If Our Prices Are Wrong, We’ll Just Change Them Later

By Lincoln Murphy, Managing Director
Sixteen Ventures

If there was ever any doubt that the “Pricing is Marketing” mantra of Sixteen Ventures is true, just look at the SaaS and Web App pricing related stories that have come out lately. From the positive, where RightNow used changes in pricing in an attempt to disrupt the status quo in the SaaS CRM world, to the extreme negative press generated by Zendesk – and the accompanying customer backlash – last week when they jacked up their prices. I’ll focus on the latter of those two examples in this post.

I’m going to lay it out plain and simple so there are no misunderstandings: you need to get your pricing as right as possible out of the gate – don’t just guess or make up numbers. Once you are in the market, you will learn new information, customer buying behavior, feature bundling problems, etc. This is like the Mike Tyson quote “Everybody has a plan until they get punched in the face.” This isn’t terrible, as long as you got it close in the beginning – but if you are off by a significant factor, or if you didn’t train to fight Mr. Tyson, then you are going to have a hard time changing your pricing without hurting your existing customer base, or you’re going to get knocked out as soon as the bell rings

Pricing is not static; rather, it is fluid over time, moving with market conditions, time in market, market segmentation, etc. This doesn’t mean it changes every day, or week, or month, but it is not something that you figure out once and then never think about again – until you need to make a huge adjustment. You want to avoid huge adjustments, and you can do that by getting your pricing as right as possible out of the gate and then monitoring it over time. Ensuring that your prices are part of an overall pricing strategy that is aligned with your overall marketing strategy is critical. It appears that Zendesk didn’t get their pricing close to right at first and then had to make some significant, sweeping changes; and they paid for it – and likely still are.

It is even more critical for startups that don’t have time in market and historical data to pull from to start with a solid Pricing Strategy. If you understand why you are developing the pricing that you are, you are more likely to get it right. Ask most startups what their pricing strategy goals are and some statistically significant amount will say something about “making sales.” Then they’ll ask what you mean. On our Pricing Page Tune-Up™ sign-up page, for example, we ask what your Pricing Page goals are; included selections are User Growth, Increased Sales, Lead Generation, Market Position, etc. Remember: Pricing is Marketing.

But many companies don’t get it even close to right at launch – likely because they neglected to develop or execute on a real pricing strategy. So what if they need to make a big change, like Zendesk did, and raise prices? Is it even possible to do this without a negative outcome? The answer is yes, but you need to have a strategy and execute according to plan. Some people will always be upset by a price increase – they will be vocal in their opposition. Let them vent and then let them move on. Have you successfully raised prices without causing a backlash? Please comment on this post and share your story!

Engage or Alienate

If you have a mailing list, a registered user base, or active customers using your app, you have what we refer to as a voluntarily captive audience; exploit it! When you need to raise prices, there are only two options with your users and customers: engage or alienate. Its your choice - I suggest the former. One method is to find your top users – the oldest active users – and get them to help you. Engage (there’s that word again) with them. For startups with a beta user base, this is your chance – the kids these days are calling this “customer development” – whatever the term is, get out and talk to your users and existing customers. Maybe even call them on the phone.

Find out what these folks want, if they’ll pay for it, what they’ll pay, how they’ll pay, etc. Just like anything, this should be executed according to a well thought out plan. Not only will you learn a lot while you engage the user base, you could even create evangelists. The more engaged and respected users and customers feel, the more they’ll be happy to help you – which is what you’re asking for.

The backlash from the Zendesk users was more likely that they felt betrayed and less about the actual pricing. Pricing is neither good nor bad – its empty – its all about perception and the betrayal likely clouded the perception of their customers (that, coincidentally, is very Zen-like itself). If Zendesk had actively recruited their customers to help or otherwise made sure that every customer knew something was going on with pricing, the customers might not have revolted in such a way. In fact, had Zendesk done this, they would have been made aware of some of the use cases that they should have known about, but obviously didn’t consider – the ones that lead to the 300% price increase some customers mentioned.

But to find out on a blog or via email after the fact that the prices are now 300% higher is a slap in the face. Consider that your current users (especially early adopters, beta testers, etc.) and customers want to feel special – like they’re in a club – and by telling outsiders first, you take away that special feeling of belonging that we all long for. At the end of the day, would Zendesk still have alienated and irritated a segment of their customer base? Sure. But it would have been a lot smaller and they would have had the rest of the customer base to defend them – rather than add the attack!

