One of the main differences of software vis-a-vis physical products is that it is extremely cheap to produce another unit. Making your app available to yet another customer comes at little, or even zero costs to you. That means that, even though you will need to cover the initial costs of building the app, you do not need to take account of the marginal costs when calculating your selling price.

In case of Software-as-a-Service, competition is very rarely a race to the bottom – where you try to outsell your competitor by offering ever lower prices for your product. Generally speaking, your (potential) customer would probably be able to find a freely downloadable version of similar software somewhere on the web. Instead, they choose you. Why? Because your service offers a feature that is especially useful for them. Maybe your service is more reliable, better tailored to their needs, easier to use etc. This means that even though other people may be offering a similar service, there is no immediate need to try and out-price them.(basically, if your potential customer downloads the free version instead, you’re doing it wrong)

Providing SaaS allows you to offer a subscription model, where your customers pay a monthly fee, instead of a one-off sum. This simple fact has important implications for both marketing and pricing. For one, keeping your customer happy is of vital importance. Secondly, instead of continuously searching for new customers, you could also try to increase your earnings from existing clients by adapting your service to their needs and offering them additional features whenever they outgrow their current package. Obviously, you should include all this in your pricing (see below)!

First off, you are not just selling one service. That beautiful piece of software you just wrote has many different features. Features that can be switched on, or off. In addition, once you start talking to your customers you will soon learn that they all have different needs and requirements. Some want more speed, but without the storage, while others may have a need for storage but could do without any syncing. Listen to them too much and you will soon end up with 48 different packages, all with different prices. The sort of chaos you should want to avoid.

Studies into human behavior show that too much choice means we avoid making a decision. Offer your potential customer 48 options and they will pick none. Give them only 3 options, and they are far more likely to subscribe to your service!

Increase conversion rates even further by making the 3 packages highly comparable. This means that the most expensive version should have all the same features included in the basic package, plus extras. All this information should be easily observable and the three packages should be displayed on a single page.

The lowest priced package is the one you’ll use for advertising and marketing. It should cheap, if not super cheap. This is also the (only) package for which you offer a free trial. Both the low price and free trial lower the entry barrier, making it easy for people to start using your service. So, go as low as you can, while still making some money.

What should you offer in this cheap version? Enough to be interesting for new customers. If you’ve a good feel for your market, you probably know what that entails – otherwise do some market research. At the same time, the cheapest package should be too lightweight for your real customers. For example your customers might be self-employed lawyers acting on 10 court cases at the same time, and your smallest package only allows for 8 court cases. That should be enough to get a good idea of the service, but anyone using it full-time would eventually want to pay more to include all 10 cases.

Once the free trial is over and someone comes back to select a 'real' package, you have got yourself a customer! Now, it should be obvious to them that the cheap version is not enough (again, know your market). This is why you also offer two other packages. By making the cheapest solution irrelevant to your real customer, they immediately move to the second plan, not even questioning whether the competition might offer something better at the same price. In addition, research shows that by selecting the second or third package people enjoy a slight satisfactory feeling of "being higher than just somebody".

The second packages offers much more than the lowest one we previously discussed. Not only can your customers run their businesses with it, but it is almost too generous, offers more than they ever feel they’ll need, for just about double the initial price.

It is indeed a very good offer, and they should now want to settle settle. Yet, many do not. By offering so much already – essentially all most people would ever want – they become curious about what more you could be offering. And they’ll have a look at the third package to compare it to the second.

This it where things get interesting. The third package is usually suggested as a way to get your customer to settle on the second package, however you could probably do better. First off, the price difference between the third and second package should be less than that between the second and the first. Next to that, the third packages should offer something extraordinary, though not necessarily needed (like 10.000 sms per month – no one ever uses that). By adding this glitter and glamour you increase the attractiveness of the third plan by a lot, while staying comparably in-expensive.

In my experience, the best way to achieve this is by adding exactly one major key feature on top (aside from appropriate scaling parameters). Like in the formerly mentioned lawyer example, a third package couldadd a second account for an office assistant. This adds a lot of value, while the perceived price difference is very small (coincidentally, it comes at almost no costs to you). Ultimately, when comparing the second and third packages, the third becomes much more attractive.

