Pricing Science

Seth Levine provides some very sound thinking around pricing determination and models. Seth is a managing director at the Foundry Group, a Boulder, CO-based VC specializing in Internet Software companies. He's flanked by some pretty incredible partners, a la Brad Feld, so his words have credibility from my perspective. 

http://www.sethlevine.com/wp/2010/08/pricing-models-the-freemium-myth-and-why-you-may-not-be-charging-enough-for-your-product

Nugget: "...most companies vastly overestimate their prospective customers’ ability to understand the features of their product (thinking the value of each feature is self evident). It also complicates the buying process as prospective customers try to figure out how much of each of those great features you’ve developed they want, and doesn’t create clear delineations between pricing tiers."

I'm a fan of KISS in most things, especially pricing. We've recently revamped our product pricing at Qualtrax. I hope this makes more sense for our prospects to understand.

I'm a fan of packages. I like to feel like I have some levels and modules that I can decide upon initially, upgrade to, or add later. It makes sense. I also like to pay for what I use - the notion of pay-by-the-drink instead of open bar. This is easier to facilitate through SaaS model where you can remotely control accessibility and measure usage.

In terms of price sensitivity, especially in early markets, it's a toss-up.  I believe you should give early-mover advantages to first adopters.  This should include a large services package to help them customize the tools and to also ensure they get-out-of-it what they expected or more.  As the market matures and moves toward a more predictable demand, stabilize your discounts and learn to close the loop from market feedback.  If your saving $100K/year for your customers - then price your software based upon perceived value and ride that as central to your value proposition, messaging and positioning.  If you want to quickly grab market share in an untapped less developed industry vertical, then price it aggressively and develop staged add-ons and additional modules to capture more revenue and offer up more software or services that help you realize long-term goals and pay for the initial market discount.

What do you think?