Grandfathering is NOT the Answer

Okay, so Zendesk admitted that they messed up with their price hike. They probably needed to do something to respond to the backlash, but what they did seems to further indicate that they really didn’t have a strategy going into this. What did they do? They “grandfathered” existing customers and are only applying the updated pricing to new customers. Let me make this very clear: “grandfathering” prices is not an acceptable alternative to having a good pricing strategy or failing to execute on it!

So, while the tactic of grandfathering prices might appease some of their customers, what is the cost – in real dollars, PR, position as the market leader, etc? Why would a company backpedal on something that was good – their new pricing? Ultimately, this all comes down to lack of a strategy, lack of preparation, and an overall inability to execute if they did have a plan. It shows they didn’t talk to anyone outside of perhaps some “star” clients and now it shows that the new customers are going to get the “bad” pricing. Pricing is Marketing and what message is grandfathering sending?

Remember, it isn’t like this grandfathering is a secret – especially when the CEO posts this to their blog and it gets picked up by Techcrunch and every other tech news site – exactly Zendesk’s target audience, by the way. It is clear that those who were members on or before 5/18/2010 paid one price and anyone else that joins after that date has to pay more. Period. What a great way to entice new customers to join, right?

Some commenters on the Zendesk site and Twitter said that they were talking to Zendesk about becoming customers in the days leading to the price hike and were not told about the pending changes nor given the option of locking in “legacy pricing.” Way to start that relationship off on the right foot! I imagine sign-ups slowed immediately following the announcement and will be slow to come back until this gets swept under the virtual rug. Which it will, but that 2Q update to investors will be interesting, to say the least.

While the majority of this post has been talking about how to engage existing customers and users, it is very important to consider the impact of these changes on new customers. Does your value proposition correlate to the new prices? Obviously Zendesk didn’t talk to their customers to get to this point so by continuing with the pricing, are they going against the customers’ value perception? What about trust – are new customers going to trust that they too will be grandfathered on the next huge price increase?

It should be obvious that you just don’t want to get to this point. It is much better to be transparent leading up to the pricing change than during the backlash and accompanying backpedaling. Forced transparency is ugly! But what happens if you do find yourself in this situation? How should you handle it? There are a lot of different ways to work with this. Keeping in mind that Pricing is Marketing, you want to make sure you clearly understand the Value Perception from the eyes of the customers who will pay the higher price. Nobody wants to pay a higher price just for the privilege of doing so. What’s in it for them? Can we give them something more?

Perhaps you could consider one of the following if you must raise prices and are backed into a corner where grandfathering seems to make sense:

  • Grandfather privately – reach out to the legacy customers and tell them that their existing pricing will be in effect for some amount of time
  • Offer to let new customers lock-in “legacy pricing” for some amount of time if they sign-up in the next 30 days
  • Add value to coincide with the increase in price – this is the preferred option – is there a much-requested feature or service you can dedicate some resources to work on in an effort to appease them?

So, if grandfathering isn’t the answer, what is? Strategy - plain and simple.

Intentional Alienation – or – Firing Unprofitable Customers

There is the reality that sometimes it is just wise to get rid of customers that cost more than they are worth – a strategy that was undertaken by Ning when it dropped its use of Freemium. Raising prices to force low-profit or high-cost customers to leave your company and hopefully bring their troubles to a competitor is a valid strategy. Just be prepared for the backlash! From what I’ve seen, it is usually the low-end customers that do the most complaining – they have more time to do that sort of thing which is likely why they are low end clients.

They will be loud, vocal, and spread the bad word everywhere they can. When they do, you know you did the right thing – now they will move to your competitor and be unprofitable for them. Win – Win. In dealing with them, it is wise to just let them vent and then let them move on. If you have a strategy in place and know that this will happen, it is easier to deal with them and you won’t be as tempted to give in to the noise.

But to be clear, Zendesk obviously didn’t just irritate the low-end customers – they hit everyone equally hard. Again, this is something you will want to avoid. By having a complete pricing strategy at the beginning, you will know who your target audience is and perhaps save yourself from having to deal with a similar mess.

The great thing is, with SaaS or Web Apps, you can actually create different versions of your application for different target market segments – in this case low-end and high-end customers – with the same code-base! This is why we advocate decoupling the pricing strategy from revenue model in SaaS and why single-instance, multi-tenancy – or everyone using the same version of the app – is a key component of real Software-as-a-Service.

A great example of a this is the company behind SendPepper and OfficeAutoPilot. They have one marketing automation SaaS product that, through feature configuration and skinning, serves two very different market segments. Nothing like being able to send people to “the competition” and having that company be… you. Behold, the power of single-instance multi-tenancy in SaaS that few companies really understand and take advantage of.

