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Ask HN: How to Price a Product
137 points by imvetri on Aug 11, 2024 | hide | past | favorite | 68 comments
I'm 11 years experienced software engineer. I have been showing interests in frontend design and development and my day job is around it.

I built a working concept that converts designs to interactive code. However, the tech is not usable at this stage, no documentation and looks bad, but works as expected.

I'm aware of selling services as SAAS. I'd like to sell the tech as a product containing a software, product manual, usage instructions with samples.

The target users are designers, initial feedbacks were some points to address and they are curious and interested.

Having said that it's not SAAS, not subscription based, I'd like to know how to put a price on it as a product.



If you have access to target customers (hopefully you do), I'd recommend a short questionnaire using Van Westendorp's Price Sensitivity Meter [1]. I've had success using it in the past, and you only have to ask four questions:

1. At what price would you consider the product too expensive?

2. At what price would you consider the product too cheap (low quality)?

3. At what price would you consider the product expensive enough to make you nervous?

4. At what price would you consider the product to be a bargain?

You can then graph the results and pick the optimal price (for starting, at least).

[1]: https://en.wikipedia.org/wiki/Van_Westendorp%27s_Price_Sensi...


In https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2020.360..., assuming the demand curve slopes downward, a quite reasonable guess as to the optimal point on the demand curve is ([Max willing to pay] - [marginal cost])/2.

So if doing the market research here in this post, #1 in your above list is the main thing. You want to find the reasonable upper bound before the demand goes to 0 on the price curve.

For one time sales, like in this scenario, it is a fairly simple way to price things.


Marginal costs makes no sense for software…

Neither does it in most aspects of modern economies BTW, as it's zero or very small almost everywhere on the supply curve except in local places when the business is at capacity, and then the marginal cost is ridiculously high locally before returning to zero.

Economics are really the only domain where someone (here Maurice Allais) can receive the “nobel price” and then see his results completely ignored later on, it will never cease to amaze me.


There is quite a lot of software (mostly in B2B market) that has a very high marginal cost, where the cost of doing sales and customer-specific customization can easily dominate the fixed cost of making the pre-sale software.


- what you're talking about here isn't software, it's consulting service and (at least in all companies I worked with) this is usually billed separately from the software license itself (Edit: now that I'm thinking about it, in fact this is even mandatory in my country because of accounting rules: you can do amortization of software cost but not of service cost so you have to bill them separately, and I'd be surprise if such rule was unique to my country actually given that many countries have rules about amortization of software investments)

- if you end up with a recurring license afterwards (which is what were're talking about here because SaaS works this way) then it's not even marginal cost, it's a fixed up front cost and then you have a stream of revenue. You know it's fixed costs because you don't have to pay it again when you're billing the customer for the second year. Same if your license includes a per-seat/per-CPU price.

And the problem with the idea of “marginal cost” is that in practice almost every cost is a fixed cost.

For instance, let say you have two guys that are dedicated to the customization of your product per client. You call this customization “marginal cost” but in reality it's fixed cost, as their salary is due whether or not you have a customer's product to customize this week.

And I'm not being original here, as I said it's straight from the work of 1988 econ Nobel prize Maurice Allais.


It's not always clear cut when configuration ends and when custom code starts.


But we do bill configuration time.

Customer acquisition cost at least ticks the box of being a net expense, but it's still a one time cost.


Why does it subtract the marginal cost? According to the formula the more it costs to make the product (per customer/sale cost) the cheaper you should sell it.


I assumed they meant “+” (and that's indeed what's in the paper) which is “split the difference between max customer price and marginal cost”, but that doesn't seem particularly insightful nor worth writing a “research paper” for that… (I'm always baffled how low the bar is for submission in econ journals).

B basically any economic reasoning around “demand curve” and “marginal cost” is meaningless in real world situations.


Yes it should be a "+", thank you.

Just because marginal cost for software can be close to zero in some circumstances does not make demand curves meaningless!


Demand curve is meaningless because humans don't have a stable and rational assessment of the price they would accept to pay for something (that's why having pretty hostess and expensive packaging are a thing) and this price also depends on many contextual factors: you're OK to pay much for for a glass of Coke in a fancy restaurant that you would accept at Mc Donalds, and a business values a piece of B2B software very differently depending on at which point we are in the fiscal year.

