Pricing: What Should I Charge?
How much do you charge for this fantastic product that you’ve built? The answer is not static, and it involves a method for learning as you go.
Before I start, I want to address one concept. Everything I’m going to say about pricing here assumes you want to make money. I’m not talking about market capture or freemium here. I’m guessing you have a cost associated with making this product a reality and you want to be profitable. If you want market share and are going to use any one of the different approaches required to do just that, this is not your article.
I would argue that setting price means that you need to understand two principles. How much risk are you willing to take and what does it cost to run the business to support the product you’ve built.
Let’s create a simplified budget for our product. The product will be a software product you will be supporting it for one year.
- You’ve already sunk $100,000 into the build.
- You want to make a salary of $80,000 to start.
- Your server costs will be $2,000 per year to start
- You’ll need 40% of your salary (yes, that’s conservative) for taxes
- You will spend about $500 a month on marketing in year 1
Your total year one budget is $220,000
If you make $220,000 in year one, you are breaking even WITH A PAYCHECK. So you won’t starve, and you won’t hate your product because you are earning revenue. Mind you, not profit, revenue. In this scenario, profits would start at $220,001.
Now you have to look at risk and how much you are willing to take on. In this instance, you can maybe take a much smaller salary and reduce your tax load. Or no salary at all. Payroll is an enormous business cost.
Regardless, what you can risk will be up to you. Don’t let anyone tell you to do something one way or another. Without outside money, you will need to figure out a way to float what you are doing while you gain users and subscription fees.
You know that some products are similar to yours in other markets. They are selling for about $20 a month in subscription fees. So, If you want to meet the budget you have listed here, you’ll need about 11,000 subscribers to get to $220,000 in revenue.
That feels like a lot. Not the money, but the number of subscribers. Getting to 11,000 subscribers is a lot of work. So what if you doubled the fee? $40 a month instead. Then you only need about 5,500 subscribers. Now, what if you reduced your salary to $70,000. You’ll save $10,000 and $4000 in taxes. Now you’re down to 5,150 subscribers. Divide that by 12 and you know you need 430 subscribers per month or about 15 subscribers a day. So that’s the goal. 15 a day.
Regarding the doubling in price; try this experiment at home.
Take something you don’t want at home and sell it on Craigslist. Price it way above what you think it would sell for. Assuming, of course, you are not silly, after a few days, you won’t have any offers. Now INCREASE the price.
I have had just as much luck selling items on Craigslist by increasing the price than I’ve had by reducing it. The key is value and the perception of value. If I list something on Craiglist for $10 and it doesn’t sell, what if I include the box that the thing has been stored in and add $5. Would that sell? I’done EXACTLY this same thing. The item wasn’t moving so I added the storage box to the description and increased the price by 25%, and it sold that day. It’s happened to me a bunch. Increase the perceived value, increase the price you charge for it.
Along the way, you’ll need a spreadsheet that helps you track what you are selling things for and if you are meeting your goals. It can be really simple. Two columns. In one, you track the price and in the other the number of subscriptions per day. This spreadsheet will get you started thinking about how you want to follow pricing over time and help you establish ranges for what to change over time. If you start to see a significant drop in subscriptions per day when you upped the price, then you know that you have overstepped what your customers are willing to pay. And the converse is true. If you see a flood of signups, either your product is AMAZING or you are priced too low.
The point of all of this is that assuming you want to make money, you will need to play with the pricing based on your goals. You can’t just set it and forget it and hope for the best. You have to pay attention and think about what you are doing.
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This is the from the archive of an ongoing series called Making Things That Matter. Each week I will send you an email with another step in the process of building products and launching ideas. Signup here to join the conversation.