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Lincoln Murphy (@lincolnmurphy on Twitter) is Managing Director of Sixteen Ventures, where he works with SaaS & Web App companies on Business Strategy, Revenue Modeling, Distribution and Pricing Strategy – check out the new Pricing Page Tune-Up™ service for on-demand Pricing Page feedback and improvement recommendations.

MicroISV Digest – 06/02/2010

Community News:

  • There’s a new startup podcast: Startups for the Rest of Us. It focuses on actionable strategies for bootstrapped startups, microISVs and Micropreneurs, with hosts Rob Walling of Software by Rob and Mike Taber of SingleFounder.com. There’s a new episode every Tuesday at StartupsForTheRestOfUs.com, with full episode transcripts provided. [iTunes link]. Way to go Rob and Mike!
  • Will Rayer, Ubercode Software, has a new release of Ubercode out with an improved code editor, optimized highlighting code, and improved tooltips. Ubercode is an easy-to-use environment allowing you to create your own software, Free download available.
  • Keith Platfoot, RBK Inc., has started an open beta of Maintaino, an online, subscription-based maintenance scheduling and tracking application.  Beta participants will receive a 50% discount for a full year after they launch.

Interesting  Answers.Onstartups.com questions with useful answers:

News/posts for microISVs and Startups:

StartupToDo.com, The Startup Success Podcast and other plugs:

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(If you have an announcement of interest to your fellow microISV, indies or startups, please email me atbob.walsh@47hats.com with the word digest in the subject.)

MicroISV Digest – 05/26/2010

(Apologies to all for the six-week hiatus the MicroISV Digest took while I was working to get out StartupToDo.com Version 2 and start marketing.)

Community News:

  • BP and the feds may not be able to turn off the Gulf Oil Spill disaster, but maybe you can code a mobile app that will help. At least that’s the approach Jeff Haynie and the rest of the Appcelerator team is taking. Two open source apps – Oil Reporter and Oil Tracker – are in use, and the company that developed these two apps is working to connect other volunteer developers with government agencies and animal rescue organizations. More info here and especially here.
  • Chet Karella of Dangerous Decisions has created the perfect high school graduation gift for parents worried about their speeding sons and daughters: Save Driver Program uses the iPhone GPS and accelerometers to email you when an iPhone toting driver exceeds whatever speed or acceleration set points you want them to stay below.
  • Richard Nichols has released Draw 5 (iPad version). What caught my eye was when he said, “Imagine, it actually took me less time to write a full featured Draw 5 Video Poker game that it did for the iTunes reviewers to review and pass it! This was all from scratch and is fully animated with voice prompts and detailed score history. I say this because someone actually accused me of using a 3rd party game framework!” I think I’m in the wrong business. Details here.
  • Need to be willing to share. Besides all of the cool apps for adults coming out for the iPad (remember a mere two months ago when it was all the rage to diss the iPad? I do.), there’s plenty of goodness for the wee ones. Case in point: School Zone was among the first companies to launch titles, which parents and teachers can download for $9.99 each: “On-Track Time, Money & Fractions,” “Flash Action Multiplication & Division” and “Flash Action Addition & Subtraction.” More info.
  • Steve Cholerton, Arten Science, have recently released the Multi-User MySQL Edition of their popular ContaxCRM software.  Further information on ContaxCRM Cross Platform Contact Relationship Management Software can be found here.
  • The conference schedule for the 20th annual Software Industry Conference (SIC) has been posted. Join your fellow MicroISVs in Dallas, Texas July 15-17, 2010. Special topics include: Selling Your Product on Amazon.com, Code Signing and Authenticode, 25 Ways to Get Google AdWords Wrong, Software Update Strategies, Conversion Optimization, Essentials in Successful Software Promotions, and e-Commerce 3.0. Network with MicroISV pioneers and hundreds of your peers. See the full conference schedule at: http://sic.org/fullsched.asp. Hope to see you there!
  • Speaking of conferences, I’ll be giving the keynote for Deploy 2010 June 24th in Seattle – more info here. Early bird pricing ends Friday, so now’s a good time to hop on it.

