Choosing a Pricing Strategy

Product Business

This week I'm headed to WordCamp US (#WCUS) and will see folks that I haven't seen in a couple of years. I stepped away from a full time focus on WordPress about 18 months ago, and I'm excited to circle back and see so many friends in a single event. I'm not speaking, sponsoring, or doing anything official. So maybe my only contribution this year will be this post helping product folks in the space think about their pricing strategy.

Pricing Strategy #1: Starting Free or Really Low

One of the most common strategies for pricing software products is starting with a low-cost (or free) offering, with a plan to monetize later. When you choose this strategy, you're looking for quick and early adoption. After all, why wouldn't someone want a product when the price is free (or really really low).

Advantages & Examples

In the WordPress ecosystem, for example, you see lots of folks create new products and put it on the repo. The strategy is to get someone to download your product, fall in love with it, and then become so dependent on it, that you would consider upgrading to a premium version.

Yoast is an example of a freemium product that pulled in a huge following for a free product. Elementor is another. This strategy also allows you to gather feedback, refine the product, and truly get to know the market (your “customers”).

When you go this route, you also can benefit from rapid user adoption and a potentially viral effect of word-of-mouth distribution.

Challenges of a Freemium Strategy

Of course, this strategy isn't perfect. It brings challenges as well.

The biggest challenge, in my opinion, is that product developers spend so much time trying to build large communities around their free products that they keep throwing new features into their free product. The challenge is having a plan for what will be a premium feature. If you wait too long to figure this out, you'll define a feature that few will need or want.

Imagine building a product, adding a ton of features, and then having millions of free customers and only a few that are paying for the premium version.

And those millions of free customers? They represent the second challenge. Supporting them all – for free. That can be a very expensive proposition.

The other big challenge with pricing strategy is the entitlement that comes with it. People who embraced your free strategy can get really angry when you start charging for a few premium features.

The last note on this approach is that anytime you choose the free or low pricing strategy, you also have to deal with a potential perception that you're not a serious alternative for serious people. I'm not saying it's true. I'm simply stating that it's a real dynamic for some product owners.

Pricing Strategy #2: Premium Price & Moving Lower Later

I'm current writing you from my fourth stay at a Wander property. These are incredible properties (with great workstations and really high speed internet) but they come at a price (typically $500-$1000/night). They only have 20 (or so) properties. They target information workers that are looking for a consistent, luxury-oriented option.

Advantages & Examples

I'm highlighting Wander as a perfect example of the opposite strategy than the first one we looked at. They generate higher revenue per person and per stay. And they drive a high value in terms of brand perception.

And while you may not have heard of Wander, you clearly have heard of Elon Musk's Tesla. Their strategy with the S and the X? Charge a premium and then move lower later (with the 3 and Y).

A few years ago I started working for a host that was entering the “Managed WordPress Hosting” market long after others had created it. Instead of charging $19 a month, we started at $100/month for a 10 site plan. Considering that there were players charging $4.99/month for a Managed WP plan, we were starting at 20x higher.

We were able to grow to a $3MM/year run-rate in no time. That's not massive, but it's also much better and faster than you would imagine the 11th entrant in the market to make. Like Wander, the strategy wasn't to get massive numbers of unknown customers. It was to generate higher revenue per customer.

After a couple of years, and the acquisition of Nexcess, we shifted to a lower priced offering (from $20-50/month). I'm no longer there, but my guess is that the adoption curve followed what most people see when implementing this strategy. More customers, but lower average revenue per user (ARPU).

The good news is that it's often easier to know what to “take away” as you shift to lower-priced offerings, than it is to figure out what to charge more for. And you don't deal with the entitlement that I referenced before.

Note that I'm not discussing a different “Premium” pricing strategy of targeting enterprise customers. That's a different strategy with a much longer sales cycle and often a complex sales process (with high expectations).

Challenges of the Premium Strategy

The biggest challenge of this premium pricing strategy is slower adoption. When you're giving things away for free (or really low price), it's easier to get your first 1000 customers. Mind you, I'm not saying it's easy. I'm saying it's easier than when each of those customers has to pay you real money.

What makes this a harder strategy is that you also lose the benefits of the word-of-mouth marketing we talked about before. Since people aren't raving about an incredible product that's free, you have to get your brand out there in other ways. Often that means you have to spend even more money on marketing (ads).

You also have to deal with free competitors. Gravity Forms is known as the original premium form plugin in WordPress. They're an incredible product that has been in the market for years. But their premium price strategy opened the doors for a free form plugin called Ninja Forms.

Choosing a Pricing Strategy: 10 Questions To Answer

How do you decide which approach is the right one? As you can guess, it's completely dependent on you and your specific situation. But here are the ten questions that I think will help you get to the right answer for you.

  1. Is your product “must-have” or “nice-to-have”? If your product is must-have, give the premium strategy a strong consideration.
  2. Is your product seriously unique? If your product offers functionality that isn't available anywhere else, strongly think about the premium pricing strategy.
  3. Are you looking for quick adoption? Freemium models can lead to rapid adoption, especially if small businesses perceive low risk in trying out a free utility.
  4. Does your product work better as more people adopt it? If your software gets better with larger amounts of customers (like a virus protection firewall), then strongly consider a freemium strategy.
  5. How long can you afford to handle low revenue? If you need immediate revenue then look at a premium pricing strategy. But if you can handle a longer runway, a freemium strategy could work for you.
  6. Do you already have a roadmap for upsell opportunities? Freemium works well if you have clear and compelling upsell options.
  7. What's support going to cost you? Some products have virtually no support costs. If that's you, a freemium model could work well. On the other hand, if your product requires some help or hand-holding, premium pricing helps you cover that cost.
  8. What's going on with your competitors? How do you want to be positioned? Top of the market suggests a premium pricing strategy. If you want to be considered an accessible solution for everyone, consider freemium.
  9. What kind of product feedback are you looking for? If you want or need product feedback because you're trying to figure out exactly what you're offering (and this happens a lot), I strongly suggest a premium pricing strategy. You want feedback from paying customers, not free ones.
  10. How well do you handle rejection? Freemium conversion rates (to higher priced features) are often under 5% (and in many cases under 1%). If the low conversion rates make you feel bad, consider premium pricing.

Depending on how you answer these 10 questions, scoring one point per question for either approach, you'll know which strategy is right for you.

One Last Warning: Don't Copy Someone Else

If you've heard me talk about pricing before or write about it, you've likely heard me make this case before. Don't copy someone else's pricing strategy. That's like choosing an outfit or haircut based on a photo of somewhere else. It works for them, but it can look really silly on you.

Don't be silly.

Figure out what works for you and then chase it down. And don't worry when someone tells you you're wrong. Someone is always going to think you're wrong. But when you copy someone else, you often find out (much later) the details of why it worked for them (and why it didn't for you).

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