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How not to price your app
written by Steven Bristol on February 12th, 2009
How much to charge for your web application is a question with no right answer. You will never make everyone happy. Nor should you. I firmly believe that if you hear no complaints about the price then you are not charging enough.
Although you’ll never know for sure if your pricing is right, I can give you one example of a pricing model that is wrong. There is an online invoicing application that recently sent an email to all it’s users asking what they thought of being charged based on how much they invoice. I became very excited when I heard this because it meant that Less Accounting would be getting a whole new group of customers. Here’s what they suggested:
- $6/mo
- $1,000 invoiced or
- 320 hours tracked
- $12/mo
- $2,500 invoiced or
- 800 hours tracked
- $25/mo
- $5,500 invoiced or
- 1,600 hours tracked
- $45/mo
- $9,000 invoiced or
- 6,400 hours tracked
- $75/mo
- $15,000 invoiced or
- 16,000 hours tracked
- $125/mo
- $25,000 invoiced or
- 32,000 hours tracked
- $200/mo
- unlimited amount invoiced and
- unlimited amount hours tracked
I mean seriously, it’s so easy to invoice over $15K with one or two invoices. We see this all the time in Less Accounting. Is this worth paying $75/month? I don’t think so. The rational is that the software is being priced in the same manner as your credit card processing. Although I like the idea of paying more for using more, this is just ridiculous.
I also think that the VALUE of using accounting software does not correspond to the $ being billed, as readily as it does in credit card processing. With CC processing, there’s very little other value to the transaction system—it either works or it doesnt work. So, assuming it works, the processors need something to call volume, and dollars work pretty well here.
With web based software tools, it’s fine to price on volume, but I would expect to pay more for charging 100 customers $50k/month each than I would to charge one customer $5m once.
...although I won’t object if you send me a customer that wants to pay $5m/month for something.
to me those prices seem way out!
as you say though more customers for you :)
Ditto. Those prices seem off.
A more logical approach would be to base the pricing levels on the size/maturity of your customer’s company. For example:
1) Free – For getting a feel for things 2) Solo – You handle everything, only need one account 3) Virtual team – Busy enough to start hiring out stuff, main account + inflexible limited accts 4) Small/Medium biz – Enough staff to start specializing, user levels 5) Large biz – Dedicated department for accounting, fine-grained permissions 6) Unlimited – Above that
I see your point. Obviously if someone does just one invoice a month for 15k, it’s obviously cheaper to use some ms word template.
But also they just can’t assume that customers who bill more make also more money. Profit margin can be anything between 1-100%.
Either way, trying to bill customers based on how much they make is always wrong. It’s sending wrong message to their customers that they’re going to punish them for their success with higher fees.
However saying that now all these customers will switch to less accounting is also wishful thinking. They’ll probably switch back to quickbooks.
@lubos:
Regarding your last statement, here are your choices:
1. Take it back. 2. Clarify that is was only a joke. 3. Be banned from this blog.
Please choose number 2, I would hate to loose such a rapier wit. (Not joking, your comment really cut me ;)
I’m sorry for my last statement but unfortunately I wasn’t joking. SaaS is so young and industry can’t afford to make mistakes like this. There is always risk that customers will simply give up on SaaS model altogether due to pricing instability.
Nobody has mentioned the part that has tickled me the most: what a horrible failure you’d have to be to hit the max hours for a given level before hitting the max invoice amount. These are hours per month, right??
At level one, you’d have to track two full-timers pulling in a fat $3/hour. At the highest metered level, your staff of 20 would be making about 75 cents an hour. And presumably holding bake sales using ingredients they bought with food stamps in order to pay the $125 monthly fee.
Huh…it’s starting to sound like when I was a perl developer trying to make a living underbidding my competition on Guru.com :)
Nobody has mentioned the part that has tickled me the most: what a horrible failure you’d have to be to hit the max hours for a given level before hitting the max invoice amount. These are hours per month, right??
At level one, you’d have to track two full-timers pulling in a fat $3/hour. At the highest metered level, your staff of 20 would be making about 75 cents an hour. And presumably holding bake sales using ingredients they bought with food stamps in order to pay the $125 monthly fee.
Huh…it’s starting to sound like when I was a perl developer trying to make a living underbidding my competition on Guru.com :)
This methodology of pricing reminds me of the way we tax the rich at a higher percentage therefore punishing them for being sucessful….
Out of curiousity is the above pricing method whichever is hit first, or last? If last it could be a good deal.
example at my rates using the $6/mo plan If hit last = 320 hours * $50 = $16,000 If hit first = $1,000 / $50 = 20 hours
I assume it is NOT in my favor but, if it were, $6 for 16000 in invoicing isn’t that bad…
@Ryan: I agree in this case, only because we’re talking about business income here. There are tight profit margins and the concept of an increased cost for increased dollar amounts (despite no additional work on the software’s part) seems off.
However relating that back to personal finances is a fallacy. Individuals need certain bare minimums in order to hold a job, but any expenses past that are largely discretionary. My rent isn’t a percentage of my income. I don’t eat twice as much after a hefty raise. If a millionaire was so concerned about money, he could move to a middle-class neighborhood and save thousands per month. Thus, comparing business software pricing to personal income taxes is like comparing apples to oranges.
Not that I’m impressed a lot, but this is more than I expected when I found a link on Digg telling that the info here is awesome. Thanks.
After reading this article, I feel that I need more info. Could you suggest some resources please?
@vince,
More resources for what? How to price a web app? I don’t know any other resources.