How Google “accidentally” devalues its own ecosystem for other software vendors

Would you buy a $500 jalopy and install a $1,000 stereo? Probably not, most people wouldn’t. It doesn’t make sense. But if you just spent $60,000 on a new Porsche then what’s a few extra bucks? I’m not likening the quality of Google’s software to a jalopy, but the pricing aspect of this metaphor is useful. I’m going to explain how Google creates an ecosystem of highly price-sensitive customers that is tricky for third-party vendors to operate in.

Google’s prime ambition can be summed up as: “Get more people using the Internet, more frequently.” The more people using the Internet, the more money they make through advertising. Despite everything, this is still their major source of income. According to Asymco, Google makes about US$6.30 each year for every person using the Internet. The goal of everything Google does, whether it’s Google Translate (surf the web in your own language), or Project Loon (surf the web from the middle of nowhere using balloon-based wifi), is to get more people using the Internet. Google can offer their software “G Suite” (Docs, Sites, Gmail, Drive, Hangouts, etc) so cheaply because it’s a loss leader for this prime ambition.

For a software vendor offering a freemium product, $6.30 per user would be an amazing return. Most freemium products have a conversion ratio of about 1–10% with the majority of companies in the range of 1–3%. So using rough, flawed, imprecise, and purely demonstrative math: if Google were another software vendor with a 1% conversion ratio on their product and were making $6.30 per user, that would equate to charging $630 per premium user per year — over twice what Salesforce charges. That’s why Google can charge so little for their software.

So why don’t Google just give away G Suite? Because, by giving away a service for free you’re signaling to your customer that it has no value. Getting something cheaply makes people think they’re getting a bargain. Getting it for free makes them think that it’s worthless or of poor quality. It’s always better to charge a little bit for something rather than nothing.

Unfortunately, while Google can still make money from selling cheap software, other software vendors cannot. I’ve lost count of the number of Google customers who send emails like: “it looks a little strange to see a spell checker coming in at the same per-seat costing as an entire Google Enterprise individual account.” If we set aside for a moment the fact that we’re obviously not conveying the value of our writing coaching software (not just a spell checker) to this customer, they have a good point. We don’t have the same issue with customers from other platforms. Our user research suggests that users expect to pay about 20–30% of the cost of the platform they’re using for an add-on. This is great news if your platform is Salesforce (charging up to $300 per user per month) but not so great for G Suite ($3 per user per month). This expectation means that it’s hard to sell software at a reasonable price to most people on G Suite. I’m not sure if Google actually appreciate this themselves, but maybe they should take note. It is definitely harder for people to switch to G Suite if they don’t have the same ecosystem of integrated products produced by third party vendors — just look at Windows Phone. And it’s hard for third-party vendors to flourish in an ecosystem of highly price-sensitive customers as has been created by G Suite’s pricing.

Nevertheless, the Google ecosystem is not alone. If you were going to develop a plug-in for a CMS, which one would you pick? Most people would probably start with the biggest, WordPress (over 60% of the market). More users equals more potential customers, right? On the surface this makes sense but it is, in fact, a specious argument. You’re missing one key element from the equation and that is price sensitivity. WordPress is free and this means while it may have more users, there will be more price sensitive users within your potential customer base. Other CMSs that are paid may have a smaller user base, but that user base is used to paying for things. It may well be worth exploring those platforms first. WordPress make money by offering “JetPack,” a set of enhancements and premium features for WordPress. This offers over 40 features (Design, Marketing, Security Tool, Support, etc). They have to offer so many features because the base platform is free. They may have shot themselves in the foot.

Pricing is one of the trickiest things about running a business and it’s even harder when you’re dealing with different demographics of clients. The one immutable law of pricing is: “You’ll always have customers that complain.” As Eric Sink states in this excellent article on pricing: “If I gave the product away, someone would complain that I am making them buy more disk space to install it.” Even if you gave every user a free holiday to the Caribbean to install your product, some people would complain that they don’t like the beach.

In pricing, the easiest demographic change to deal with is geographic demographics and you will see companies (such as Microsoft) pricing their products differently in different territories (e.g. cheaper in developing countries than in Europe and North America). In this case, transparency to the purchaser is low, because you’d have to be in a different continent (using a different computer) to see the difference. Who looked up the price of Office 365 last time they were on a beach in Thailand (and converted it from baht)? But when you’re dealing with different demographics within the same geographical location, transparency is high. It’s pretty obvious if you’re charging your users 10 times as much for your Microsoft Word add-in as you are for your Google Docs add-on. They can see it on your website. You could probably just about get away with charging people more on Mac (especially iPhone): a lot of companies do.

Interestingly, the same customer can also have different price sensitivities depending on the platform they’re using. For example, it’s hard to get a mobile user to spend more than $1.99 for an app, even if that app makes them young again. The same user would happily pay $50 for a piece of software on their PC that helps them manage their budget. This dichotomy comes about because of the behavior that user is engaged in on each device. Mobile is mostly about consuming behavior: reading news, watching videos, playing games. Only a fraction of the time spent on mobile is producing things. People are used to consumption being free (or at least only paying for it by watching ads), so when you’re using your mobile phone you’re generally in consumer mode. When you’re on your PC, you’re creating videos, writing documents, etc. You’re producing, and people don’t mind spending money on things that help them produce more efficiently. So when you’re evaluating an opportunity, also consider which environment people will be using your software in. Quiet those voices telling you that you really need to develop a mobile version of your app — it may not be worth the investment.

So remember: All users are not created equal, and even users that are created equal can be unequal. When you’re evaluating the size of a potential customer base, don’t forget to factor in the price sensitivity of those users and the wider ecosystem. The biggest opportunity might not always be what it seems.

All is not lost though. There are techniques to escape this pricing trap and stop your price being defined by the ecosystem you’re in. I’ll discuss these in a future article so follow me below to read it.

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