The secret to pricing your SaaS product right

It’s far more simple than you may have thought. Also it’s more common sense than secret. Anyway it goes like this.

The million euros question

You (obviously) know your product, and you know the competition.

So since the main competitor in your field prices their equivalent product at $X/m, how much would you pay for your product. Oh, you have 5 seconds to answer…

If you can’t answer this question in 5 seconds, this means one or more of the following:

  • You don’t have a clear idea of what your product really is.
    You’ve built some features together, but you have no sense of the end result.
  • You have not studied the competition enough.
    You may have a good product, but you don’t know if it’s good enough.
  • You can’t put your self in the customer’s shoes.
    This is by far the worse case scenario. If you don’t know how people perceive and evaluate similar products, it’s very hard to know what features to build, how to advertise your product right and obviously how to price it.

Dollars stack

The tablet example

First of all let’s define tablets.

Tablets are the device that people use to get away from all the things that suck about computers. These include, Adobe flash, keyboards, cables, Microsoft office, loosing your work because of a virus, running out of battery after an hour, troubleshooting driver problems and many many others.

People use tablets to easily watch videos, surf the web, enjoy music, and talk with friends. They like them because they are simple, light and the battery lasts for long.

Microsoft released Surface tablet for $500, the same price as iPad. Surface had most of the problems in group A, where iPad had all of the qualities in group B. Surface’s only competitive advantage was running Microsoft Office natively. As we all know, MS Office is a boring piece of software most of us already use all day at our computers at work. Mostly because we have to.

So if the top competitor in the market prices it’s product at $500, and your product is heavy and boring, with a worse screen and poor battery life how much would you pay for it? I’d say $200 would be a fair price, although I’d still go for the iPad.

Microsoft failed to answer all of the above questions and ended up dropping the price by $150 a couple of weeks ago.

Who got the price right ?

Google was more respectful of the competition and priced Nexus 7 at an introductory price of $200. At the time android was not as polished as iOS, it didn’t have an equally large app selection, it was heavier and with a bit worse battery life. Still at $200 it was a very honest and competitive offer compared to iPad mini being 65% more expensive at $330.

The pricing path

Every day during the development of your product, it’s important to be respectful of the efforts of other talented people. The market is full of well established products that you simply cannot compete with without either an amazing product or a very competitive price.

The more you evaluate your competition the harder it looks. This not defeatism. This is realism. There is a good reason 80% of new companies fail during the first five years. This thought path will eventually lead you to the conclusion that in most markets it’s impossible to compete. For example I can’t imagine any startup competing with Gmail.

That’s perfectly fine, you don’t have to compete with giants. Through constant and honest re-evaluation of your pricing strategy you will understand in which market segment you can achieve a competitive pricing for your product.

The rule of thumb is that if you end up pricing your product very low, your are trying at a very saturated market. If you end up pricing your product very high, you are trying at a market where there is not sufficient demand. The pricing path leads to the ideal positioning of your product in the market, in a segment where you can realistically have a good chance of competing.

Irony is a loser’s trait

It’s fun to see Siri making fun of Android and Samsung at WWDC 2012.

It’s also fun to see Microsoft making fun of Siri in it’s latest commercial.

But it’s infinitely more fun reading IDC’s report on mobile OS market share for the first quarter of 2013.

Android: 75 %
iOS: 17,3 %
Windows Phone: 3,2 %

Losers always try to find cheap ways to degrade other’s work.
Winners are busy developing their next version.

An industry that’s left behind

As of today there is a huge number of startups, both in the US and abroad, trying to create new applications to inject functionality to cyberspace. It’s very easy to notice that these days we don’t have a problem of finding software to get our job done, but rather a problem of finding software to get the job done the right way and in the right timeframe.

I feel that the software industry in the 2010’s is quite similar to the automobile industry of 1910’s. Obviously we got “cars”, but not the right ones. Cars today serve  a variety of roles. Some are sport cars, some are trucks and some are busses. But our software is not equally evolved. It’s quite monolithic (and disapointing) that the majority of computers in the workplace today are evolved typewriters.


Ford model T

Ford motors, Model T, 1908


Yes we got the internet of course, which means that fortunately we got “roads” to let our information move. But the vessels that use these roads (computers) were not built for the highway. The basic elements which allow someone to use a computer, are the keyboard and the mouse. This means that so far, we have digitised the pen and pensil.

Watching at the huge amount of research taking place in the B2C software marketplace, I can’t but stop and think. Is this the best we can do, in the business software world ? Are we left behind ? Have we injected our organizations with a culture of innovation and adaptation of the new, or are we just laggards who just wait for the inevitable to be forced upon us ?