Interesting  Answers.Onstartups.com questions with useful answers:

News/posts for microISVs and Startups:

StartupToDo.com, The Startup Success Podcast and other plugs:

  • Seven new Guides at StartupToDo.com (StartupToDo.com is a subscription-based community of startup founders; if you’re not already a member, you will need to start your free 30 day trial membership for these links to work.):
  • Five new Shows at the Startup Success Podcast:
    • Show #64 [link] [iTunes]. Bob and Pat interview Maria Ly, co-founder of Skimble, an iPhone app for tracking and sharing all your sports activities (from rockclimbing to yoga and everything in between). Maria shares her experience as an Apple iPhone developer, how she and her partner and co-founder Gabriel Vanrenen make a business and personal relationship work, and lots more.
    • Show #65 [link] [iTunes]. Bob and Pat interview two key players in the Startup Visa Act – Eric Ries (see show 59) and Representative Jared Polis (CO-D) who is sponsoring this bill in the House. Eric is also the organizer of the Startup Lessons Learned Conference on April 23rd about the lean startups methodology.
    • Show #66 [link] [iTunes]. Bob and Pat interview Tom Foremski, one of the foremost journalists covering Silicon Valley, the world of startups and the shifting sands under the feet of traditional media. Tom was one of the first top rank journalists to go solo and leave the sinking mainstream media ship. You’ll find his analysis of the coming media tsunami and why every company – including your startup – is now a media company nourishing food for thought.
    • Show #67 [link] [iTunes]. This week, Bob and Pat talk with Steven Rodin, President of StoragePipe Solutions, one of the first companies to provide online enterprise backup in North America about the changing face of business backup needs in the age of cloud computing. And we talk (starting about 19:20) with Marsh Sutherland and Ken Herron, 2 of the three co-founders of SocialGrow, a still-in-alpha New England startup that holds the promise of restructuring our social media relationships with business peers and personal friends.
    • Show #68 [link] [iTunes]. This week, Bob and Pat interview friend of the show David Schenberg, CEO and cofounder of BusyEvent.com about new events technologies that change the equation both for organizers and attendees. David shares his insights on why being first matters, not being afraid of creating a hardware-based barrier to entry for potential competitors and choosing a business that can scale.
  • Four active Scholarships at StartupToDo.com:

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(If you have an announcement of interest to your fellow microISV, indies or startups, please email me atbob.walsh@47hats.com with the word digest in the subject.)

StartupToDo.com: why all the scholarships?

I’d don’t know about you, but if I hadn’t gotten a couple of small, key scholarships, I would not have gone to college. It wasn’t just the money – it was having someone real tell me that, yes, I should be in college that made a huge difference. When you’re doing something new, different and scary, getting that kind of validation matters.

That’s why I’m very pleased to say there’s not 1, or 2 but 3 different scholarship programs running right now at StartupToDo.com. Like scholarships in the academic world, each of the sponsors decide eligibility, but they all share a real desire to see more startups succeed.

OnStartups.com – (See this post at OnStartups.com for details). Dharmesh Shah and Jason Cohen – the cofounders of Answers.Onstartups.com – are giving away 20 six-month scholarships to StartupToDo.com. Dharmesh’s day job just happens to be creating and running HubSpot.com, a startup that has raised $33.5 million in VC money in the past year and a half. Jason, of the A Smart Bear blog and founder of Smart Bear Software, is known for his insightful posts on many startup topics. They guys have plenty on their plate. But it matters to them your startup succeeds.

Atomic Object – (see this page at Atomic Object). It’s easy for people in California in general and Silicon Valley in particular to scoff at the IT/startup communities in “flyover” country like Grand Rapids, Michigan. Easy and oh so wrong.

Software development companies like Atomic Object roll up their sleeves and get the job done right for global companies, and in the process move their communities from light-industrial to heavyweight post-industrial and a great place to live. Carl Erickson, President of Atomic Object, isn’t just thinking about getting the job done for AO’s many clients, he’s thinking about how to grow and nurture the west Michigan IT/Startup hub. That’s one of the reasons AO is sponsoring 20 Michigan-based startup founders to be part of StartupToDo.com.

Microsoft WebsiteSpark – (see this page for details) Speaking of scoffing at, let me just come out and say that all too many people in our industry profile Microsoft as the big, bad corporate wolf. Bull. Like every other company and organization, Microsoft is the net effort of the people who work there now, not what it was in the past.

That’s why Jacob Mullins, who runs WebsiteSpark in the U.S. anted up 130 six-month free StartupToDo.com scholarships for budding startup founders who’s day job is building web sites for clients. And it’s people like Midori Lawler, Ludovic Ulrich (and before him, Julien Codorniou) and Tom Halabi who are the reason Microsoft BizSpark exists and why I’ve volunteered my time to help 392 startups to date join BizSpark in the last 18 months.

