9 Tricks to Experiment with your Pricing Strategy
As part of my job at Stripe, I get to work with many early-stage startups and help them figure out their monetization and pricing strategies. While most founders have a clear product vision and have thought through things like their go-to-market strategy or hiring plans, surprisingly few have an idea about what their pricing should look like.
Interestingly, this is not just the case for early-stage startups but also more mature companies. Back when I ran pricing workshops at Google Play, many startups didn’t have an active pricing strategy — despite multi-million dollar run rates in some cases.
Pricing is not just perceived as a boring, but also as a complex subject matter that requires someone with a math PhD. Both of these assumptions aren’t true.
When I discussed the topic with Robin and Louis from Point Nine, we realized that we were seeing a lot of similar challenges. In this post we’ll show you 9 simple pricing and packaging hacks that we have seen work well - especially for early stage founders. We hope they’ll inspire you to experiment with your pricing strategy too!
Let’s get into it!
➀ ‒ You Can Probably Charge More
Christoph Janz, patio11 and others have been beating this drum for years: You can probably charge more for the product or service that you are selling. Startups often assume that their demand curve looks something like this:
Theoretically, this would mean that even a small price increase automatically leads to a pretty massive decrease in potential customers — but that is usually not the case (demand curves are generally not just simple straight lines as the examples in your economics 101 textbook might suggest). Especially in a B2B context, the willingness to pay is often significantly higher than people expect.
The other thing to keep in mind is that pricing is not just a finance exercise - it should also be part of the marketing and product strategy. High-quality products usually come with a high price tag. Conversely, price can also be an indicator of product quality. A high price point can help you build the image of a premium product.
Even if it sounds counter intuitive, a higher price tag might therefore actually lead to an increase in sales.
➁ ‒ Use Early Adopter Discounts
“But shouldn’t I focus on maximizing the amount of users first?”
This is usually the pushback I get from entrepreneurs when suggesting to charge more — and it is a good argument.
Especially when you are just getting started, it’s absolutely critical to get users to test your product and give you feedback. A high price tag will most likely be a barrier to getting those users on board.
Instead of lowering your price or giving the product away for free, however, consider using early adopter discounts. This way you still have the original price as an anchor and you clearly communicate the real value of your product offering.
This strategy does not just apply to companies who are just getting started. When experimenting with your pricing, promotions (ideally limited to a certain time period) are often better than simply A/B testing different price points.
➂ ‒ Offer Different Products for Different Audiences
Not every user has the same preferences. And not every user has the same willingness to pay. One way to increase the number of addressable users is to create different product packages for different user segments. SaaS products, for example, are usually segmented by user type (personal/hobby, SMBs, scale ups, enterprise).
While the core product is the same for everyone, premium plans come with additional features (that are more relevant for larger businesses) and thus a higher price tag (enterprise customers usually have higher willingness to pay than startups).
You’ll see this less in consumer software, but there are examples like Netflix:
The core idea behind these different packages is to find features that are proxies for willingness to pay. Screen quality is a perfect example: Users who are willing to spend $$$ on an Ultra HD TV, are probably also willing to spend more $$$ on a video streaming service.
Similarly, company size is a good proxy for willingness to pay when you are selling to other businesses. This is why many SaaS plans use the number of users as their pricing metric.
➃ ‒ Pick a price metric that scales with value
Charging on a per-user basis not only optimizes for willingness to pay, it’s also a price metric that correlates and scales nicely with the value you provide. Slack becomes more valuable the more people join an organization, so it makes sense to base the price on the number of users. As the organization grows (which, again, is a good indicator for company success and thus willingness to pay), so does Slack’s business.
It’s worth mentioning here that Slack only charges for users who are *actively* using the product: The pricing is perfectly aligned with the value it provides.
The thing to keep in mind is that your pricing needs to be predictable and simple. Slack could also base its pricing on the number of messages sent - another good proxy for the value it provides - but that would make it really difficult for new customers to predict how much the service will cost them.
Stripe, for example, doesn’t charge any setup fees or monthly subscriptions. The pricing is based on the value of each successful transaction it facilitates, which means it only wins if its customers win.
➄ ‒ Price Discrimination
Earlier, we discussed building different product packages for different customer segments, which is tends to be best practice in the B2B SaaS space. In consumer tech, we often see a slightly different version of this strategy where companies charge different prices for different audiences - even though the product is exactly the same. This is called price discrimination.
Apps like Loom and Notion have a free tier for students, for example. The main driver is, again, willingness to pay. Students tend to be less affluent, so it makes sense to offer them the product at a lower price point to lock them in — and then increase the price once they have a steady income.
What is less well-known is the variety of other proxies many consumer apps use to price discriminate. Dating apps not only charge different prices for male and female users, some also show different prices based on the type of phone you use. Similar to the Netflix example we looked at earlier, the price elasticity of an iPhone 11 Pro user will probably look more favorably than that of someone who uses an older iPhone 7.
I have also seen companies who use user location as a proxy for willingness to pay and charge higher prices for people based in cities with higher GDP per capita.
