Monthly Archives: November 2009

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I’m going to open this article with a short (and true) story.  I officially
kicked off my marketing software company,
HubSpot, about 17 months ago.  If you’ve read my blog for any period of time,
you likely know that I’m a big beliver in the “charge early, charge often”
mantra.  As it turns out, in order to “charge early”, you have to figure out
what you’re going to charge people.  That is, you have to have a
price for your product.  Thankfully, both my co-founder (Brian
Halligan) and I had recently graduated from a top 5 MBA program.  And, it wasn’t
just any top 5 program — it was MIT.  You know, that place where
science and math and uber-geeky analytical stuff happens.  So, you’d think that
when it came time to figure out a price for our product, we’d really dig in, do
some heavy-duty analysis, some really hard thinking and come up with a
relatively well thought-out price.  That’s not what happened.

When it came to deciding on the price for our software, we basically just
rolled the dice.

I’d love to for the statement above to be an exaggeration.  Surely, we spent
some time pondering that oh-so-important factor in our business
sucess.  Nope.  We didn’t.  One of us (I think it was me) suggested “how about
$250/month”, and that’s what we went with.  And, that’s where the price remained
for about 2 years. 

Things turned out fine for me and HubSpot.  But, you still shouldn’t do
this.  Don’t just roll the dice when it comes to pricing your product.  Give it
some thought, consideration and (gasp!) some analysis.  Your first step towards
this path should be to run over, right now, and get the book “Don’t Just Roll The Dice: A usefully short guide to
software pricing” by Neil Davidson.  Even if Neil weren’t such a nice guy
(he is) and even if he doesn’t run my favorite conference (he does) and
even if he didn’t build a really successful software company himself (he did),
I’d still implore you to read the book.  It’s got the highest value-to-length
ratio I’ve seen in a business book in a long time.  Go get it, right now.  And,
if you’re still not convinced, Neil’s even been nice enough to give it away for
free in convenient PDF form.  Yes, that’s right, you don’t even have to buy the
freakin’ book on Amazon for $9.95 (though
you could). 

Just on the off-chance that I caught you at a particularly skeptical time and
you’re still not convinced, here are some of my notes from the book.

Insights On Software Pricing From “Don’t Just Roll The
Dice”

1.  Your product is more than just your product.  You might
think that your software product is just the bits and bytes that your customers
download (or access online), but you’d be wrong.  What customers are actually
paying you for is the entire experience of doing business with you. 
Everything from how you market and sell the product, to how you help people use
it and how you maintain it going forward.  All of it.  Your pricing should be
based on this reality.

2.  There’s a difference between perceived and objective value. 
It doesn’t matter how much “real” (objective) value you have baked into
your product if your customers don’t perceive that value, they are not going to
pay as much for it.  Hopefully, their perceived value is a function, to some
degree, of the objective value.  If not, you’re screwing something up. 

3.  Community matters.  The group that your customers belong
to, or want to belong to will impact the price they’re willing to pay. 
For example, some people buy hybrid cars not just because of the environmental
benefit or the higher mileage but because they want to be part of that
community.  The same reason some people buy a BMW.  Determine what kind of
community you can build (or tap into) around your offering.  Help people belong
to the community they want to belong to.

4. As it turns out, people do buy drills (not holes). 
There’s the reasonably famous adage around “people buy holes, not
drills”.  The point is to focus on the benefit to the customer (not the product
itself).  I generally agree with that notion.  But, it’s useful to keep in mind
that holes can be a commodity, but people still sometimes pay $400 for a drill. 
Benefits are important, but the direct benefiit is not the only one that
customers value.

5. The more differentiated you are, the more you control price. 
This one should be obvious.  If you have a product that’s about the
same as all of your competitors, then you don’t really set your price — the
market does.  Of course, nobody thinks of themselves as being identical to their
competition (especially software companies).  But, what we often forget is that
it’s difficult — and very risky, to try and create a completely new category and
be totally differentiated.  Decide which dimension you’re going to
differentiate on and make sure it’s reasonable given your particular constraints
(like cash).

