Internet Pricing and The Suck.

At some early stage in a novice blogger’s life, the inevitable question comes up: "what on earth am I going to write about?".  If most bloggers are like me, the initial answer is "dunno", quickly followed by "stuff" and carefully refined to "whatever I feel like writing about". But then, if you’re like me, your Inner Marketing Demon (IMD) starts whispering in your ear about building a brand, appealing to the crowd and generally pimping whatever be the mandate of the day.

So for post #3 I picked a topic that I knew would appeal to a substantial percentage of the readership of this blog.  Since that group currently includes me, a Googlebot and my nearest and dearest fan, I am quite sure that today’s subject will appeal to at least 33% of the readership…

Josh Kopelman (entrepreneur, founder of half.com, and Managing Partner at First Round Capital) has a great piece on his blog about the impact of charging $0.01 versus making a product free. 

If you haven’t read it, you should: http://redeye.firstround.com/2007/03/the_first_penny.html

Now as any good sales/marketing bod can tell you, the price someone will pay is a function of the perceived value.  High perceived value and low dollar price looks like a great deal.  Low value and low price looks like a weak deal… and so on.  But Josh points out that pricing doesn’t work quite the way you might expect.  You might think that the number of customers would increase smoothly as the price decreases — everyone likes a bargain, right? Not so.

"Free" gets big numbers.  Charging anything at all results in an immediate and huge decrease in the number of customers.

He doesn’t talk too much about why and what happens when you do charge.  After a chat with fellow Collaborator Monkey Andre (that name drop should drive up readership by 33%) I have a few thoughts…

1)  Dragging out your credit card is a roadblock.  If you get through it, it doesn’t make much difference what the amount is as long as the amount is "trivial".  If I’m paying $0.01 or $4.95, it’s the same amount of work to make the payment. 

2)  Once you’re through the roadblock, I think pricing falls into discrete groups with elastic limits based on perceived value.  I believe the willingness to pay is relatively constant within any single group.  These groups will vary by product/perceived value…

SuperProduct A might be attractive to 80% of customers at $0.01 – $4.99, 15% at $5.00 – $14.99, 4.5% at $15.00 – $24.99 and 0.5% at $30.00 or higher. 

Scenario A:  Let’s charge $2.95.  It’s a bargain!  How can people say no to that price?  Well, 80% may not say no.  But that 80% may also be just as willing to pony up $4.95, or ~68% more cash… 

Scenario B:  Let’s charge $9.99 and go after the 15%.  They’ll be good dedicated customers.  Fine.  But I think they could charge $14.99, get just as many customers and be generating 50% more revenue per sale.  If your business model aims for 500,000 customers, that’s an extra $2.5 MILLION in revenue.

Perhaps after a few months of lousy sales, the decree comes down to lower the price.  Company expenses have been built around the original $9.99 price and it really hurts to go lower.  The new price is set at $6.99 — that’s a bunch less than $9.99 so sales should go up, right?  I don’t think so.  Unless they lower the price enough to move into another price group, I think sales will remain pretty much constant.  The company won’t see a noticeable spike until they get in to the next price group, in this case $4.99 or less.

Finding the price groups that apply to your product is tricky.  I also suspect they are influenced by the whims of the Gods of the Internet (Google et al) in non-obvious ways — frustration with ad-loaded free products drives up willingness to pay vs. giving away everything for free driving down willingness to pay. 

Pricing is always tricky. Some of the old rules still apply — I still don’t think you can raise a price once it’s accepted — but I’m increasingly coming to the conclusion that pricing for Internet apps has a different kind of squirminess to other products.  And that, dear readers, is The Suck.