Tag Archives: pricing

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.

Marketing for microISVS

Below are the video and slides of the “Marketing for microISVS – embracing the ‘dark side’?” talk I gave at ESWC 2009 in Berlin. This is a high-speed ramble through a vast subject. In the 45 minutes available I do my best to dispel some of the myths software developers have about marketing and discuss some marketing concepts, including: branding; positioning; pricing; and segmentation. Taking in Harley Davidsons, tinned tomatoes, Coca Cola and food blenders on the way. The first couple of minutes, where I dispel the myth that good software sells itself without marketing, are missing from the video due to a dead camera battery. But you knew that anyway, so I don’t think this detracts much overall.

Video:

Slides (which might not make much sense without the video):

NB/ When I said 47Signals, I meant 37Signals (brand inflation?). Thanks to Tarek for the correction.

Links to some of the things mentioned in the talk:

A big thank you to Alwin and Sytske of collectorz.com for hot-footing it from Alwin’s talk to do the video (you can see Alwin’s excellent talk on web app pros and cons here). And also to David and Panagiota for all the hard work that goes on behind the scenes organizing ESWC.

If you found this talk useful you might also like 10 mistakes microISVS make.

The great digital certificate ripoff?

digital certificateRipoff: A ripoff (or rip-off) is a bad deal. Usually it refers to an incident in which a person pays too much for something. A ripoff is distinguished from a scam in that a scam involves wrongdoing such as fraud. From Wikipedia.

Digitally signing your software allows you to show that you are the author of the software and that the application hasn’t been tampered with. If your software isn’t signed, Windows displays scary looking warnings when customers download it. So it makes a lot of sense to digitally sign your software if you are distributing it on Windows. So far so good.

Anyone can create their own digital signature, but Windows only ‘trusts’ signatures that have been created by certain third parties. While there are quite a few Microsoft root certificate program members, I am only aware of 3 that sell code signing (‘authenticode’) certificates. This is where it starts to get ugly. Here are their published prices per year:

Verisign: $499.00

Thawte: $299.00

Comodo: $119.95

That seems an awful lot considering that all they appear to do is check a document (e.g. a scan of your certificate of incorporation), check your whois record, multiply a couple of large prime numbers and then send you a certificate file. Much of this process is (or should be) automated. No wonder the founder of Thawte could afford to be one of the first space tourists.

Given that authenticode certificates from these three companies are functionally identical[1], as far as I can tell, why the price difference? It seems even more bizarre when you consider that Verisign now own Thawte. If you had the misfortune to sign up for the Microsoft ‘works with Vista’ program you could get a 1-year Verisign code signing certificate for $99. I doubt they were doing this at a loss, so how can they justify selling the exact same certificate for $499? I would guess that at least 99% of customers will never check who issued a certificate, so it can hardly be due to the power of the brand.

So why doesn’t someone just set up their own certificating authority, get approved by Microsoft, and undercut these 3 companies? Because their root certificate wouldn’t be installed on all the millions of PCs currently out there. It would be worthless until the vast majority of PCs had the new root certificate. What a fantastic lock-in!

The good news is that you can buy Comodo certificates for much more reasonable prices from these resellers:

Tucows: $75 [2]

KSoftware: $85 ($75 for ASP members)

Which rather begs the question – if resellers can make a profit at $75, why are Comodo charging $119? Because they can, I suppose. I emailed Verisign, Thawte and Comodo to ask about the disparities in price. I only received a reply from Comodo:

This [difference between their price and the reseller price] is simply due to Retail Vs Wholesale solutions we offer. Our Resellers commit to a specific program which enables discounted prices allowing them to make margins on the product as they see fit. Whether that be reduced prices, or make a cash profit from the sale.

All 3 companies have had major price hikes in the last few years. With so little competition, why wouldn’t they? So what is Microsoft’s role is in all of this? One would have thought that they would want to keep certificate prices low to encourage their wider adoption. I emailed Microsoft’s PR people to ask about pricing and whether they had any financial interest in Verisign. Here is the response:

1) Why does Microsoft “insist” on VeriSign certificates?

Microsoft Windows Quality Labs only recognizes files that are signed with a Verisign Class 3 Certificate of Authority (COA). Windows Quality Labs is evaluating recognizing other COA’s. There is a USD $399 offer for Class 3 COAs for those partners (IHVs, OEMS, ISVs) – who plan to submit solutions for Microsoft certification. More details are available at http://www.verisign.com/code-signing/msft-organizational-certificates/.

2) Does Microsoft have any comment to make on the disparity in price?

VeriSign also offers a USD $99 Organizational ID certificate. This provides authentication for organizations to Microsoft Windows Quality Labs, providing access to various services, such as creating submission IDs for products to undergo Microsoft testing. This certificate is not valid for signing drivers or executable files.

Information pertaining to Microsoft Investments can be located at the MSFT Investor Relations site, under Investments/Acquisitions: http://www.microsoft.com/msft/default.mspx.

Steve Bell, Senior Product Manager – Server Certification Programs, Windows Server

After a bit of surfing I found this page which says that Microsoft invested in Verisign in 1996. I don’t know how much they invested, but it certainly puts things in a rather different light. So Windows authenticode certificates are effectively controlled by just 2 companies, at least one of whom is part-owned by Microsoft[3]. Companies are in business to make profits, but it seems to me that these companies are using their effective monopoly to take advantage of the situation. I only see the situation getting worse as Windows displays ever more scary warnings for unsigned software. Perhaps this is something government regulators should be investigating. Let’s hope that Verisign don’t buy Comodo as well.

[1] Only Verisign certificates are recognised for some of the Microsoft certification programs, for example x64 Vista driver signing.

[2] You need to register with Tucows to login.

[3] Assuming they haven’t sold their Verisign stock. I am not aware that Microsoft owns any Comodo stock. I haven’t been able to find any further details by Googling.