Don’t Roll the Dice: 4 Rules for Pricing Your Software Product

I had a pretty candid phone conversation last week with the CEO of a newly-launched software startup who told me, “we spent so much time thinking about engineering the product that we completely neglected the marketing and sales aspect of the launch.” 

But hey, when you’re in the trenches developing a product, many things tend to take a backseat to the engineering process. 

Sleep. Food. Overall hygiene. It happens. 

Sometimes this works, sometimes it gets you into trouble in a hurry. 

Most startups aren’t afforded much time when it comes to proving profitability. That’s why things like pricing need to be clearly ironed out before launching your minimal viable product (MVP).

The operative word here is clearly, as this is no "roll of the dice" as Neil Davidson puts it in his guide on software pricing. 

Control your pricing by being different

Positioning isn’t so much a marketing tactic as it is an engineering one. At its core, how is your product or service unique from the rest?

If it isn’t, you have bigger problems than pricing your product.  

Differentiation in your offering allows you to control your own pricing, as if you’re too similar to the competition, the market will control it for you. Now, your product bias probably has you thinking, “We’re completely unique. We’re not similar to anyone out there.”

If this is true, kudos. But let’s be real, there’s enough risk in starting a company in the first place, creating a new product category or market is even scarier. Chances are you'll be elbowing for marketshare at some point, so it's all about finding fertile soil that's going unnoticed. Identify your niche and position your product and marketing differently and you’ll have much more control over pricing.

Perceived Value vs. Objective Value

You’ve engineered a great product. Great. 

No one knows how great it is until they’re using it. And typically people aren’t using products they don’t perceive as valuable in some way. 

People first need to perceive the value of your product before they can experience it. 

“Hopefully their perceived value is, to some degree, a function of the objective value. If not, you’re screwing something up,” says Dharmesh Shah, founder and CTO of HubSpot. (Source: OnStartups.com)

For marketing and sales, this means focusing more on the benefits of your product rather than its features. What is it solving? What pains are you addressing? 

Before launching a product, or even in the early stages of doing so, only the engineers understand the true objective value of a product. It’s up to marketing and sales to convey this value in a way that empathizes with your audience. This directly impacts perceived value.

Customers are buying the entire experience, not just the end product. How is the user experience on your website? How are they treated during product demos? How high is the barrier of entry for people to try your product?

This is all part of perceived value. People pay more when the experience justifies it. 

Avoid Price Wars With Competitors

Engaging in a pricing war with a competitor is dangerous for two reasons:

1. If price is your only differentiator, what happens when a bigger, well-funded company comes along and decides to squash everyone on price?
2. As Seth Godin says, when you compete on price, you’re simply in a "race to the bottom.” Who can be the cheapest? Everyone loses.

As we talked about earlier, your main differentiator should be your product offering, not your pricing. As tempting as it might be, it’s better not to even go down this road, as the market response is always going to dictate the price. So if you're fully engaged in a pricing battle, the only winner (or loser?) is the one who is cheapest. 

Pricing Tiers Have Complexity 

A logical step for many early stage software companies is to (at some point) introduce segmentation into the pricing model. 

This can be great, but as Shah warns:

“Remember that this segmentation has a price — it’s not free revenue.  For example, when HubSpot went from a single price ($250/month) to two prices (still pretty simple), life got a lot harder.  All of a sudden, our marketing, sales and even our operational efforts got more complicated. The reality is that when you add a new dimension to your pricing structure, you’re adding a new dimension of complexity.”

Consider the trickle down effect, from product to marketing to sales, before making any changes to your pricing. Not because you shouldn’t do it, but because the level of complexity can be better managed when everyone is prepared. Once the process and infrastructure is in place, future adjustments are easier to manage.

Don’t wait on pricing your software product

Launching a new product can sometimes feel like a roll of the dice, but your pricing model should never be a gamble. Even in the early stages. Heck, especially in the early stages.

So focus on engineering. That’s great. It’s much easier to market a remarkable product than it is a good one, anyways. 

Just don’t neglect your pricing model, because sleep, food, and overall hygiene can (arguably) wait. 

Profitability cannot.