[danieltillett]

If pricing was as simple as "charge more” then business would be so much easier. You really want to charge the price that maximises your net present value. This is not a easy number to calculate as there are so many moving parts.

I have often wondered if there was a business in just feature copying a well known SAAS business and selling at exactly 50% the price. The selling pitch would be "identical product, but half the cost because we don’t have the massive SV overheads." I have seen quite a few examples of this in practice, but none where it is blatantly stated.

[fyfy18]

I think you missing the point. As you say there is no way to know for sure what the ‘correct’ price is for your product. One customer may be willing to pay $X and another $5X for the same features, but you need to find the number that maximises your profits across your whole customer base. As such most companies effectively just pluck a number out of the air and see what works.

Patio11’s argument is that most companies are charging a safe number that works, however that number is too low. By charging more, yes you will scare away some customers, but the customers who are concerned about price aren’t the customers you want.

In your case, say you cloned something like SendGrid and charged half the price. Their big customers like Airbnb or Uber effectively don’t care how much an email costs to send, they just want to guarantee that it is sent. So if you manage to score a customer like that, you are leaving a lot of money on the table.

On the other hand, the customers that do care about price are likely going to be lower quality, maybe they are sending bulk newsletters which if marked as spam will damage your company (as your IPs will end up on blacklists) - meaning more work, and more cost, cleaning up their mess.

[danieltillett]

Yes there is a way of knowing what is the correct price and it is the one that maximises your NPV. The fact that many times companies charge too little does not change the fact that there is an optimal price. It is not found by just increasing your prices. You need to treat pricing like the hard problem it is.

I tend to think the mantra of charging more has gotten a little too popular and I suspect that many companies are now charging too much.

The big customers like Airbnb and Uber very much care how much it costs to send emails. The most price sensitive customers are the largest and they will try to screw you down on price much harder than smaller customers. When you are sending a billion emails the price per email is much more important than if you are sending a hundred.

Taking your example, there is no reason to think that charging less would result in more spammers using your service provided that you maintained equivalent quality controls. Spammers are probably the least price sensitive mass email customers as they are professionals who are most concerned about deliverability and ROI.

[melvinmt]

> You really want to charge the price that maximises your net present value.

This goes both ways. You can definitely also increase net present value by pricing higher as long as value > price. Even better would be to create segmented/dynamic pricing that would maximize value capture up and down the demand curve.

If the market pricing is apparently so inefficient that a lot of potential value on the high end isn’t being captured (in economics speak we call this the consumer surplus), then this means there is also potential for arbitrage on the high end. Clone any service and charge 4X!

[danieltillett]

Yes that is certainly another approach to take. Same service at 4x the cost so it must be better.

Probably a more useful approach to take is for the original service to do this - set up your own competitors and see where the customers go. This approach is pretty common in the non-SAAS world.

[rrcaptain]

Why only charge 50% though? You only need to lower the prices to the point where the alternative is less desirable. That being said the point about getting lower quality customers remains.

In my personal experience, I once chose a host for a game server for my friend group because it was by far the cheapest option. However, one day with only a couple hours warning the host shut down. I didn't even have a chance to download a backup. Had I been running a for-profit server, my entire business would have vanished overnight and choosing the cheapest option would have shot me in the foot. Often paying more is worth the guarantee that stuff you depend on won't vanish overnight.

[danieltillett]

50% was just an example, but it has a nice round number about it that makes a compelling pitch. The key to making this idea work is to have much lower costs so that quality of the service doesn't suffer.