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Pricing a new product: better to start too high or too low?

We all know that pricing a product to maximize profits is difficult.  Experimentation is often the best way to find the optimum price, but you have to start somewhere, and that somewhere is unlikely to be the best spot.

When launching a product, you probably have an idea about what its price should be.  However, rather than set the price at that point initially, I wonder if it might be better to start some way above or below, so that at least you have a good idea of what direction to start testing your price-changes in.  So you could either:

A) START TOO HIGH - intentionally price too high, so that you can DROP the price until you hit a sweet-spot.  Or

B) START TOO LOW - intentionally price too low, so that you can RAISE the price until you hit a sweet-spot.

Any thoughts on which might be a better approach?  Or are both stupid?


AN ANALOGY OF DUBIOUS RELEVANCE:

I used to go orienteering as a boy-scout.  We were taught how best to use a map and a compass to get from A to B in the countryside.

One of the only lessons I can remember is that of how to navigate to a specific point on a river - a bridge, say.  We were taught that it's a bad idea to aim directly for the bridge because, if your compass bearing is a little off, you'll reach the river either upstream or downstream and you won't know which way to go.  Instead, you should aim to hit the river a little upstream of the bridge, so that when you do hit the river you'll know that you can find the bridge by following the river downstream.

Basically this approach allows you a margin for error in your following of the compass bearing, and means that you don't waste time wandering lost along a river in BOTH directions.
MB Send private email
Tuesday, August 01, 2006
 
 
I think the analogy could even be applied to pricing. It would read as "aim either way too high or way too low, so that you know towards where to adjust later on".

Personally, and lacking (more than) half the actual experience, I think it's better to start low and raise afterwards. Existing customers won't be pissed by having bought at a high price and finding it cheaper afterwards. If you raise the price, existing customers will feel they were savvy to buy at the lower price point.

Anyway, I find pricing the most difficult area of being an independent software developer, by far, so good luck.
J Send private email
Tuesday, August 01, 2006
 
 
I'd recommend starting too high. Actually not truly too high just what you think it too high. Most startup ISV's value their products way to low and/or are scared to charge fair value because they want to ensure some initial sales.

Whatever your inclination is on pricing, try doubling it and you'll probably be pretty close to the right price.
Ian Send private email
Tuesday, August 01, 2006
 
 
I say, start high.

If you start low, you have to do tech support for people whom will cost you more money than you make.  You don't really want these customers.

If you start high, you only get the people who are price insensitive or are really interested in your product.  That's a nice (but small or even non-existent) group to have.

Some might argue that a lower price builds a customer base quickly.  Perhaps.  But, as I see it, either a customer wants your product or he doesn't.  Your product will drive the decision; price will only influence it.
Daniel Howard Send private email
Tuesday, August 01, 2006
 
 
If you start high, you may ruin relationships with your first clients when your new clients start getting a better deal.

However, in software, raising the price can be done relatively easy by adding value to your product.

Laslty, when I see steep price cuts on software, I figure it's a desperate attempt to make sales.  Unless it's done very tactfully that is.
Ben Mc Send private email
Tuesday, August 01, 2006
 
 
I say start too high if you have the patience.  It's shady to have prices changing all the time.  At least with a high price you can have sales to test the lower prices.  Nothing annoys me more then when I'm looking at a product, only to come back like a month later and see the price has gone up.
Phil Send private email
Tuesday, August 01, 2006
 
 
I’m currently grappling with the same issue:  trying to determine the best price for my product.  I haven’t decided on a price yet, but I think I’m going to start with a price at the high end of the market (for my particular product) for the following reasons:

1.    The product is better than most of the competitors and commands a higher price (yep, that’s subjective) because I’d like to position the product at the top end of my particular niche.
2.    It’ll be easier to discount the price of the product rather than increase the price later.  At least I assume that’s the case.
3.    I want to make sure that I have a healthy enough profit margin to cover support costs and on-going development (i.e. creating the next version and growing the company).

Of course, if no one buys my product…



Here are a couple of link to good articles about pricing.

Joel on Software
http://discuss.fogcreek.com/newyork/default.asp?cmd=show&ixPost=1389&ixReplies=7

Eric Sink
http://software.ericsink.com/bos/Product_Pricing.html
David Duey Send private email
Tuesday, August 01, 2006
 
 
Hmm split opinions... 

