teams can manage it unassisted after the setup. The service covers rate tweaking, discount notifications, and promotional events. Chargebee is a freemium service, by the way, at no cost to the user until reaching a certain monthly revenue threshold.
As you can see, there are a variety of systems, some especially appropriate for certain software pricing models. Other factors should be considered as well, like the product’s geographic distribution or expected sales channels.
From Purrweb’s experience: how we helped our customers pick a revenue model
Sometimes, people come to Purrweb when they have only the concept of a startup, the basic kernel idea, and the rest develops as we look after the seed together. That was so with Contentplace — a video content marketplace.
The case of Contentplace
Coming to us, this customer was indecisive for a long time, unable to choose between models. What to do, leave platform access free, or set a fixed price? What would bring better income? Eventually, the developers agreed to go with a per-function model and present users with a choice of packages with different scopes and prices. Their original list of options was too long, however, about 30. The audience would have been confused and discouraged by this pointless abundance.
We decided to chime in with our own suggestions, and the result was to reduce it to three. Given the platform’s capabilities and the audience’s needs, as we envisioned them, it was resolved that a multi-level system would work best. There would be two payment options, for 25 and 100 GB of data, along with a special offer for new clients only — upgrade to the full-featured option for the price of the basic choice.
As for the payment system, we went with Stripe because of the wide variety of payment choices for consumers and the ease and quickness of implementation – just what the doctor prescribed for MVP and the testing to follow.
The case of Daiokan
We can also look back on the case of Daiokan, a photographer’s marketplace. The situation was similar, with no clear plan and software pricing model when the company came to Purrweb, so we got to have a say in that. A commission model was chosen, where photographers would upload their photo sessions, users would pay for them and Daiokan retained a certain something. It was more difficult to choose a payment system. Our original choice, PayPal, turned out to have no presence in Hong Kong, where the customer decided to register the company. We tried to circumvent this issue with an API, but PayPal did not support credit card payments. Then, we turned to Braintree which already worked in Hong Kong at the time, however, the service ruled the business too risky and blocked the account. As the marketplace’s MVP was rolled out, we had to stick to a credit-card-unsupported PayPal — not a perfect solution, to be sure, but at least it was on time and people could pay.
Startups on occasion run into suspicion from payment systems. To avoid this eventuality, begin by reading startups’ reviews and comments about the different systems out there and choose something appropriate for your release timeframe, country of registration, functionality, and other important aspects.
Final words of advice
Did you know that only 60% of software startups have a webpage with a price list? The rest either put up a write-and-ask form or ask visitors to request an individual price estimate. Marketologists have said time and again, that a price list is a sine qua non because not seeing the prices repulses customers and increases the number of refusals. Let people know what the product costs, or they will rightly get suspicious about your opacity. So after you have decided on the pricing model and the price itself, tell people what those are. Make a price list!
It is important to select a software pricing model before product release, but remember that you can always change it during testing or after the big event, once you gauge customers’ reactions. We had cases when MVP models turned out to be poor choices, and testing led to their replacement. It is never too late to improve the product and thus your revenue.
If this article has led you to consider the different sides to the issue and helped you pick the perfect (or tolerable) startup pricing model, Purrweb’s job here is done — unless you want some practical, hands-on help from us! We have lots of experience developing mobile and web applications and putting them in appropriate market niches with strategy and pricing choices.
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