Tag Archives: differentiation

How I increased sales 50% by adding extra price points

tinsHow 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.

multiple-price-points

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.

Success is always one feature away

In my consulting and various other dealings with aspiring microISVs, I notice certain recurring patterns. One of the most common is the belief that it is just one missing feature that is holding back a product from the commercial success it deserves. As soon as that feature is coded the sales are going to come pouring in! When they don’t, then maybe it was that other missing feature that our competitor has. It is a horizon that keeps receding until you run out of money or enthusiasm. But, in my experience, poor sales are almost always due to insufficient marketing. A fact that is borne out by these 13 case studies. It doesn’t matter how great your software is if no-one know about it, or if you can’t persuade them to try it when they do find out about it.

It isn’t surprising that microISVs fixate on features. MicroISVs tend to come from a programming background and learn marketing  on the job (I have yet to meet a microISV who started off in marketing and taught themself programming). Features and coding are what we like to do best and it feels like ‘real work’. But all too often the warm embrace of an IDE is just an excuse to stay in our comfort zone. Of course, features are important. No features = no product. But, if you have got low traffic to your website and/or you are doing a lousy job of communicating with people that arrive at your site, then adding more features really isn’t going to help much. If you are in a hole, stop digging. Successful marketing is about being different from your competitors. You can even make a virtue of your lack of features. If you are competing against more feature-rich competitors, then emphasize the simplicity and ease-of-use of your product instead. It certainly seems to work for 37Signals.

Marketing can seem like a very alien discipline for someone from a programming background. But you can learn it like any other skill. There is loads of great information out there, for example Eric Sink’s marketing for geeks. Also, some elements of online marketing are actually quite technical with plenty of opportunites for number crunching. Analytics, A/B testing and Adwords will give you more data than you know what to do with. This can give programmers a considerable advantage over people from a more traditional marketing background, many of whom don’t seem to be able to handle anything more complicated than a 2×2 matrix. You don’t have to be a marketing genius, you just need to be better than your competitors (in the same way that you don’t need to be able to run faster than a lion to survive a lion attack, you just need to be able to run faster than the next guy). Given that your competitors are likely to be other programmers (who are probably also not doing enough marketing) or people from a marketing background (who don’t really understand software and are probably more interested in long lunches) that may not be as hard as you think.