I had thought that it was probably a good idea to start too high if anything, but reading an article on OISV (which said to start low to get users and word of mouth) made me question that.

I suppose a central issue with a new product is that initially it's almost certainly going to be lacking in features.  By starting with a high price you can improve the product until the price seems more reasonable to more people.  By starting with a low price, you can raise the price, justifying it by adding new features and generally improving the product (good point BenMc).

But first impressions count, and if you start with a cheap product isn't there a risk that it'll always be seen that way?  I guess this is less important when you're a startup software company that next-to-nobody has heard of than when you're Microsoft.
MB Send private email
Tuesday, August 01, 2006
 
 
Start with a low time-limited offer for early adopters (make sure you state the time limit and the full price after it and commit to both)
Lowering a price on software sends a negative message cause it usually means one or more of the following - Noone is buying it, you try to compete on price rather then quality, you are about to release a new version and want to squeeze money from the old one before you do so.
Bnonymous
Tuesday, August 01, 2006
 
 
"But first impressions count, and if you start with a cheap product isn't there a risk that it'll always be seen that way?"

I'm concerned about the very same issue; I'm afraid if I start at a low price, I'll never get out of the slums.  There's a lot of low-priced junk out there that is awful.  I wonder if potential customers won't simply dismiss the product without giving it a "test drive" because the price is the same as the junk. 

I wish I knew the answer.
David Duey Send private email
Tuesday, August 01, 2006
 
 
Another option is to start with a high "retail" price, but put an "introductory offer" price on it for a set period of time.  This lets people know where you think it should be priced, but also lets those people think they're getting a deal by helping you launch.

Down the road, if you think you need to lower your retail price you customers who got the intro deal still will think they got a deal.
Karl Perry Send private email
Tuesday, August 01, 2006
 
 
If you drop the price, early purchasers will be annoyed. If you raise the price, later purchasers are likely to be annoyed. You want more people in the latter group, so you probably want to make them happy. (Depending on numbers, offering something like a free upgrade to the next version when it's released may help them feel like they're coming out ahead, which often makes people happy.)

But if you drop the price too often, some will start waiting til it goes even lower and never actually purchase.  ;)

Or you might be surprised and find out that people will pay more than you thought, in which case you don't need to annoy anyone by raising or lowering the price.

Ask a simple question, a dozen people answer and you get two dozen conflicting answers. Aren't you glad you asked?  ;)

Tuesday, August 01, 2006
 
 
A bunch of people mentioned not annoying customers by lowering the price soon after they bought it, but ask yourself this: how many people will even know?
IOW, after purchasing the product, the customer is now using it and what reason do they have to return to your website in say, the next month? Ask this question using your own typical behavior and see what answer is.

I think you should start high for all the reasons mentioned. My hunch is that after buying the product, unless they want their money back, they won't be visiting your site for a very long time and won't even know the price has changed.

And for the few that come back in a week and are pissed off at the new price? Either give them the lower price or offer a free upgrade when the new version comes out. But let THEM drive the decision: don't post on the site: "free upgrades to those who paid the higher price."
farmboy Send private email
Tuesday, August 01, 2006
 
 
Price high, use time-limited intro price for early adopters to build an initial base, add features over time to make the price attractive to more people.
Mike S Send private email
Tuesday, August 01, 2006
 
 
>If you start high, you may ruin relationships with your first clients when your new clients start getting a better deal.

Thats definitely an issue for me. I'm working on a web app which will be given with a monthly subcription model, so if I start with charging too high, and then start to lower it, my previous customers are going to find that out and will OBVIOUSLY be annoyed. How does someone deal with that issue?
Ali Send private email
Tuesday, August 01, 2006
 
 
Ali,

If you have to reduce your price, give your early customers a credit towards their monthly payments for some period of time.  For example:

You start at $50/month and get a few customers.

Then you realize by lowering your price to $40 you can get 10x the business.

Give the few earlier customers the $40/month deal, plus an additional $5/month as a credit for several months. 