Unfortunately not a lot of people in the business world today talk about the concepts which make today’s software fresh and exciting. There is no UX research in business software today. There is no design which supports functionality in business software today. And worse of all, we still believe that it’s still ok to be stuck behind a static monitor, with a keyboard and a mouse.

The single most important factor in breaking the norm and moving forward is us. Humans are the weak link in the chain in the modern organization’s workflow. We still believe that software developers need a keyboard because they need to type a lot. And we believe that designers need a mouse to create “pixel-perfect” designs. They don’t.

Quite the opposite. We should be asking ourselves: How can we transform software production today so that it doesn’t involve huge amounts of typing ? How can we change the workflow of designers so that a mouse is rendered obsolete.

We must start producing new cars today. Sport cars, trucks and busses. We got engines, we got tires and most important, we got roads. The more we continue to use Model T’s in our organizations, the less competitive we are. And there is really no point, in waiting for retail computing to force the evolution upon us.

Update 7/5/2013:

I’m so glad to see that there are companies willing to really innovate and create new ways for us to unleash our creativity. This is adobe’s mouse and keyboard killer:

Why you should say no to philanthropy

I don’t agree with everything Steve Jobs did, neither do I consider him an example that I’d follow. But I have to give him that not giving a cent to philanthropy was the best thing he ever did for the rest of us. You see, there is no greatest temptation for the modern man in the western world, than to find ways to justify his wealth. Deep inside we all know that while we wait for next cool iPhone 6 or a shiny fast MacBook, millions of people starve to death in other parts of the world.

Homeless person

The mess is all around us

But you don’t have to go that far to experience the mess. As a person living in the center of a capital, in a western country hit by recession, I see homeless people in the streets every day. Before the recession, people living in the streets was a problem of some major cities like New York and London. I’ve never had the chance to see people who literally just hope to make the day by finding food in the garbage.

In the first few weeks it was a shocking view. For the first time I’ve seen people whose entire fortune is just a blanket. But what was even more shocking was the months that followed that. I’ve started to notice each of these people individually and notice trends in their daily lives. There is one guy sleeping outside the office where I work. He only shows up after night so that all the people from the offices are gone. Another one, an old guy with a large beard, lives outside a jewellery shop and eats from the garbage can next to it. He sits for an hour or so before he goes back in the garbage for a snack.

There is a huge number of immigrants in the center of Athens as well. People mostly from Bulgaria, Albania and other countries of the former Soviet block but also from Pakistan, Afghanistan and even from African countries. At best they live piled up in old abandoned houses without electricity, water or heating. Ten or fifteen people are forced to live in the same room because that’s the best they can afford. Needless to say, they missed the announcement of the new lightning connector on the new iPhone.

Why do those people suffer ?

Why do all those people suffer so much ? Why is it that they can’t afford anything, while at the same time others have everything ? To be honest this is a question that goes beyond me. I can’t tell you if it’s the flaws of capitalism, or if people are greedy by nature. I can’t even tell you what we can do to make things better for them. Should western governments force multinational companies to raise the wages they pay on Asian and African countries ? Should we make more free trade zones that include the poor countries ? Perhaps there is an answer to be found and perhaps there is hope for a better more equal world. I certainly hope so although I don’t have such an answer.

However I am certain that we won’t find a solution through philanthropy. In fact I believe that the more we fund philanthropy, the more we condemn those people to more poverty. It sounds very reasonable though, I’ll give philanthropists that. How is it not help, when we give the poor people money ? It’s not help because you’ve missed the fact that poor peoples’ problem is not the lack of money.

What is the problem poor people have then ?

I have been without a job for a couple of long periods in my life. But it only took a few months each time, before I got a new job and joined the moneymakers again. I didn’t have an income at that time but had lots of other benefits to make up for it. Most of all I kept on being considered a part of society and an able worker. To everyone, including me, losing my job was only a minor temporary setback.

Unfortunately unemployed people and immigrants are not that lucky. Even if they do have a job, it is (ironically) considered a temporary success. The major problem poor people have, is the fact that by default, society considers them less entitled to wealth. This happens for one reason or the other depending on the case. For immigrants it’s their nationality, for black people it’s their color, for people in underdeveloped countries it’s the fact that they just happen to live in underdeveloped countries.

The global point of view (in the western world at least), is that Chinese workers are entitled to $400/m at best in companies like foxconn, while people working to produce the same products in the USA, are entitled to more than $15.000/m. So even if Bono succeeds in the “drop the debt” campaign, people in Africa will still be making pennies the next day. It will only take a few years before we get back to the same state. As long as we leave the causes of inequality untouched, we will end up in the same state.

But why is philanthropy a problem ?

