One of the biggest lessons I've learned as a VC in the past few years is that pricing really has to be aligned with and proportional to the value your product provides. If someone gets $100 of value per seat and you charge $15/seat, that's great. If you charge $15/seat for a product that creates value per gigabyte, people start gaming the system. E.g. they'll buy one seat for their company and ask that person to be the proxy user for your product. Or if you charge $10/GB and people get $20/GB of value of the first few gigabytes and then $5/GB of value after that, you're going to run into problems.
So figure out how users perceive and quantify your value to themselves, and then try to come up with a simple pricing scheme that captures 10-25% of that value. That way every time someone pays you $1, they get $4-$10 of value, and that's a no brainer purchase.
Getting pricing right has a huge ROI across the board. Good pricing improves margins, reduces sales friction, and creates happier customers.
I've been working on a pricing project using a methodology largely influenced by Nagle's work. The premise is that it's possible to learn what customers value before pricing something and for the price to be optimized around customer value, and perceived value. It feels much more promising than other pricing projects I've been involved with. This podcast gives an overview of some of the thinking here: https://impactpricing.com/podcast/ep46-alan-albert-why-much-...
that nagle book was taught in my MBA pricing class. small but surprisingly dense and thorough. there's a lot more to pricing than just value pricing vs. cost-plus.
This doesn’t just apply to tech. Take healthcare, where the value created is per patient healed (oversimplified) but the pricing is per item/staff time used. Once again, people game the system, in this case by doing excess charges (see any itemized hospital bill to a private party). The U.S. government’s Center for Medicare has been trying to align the pricing model with the value created by paying flat rates for each type of surgery or illness treated. It seems to work pretty well.
Aligning value with payment is critical to success in any business.
I am slightly ashamed to say that I was one of those people who gamed Dropboxs packrat feature to store close to 10 TB of data on a 1 TB premium plan. I'll concede that they grandfathered that feature for longer than I thought they would, and am still a (somewhat) happy Dropbox subscriber, but those were good times indeed.
If someone gets $100 of value per seat, and you charge $15, why is that great? Are you leaving money on the table or facing competition? And shouldn’t you react strategically to either situation?
So figure out how users perceive and quantify your value to themselves, and then try to come up with a simple pricing scheme that captures 10-25% of that value. That way every time someone pays you $1, they get $4-$10 of value, and that's a no brainer purchase.
Getting pricing right has a huge ROI across the board. Good pricing improves margins, reduces sales friction, and creates happier customers.
The best book that I've read on pricing is Monetizing Innovation: https://www.amazon.com/Monetizing-Innovation-Companies-Desig...