One thing I don't think has been mentioned here yet (if so I apologize) is that early adopters often expect to pay more.  They are far less concerned with what they pay than with the benefit they receive.
Karl Perry Send private email
Tuesday, August 01, 2006
 
 
If you have the cash flow, start low. If folks don't buy, there might be something wrong with your product. Find out and fix it. Then start adding features and raise your price because of the improvements. Makes a good story and moves forward.

The CEO at RightNow Technologies did it this way. Started at $5k and now beyond $75K for a 2 year license.

Try to find other examples of product sales that are similar to yours. Keep in mind that your situation is not unique no matter how good you feel your product is.

You have a better chance of making $ by raising your price. Lowering your price ASSUMES a price elasticity that might not be there and you could lose $ to the bottom line.
Stacy Murray Send private email
Tuesday, August 01, 2006
 
 
My very first post to this board was asking the exact same question.  I was terrified out of my mind that nobody would pay $25 for my product.  Lots of people told me "Start at $25, if that doesn't work you can always decrease later".  Turns out a) they were right and b) teachers really will pay $25 for a tool that helps them out.
Patrick McKenzie Send private email
Tuesday, August 01, 2006
 
 
The benefit of your first 10 to 50 customers (assuming a $20 to $200 product) is FEEDBACK not revenue.  That feedback will let you sell 100x as much product. But be prepared to raise the price, and your marketing/sales 'polish' as the quality of the product improves.

COMMON MISTAKES
1. Pricing it too high. I've seen competitors do this. They don't get many sales, thus little feedback or traction.

2. Pricing it low, even after they have traction and a quality, evolved product, because that makes SALES & MARKETING too hard.  Ironically, the same geeky-inclination that makes you tweak a product to perfection can cause you to shy away from the challenge of marketing. If you raise the price you gotta really work on communicatihg the value. Scares the HECK of out of many people. But it's the fastest, easiest way to profits, which you'll need to make your next version or go on vacation.


And those first customers MAY be hard to get.


Suggestions

1. Release something USEFUL ASAP, so 'start the clock' on your marketing. (I.e., it may take X weeks for your site to show up well in google, for appropriate customer-type folks to find you.

2. Price it low because you're starting by offering just a PIECE (the best 10% of the total features) of the total value.  And if you can't sell it with the best 10% of the features you were planning (for 10% of the price) then either you can't sell the 100% product either (for 100% of the price you were planning) OR you miscalculated which features would be most valued.

But.. be prepared to raise the price as the quality of the product improves. Continue this until you approach the feature bloat of MS Office <grin>.
Mr. Analogy {Shrinkwrap µISV since 1995} Send private email
Wednesday, August 02, 2006
 
 
NB: No offence, but when providing advice on "real" topics like this, I really, truly, honestly, feel that any contributor should provide either a disclaimer or background that supports their position. Just having a gut feel or what have you with no real-life experience is going to be difficult to heed, in my opinion. It's kind of like a single, childless guy providing child discipline techniques or advice to a married couple?

NB 2: I have never priced or sold software before.

I have read that increasing the price of software has increased sales.

I have read that making price the (or a) differentiator is a bad thing (tm).

That's all
Aaron
Aaron DC Send private email
Wednesday, August 02, 2006
 
 
Thanks to all for the great comments and ideas.  There clearly isn't a united voice on this issue, but the discussion is very helpful indeed :)

NB  To Aaron DC - you definitely make a good point, but at the same time readers should know to take everything they read here (or in any forum) with a pinch of salt.  Fortunately I've been reading this forum for a fairly long time so I've got a pretty good idea of the background of many of the regular posters.  This helps me to assign an appropriate level of scepticism to comments when I read them.    Some of the posters above have my utmost respect and admiration for their knowledge and experience, and their willingness to share them.
MB Send private email
Wednesday, August 02, 2006
 
 
Another approach is to segment the product to hit multiple price points (e.g. home, professional, enterprise).
Andy Brice Send private email
Wednesday, August 02, 2006
 
 
> A bunch of people mentioned not annoying customers by lowering the price soon after they bought it, but ask yourself this: how many people will even know?

Well, Amazon tried random pricing, based on the "how many people will know?" argument but the answer turned out to be "very soon, enough to be a big problem".


> my previous customers are going to find that out and will OBVIOUSLY be annoyed. How does someone deal with that issue?

