Pay the Man

There's only one way to ensure products you use stick around: keep the founding entrepreneur(s) interested.

The same applies to the products we - as entrepreneurs and software makers - build: the only way that you can maintain & nurture those products is for you to have that vested interest.

I was recently embroiled in a shitstorm with WooThemes, when we increased the prices of our products and limited grandfathering for past purchases. Our goal:

1. Fix our broken business and support model, which was chomping away at our operating margins.

2. Ensure sustainability so we could be around for years to come (i.e. pivot from the broken legacy model).

3. Hopefully free up enough of our operating margins to experiment and innovate (a long-term risk if we're not doing this often enough).

While the situation played itself out eventually, there are a few things that still bother me; not about WooThemes or this specific situation, but about the software ecosystem at large.

As tech entrepreneurs, we are absolutely terrible at pricing and valuing our products.

Marc Andreessen famously said that software will eat the world and I wouldn't bet against that. In fact, every day there's a new SaaS / web / mobile app popping up to integrate itself into another aspect of our lives. This won't go away or even slow down.

And we have seemingly decided that an iPhone app should cost $0.99 and your average SaaS service $15 - $50 a month. The bigger the supply (of applications), the more it seems to have driven down the unit price that we have attached to the products and services that we sell online.

But you'll say that price decreases are generally a good thing to the consumer. Or is it?

We made a mistake when we initially priced our products at WooThemes. We didn't have 5 years of data. It took us 4 years just to realize that our model was unsustainable!

But, we should've never made that mistake in the first place. We should have spent more time thinking about the value our product provides to customers, instead of just arbitrarily guessing what the first prices should be. This is a mistake we could have avoided.

Below is a new framework with which we should think about how we price our products and services. It's based on experiences I've had running WooThemes over the last 5+ years.

It is also the blueprint that I intend to use with my new company, PublicBeta.

So here goes...

1. Think like a user.

The biggest mistake we make is to not view our products (and the prices thereof) from our users' vantage point. Understanding the difference between how you and your users view your product, sheds light on why we are so bad at pricing.

Nathan Kontny advocates actually paying for your own software just to get a sense of the value proposition.

For me, it even goes even beyond that perspective. It's also about supporting the products I use most often, which also means supporting the companies, founders and teams that build and maintain those products.

How can you make it easier for your users to support you? As a user (of other products and services), what motivates you to support those companies & teams?

There's a reason why B2B sales are generally easier than B2C: because you're dealing with a more educated customer (at least about what things online should be worth). If you're selling your SaaS app to the maker of another SaaS app, they understand the blood, sweat & tears that goes into that.

But Average Joe Public simply doesn't have that point of reference. So how do we educate Joe?

2. Lead by example. Stop using or building free stuff.

The only way for a software product or service to be around for a while, is if it can generate enough money to at least sustain the team. They have bills to pay too, otherwise their electricity and water gets cut.

Using free stuff helps nobody. Successful business models based on advertising are extremely rare.

So, help the companies providing these solutions by offering to pay them, and pay them what it's worth to you (more on this below). Even better, persuade them to stop offering a free option altogether.

Similarly, drop any and all free options that you have for your own products. If you have some kind of freemium model going, I would even scrutinize that heavily.

As long as we perpetuate the notion that software is cheap and sometimes free, we devalue our own work.

3. Price according to value.

I love that Mattermark costs $499 a month and I think it represents fantastic value at that price. For myself though, I'm just not in a position that warrants that kind of expense, since I'm not actively investing in other companies. If I were though, I could probably easily get 10x / 20x / 100x that value by using Mattermark to find a really great investment.

This is a similar mindset that I'm hoping to adopt with PublicBeta. Not because I want to be exclusive, but because the pricing should align with the value.

If you're charging $50 a month for your service, then your customers need to extract at least $50's worth of value out of it, otherwise they are wasting money.

Communicating and explaining this is mostly down to the education of your customers. So how can you help "create" better, more educated customers that understand your value proposition and are thus willing to pay you more?

4. Quality over quantity.

If you're a solo founder and you are building a new SaaS app, how much monthly revenue do you need to generate to pay your bills and enjoy your life?

Let's say that number is $10 000. Instead of having to find 1000 customers (which is hard) to each pay you $10 per month, why not find 200 customers that are willing to pay you $50 per month. In every single scenario the latter saves you quite a few grey hairs.

My point here is that we should stop focusing on building businesses that requires thousands of customers to be profitable. Instead we should focus on building high resolution audiences who believe in your product and have their own benefits align with whatever they're paying you.

Simon Sinek says: "Do business with people that believe what you believe."

That's a shared interest, which perpetuates a shared goal: both software maker and customer wants the software to never go away. So the customer is happy to pay the software maker according to the value they receive and the software maker is inclined to nurture that vested interest.

Build products and companies that are focused on these high value customers, instead of trying to scrape the bottom of the barrel with a $0.99 iOS app.

Think about all of your favourite applications and services: do you want to see them disappear?

More importantly, think about the applications and services that form an integral part of your own business or work: what happens if they just died while you were asleep?

The only way you can influence this is by doing everything you can to support these companies and the teams behind them. This means that we - as entrepreneurs and software makers, but also as customers - should fix our ecosystem, which is currently devaluing all of our work.

Which brings me back to my original point...

Products and service exist today because an entrepreneur decided to take the immense risk of building something on their own dime and hoping that they can sell enough. Entrepreneurship is about that risk and the reward (money, altruism, warm fuzzies, whatever) that hopefully follows.

Paying the man or woman behind these companies rewards them for their hard work and makes sure that they have a vested interest in growing and maintaining the product or service that we so love.

PS. If you'd like to pay this man (i.e. me), then join me over at my new startup: PublicBeta, an online learning community for entrepreneurs.