As you read this, whether you’re the CEO of a software company with 10,000 employees or you are it, I’d encourage you to find a way to help other IT startups get off the ground. Whether that’s sponsoring scholarships at StartupToDo.com, bringing on a summer intern (I’ve got someone for you if you’re interested), being a sponsor of a startup event in your geographic area, you can make a huge difference. And if you’re not making a difference in this world, what are you doing?

It’s new, hot and matters: the Lean Startup Methodology

For years, startups and their founders have built their products, then searched for their markets and prayed for the best. I won’t dignify this as a methodology – it’s rolling the dice, hopefully with somebody else’s money.

If you want to roll the dice, go to Vegas. If you want to build a successful business producing software, then now is the time to learn about the Lean Startup approach.

In one short year, Lean Startup has gone from a keynote at one Web 2.0 Expo to its own full-blown conference streamed to no less than 50 meetups around the world. That’s what’s called traction in Silicon Valley, and the creators of the Lean Startup approach – Eric Ries, Steve Blank, Sean Ellis, Dave McClure, and others are on to something Big.

The Lean Startup approach puts front and center finding the intersection between the founder’s interests, deep domain knowledge and passion and the market. Though building rapid prototypes and learning from prospective customers what’s working and what’s not, a Lean Startup does its homework to find Product/Market fit before investing in a complete product.

Instead of buying into the traditional industrial model of having separate departments (or at least separate roles) for product development and marketing/sales/pr, a Lean Startup has a product team (development, QA, operations) and a problem team “that is asking the bigger questions, such as: Who will our customers be? What problem does our product solve for them? How many of them are there? And how will we reach them?” (see this post by Eric Ries)

“And the problem team is not merely engaged in a series of whiteboard exercises. Rather, they are working to validate or refute their hypotheses, and to then share their findings with the rest of the company so they can be used to reduce uncertainty and further chart the firm’s destiny. Each iteration leads to a “pivot” in which the company systematically changes some part of the vision to adapt to reality.”

What we are talking about is post-industrial model of product development and marketing here: putting learning what the market has to say before all the blood, toil, sweat, tears and money is spent, not after.

So how does a Lean Startup learn? By taking a fact-based approach and leaving faith-based to others. Lean Startups are numbers driven, and built atop of a development environment (continuous integration, continuous deployment, massive automated tests and more) that supports feature testing in depth by your customers, and using real analytics to understand what they experience.

If some of this sounds familiar, it’s because Lean Startup has a lot to do with applying the best practices of lean manufacturing with true continuous improvement. It’s taking the Toyota Way instead of the GM crash and burn approach.

Here’s a few places you can go to learn more quick and easy:

Now you can ignore Lean Startup. It’s your startup. And maybe you’ll do alright. But the most practical thing in the world is a good theory, and Lean Startup is well on its to being the Next Big Thing and as important a theory to what we do in this industry as Agile Development. Don’t take my word for it – read what Kent Beck, the creator of Extreme Programming, Test Driven Development, and one of the 17 original signatories of the Agile Manifesto in 2001, has to say.

Announcing StartupToDo.com Version 2

It’s been a long haul, but StartupToDo.com Version 2 is officially out today!

Four times faster loading each and every page. Supports all current browser versions. With a new layout throughout thats easier to read, easier to work with and just plain more attractive. And now with an industry-standard 30 day free trial period before you need to pay for it.

And to get the ball rolling again, 3 new Guides (clicking the title of the Guide will take you there if you’re logged in:

Improving your copywriting (http://startuptodo.com/guides/63) by Pietro Polsinelli. Pietro’s Guide will help you write better blog posts, copy for your web site and even tweets.

Recording audio guidelines for videos, podcasts or Skype
(http://startuptodo.com/guides/64) by Corey Maass. This Guide will get you started with improving your computer-captured audio for videos, podcasts or Skype – however you communicate.

Managing your testimonials with Propadoo.com
(http://startuptodo.com/guides/61) by colospeedskierboy. Testimonials boost sales, but can be a pain to manage. With Prooadoo.com, that pain goes away.

So what can StartupToDo.com do for you?

Guides – 49 today and a firm plan for creating at least 3 a week. Guides take 3.5 hour tasks and turn them back into 30 minute tasks. Rated and commented on, Guides are the wheels for your startup you don’t have to research to reuse. What happens when instead of spending hours bouncing between google, blog posts, and out of date pages you can take a Guide, make it your Project, work through it and get it done? You save time, frustration and energy – and build more of your startup faster.
Site Reviews - Instead of asking at public forums (where your customers can see it) for feedback on your site, create a Site Review Request at StartupToDo.com and let your peers provide you with targeted quantitative and qualitative feedback. And by reviewing other member sites, you’ll develop the skills you need to explain your product or service, connect with your intended market and facilitiate the sale.