6. No battle plan survives contact with the enemy.  This
quote is not actually in the book, but I think it still fits the theme.  When
setting pricing, it’s important to consider what the “market response” is going
to be — particularly if you’re in a well-defined category.  Just because it
doesn’t make economic sense for a competitor to get in to a price war with you,
it doesn’t mean they won’t do it.  Particularly if they’re big or well-funded.
If you’re thinking about competing on price, keep that in mind.  Better yet,
don’t do it at all.

7. Remember to be fair.  As humans, we often have a sense of
what we think “fair” pricing is.  Even though a particular pricing model is
“theoretically optimal”, it might not be wise in practice.  As software
entrepreneurs, we often think we can get away with certain types of price
segmenting simply because it’s enforceable in the software.  Just because you
can keep customers from doing certain kinds of things (unless they pay up),
doesn’t necessarily mean it’s the right (optimal) thing to do.  In the long
term, it could actually hurt.  Try to put yourself in the customer’s shoes and
envision if they think the way you price things is fair.  [Note: I’m not
suggesting you be all rainbows and cupcakes and suggest that you price based on
being “nice”.  I’m just saying that you might actually make more money by being
empathetic]

8. Pricing complexity has a cost.  One of the things you
learn in micro economics (and is discussed in the beginning of the book) is the
concept of supply and demand curves and how you can segment your pricing in
order to capture the maximum value (i.e. optimize revenues).  This can be a
wonderful thing.  But, it’s critical to remember that this segmentation has a
price — it’s not free revenue.  For example, when HubSpot went from a single
price ($250/month) to two prices (still pretty simple), life got a lot
harder.  All of a sudden, our marketing, sales and even our operational efforts
got more complicated.  The product got more complicated.  All of our pretty
charts that we used to talk about the business and measure success got more
complicated.  The reality is that when you add a new dimension to your pricing
structure, you’re adding a new dimension of complexity.  Oh, and by the way, the
*second* price that you add to your product is the most expensive.  After that
(third, fourth, etc.) things get a tad easier because you’ve already built some
of the infrastructure to support multiple prices.  And by that point, your brain
is already used to the pain.

Phew!  I typed this entire article in one sitting while simultaneously
reading a majority of the book for a second time.  If I haven’t convinced you
yet that you should go read it then I think I’m hopelessly inadequate at
conveying the importance of this topic and the usefulness of the book.  Or,
maybe you’ve already got it all figured out.  If so, may the wind be in your
sails and may you go forth and prosper.  For the rest of you, just download the book.

And, on a more selfish note, what are your biggest insights when it
comes to software pricing?  What challenges have you dealt with?  What questions
do you have about pricing your software?  If you’re looking for some great
answers, you can post a question on Answers.OnStartups.com where a bunch
of smart folks like Neil Davidson (the guy that wrote the book) hang out.  Hope
to see you there.

Looking for other startup fanatics?  Request access to the OnStartups LinkedIn Group.  130,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter: @dharmesh.

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A few more thoughts on quarterbacks: There are two separate issues with respect to quarterbacks. The first is whether, historically, NFL teams have done a good job of predicting which college quarterbacks will succeed in the pros. Dave Berri and… Continue reading →

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As noted in my previous article on startup marketing, I had the opportunity to speak at the MIT Startup bootcamp recently.  My friend, and an all-around great guy, Adam Smith (founder of Xobni) spoke earlier that day.  Adam did a great job capturing the experience of starting a company and watching a company grow.  Adam’s both brilliant and articulate.  Well worth watching the video.

Here are some quick notes from the video (to help entice you to watch).

1.  If you can improve email just a little bit, you can create a lot of value.

Looking for other startup fanatics?  Request access to the OnStartups LinkedIn Group.  130,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter: @dharmesh.

Continue reading →

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I recently had the opportunity to speak at the MIT Startup Bootcamp held at the MIT Kresge Auditorium (a great venue that President Obama spoke at just a couple of weeks later). This was a fantastic event with a packed house (1,000+ people in the live audience) where some great entrepreneurs had a chance to share their experiences and insights. 

I was a little nervous in the beginning (as usual), but once I warmed up, I think I did OK.

Here’s a recorded video of my talk.  

Hope you enjoy the video. Would love to hear your comments and questions.

Looking for other startup fanatics?  Request access to the OnStartups LinkedIn Group.  130,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter: @dharmesh.

Continue reading →