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Andy Brice
Successful Software

Doug Nebeker ("Doug")

Jonathan Matthews
Creator of DeepTrawl, CloudTrawl, and LeapDoc

Nicholas Hebb
BreezeTree Software

Bob Walsh
host, Startup Success Podcast author of The Web Startup Success Guide and Micro-ISV: From Vision To Reality

Patrick McKenzie
Bingo Card Creator

Is it OK to differentiate by pricing?

I am trying to decide on pricing for the upcoming product (test automation tool for Flex).

There are existing competing products which cost many thousand dollars. These are sofisticated QA tools for large enterprises.

My plan is to price our product significantly below $1000 and target it to small bisinesses. Of course feature-wise our product will be also much simple so strictly speaking the differentiation will be both by price and feature set.
TN Send private email
Saturday, December 08, 2007
I definately think there is a place in a lot of markets for less sophisticated, cheaper applications.  Just make sure you aren't missing key features that actually make the product useful for most people.
Saturday, December 08, 2007
Differentiating by price in the enterprise doesn't work, with the exception of if you can price cheaply enough that companies can buy with their credit card and skip a significant purchasing hassle.

What I would do is find a way to look like a completely different niche so you're not even competing.
Philo [MSFT] Send private email
Saturday, December 08, 2007
> with the exception of if you can price cheaply enough that companies can buy with their credit card

What price point is that?

> Differentiating by price in the enterprise doesn't work

In startups where I've worked, a few $1000 per seat is (and I don't know why, compared with the cost of salaries) seen as too expensive for any but the most essential tool.

Perhaps that implies an opportunity for tools which compete by the most important fraction of the expensive tools' functionality, and a tenth of the price?
Christopher Wells Send private email
Saturday, December 08, 2007
Sure, why not.  If you walk into a store, and go to buy ... almost any food or cleaning product ... there is the "brand" version (priced at 1X) and then there is an off-brand version (priced somewhere between .4X and .9X).  If you're not too careful, you'll find out that many of the "brand" versions are the exact same company (the horrors - I know, I know).

Milk has always been my favorite.  Almost identical products lining the shelves, and in many cases, the same distributors .... which one do YOU buy?

That being said, remember that your product has to have the "key" features that make up the core of your target audience.  If the off-brand milk was actually water, no one would buy it, regardless of the price (nevermind that water costs more than milk in some quantities).

Also, once you launch with a "cheap" version, it's going to be hard to shake that stigma.

Southwest airlines launched as a value player (hey, they get you from point A to point B which is what 80% of the target demographic wants anyway - I don't care about the "meal" or seating arrangements).  Can you imagine them trying to rebrand themselves as targeting the "Delta" audience?

Besides, it's often easier to take an existing product, grab the key features, be a sleeker organization / faster development / better customer service, and copy what your competitor is doing, than it is to be innovative (not all of us are so brilliant to be innovators).

..... But make sure that your product does the 80%.

And hey, quit copying my product :-)

Contrary to everything I just said, if you price your product TOO low, you'll get disbelief of your claims rather than adoption of your product.  Buyer beware the $39 vacuum that does everything the $500 vacuum does.
Anthony Presley Send private email
Saturday, December 08, 2007
Go for it. I work for a large corporation, but I still look for lower priced items. Anything under $1500 can be bought with a purchasing card where I work.
Saturday, December 08, 2007
> the differentiation will be both by price and feature set

I'd guess it's OK, i.e. possible, but not sufficient:
- You still need to market it, i.e. people need to be able to find it
- And I'd guess it's better if you have something positive (not simply non-negative) to sell, e.g. "EASIER TO USE *and* cheaper".
Christopher Wells Send private email
Saturday, December 08, 2007

Just make sure not to price yourself too low. You will see that there isn't a huge difference in the number of people (or companies) that would buy a product for $199 and $999. But to make up for the reduced price (5x cheaper), you'll need to get 5 times more customers. That's a tough one.