Track your progress, build your momentum. Whether it’s completing projects, reviewing member sites (or asking for Site Reviews) or just recording your development time and business decisions, everything you do in StartupToDo.com earns you points. And points let you compare your progress this week to last week, to what your StartupToDo.com friends are getting done, and to an average of everyone.

Tips, Resources, Events, Groups, StartupToDo.com Friends and more.

Why not try StartupToDo.com today – free 30 day trial before you have to pay, costs between $30 and $15 a month. Be Successful Faster.

Pricing is Marketing: Understanding the Pricing Process for Web Apps

By Lincoln Murphy, Managing Director
Sixteen Ventures

“Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for.” – Peter F. Drucker, Innovation and Entrepreneurship

SaaS and Web App companies often charge their customers based on usage in an ongoing or recurring fashion. This can be subscriptions, usage, credits, etc. and is generally their primary revenue stream. This is the typical “pay as you go” model everyone is familiar with.

It is recurring revenue that is primarily responsible for Software-as-a-Service or SaaS becoming so disruptive against legacy software companies and their outdated licensing and pricing models. The ability to pay for a product or service over time makes it more attractive to the customer and results in more predicable revenue for the company and their investors.

(Recurring Revenue is only one of seven different revenue streams available to SaaS & Web App vendors as identified by Sixteen Ventures – download the 7 SaaS Revenue Streams PDF for details on the other six).

To make recurring revenue work, what a SaaS or Web App company charges the end-customer must be aligned with the market position of the company as well as with the end-customer; how they buy and what they’ll pay. Unfortunately pricing is one of the least understood elements within a SaaS or Web App company. For startups with no time in the market, it is even more difficult to figure out since there is no historical transaction data to analyze.

One common non-market or non-value driven method for developing a price is the bottom-up method. Using this method a company will figure out their cost and try to apply a profit margin to come up with pricing. To illustrate why this isn’t ideal, consider the incredibly simplified idea of trying to get to a 35% net margin because you heard that is a good margin for a SaaS company.

If it costs you one dollar to acquire and support the customer and you add 35% to that, you’ll meet your margin goal. Now scale that up in your spreadsheet and you’re in business, right? No. You’re missing a big piece and here are a few scenarios to illustrate the point:

  1. You charge $1.35 for your service knowing you have a built-in 35% net margin and find that no one will buy your product. It turns out the market will only pay $0.85 for what you have to offer. And they don’t care that it costs you $1.00 to land a customer (Customer Acquisition Cost) and to support them. They will only pay $0.85. How do you deal with that knowing that your cost is $1.00?
  2. You charge $1.35 for your service knowing you have a built in 35% net margin and find that everyone buys your product. It turns out the market would have paid $5.00 for what you have to offer. Since you consulted your spreadsheet and not your market and potential customer base, you left a lot of money on the table and positioned your company as the low-price leader.  Many people think that you can just raise prices, but how does your self-created low-end market position affect your ability to do that?
  3. You charge $1.35 for your service knowing you have a built in 35% net margin and are in-line with how your competitors have priced their solution. But you find that no one will buy your product. In this case you consulted your spreadsheet and the competitors’ websites, but again, not your market and potential customer base. How will you deal with this misstep?

These scenarios can play out all day long. The lesson from all of those is to not only rely on spreadsheets, formulas, or competitive intelligence to come up with pricing. You need to know how your customers will buy, what they’ll pay, and how they’ll pay. If you don’t know those three things intimately, everything else, including your financial modeling is worthless.

Rule number one about pricing: it is marketing. Pricing is one of the 4 P’s that make up the traditional Marketing Mix, along with Product, Promotion, & Place (distribution). This means that your product or service pricing must be part of an overall pricing strategy, which must be part of an overall marketing plan. An effective pricing strategy must go beyond simple financial modeling and include distribution, sales methods, positioning, market segments, etc.

For a SaaS or Web App company that uses an automated sales process where marketing, e-commerce, and application functionality are tightly-coupled, getting your pricing right is even more important since there is not a sales person to negotiate, convince or otherwise defend your pricing. For those companies, the Pricing Page is something by which their company will live or die. To that end, we have recently introduced our Pricing Page Tune-Up™ service to help SaaS & Web App companies optimize the most important page on their marketing site.

