February | 2013 | Successful Software

tins How much should you charge a customer for a product? From a pure economics point of view – as much as the customer is willing to pay. The airlines are masters of this. The people on a typical commercial flight pay a wide range of prices depending on factors such as: which class they are travelling, whether they are returning before the weekend and how far ahead they booked. The smug businessman in first class (who booked a week before and is returning the same day) might be paying more than 10 times as much for a seat as a someone in economy (who is going on holiday for 2 weeks and booked 6 months in advance). The businessman probably isn’t spending his own money, so he doesn’t care that much what the price is. Does the business traveller cost the airline 10 times as much? Of course not. The airline is simply maximizing its profits by charging more for the people who are prepared to pay more.

Supermarkets also use multiple price points by offering value, standard and gourmet versions of common products. The gourmet version has pictures of smiling farmers and tells you how it was lovingly hand-picked from a sun drenched hillside in an exotic country. The value version looks like UN emergency rations. The supermarket hopes the less price sensitive customers will buy the gourmet version, but they still want something they can sell to the more price sensitive customers. Is there much difference between the 3 products part from the packaging? Probably not.

When you start to look around you can see there are lots of different strategies businesses use to charge according to how much the customer is prepared to pay. Does a hardback book cost significantly more to produce than a softback book? No. But if you really want to read the book you will pay the extra for the hardback, rather than wait 6 months for the paperback. The gaming industry doesn’t even bother to change the product. Hardcore gaming fans will pay £40 for a new blockbuster game. A year later you can get the same game (probably with bug fixes and add-ons) for £15. Two years after that it will be in the bargain bin for £5. Discount coupons are another common method you can use to charge price sensitive customers less.

I decided to try multiple price points for my table planner software. The graph below shows the 12 monthly cumulative sales[1] of my product for a year before and a year after moving from 1 to 3 price points. The red arrow points to the month I made the change. The revenue for the 12 months after the change were almost exactly 50% higher than the 12 months before.

Before September 2009 there was only 1 edition of PerfectTablePlan and it cost £19.95. Initially PerfectTablePlan was aimed at people planning their own wedding, bar mitzvah, Quinceañera etc. Typically they would only use the software once, so £19.95 was a sensible price. But as the product matured and improved it was increasingly being used by professional planners. It seemed crazy to be charging professional planners such a low price for software they might be using every week. So I decided to add additional price points at £49.95 and £199.95. The higher price points having additional features aimed at frequent and professional users.

I choose 3 price points because this seems a natural fit for the different types of people using my software (one-off users, frequent users on a budget and professional users spending someone else’s money). This turned out to be a big win for me. Not only did my average order value shoot up, suddenly I had more credibility with professional event planners, who might not have taken a £19.95 product seriously, no matter how good it was. Price is a signal of quality, after all.

Having 3 editions of the product with different feature sets also allows me to offer an increasingly sophisticated product to ‘power’ users without overwhelming more ‘casual’ users. This is a big bonus for all my customers and it reduces my support burden considerably.

There are various ways I could have set the price points. For example I could have set the price points based on the maximum number of guests at an event or on the duration of a licence. Charging according to the number of features seemed to fit best with my market and existing licensing.

I thought carefully about how to introduce the extra price points part way through the life of the product so as not to confuse or alienate existing users. I decided it would be too complicated to add the new price points at the same time as doing a major (paid) upgrade from v4 to v5. Instead I released the new editions at the same time as the v4.1 upgrade. I announced ahead of time that v4 would become v4 Home edition and that 2 new products were being released: v4 Advanced edition and v4 Professional edition. I was careful to ensure that I added plenty of new features and didn’t remove any existing features between v4.0 and v4.1 Home edition, so users who didn’t want to upgrade didn’t feel cheated. They were few complaints. I encouraged existing customers to pay the difference to upgrade edition and many did.

All 3 editions of the product are contained in a single executable and customers can switch between the editions dynamically at runtime. This was more work initially than using #defines to create 3 separate executables, but I think it was worth it as it allows the customer to easily trial or upgrade to a different edition without reinstalling or re-starting PerfectTablePlan.

A lot of software products have 2 or 3 editions, with the most expensive edition costing 1.5 or 2 times the cheapest edition. This seems far too narrow a range to me. I’m confident that a professional event planner can get at least 10 times the value from the product compared to someone planning their own (hopefully) once-in-a-lifetime wedding event. So I decided to go for a 10:1 difference between the cheapest and most expensive edition. If the airlines can do it, why can’t I? In retrospect I think this was a good call.