9.99, 19.99, 29.99??? Tell them to look at compar

The answer is yes. Humans don’t trust rounded numbers (like 10.0) and deem numbers with more decimals more reliable – in the sense that they would be more likely to represent some true price. Obviously, all of this is highly unconscious. In addition, research shows that for some reason (unknown to me, or the researchers) prices that end with a nine outperform every other option (with five and seven right behind, but off by far). This has been shown in a series of studies, like this one from MIT and discussed in detail in books like "Priceless" by William Poundstone ^[1]. If you want more detail on that, I recommend reading those for further insight.

The basic rule goes like this: if the company is big enough to employ someone who’s main job it is to buy services like yours, instead of pressing a button on a website, they’ll call you up and ask to negotiate a custom pricing plan. Big companies assumes normal pricing plans don’t apply to them. Also, the person in charge with subscribing to these services needs to be able to justify their job.

Obviously, all of this means more work for you. You now need to pick up the phone and negotiate. Let’s make sure it’s worth the effort!

During the negotiation you triple your offer and add a big support package on top, which you sell for at least ten times the price you have on your highest plans. That at least puts it back into the price-range that enterprises are used to deal with and happy talk to about: they really rather buy the service for €5.000 than for €50.

That is also why even your highest priced plan should still have limits, it leaves with something to sell to enterprises and high-class customers. Even if during negotiations you settle for eight times the highest plan so they feel they "won" the negotiation with you, it was worth the effort for you. But don’t ever think that this is an option to include via a one-click sign-up. Enterprises don’t do one-click-sign-up.

Finally, if you expect your service could be interesting to corporate clients, don’t forget to add another box on the bottom of your landing page (or somewhere clearly off the comparison table) saying you are open to discuss other pricing options and offer individual pricing for bigger customers or special institutions (like non-profits or education, as Google is doing).

Generally speaking, upselling happens right after your customer selected a package and right before they hand over their payment details. At this stage, you often present your customer with a screen that allows them to configure the acquired service – a great time to upsell.

It is not hard to imagine that your customer, who is now in the process of setting up the service, might be interested in configuring more features. Psychologically, as the initial buying phase is behind them, it is unlikely your customer will return to the packages page to figure out whether they can get the same feature as part of another package. They’ve already settled.

At this time it is about presenting presenting some additional options in a non-threatening way and allow your customer to "configure" those.

In order to be able to upsell, you obviously need to know your numbers and your customers. For upselling the best are those features people think they need, will need soon or want, but which are slightly outside of the main product.

For instance, in the case of our lawyer, you could allow them to configure more frequent backups of their data (increase to hourly for example) for a little more or allow them to enable encryption (and secure signing) for archived cases. Both are not necessarily the core of the product, but your customers, once reminded that this exists, might well be willing to pay for it. An upsell is always the question of what your customer needs, wants and might want to need.

_Another example would be the an online radio streaming service, which had a feature allowing to directly stream to the shoutcast service. Shoutcast is an external server that would then handle the distribution of the streams, resulting in their service only having to offer one output stream. It didn’t cost them anything – if anything it was cheaper for them as the traffic would go through Shoutcast. But as many (if not all) other competing providers forbid these kind of features to enable a lock-in effect, enabling this feature is a classic thing to upsell with. Not only because more people think they need it than actually ever use it but also as the numbers show plenty people do use it instead of taking the more expensive plan with more streams.

By having to buy this feature extra on the second page, for an additional price, many people were willing to pay a higher total than just getting a plan that costs more but includes more streams and but would cover that, too. People pay for control and convenience._ NEEDS WORK!!

Thinking back of the plans we talked about before, how does that integrate in a pay-as-you-go-model? Amazon has been pioneering here as well, with a feature they call "reserved instance hours". It boils down to a classic and old principle: the discount if you buy a lot and pay upfront.