The keys to increasing the effectiveness of a pricing strategy are to know and understand the following items before you develop it:

  • Your Pricing Strategy Goals – Market Position, Hyper Growth, something else?
  • Ensure Market Alignment – Know how they buy, what they’ll pay, and how they’ll pay
  • Market Segmentation – Do you have one-size-fits-all pricing, is that the right strategy?
  • Distribution – Will you sell direct or through channel partners or App stores?
  • Sales Model – Do you have a sales force or will you use an automated process?

After you’ve come up with those items and dive back into your spreadsheet to work on your financial model, keep the following in mind:

  1. Pricing is Marketing
  2. The market doesn’t care what profit margin you want to make only what they’ll pay
  3. Don’t copy 37Signals pricing page
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Lincoln Murphy (@lincolnmurphy on Twitter) is Managing Director of Sixteen Ventures, where he works with SaaS & Web App companies on Business Strategy, Revenue Modeling, Distribution and Pricing Strategy – including the new Pricing Page Tune-Up™ service.

Three dot Friday

(Various short items in the Startup/MicroISV world I’ve bumped into this week, paying homage to Herb Caen.)

… When Geoffrey Moore talks, startups should listen. Geoffrey, author of Crossing the Chasm, Inside the Tornato and Dealing with Darwin, is a must-read if you want to get your head around the stages of growth for a startup from bedroom to boardroom. Here’s a recently-made available video from last year’s Business of Software Conference. Hope to see you in Boston for the 2010 confab.

… Speaking of reading, do you have too much of it? With ever more books and more ways to get them (think Kindle; iBooks doesn’t yet have a Computer section – sheesh!), sometimes you’ve got to cut to the chase. That’s why Dr. Doug Green is your new best online pal. Doug, an educator for 30 years now with time on his hands, crafts excellent summaries of hot business, technology, and education books, and gives them away for free. I know of at least one author, Dan Pink, who’s endorsed Doug’s summary. Cases in point:

Lean Startups and Startup Visas are two of the hottest topics in the startup world today. Is there a better way of doing a startup that the “tried and true” approach that creates a few winners and multitudes of losers? Should the US change its visa rules making it way easier for startup founders to come here to build their companies? What do they have in common? Eric Ries, who’s Startup Lessons Learned Conference in the City by the Bay next Friday will be simulcast to no less than 20 cities globally. Eric is also a major force in the Startup Visa movement. Busy guy!

Pat and I will be talking to him Monday April 18th to get updates on both hats he wears, and we’re also interviewing Rep. Jared Polis, who’s sponsoring the bill in House re why it’s (presumedly) a good thing and why anyone smart enough to launch, build and sell three Internet startups wants to sit in the same chamber as Rep. Michele Bachmann. Got questions for “the dot-com congressman”? – leave them here or pick up some good karma points over at Answers.Onstartups.com.

… And finally, just when you’ve reached overload with me-too and silly game iPhone apps, there’s this: Autism iPhone breakthrough: from tantrums to app-y days. Seems there are developers out there who want to make real differences for the better in people’s lives. Good on you!

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(Photo credit: http://www.flickr.com/photos/troyholden/4078141144/)

MicroISV Digest – 04/9/2010

Community News:

  • Eight free scholarships to the “Startup Lessons Learned” Conference – On April 23 the first Lean Startups conference happens in San Francisco, and the organizers have made available eight scholarships to startup professionals who are interested in attending the show. The scholarships cover the full price of conference registration, valued at $699 for the “early-bird” registration. The confirmed speaker list is a who’s who of the Lean Startup movement, including:
    • Eric Ries, The Lean Startup (@ericries)
    • Kent Beck, Three Rivers Institute (@kentbeck)
    • Steve Blank (@sgblank)
    • Randy Komisar, Kleiner Perkins Caufield & Byers
    • Andrew Chen, Futuristic Play (@andrew_chen)
    • David Weekly, PB Works (@dweekly)
    • Hiten Shah, KISSmetrics (@hnshah)

    If you’re interested in applying, send an email to leanapplication@imvu.com before midnight on Monday, April 12, 2010 describing (in 500 words or less) who you are, how you are using (or intend to use) the lean startup methodology and how the scholarship will help your company. Selected recipients will be notified by Friday, April 16, 2010. More info.

