Entrepreneur

Software startups: Here’s how NOT to price your product

Image Credit: Sychugina/Shutterstock

You know how it goes in economic theory: To maximize your returns, you should find the reservation price (i.e. the maximum price) each of your customer segments is willing to pay and charge them that amount. This way, you’ll be able to charge $10 to a company willing to pay $10, and $5 to one that isn’t willing to go up a cent more. You might not be getting $10 from the second customer, but it’s better than $0.

In practice though, this exercise may not play out the way our Econ 101 professors have taught us. And that’s exactly what happened to us at Easy Projects.

Here’s a bit of a background: We are a completely bootstrapped and profitable Canadian producer of project management software based in Toronto, Ontario. We have a healthy client base and positive growth rates year on year. Just like any other well-performing company, we wanted to do something to super-charge this growth so that we could invest more in our development and marketing teams.

Sounds good, right? Well, we thought so too! Our brilliant idea in this endeavor was to create an intelligent, tiered pricing system so that our customers could pick the features and the options they like, at a price that was closest to the maximum amount they were willing to pay. We also needed a way to introduce the new Enterprise Edition, which was ready to ship around this time, into our pricing strategy. By introducing this new edition, our goal was to avoid raising our overall product prices to accommodate for the new enterprise-level features we added, but still allow larger companies to pay for them as needed.

This was what we had before the change:

1. Hosted option: Software-as-a-service project management software, hosted on our servers for a monthly fee.
2. In-house option: Installed on the customer’s own servers, mostly for bigger clients with internal IT departments.
3. License packs: Packs of 1, 5, 10, 50, 100, so that the customers could choose the most appropriate option for themselves, with the accompanying bulk discount. It’s important to note that these were the only options, so if someone wanted, let’s say, 37 licenses, they needed to get 3 of the 10 packs, 1 of the 5 packs, and 2 of 1 packs. I know what you’re thinking but hey, hindsight is 20/20.
4. Billing Cycle: We want to reward the customers who committed to longer terms with us, so we had discounts for 3-month, 1-year, and 2-year commitment terms.

The changes we made were:

1. Introducing the Enterprise Edition
2. Single page for all pricing information, so that customers did not have to navigate multiple pages for the right option
3. Replaced the packs with tiered pricing, where accounts with more than 20 licenses got increasing discounts at different tiers (e.g. 21-49, 50-99, etc.) and the new licenses they bought would be at the appropriate price point.

Our goal was to address the vast variety of needs our customers had, with the best option for them at the right price. The unforeseen effect of this attempt, though, was an almost 50% increase in the options the customers had to choose from. Not only did Enterprise have every single option of the previous choices (hosted and in-house, dubbed Pro Edition with this change), it also presented additional choices to the customer in the form of payment methods, etc.

To give you a better sense of what the decision tree looked like, consider this: If you were a medium- to large-size organization, you could choose between Pro Hosted no commitment, Pro Hosted 3-month commitment, Pro Hosted 1-year commitment, Pro Hosted 2-year commitment, Pro In-house no commitment, Pro In-house 3-month commitment, Pro In-house 1-year commitment, Pro In-house 2-year commitment, Enterprise Hosted no commitment, Enterprise Hosted 3-month commitment … After all, we want to capture as many reservation price points as usual, right?

Needless to say, this change backfired. As brilliantly explored by Barry Schwartz in “The Paradox of Choice” (you can check out the TED talk), having too many options to choose from, even if the perfect price point is one of them, can be worse than having too few. Abundance of choice can lead to paralyzing indecision, as we found out in our little experiment.

After experiencing a drop in sales, we first waited a few months to make sure the problem wasn’t just a seasonal discrepancy. When we confirmed it was due to the pricing change, we drastically simplified our Pricing Page, which, incidentally, is one of the most important pages on any company’s website. This is what it looks like now:

1. Split Hosted and in-house into two separate pages so the average visitor, who is most likely interested in hosted anyway, is not burdened with irrelevant information.
2. Hid Enterprise Edition completely. If a customer is large enough to require it, they know to get in touch with us anyway (No large sale is made without contact with the vendor, believe us).
3. Removed all license tier options from view, and integrated them into the calculations in the background. Now, the page automatically adjusts the price through user input for accounts with 1-20 licenses and tells the visitor to get in touch with us if they need more than 20, as we can offer bulk discounts.
4. We also got rid of the 3-month commitment option altogether, further simplifying the choices.

As a result of this simplification, we saw a drastic improvement in our sales figures, even going beyond the numbers we had before the price segmenting experiment. This is most likely because the current pricing scheme is even more simple than the one we had originally.

Even though we’re not covering the whole spectrum of reservation prices, we are seeing better conversion rates, which confirms Schwartz’s theory that simplicity of choice is sometimes more important than freedom of choice. I hope this little experiment-gone-wrong of ours will help some of you out there who are trying to decide your pricing strategy.

When in doubt, go the way of Eric Ries and conduct small-scale experiments.

Vadim Katcherovski is CEO of  project management software maker Easy Projects. He and his team created Easy Projects eight years ago due to a lack of easy, flexible, and low cost project management tools that he needed to manage his software company. What started as an internal tool developed into a commercial product over time is currently being used in over 50 countries. He lives in Toronto, Canada, where Easy Projects is headquartered, and slips away on photography trips whenever he can, which has become increasingly rare nowadays. 

[Top image credit: Sychugina/Shutterstock]


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