Basically instead of being charged for every minute you use, you say at the beginning of a period that you’ll pay for at least 2 full CPU months and Amazon gives you that for a discount. If you don’t use them, you pay too much but if you do, you don’t pay as much as for the normal pay-as-you-go. If you need more resources than that, you often pay a discounted price on those extra resources, too. Not as good as the offer for the reserved resource but still cheaper than if you hadn’t reserved at all.

So, if there is any way that you can create billable timed resources through your service, this is the model you want to go for. Going back to the radio streaming example from before: one stream hour could be such a resource – every hour that one persons listens to a stream. Now on the lowest plan, you’d have to pay nothing, get 1.000 StreamHours included but every stream hour after is at 10 ¢ - this would account for a little more than one full-time-listener but is enough to try the service and see if it works for you. As the previously mentioned shoutcast-streaming feature is excluded in this plan, this isn’t a long-term option for you. But 10 ¢ per stream per person per hour also doesn’t sound too much to pay.

The second plan now costs, let’s say 39 €, includes 5.000 StreamingHours and every hour on top costs another 8 ¢. The next higher plan includes 15.000 at 79 € at 6 ¢ the extra hour and the one for 99 € contains 50.000 StreamingHours with any hour after being as cheap as 2 ¢. This is only a calculation example and doesn’t necessarily work in the real world but it illustrates the idea. Because the concept of plans still works here, with the special feature that you can even offer a plan of 0€ you make money with. Might even make more money than with the other plans because of the higher per-hour-price.

The reason why you still want the other plans though, should be obvious. Aside making business predictions easier, you can also reward your customers on their success. Instead of making it the experience of "well, you had so many streams, we had to cut your services", you can make it the story of "Congratulations on your peak of listeners last week. We just wanted to let you know, for successful Radio Streams like yours our plan B has a pricing system, with which you’ve saved 100 € this month alone already.". You become part of their success story, a supporter and helper on the way. Not the technology that failed on them during the best stream of their lifetime.

Through this model suddenly you are also much more interested in the numbers of each and every client and love to serve them to optimize those, give them insights and dashboards, even live stats to make them do their job better. And once you understood this mechanic behind the curtains, it becomes obvious why Amazon is so successful. It isn’t because of their resources, it is because of the business model implemented through their pricing scheme.

>>>>>

Gandi.net is a Domain name registrar and cloud hosting provider. They became very famous in developer circles for their no-bullshit rules applied to everything, including their customer service.

Though Gandi’s main product is domain registration and hosting, they don’t really master good pricing here – it is highly competitive and complex. But on their mid-level Platform-as-a-Service-Hosting solution, they do the job very well. Let’s take a look on what how they are doing it. With that service you can easily deploy PHP, Python, Node or Ruby project on one of three pre-selectable database engines without having to bother too much about setup and configuration.Here’s what their plans overview looks like:

Do you remember when we talked earlier about having a low-end-base-price that is okay and totally fine but misses one important feature? Take a look at the difference between the plans S and M. Not only is M double the size but more importantly S doesn’t support SSL at all. Even if you are just running a rather small website, as long as there is some handling of sensitive information, you want SSL-Support. So without further notice only M and higher are of interest to you.

As previously stated, Gandi is very proud about their "no bullshit" rule. Which they also applies to this screen. It is clean and clear, the prices are full numbers and are practically bound to the fact you get double the service. But do you? The switch from M to L, though costing the double actually gives you more than just double. Sure, 250 GB is only 10 GB more than twice the 120 that M offered, but it is more none the less. And though subtle, if you are really checking the prices, you will notice and it will make you curious what they do at the next plan. Where they – all of the sudden – don’t only offer the expected 2.4M page views but over 5M. And for a price just about 50% more than L. M already looked like the better offer already, but now XL just became the real bargain on this page.