  • Jordan Osher, Meet The Famous, Inc., recently launched this crowdsourcing celebrity photo agency. Get the shot, upload it, they sell it for you and you get paid.
  • Richard Nichols, ranware.com, has released qikTweet for the iPhone/iPad. qikTweet is for those situations when you want to get your tweet out faster than waiting for your usual Twitter client to start, load your message feed, any new messages and anything else it needs to do.
  • Interesting  Answers.Onstartups.com questions with useful answers:

    News/posts for microISVs and Startups:

    StartupToDo.com, The Startup Success Podcast and other plugs:

    • No new Guides at StartupToDo.com (I’ve been on a programming deathmarch the past month, striving to finish 2.0a):
    • Show #63 [link] [iTunes]. Bob interviews Jason Fried, co-founder and president of 37signals and co-author of Getting Real and now REWORK. Jason is the archetype of a successful web-based software company founder (Basecamp, Highrise, Campfire, Backpack), a strong proponent for a reality-based (versus VC-funded) approach to building a tech company with a point of view, and a strong believer most of the accepted ways of doing business don’t scale down to startups.

      In this interview, we dig into not just Jason and David Heinemeier Hansson’s new book about the business of startups, but why and how they arrived at 37signals’ successful approach to building a software company. Jason generously shares a range of advice and experience about building your startup that is anything but a rehash of all the other advice you’ve heard.

    • Show #62 [link] [iTunes]. Bob and Pat talk with Paul Pluschkell, CEO and cofounder of Spigit.com, an innovative startup that is transforming social media, innovation and idea creation in large enterprises and other companies. What happens when social media reputation building, leaderboards, voting ideas up and down within a company meets companies like AT&T, Walmart and Southwest Airlines? The results may surprise you.

      Paul shares some very useful advice for startups selling to enterprises as well, and offers a perspective from a vantage point few enjoy on how social media is going change the workplace.

    • Show #61 [link] [iTunes]. This week Bob and Pat conclude our interview with Daniel Pink, bestselling author of Drive: The Surprising Truth About What Motivates Us.

      In this show, we quiz Daniel on why public education systems don’t teach how to select your own motivation, how organizations can build that into their business DNA, get some answers for questions for Dan posted by our listeners, how he personally integrates work and personal time, and more.

    • Show #60: [link] [iTunes]. This week Bob and Pat start an interview with Daniel Pink, bestselling author of Drive: The Surprising Truth About What Motivates Us.

      If you’ve ever wondered why sometimes when doing creative work you’re highly motivated and other times unmotivated, this is part 1 of a 2 part interview that may profoundly change your life.

      The scientific research and conclusions Dan brings to the modern business world go a long way to explain why some startups founders succeed, others run out of steam, why some companies will succeed and others fail as we continue moving to an world based on creating ideas, not running assembly lines.

    ====
    (If you have an announcement of interest to your fellow microISV, indies or startups, please email me at bob.walsh@47hats.com with the word digest in the subject.)

    Three dot Friday

    (Various short items in the Startup/MicroISV world I’ve bumped into this week, paying homage to Herb Caen, the best damn reason to read a San Francisco newspaper, when people still read newspapers.)

    … March showers have given way to April showers in the soggy San Francisco Bay Area – take a moment to sympathize with all of shivering people who will be in line bright, early and probably very wet to pick up their Apple iPads in person Saturday. Forecast (according to my Weather Channel iPhone App): A mix of clouds, sun, naysayers and media pundits who don’t get it, followed by jaw-dropping shock after your first 10 minutes with your own iPad. Okay, I’m a fanboy. Stephen Fry is a fanboy – and a great writer too (even if Time still does popup ads – sheesh!). But he’s right. And, I think I will be right – welcome to the Revolution.

    … One down, one up: Go Test It, the automated cross-browsing startup we interviewed founder Martin Kleppmann for on the Startup Success Podcast (shows #46 and after he sold the company, #47) has shut down. On the other hand, Martin and two cofounders have fired up http://www.rapportive.com/ – it’s a cool Chrome/Firefox extension that replaces the vertical column of ads in Gmail with a widget that’s part social media lookup and part your own private CRM – something that is immediately useful.

    … Speaking of podcasts, a few listeners recently have taken me to task re my speaking skills (or lack thereof) on a few (many) of the episodes. That hurt. Especially since it’s true. When you’re in pain, you put aside your pride and get to the Doctor, in this case Dr. Ann Utterback, PhD a voice coach to mainstream media. Ann has been turning vocally-challenged people into professional broadcasters for a very long time – and now she’s getting with the times and offering podcasters like me great advice on how to upgrade the noises coming out of our mouths. If you do a podcast, or training/demo screencasts or talk with customers, this is advice worth listening to.

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    (Photo credit: http://www.flickr.com/photos/troyholden/4078141144/)