The so-called demand curve is as useful for a business as a population-wide heartbeat distribution would be. It makes no sense to talk about “the” curve, since it changes all the time!


doesn't that slope imply monopolistic markets?


Noticeably, this is geared around the customer (rather than your costs)! This is the right way around. Then if the price doesn’t cover your cost, you don’t have a business.


This is my preferred method of understanding price sensitivity, and I use it frequently in my work helping clients find the right price.

Be advised, a prerequisite is having trusted camaraderie with the prospective customer. By which I mean, dont open with these questions…. You nay need to wait for the second conversation to ask them, having used the first conversation to build the trust.

Happy to discuss further


Instead of "nervous", I would lean towards hesitant.

The actual question is: "At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?"


Interesting, a questionnaire with 4 questions might be a naive methodology.

I would design the experiments so that one customer only answers one type of question, and they wouldn't even know they are being part of the experiment.

For example: yesterday I bought a coffee, and the price seemed too high, I asked the cashier if they were sure, that the price wasn't right, and that I would like to cancel the purchase.

It turns out she had wrongly understood I wanted 2 coffees, but if this is an experiment you can replicate, and train staff to do this once or twice per day, you've got a distributed and blind trial that doesn't rely on predicitons of subjects of their own perceptions.


Many years ago, Fog Creek Software (actually Joel Spolsky) published a blog showing results of a similar experiment: price vs demand, where price of a certain population fluctuated naturally due to exchange rate fluctuations. There are more posts on price sensitivity in their archive.

https://www.joelonsoftware.com/2007/04/24/deriving-your-dema...


OpenAI used this when they launched ChatGPT. I recall answering these questions.


The book Monetizing Innovation, to me, has been the smartest approach to pricing I've encountered: https://www.amazon.com/Monetizing-Innovation-Companies-Desig...

Basic idea is that you should design the product around the price. Do price discovery before you do anything else.

Podcast ep here: https://www.youtube.com/watch?v=A6veeCbKIzw


Great point.

Reminds me of a SaaS product I was brainstorming some time ago.

Two guys came up with an idea for a niche product they could push to clients using their network. The first and foremost thing they mentioned was the price. It will cost X, charged monthly, we can sell it to Y clients in few first months, and the market depth is Z.

We did a napkin math and started from that.

Why X? Because that was the highest price an average HR dept could pay out of their own pocket without asking higher ups for a sign off.


Price first!! Yes. Price is a key feature!


https://personalmba.com/4-pricing-methods/

This reference book is great, and makes the case that there are roughly 4 broad types of pricing strategies:

1. Replacement cost: How much would it cost to replace/build from scratch?

2. Market comparison: How much are similar products/services selling for?

3. Discounted cash flow / net present value: How much money will this make for the customer in the future discounted to today's dollars?

4. Value comparison: How much 'Value' is the product worth to the customer?

So, the 'Value Comparison' can usually support a much higher price than the replacement cost, market comparison, or DCF. It's worth learning just how 'Valuable' the product/service is to the customer.

The personal mba has a section outlining how customers typically 'Perceive' Value.

https://personalmba.com/perceived-value/

The most valuable offers do one or more of the following:

1. Satisfy one or more of the prospect’s Core Human Drives

2. Offer an attractive and easy to visualize End Result with clear economic values.

3. Command the highest Hassle Premium by reducing the time, money, and effort the customer has to spend getting value from your product.

4. Satisfy the prospect’s Status Seeking tendency by providing desirable Social Signals that help them look good in the eyes of other people.

Good luck!


Imo all pricing comes down to value, cost, and market.

Value (being how helpful is it to the customer) sets the upper bound.

Costs (what it costs you to run or make) sets the lower bound.

Though my product is a SaaS (https://dopplio.com) I think the process is similar:

We started with the price of alternatives solutions as well as competitors, and realized we could offer 1/10th the price of both while being sustainable.

So we started there and adjusted up a little as costs ended up being a bit higher than expected.


Just tried your product. It's brilliant. 10/10. Super easy to understand – just wish your explainer video actually used the product instead of being those cheap caricature videos :-)


Appreciate it!

We wanted the video to explain the concept moreso when we started b/c that's what users seemed to have trouble understanding

But perhaps we need to update it as this has become more common

If you ever want a demo just book on the site with me!


