Setting a price for your product is one of the most important decisions a software company can make.
I recently had the opportunity to discuss pricing strategies for developer companies with Heavybit investor and advisor Michael Dearing. Dearing is the founder of Harrison Metal and an investor in several developer-focused companies, including Heavybit member companies, PagerDuty and CircleCI. He is an expert on making products from emerging technologies, going-to-market, product marketing and pricing.
Perceived Value Must be Greater Than the Price
Perceived value is the gap between price and how much value your customers think your product delivers. When perceived value is greater than price, buyers will buy.
“For developer companies, the variable cost of producing the product is often low, making the perceived value tough to communicate.”
To combat this, companies should market the true economic value of the product. One way to do this is by calculating the total cost of the customer’s next best option — devoting valuable, talented people to a home-grown solution, for example. Another option is to emphasize the time-to-market advantage. By highlighting time savings for your development teams and faster time to market, perceived value will increase.
Diversify Your Offerings
Offer multiple versions of your service where the entry-level version has fewer features than the middle or premium version. Good, better, best assortments are an old idea that works. The most expensive version should represent what your brand aspires to.
“Customers value features differently and some who don’t see the value in that high-end version might be willing to pay less for a stripped-down model.”
For software tools, one option is to offer different numbers of users or varied number of features which allows for the product value to increase with minimal additional cost.
Offer à la Carte Upgrades
Even in a data-driven economy, it is difficult to predict customers needs. In addition to offering different versions of your product, allow users to add features à la carte. This will result in real-time feedback about price and product. It may also allow your company to expand your addressable market by picking up customers you might otherwise miss.
Do the Math for Your Customers
Spell out the value of your product with analytics.
“Developers’ time and productivity has never been more valuable, and the biggest levers for developers’ success is their tools.”
Spell out how an investment in tooling correlates with productivity, time savings and boosted efficiency. Perceived value goes up when you do this.
Iterate Pricing Like Any Prototype
Be comfortable changing the pricing of your product. Pricing is a prototype and can be changed.
Be sure to check out Dearing’s Heavybit talk for more information on pricing your product.