For corporations, I'd say if you are below $200, it can be purchased directly by an end-user and put on a monthly expense report, skipping the complex approval process.

But I'll stress again a point that someone else made already: if you are too low, people won't believe that your product is any good.

Think outside the box. Is there anything you can offer your customers, so that the total purchase price would be similar to your competitor ($1000)? For instance, multiple user licenses, or some kind of bundle so that if the company was going to spend that kind of money anyway, they'd choose your product instead? From your point of view, you'd have made an extra $800, for which you could give them something of value (ok, maybe a free iPhone with each purchase is not the best way to go).
The FairSoftware Guy Send private email
Saturday, December 08, 2007
Don't compete on price! you will price yourself out of the market. This is however twofold. Cheap prices creates the perception of cheap / lax / crappy support and service delivery.
An analogy will be VOIP. A lot of major providers compete on price but all you have to do is a simple search of user reviews.
The cheapest priced providers (who happen to be the major ones like Vonage for example) have the lowest customer feedback ratings on service delivery.
The "not to price competitive" providers have the best ratings (Vonage alternative Unia Telecom) for example.
So you need to ask yourself where you want to be on the board.
Same goes with Enterprise software. Some very well engineered applications are so low priced that they're not taken seriously at all, while the high priced "bloated" enterprise apps that always require 24/7 support are so high priced they're percieved to be the best out there..e.g. SAP.
So think about where you want to be on the spectrum.

Adrian Send private email
Saturday, December 08, 2007
Take the highest price competitor and the lowest price competitor, and price your product 3/4 of the way between the two (at the higher end). Just have most of the important features, and implement them reasonably well.

This is a brown system (brown as in numbers) but it seems as good as any other. Customer expectations won't be too high but you'll still be reassuringly expensive.

And you'll make lots of free money.
Saturday, December 08, 2007
"costs more than milk in some quantities"

People always say this, but drinking water costs 59 cents a gallon with the plastic jug, 25 cents if you bring your own.  Milk is running $7 a gallon now, or $4 a half gallon.

For drinking water to hit that price, you have to buy a half-pint of it in a fancy blown glass container.

Milk isn't available at a half-pint in a fancy glass container, but if it was, it would be priced above the fancy water in the same.
Sunday, December 09, 2007
"I work for a large corporation, but I still look for lower priced items. Anything under $1500 can be bought with a purchasing card where I work."

Congratulations for finding a company that has a brain!  Some companies require the "approved vendor" process for a single copy of a $50 software.
T. Norman
Sunday, December 09, 2007
Thanks for replies.

The price differential will be huge in my case: by a factor of 10 or more. So I think I am actually going to address a different market niche and I believe that niche does exist.
TN Send private email
Sunday, December 09, 2007
Pricing can be a tough game to play.  Have you done market research to know if you can pull this off?

QA tools are NOT a high volume business.  Will dropping the price really get you customers?  Are they there?  How will you reach them?

Can you offer customers support with sub-industry pricing?  Can you hire good engineers with sub-industry pricing?

Going after small businesses means your market will be incredibly fragmented.  The smaller the shops the more points of contact you will need to handle. (After all you will need more customers than the next guy to make what he is making.)

Have you thought through all of the angles?
Itchy Rash
Monday, December 10, 2007
Itchy, all good questions.

Do I have the answers to all? No. But I guess I will find out soon.
TN Send private email
Monday, December 10, 2007
Price is a differentiator when the product is a commodity. When all things are equal, the cheaper one will win.

However, what you are selling is not a commodity. Price doesn't come into the evaluation except at the end.

Price your product according to the value it brings your customers, not for "marketing" purposes. Lower prices will not bring you more customers, just lower profits.
Cyclops Send private email
Monday, December 10, 2007
Tomorrow is the three-year anniversary of a great post Joel made on this very topic:

Patrick Foley Send private email
Friday, December 14, 2007

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