Might want to tighten up the vertical spacing between sections on small screens


Good call -- I think the whole site needs a redo in general w/ more use cases!


Sell your product on a "pay once" model like https://shipfa.st/ which made this product a total success.

Price your product less costly and increase the price in batches when the product crosses a certain number (1-100 customers for $49, 101-500 customers for $99 and so on).


> which made this product a total success

This might be a good suggestion, but I think the success of that specific product came from being made by a popular developer with hundreds of thousands of followers and subscribers, not from the pricing model.


And are you suggesting to first build an audience that takes years to build and then use this pricing model?

This is not the only product that made this product super successful, the others are quite expensive so I didn't care to share.

Users are getting fed up with the tiered pricing model and are less hesitant to opt for the "pay once" model. Having a huge audience is one thing, SEO is essential for not so popular developer.


Having an audience is a key first step. If the product/service isn't "done" yet I'd spend time on audience as a priority over features and pricing.


It takes years to build an audience, but with simple marketing you can build your audience in days/weeks/months e.g. how a story on "The Verge" helped https://bananabin.app/ cross the 5000 order mark in less than a week.


I've tried selling products to developers and its really tough because everyone out there expects it for free. I suspect the only way to make it work is to make it free for a while until it gets enough adoption then you can license for corporate usage while still free for most people.


There are a few factors I consider.

How many hours will this save my users, how much competition there is, and where they live.

Take for example my pdf converter site https://www.pdf.to, can't charge $100/m for this even if it was to save hundreds of hours to users given that the niche is more of a commodity at this point and full of competition, so the price has to be around $7/m to be competitive.

But even that is too much for someone if they aren't in the US so localized prices are a must as well, since its unlikely someone in Vietnam would view $7/m as reasonable the price there is closer to $2/m.

But someone in Denmark might view $7/m as too little due to their exchange rate so for them it's closer to $10/m


just curious, approx much does this earn?


Between all the .to's a few k a month


Well done!


Assuming you want to maximize income (and in turn, profit), this becomes a math problem based on data. Income = Price * Conversion Rate. So assuming a constant number of people coming in to your funnel (which should be the case since it is ~independent of price), you can keep increasing price (which likely decrease conversion rate, but not always) until Income goes down. To start, you don't know conversion rate, so set price very low (0 is a good start for a few reasons), and every N sales, increase it by 20% until income stops going up.


I get the point you're making, but I can't resist pointing out that if you start with 0 and increase regularly by 20%, you'll still always be at 0.


Yep - obviously corner cases are left up to the reader! The other way to think about this is to work backwards from your guess of a final price. So that would give you the size of each step. Likewise 20% is a pretty random number and can also be tuned. The key insight is the data and math should drive the decision.


A few questions you should answer:

1. Who would you ideally like to sell it to? I know you said designers, but the question is - are you selling it directly to them, or to companies that employ designers or a design team? Selling it directly versus through an employer is different economics.

2. If you were buying the software as an end user, what would YOU consider fair value for it? Are you going to be putting in lots of time to continue developing the software, or is this a side hustle, or just a "hey buy this tool and you'll like it, it does XYZ really well and that's it, but I can't continue to build it myself" sort of thing? Ask yourself that, and price accordingly to make sure that this is a worthwhile venture for you.

3. What's the market for similar competing products? What do they sell for? If they are SAAS or subscription based, what is the lifetime value for a given user or customer? Do they rent the SAAS for a month (or for a specific task) and then unsubscribe? Or is this a tool to boost a designer's daily output that will simply integrate into their workflow? If so, see if you can understand HOW it boosts a workflow in terms of pure output, and then work backwards. If your product saves a designer 1 hour of time each day, and they use it each day, that should be a good indicator of where to start.

4. Are you competing against free software?

These have probably been echoed verbatim but just my $0.02.


You may consider starting with what you consider to be a reasonable price and doubling the price for every subsequent customer until they start to churn during pricing discussions. This is particularly useful if you’re doing B2B sales, less so if you’re putting the price on a landing page.


For that I can recommend Don't Just Roll the Dice by Neil Davidson:

https://www.red-gate.com/library/dont-just-roll-the-dice

It's free, short and easy to read.


https://www.joelonsoftware.com/2004/12/15/camels-and-rubber-...