Briefly I’d like to mention that the increasing the disk size does increase the price transparently about the same amount on all prices (90¢ per 5GB). And on the top right, you can configure the discount you get after you’ve been doing business with them. Clean and clear, no bullshit and still applying a good pricing scheme

MailChimp is an email marketing service company, known for its really cute marketing with all kinds of monkeys. Right from its beginning in 2001 MailChimp has only been available as an online service. Aside from email-delivery and tracking they are praised for enabling their customers to create good looking and well working email newsletter through a very empowering user interface. Let’s take a look at their pricing system. This is what you see, when you click on the main menu item "pricing":

Before talking numbers, MailChimps makes you rethinking what business you are and what kind of service you’ll need. Are you an entrepreneur, requiring up to 12k emails a month? Or a growing business with higher demands? Or are a fortune 500 in need to have huge demands full filled? Did you notice how they changed the conversation from money to a conversation about the customer and their needs? You aren’t thinking about what prices are appropriate or what you are willing to pay, you are thinking about your business and its needs. Only after you’ve opted in describing your request a little more you will be presented with an actual offer. Let’s take a look at those, each one by one.

Guest contribution by Alexander Scholz

Salesforce.com is a customer relationship service entirely build online. They are best known as one of the first companies successfully building a business solely based the Software-as-a-Service.

Salesforce has hardly changed their pricing in the last couple of years. They run 4-5 different pricing models. The amount of plans vary on country. The price vary on country and currency, based on their approach on how to enter the underlying market.

I mentioned enterprise before: if the majority of your customers will be in that segment and you’d actually have to sell via phones or visits, the pricing categories don’t make much sense. Customer acquisition is not going through the Internet and self sign up but on much more expensive channel. Also, as said before, they like to talk about bigger numbers generally. Calling a head of sales to sell them a subscription of 50€/month just sounds like a waste of time to them.

Another classic case I encountered at an incubator in Palestine at which I mentored, was this: one startup wanted to build a case-management-SaaS-Software for Arab Lawyers with a target price of around 30 $. I argued that Lawyers are a high-pricing audience, meaning they don’t buy suites because the price is low but because the price is high. They are used being paid a lot but also to pay a lot, their whole value-chain is high-priced, from their suits over the consultants they hire up to the parties they throw. The predominantly mentality in their line of business is that a product sold at a low price can’t be of high value. They’d rather be bragging how expensive something was than how cheap it was.

In cases like this one I’d look at my target group, try to find what they’d be saving by using this service and arrange my pricing around that. In this example, if the software is done properly, this would save the lawyer their office assistant, which would probably cost them at around 600$ a month in that market. So if you can offer the same service for 399$, argue that they’ll still be saving a lot of money, it comes of as a money saver (compared to the office assistant) but still makes them value the product a lot. And as most lawyers are also running their own shops, they’ll be happy to save that money.

This is a very classic selling but also price-setting argument actually: finding a real world costs it would replace and put your plan lower than that while providing a similar service. This also directly puts you in pricing competition against something with a rather stable price and won’t undermine the costs of the technology very soon.

Other markets with a similar attitude would be doctors, recruiters, head-hunters and HR. And I am sure there are others, so look at your market and the customers closely.

Another classic case in which you’d want to avoid the how-low-can-you-go-rule is in luxury products and brand-associated services. It is a known phenomenon that if you decrease pricing for luxury products, you make less money. There always need to be the luxury gap between the ordinary champagne were the pricing ends around 70 € per bottle and the luxury segment that starts at 600€. And though pricing your bottle at 200 € seems like a missing market niche, you will be to expensive for the normal market and too cheap for the luxury segment. Luxury people buy because the price is too high on purpose.

A similar effect goes for brand-associated products and services - unless of course the brand focuses on being cheap. Normally brands try to create an emotional connection and become part of who you are. That also puts it in a certain pricing segment, that the customers defines themselves in. By going under that segment, you might reach new customers, but you won’t convince the usual segment. And that’d disrupt your market share in ways, you don’t want to cope with. By offering a market competitive pricing or even something cheaper, you risk of creating the feeling of doing something cheap. And emotionally connected customers therefore feel cheap themselves. You want to avoid that by all means.

That said, I’d love to have your input and stories about this, too. If you have remarks or critique or just want to share your experience, please don’t hesitate to either open a ticket on the Github repository or – if you aren’t sure how to do that – email me directly at [email protected] . And maybe I will incorporate your feedback into the next update.

Thank you for reading.