It’s important to note that many of these practices aren’t legal and can easily backfire - especially when you simply display different prices to different users. A workaround I’ve seen are programmatic promotions: While the price is technically the same for everyone, users with lower expected willingness-to-pay are more likely to see a discounted offer.
➅ ‒ Signaling as a Service
As I have written extensively on before, most of our everyday actions can be traced back to some form of signaling and status seeking — especially when they involve a purchase decision. Whenever we spend money on an object or service it’s primarily because we want to signal something about our social standing.
Manufacturers of physical products already leverage signaling quite heavily. Just think about all the luxury fashion products out there. But what is the software equivalent of a Louis Vuitton handbag?
Software is at a disadvantage compared to physical products due to its intangibility. But that doesn’t mean that signaling is impossible.
- Neobanks like Revolut have tied physical elements to their digital products: Premium subscribers not only get access to more software features, they also get a fancy looking metal card.
- Strava clearly signals which of their users have upgraded to a premium subscriptions with a little badge and premium-only leaderboards.
- Superhuman is essentially a luxury email provider that charges $30 a month so you can show off with a “Sent via Superhuman” in your signature (Pro tip: You add the same text to your Gmail signature free of charge). Similarly, Hey charges $999 for scarce email addresses.
When you design your pricing packages, have a think about how you can help your customers signal their purchases to others. Not only does this help with word-of-mouth, it also increases the perceived value of your product.
➆ ‒ The Illusion of Choice
People like to have choice … but they also like to be guided towards a specific choice. Many pricing pages will showcase different packages with different price tags that aren’t based on features (we covered those earlier) but time. The product offering remains the same. The only thing that changes is the duration of the subscription the user commits to.
The merchant obviously has a preferred package they’d like to sell: The one that promises the highest LTV (this is often an annual plan).
While the pricing page suggests that the user has a lot of different options, it’s really just one option that matters. An illusion of choice.
You may have noticed that pricing pages often feature three different options. That’s not (just) to appeal to three different types of customers, but because people prefer the middle option (also called The Center Stage Effect). Unsurprisingly, the middle option is therefore the subscription plan with the highest LTV.
Making that plan the default option (less friction) and labeling it as the most popular plan (social validation) helps to further increase its conversion rates.
Make sure to make the different options comparable and highlight how much cheaper the annual plan is (the churn rates of your monthly subscription will inform how much you can discount the annual package).
Companies often include a lifetime offer as their third option. Lifetime options tend to be significantly more expensive than the other plans. That’s because the goal isn’t actually to sell many of them, but to make the other options appear cheaper. Similarly, decoy prices can help you to make the default plan look more attractive.
➇ ‒ Optimize your Payment Flow
One of the things I’ve always found most surprising is how little effort companies seem to put into their payment flows. While landing pages and apps are often pixel perfect, things get ugly once the user starts their final conversion step.
Most payment flows include way too many steps, ask for unnecessary information and are generally not well designed and visually appealing. And yet, reducing friction in your payment flow doesn’t have to be difficult:
- Surface the most relevant payment methods
When it comes to payments, user behavior is quite different from country to country. While US customers primarily use credit cards, local payment methods such as Ideal or P24 are the preferred mode of payment in the Netherlands and Poland, respectively.
- Optimize for Mobile
Similar to the previous point, the most frictionless payment path on mobile is often via Apple Pay or Google Pay. Making the form responsive and invoking the numeric keyboard were relevant also helps to speed up the payment flow on mobile devices.
- Anticipate friction points
Incorrect payment information is a one of the biggest reasons why users abandon the final funnel step. By automatically showing the right card logo and validating card details in real time you can minimize errors and thus reduce friction.
Of all the tips in this article, reducing friction in your payment flow is probably the easiest to implement and has the highest direct return on investment. Products like Stripe Elements and Stripe Checkout take a lot of the heavy load off of the developer.
➈ ‒ The IKEA Effect
Labor leads to love: Experiments have shown that people place a disproportionally high value on products they built themselves. A self-assembled piece of IKEA furniture has a higher perceived value than a ready-made version of the same product.
Similarly, people place a greater value on things once they own them (endowment effect). The pain of losing something you own seems to be more powerful than the pleasure of gaining it.
Why is this relevant for software monetization?
Well, it explains why free trials are so powerful. Not only do they allow you to get users on board who might not be willing to pay before giving the product a spin first (paywall friction is real!), they also increase the value (and thus willingness to pay) of your product.
This is especially true for products that require some setup efforts or user input. A knowledge management system like Notion is the perfect example for this: It’s like a set of legos that you have to put together. The product becomes more valuable the more time you spent with it.
If your marginal costs allow it, always give users the option to test your product for free. The decision you have to make (and test) is whether it’s easier to convert users from a freemium plan (how do you get users to upgrade?) or a free trial (how long should the trial be?). In case of the latter you also want to test when to ask for payment details.
It’s worth mentioning that there’s no one-size-fits-all approach when it comes to pricing. Some of these tricks will work for you, some won’t. But the upside of the ones that will make experimenting with your pricing worth the effort.
Do you have thoughts or feedback on this article?
Give me a shout on Twitter.
All opinions expressed are solely my own and do not express the views or opinions of my employer.