Interest thing, nobody said about price fork. What mean, anyway you will see customers, who need something special and could pay for it, and others 80% who will be satisfied with some standard functions list and 10% who will just dissatisfied and flee away.

So, simplest is to make product or service for 80% most probable clients (Henry Ford), even make it slightly limited, even try strip some functions and make some gentle pressure on clients, and make significantly more expensive offer (at least 50%) for people who need customization, and once you will see, people will demand add stripped functions, this really mean, they need those functions for these money.

Sure, you cannot strip functions if exists strong competitors on market, so you need some strategy to first become most powerful on market.


The beginning of every startup is people who value their time at zero. That is you right now.


Are you saying I'm not valuing my time or starting to value my time?


What does it mean. Could you explain


What was the cost to develop "a working concept that converts designs to interactive code"? Zero right? Because it was just you, and you value your time at zero.

You can't "just" "value" your time more than zero. Did money go from a bank account into your pocket to develop this? No right? So it is zero. Do you have to pay rent and food either way? Yes, even if this weren't developed. So you value your time at zero. There's no psychological trick here. This is fine.


Lots of great questions already raised. A few more:

- Are YOU wanting to make most of the money on this item, or on later upgrades? Or on building an entire company on the ecosystem or method?

- Are there weird payment barriers on the customers (like, they are allowed <$XX to be reimbursed, or $XXXX on dept budget with no further approval, Or XX at the end of the budget cycle in a spend it or lose it fashion, etc - see several HN threads on these things.)

- For corporate purchases, selling a product WITH support can be much easier or worthwhile for the customer. And support worth as much or more than the initial box. How will support work?

- Different pricing issues in different countries or for different versions?


At NeetoCal(https://neeto.com/neetocal) I'm offering as much free as possible. The free users help me understand if there is product-market fit or not. If the users want certain features then they let us know and we implement them.

If I put pricing day one then I'll miss out on all the feedbacks. Of course it all depends on how dire you have the need for money. NeetoCal doesn't need money immediately since the consulting company is there to provide the revenue.


Whatever price you put, you will get it wrong the first time.

Make an educated guess (maybe informed by your competition), and test raising and lowering it over time. Make sure you have a tier of pricing that gives people the chance to pay you a lot of money in exchange for additional value you can provide.

Talk to your customers and understand who they are and have that inform the types of tests you do or tiers of pricing you can offer.


As much as you can while users still buy it.

If you sell it cheap - you'll never know if users bought it for real value, or just out of curiosity/scarcity.


You could ask a set of potential customers what it would be worth to them.

You could calculate the cost savings that your tool provides to their buyers, and charge a little less than that (e.g. 20%).

You could look for similiar tools than yours (not direct competition - interpret similarity broadly here), and price by analogy.

The best pricing practice might be if you combine the three above, and they give roughly similar estimates.


In 2024? you anchor!

You make the tool convert to brainfuck for 9.99 and for 39.99 you can also have C. For everything else it's a 9.99 extra/month, except JS. You make JS (replace JS with the main language you're targeting) available only as part of a bundle at 29.99 extra/month but only if they've already got the 39.99 option.

There, priced.


In 2024? you anchor!

What does it mean


Anchoring is a pricing technique. This search term is more likely to return good explainers.


Start with reading Alex Hormozi’s $100M Offers.

You’ll gain wisdom in a few hours that takes most entrepreneurs decades to cultivate.

Basically you need to see pricing as just a single variable in the offer equation with the goal being to craft the perfect overall offer and not just focus on price.


https://www.amazon.de/100M-Offers-People-Stupid-English-eboo...

Will check it out. Thx.


Positioning (who it’s for), marketing and sales at a certain price are some of the hardest parts of business.

There’s a few good books that you might like.

Forget the funnel, founder led sales.


If you don't have any relevant experience, an easy way to do this is to refer to similar products and see how they are priced.


Personally, I’d focus on getting users first and building out the value. Throw a ‘beta’ label on it and get it out there.


Pricing is always difficult for me too.


You should use yourself as the customer: you ask yourself how much you're willing to pay for the product.


Price it as high as your users are willing to pay.


When they complain, but still pay, the price is right.