The one thing (almost) all philanthropists have in common is that they never talk about what causes the problem. They want to offer painkillers to people with a rotten tooth. Nobody ever proposed a law that will cut wages in half in his country so that people in another country can have more. Everybody pretends to want to help but at the same time all they are willing to sacrifice is their 3rd iPad. Nobody ever proposed to change the way we see ourselves as entitled to wealth.

By donating a bit of your income to charity, you are practically washing your guilt away. It’s your way of saying “I gave you something. I am a nice person. I have done all I could about your poverty. That will be all.”. What this does is shift people’s attention from the real problem. If as a society, we got some people like Bono trying to drop the debt, we get the impression that we are already doing something about it.

But we are not. We are just giving people painkillers and consider their rotten tooth problem fixed. It’s only prolonging their suffering and shifting the conversation away from “the dentist”. And the worse part is that Bono considers that bankers should lose their wealth for the debt in Africa to be dropped. At the same time it’s perfectly acceptable for him to travel the world business class.

Because Bono deep inside, seems to consider himself a god-gifted artist with sensitivities, while bankers are evil capitalist pigs who must loose their money so he can keep his, and feel good at the same time. This is the exact mentality which causes the inequality problem in our world. That for some reason “we are good” and not part of the problem. The poverty problem is supposed to be caused by “others”, the evil bankers, evil lawyers, evil politicians. And since we are good we are entitled to our wealth.

And since all people consider themselves entitled to what they have, at the same time they practically consider the others entitled to their poverty. And all the philanthropy and charity in the world does nothing to change that mentality. It’s only rich people’s way, of feeling better for being entitled to their wealth, since they gave some pennies away.

Don’t try to solve problems. Just answer, why ?

The world is full of startup mentors, that try to guide founders, on creating applications that solve people’s problems. Companies like 37signals suggest that you should “scratch your own itch”, and create software that solves your problems and then it will probably solve somebody else’s as well. While it is indeed a great way to start working on something, it is not the only way. Furthermore it doesn’t answer the question: “What if my problem is that I don’t have a problem ?”.

Smoking reggae guy

How can you not have a problem ?

There can be many reasons why you may not have a problem. First of all it’s quite possible that you already are, in a perfectly functioning ecosystem where there are no big problems left to solve. One such ecosystem is operating systems. Sure we all have our minor complaints about what we can do with our computers, but generally speaking, the operating systems of today are quite powerful and easy to use.

It is also a common case to see a problem lying right in front of you, and at the same time see a lot of people trying to solve it. This means that people are in the process of trying out things on the commonly perceived problem and a great solution will come out sooner or later. One such case is JavaScript development in web applications. Today’s applications need so much to be interactive and responsive, that developers have to write huge amounts of JavaScript to make it happen. The huge volume of JavaScript code required creates a chaos, and obviously developers need tools to bring order in their code.

At the same time a large numbers of open source projects are trying to do just that. A few that I’m aware of are backbone.js, ember.js, AngularJS, Tower.js and node.js. The real problem right now is choosing the best way to solve that problem. It will take some time for the dust to sit down, and we see one of these projects emerge from the pack as the dominant solution. Either way it is obvious that there is no problem for you to solve, since a lot of others are already solving it.

There’s more than repairing

So if there are no problems for you to solve, what is the alternative ? Let’s get back to the start and remember that the end goal of a company is to provide value. And while it is true that when your TV is broken, a repairman will be of some value to you, it is not always the case. Some people choose to repair TVs, some others try to create new ones and some others just try to sell them to you. Not only nobody considers the repairman the most important part on the TV chain, but most people will agree that he’s often the less important.

Why ? Why ? Why ?

Why was Instagram a success ? We already had the option of sharing photos on twitter and facebook with a few taps, and we also had some filters in software like Photoshop and iPhoto. Instagram just made it easier. So if you were asked by someone, “Why should I use Instagram ?”, the answer would be: “Because it allows you to easily share manipulated photos”. It didn’t solve any problems, it didn’t do anything not possible before. But it created a new pleasurable way of hiding that you are just an amateur photographer using a phone’s camera with a crappy lens.

Everyone I know has at least some free time, one way or another. And this free time has to be filled somehow. Some people watch TV, some play video games and some just go for a walk. And while it works, and we manage to fill our free time everyday, we all know, that honestly everything gets quite boring after a while. Even the most conservative people I know, are willing to try something new if the risk is low and they have a reason to do it. And since by definition, software is mostly a low risk product we should all focus on giving people reasons to use our products.

Why should I use Flipboard ? Because it’s like a magazine on the iPad.
Why should I use Path ? Because it’s like Facebook, but without the annoying people.
Why should I use X ? Because of Y.

Your startup is an X trying to create a Y and therefore complete the sentence and justify it’s existence. And while I believe that solving someone’s problem creates enormous value, just answering the why, is often a great shortcut when you got no problems to solve.