If they're coming back to the site regularly, you can be certain that they'll know. Generally it's not a huge deal - unless someone brought it the day before a 50% price decrease. One option is to offer something additional to people who purchased shortly before the price drop - a discount on their next upgrade would be relatively easy, for example. Unless the price is useful as a random number source (i.e. changes randomly every day) most people won't freak out too much, though. Few people are happy if waiting a day would have saved them 20% of the cost, but aren't going to be posting anthrax to your house.

Hell, if you have enough customers for it to be a huge concern, why would you bother reducing the price? The only reason to do that is if the total sales will increase enough to raise your actual profit.


> I have read that increasing the price of software has increased sales

Yes, we've all read that. We've also read that decreasing the price of software has increased sales, as well. And, oddly enough, increasing and decreasing the price of software sometiems reduces both total sales and total profit.

The only sure conclusion is that you can never get it perfectly right.  ;)

Wednesday, August 02, 2006
 
 
MB> Fortunately I've been reading this forum for a fairly long time so I've got a pretty good idea of the background of many of the regular posters.

Granted, MB, but I haven't, and when many of the posters do not have any link to their background or a profile, the only way of getting to know them is to read every single post they have written, or for them to have some sort of caveat at the start of their post. My suggestion was for the benefit of newbies like me :-) who may not have the time or inclination to do read everything. The choice I am having to make (rightly or wrongly) is to dismiss anything said by a poster on a worst case scenario that they don't really have any experience in what they are talking about.

...

AC> I have read that increasing the price of software has increased sales

<BLANK anon>>Yes, we've all read that. We've also read ...

Cute. The fact that "we've all read that" does not diminish the value in stating it, nor explain why noone mentioned the phenomenon prior to my post. The tone in your response suggests you really wanted to say something else. What are ya, yella, McFly? :-)
Aaron DC Send private email
Thursday, August 03, 2006
 
 
Hands down the best thing to do is to set the "correct" price right at the first attempt :-)

In my 10+ years experience, the worst thing to do is to start far too high. You'll get nobody buying the product, you'll get a reputation on the review sites (if they actually ever hear of you) for being a money grabbing b****t (which is a bad thing since these comments are never going to go away no matter what you do), you'll get no feedback other than the price is too high and the 5 people who actually bought the product will hate you if you drop the price later on.

The second worst thing to do is to raise the price without a major upgrade (e.g. from 1.x to 2.x) and the third worst thing to do is to make a "major" upgrade that isn't actually a major upgrade, but just a rehash of the earlier version. The forth worst thing would be to release a major (paid) upgrade any faster than 12-18 months.

Of course, the stupidest thing to do when you are in business for yourself is to offer anything for less than cost. So if you are going to lose money on it, just don't do it.

The only truly viable option then is to price your product as close (possibly a tiny little bit lower) to the "right" price as at all possible.

If you think that 39.95 is the right price, don't start at 74.95 intending to drop the price; you can't safely do so for at least a year. Don't start at 9.95 either because you send a signal with your pricing. If you sell at 9.95 you say "I think this product is worth no more than 9.95". If you sell at 74.95 you say "I am shameless and you can't trust me".

The idea of "introductory" pricing is excellent and gives you some room for experimentation. If you say "I think this product is worth 39.95 but I'm giving it away at 19.95 until the 1st of November", you won't find many people that will find fault with that.

You must, however, actually raise the price afterwards or risk alientating the people who well remember the "special offer". Importantly, however, you get to decide HOW MUCH you raise the price by (29.95? or 34.95? or 39.95?).

An interesting idea is to give away your product for FREE for a limited period of time making sure that everybody knows that this is only TEMPORARY. You'll get a core group of people who are well disposed to you (you just gave them something for free that wouldn't usually be free), that will be happy to provide you with enthusiastic feedback ("This sucks. I hate this. That sucks. Why doesn't it do this? or that?") and who you can ask "how much do you think a fair price for this product would have been?". What's more you get the word-to-mouth and a group of potential "upgraders" 12 to 18 months down the line.
Frank Reiff Send private email
Thursday, August 03, 2006
 
 
Frank, that's a great response.  Thanks for taking the time to write it.
MB Send private email
Thursday, August 03, 2006
 
 

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