Having multiple price points is not without its downsides. It makes the sale more complex and it is an extra decisions for the customers to make. People are demotivated by having too many choices and I think having multiple price points has reduced my visit:sale conversion rate slightly. So don’t add too many price points. 3 is probably plenty in most cases (the supermarkets should know). But the slight drop in conversion rate has been made up many times over in a significant increase in average value per order. Also I should point out that the increase in sales wasn’t ‘free money’. I had to do a lot of work to add the extra features to sufficiently differentiate the 3 editions of the software, overhaul the licensing, tweak the website etc. But it was definitely worth the effort for the increase in sales. I think it also been beneficial to my customers as they now have a choice of which edition of the product best fits their budget and requirements.

[1] Each point is the total sales for that month and the previous 11 months.

This book is an interesting and disturbing glimpse into the world of cyber-crime, particularly online credit card fraud (‘carding’). It also touches on related areas, such as cyber-warfare. It is written by a journalist, so don’t expect much in the way of technical details. But, if you can get past the tacky cover artwork and dubious sub-title (‘how hackers became the new Mafia’), it is a fascinating read.

The story mainly centres around the eponymous ‘DarkMarket’, a forum in which cyber-criminals conducted their murky business. For example buying and selling stolen credit card numbers. The story of DarkMarket is known in some detail, as it was infiltrated by various government agencies and some of its key players brought to trial.

There are lots of different characters mentioned in the book, many of whom have non-English names and online aliases. This makes the story quite hard to follow. Perhaps that is inevitable given that it is a story about deception and duplicity involving many people. Nevertheless, it still provides lots of interesting insights into this dark underbelly of the Net.

Online fraud is a cooperative effort. For example, some people specialize in stealing credit card numbers, others in selling credit card skimming devices and still others in employing armies of ‘mules’ to make withdrawals from ATMs (the riskiest part of the operation). But criminals are hardly likely to trust other criminals they have never met. Especially given that some criminals (‘rippers’) specialize in ripping-off other criminals. This is where forums such as DarkMarket come in. They act as a trusted third party, providing escrow and other services to cyber-criminals. The backgrounds and motivations of the cyber-criminals seems to vary considerably. Some start off as curious hackers withot any criminal intent, but turn to the ‘dark side’, often in small increments. Often such people seem to be motivated by status and reputation more than money. Others are simply in it for the easy money.

There are many ways in which your credit card details can be stolen. For example, you hand your card to a petrol station employee. The employee quickly swipes your card through a hidden credit card skimmer before swiping it through the legitimate device (they might pretend they have dropped something behind the counter to disguise this). A small camera hidden in the ceiling records you typing your pin. The criminal has a copy of your credit card and your pin number. These can now be sold on, perhaps through a forum such as DarkMarket, to other criminals who specialize in extracting the money. They will then clone your card and instruct their ‘mules’ to extract the money from an ATM and pay it into another account, keeping a percentage for their trouble. Some of the ‘work from home’ and ‘I made £2000 in a week’ ads you see in spam emails and attached to lampposts may be from cyber-criminals trying to recruit ‘mules’ for this purpose. Sometimes the criminals will withdraw small amounts over a long period as this is less likely to be noticed than one big withdrawal.

Cyber-crime is difficult to prosecute. It is hard to establish the real identity of the criminals and the they are often based in a different legal jurisdiction to the victim. The security services have infiltrated many cyber-criminal forums. The DarkMarket server was eventually being run by an under-cover FBI agent. However even security services from the same country (e.g. the FBI and Secret Service in the US) don’t seem to be able to play nicely together and end up investigating each others agents and informants and generally tripping over each other. The author believes that the Russian security services has infiltrated many of the Russian-speaking cyber-crime forums, but have no interest in shutting them down as long as they are careful never to steal from other Russians. The banks also aren’t keen to cooperate in investigations. You and I are ultimately paying for the fraud through our credit card fees. As long as the banks are making lots of money they don’t want to upset the apple cart by revealing the scale of the fraud. It might affect their bonuses.

So don’t expect cyber-crime to go away any time soon. But do stay away from dodgy websites, keep your credit card in sight at all times, cover the keypad with one hand while you type in your PIN with the other and check your statements!

DarkMarket on amazon.com (affiliate link)

DarkMarket on amazon.co.uk (affiliate link)