The Accounting Equation values your business:

  Asset Value = Equities + Liabilities
Accounting Equation: https://en.wikipedia.org/wiki/Accounting_equation :

  Assets = Liabilities + Contributed Capital + Revenue − Expenses − Dividends

  Revenue - Expenses
Cash flow is Revenue.

Cash flow: https://en.wikipedia.org/wiki/Cash_flow :

> A cash flow CF is determined by its time t, nominal amount N, currency CCY, and account A; symbolically, CF = CF(t, N, CCY, A)

Though CF(A, t, ...) or CF(t, A) may be more search-index optimal, and really A_src_n, A_dest_n [...] ILP Interledger Protocol.

Payment fees are part of the price, unless you're a charity with a donate processing costs too option.

OTOH, though there are already standard departmental accounting chart names:

  price_product_a = cost_payment_fees + cost_materials + cost_labor + cost_marketing + cost_sales + cost_support + cost_errors_omissions + cost_chargebacks + cost_legal + cost_future_liabilities + [...]
A CAS Computer Algebra System like {SymPy,Sage} in a notebook can help define inequality relations to bound or limit the solution volume or hyper volume(s)

And then unit test functions can assert that a hypothesized model meets criteria for success

But in Python, for example, test_ functions can't return values to the test runner, they would need to write [solution evaluation score] outputs to a store or a file to be collected with the other build artifacts and attached to a GitHub Release, for example.

Eventually, costs = {a: 0, b: 2} so that it's costs[account:str|uint64] instead of cost_account, and then costs = ERP.reports[name,date].archived_output()

Monte Carlo simulation is possible with things like PyMC (MCMC) and TIL about PyVBMC. Agent-based simulation of consumers may or may not be more expensive or the same problem. In behavioral economics, many rational consumers make informed buying decisions.

Looking at causal.app > Templates, I don't see anything that says "pricing" but instead "Revenue" which may imply models for sales, pricing, costs, cost drivers;

> Finance > Marketing-driven SaaS Revenue Model for software companies with multiple products. Its revenue growth is driven by marketing spend.

> Finance > Sales-driven SaaS Revenue > Understand sales rep productivity and forecast revenue accurately

/? site:causal.app pricing model https://www.google.com/search?q=site%3Acausal.app+pricing+mo...

- Blog: "The Pros and Cons of Common SaaS Pricing Models",

- Models: "Simple SaaS pricing calculator",

- /? hn site=causal.app > more lists a number of SaaS metrics posts: https://news.ycombinator.com/from?site=causal.app

/? startupschool pricing: https://www.google.com/search?q=startupschool+pricing

Startup School Curriculum > Ctrl-F pricing: https://www.startupschool.org/curriculum

- "Startup Business Models and Pricing | Startup School" https://youtube.com/watch?v=oWZbWzAyHAE&

/? price sensitivity analysis Wikipedia: https://www.google.com/search?q=price+sensitivity+analysis+W...

Pricing strategies > Models of pricing: https://en.wikipedia.org/wiki/Pricing_strategies#Models_of_p...

Price analysis > Key Aspects, Marketing: https://en.wikipedia.org/wiki/Price_analysis :

> In marketing, price analysis refers to the analysis of consumer response to theoretical prices assessed in survey research

/? site:github.com price sensitivity: https://www.google.com/search?q=site%3Agithub.com+price+sens... :

As a market economist looking at product pricing, given maximal optimization for price And CLV customer lifetime value, what corrective forces will pull the price back down? Macroeconomic forces, competition,

Porter's five forces analysis: https://en.wikipedia.org/wiki/Porter%27s_five_forces_analysi... :

> Porter's five forces include three forces from 'horizontal competition' – the threat of substitute products or services, the threat of established rivals, and the threat of new entrants – and two others from 'vertical' competition – the bargaining power of suppliers and the bargaining power of customers.

> Porter developed his five forces framework in reaction to the then-popular SWOT analysis, which he found both lacking in rigor and ad hoc.[3] Porter's five-forces framework is based on the structure–conduct–performance paradigm in industrial organizational economics. Other Porter's strategy tools include the value chain and generic competitive strategies.

Are there upsells now, later; planned opportunities to produce additional value for the longer term customer relationship?

When and how will you lower the price in response to competition and costs?

How does a pricing strategy vary if at all if a firm is Bootstrapping vs the Bank's money?

/? saas pricing: https://hn.algolia.com/?q=saas+pricing


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