The great thing about working in an Internet start-up is the learning we get to do every single day of our lives. We don’t always know the right answers to every question we face, but the very nature of the web lets us try out new ideas and quickly adapt them to achieve the best results for our online businesses. And one of the biggest questions faced by any web based startup is how to price your web app?
The Big Kahuna Question Faced by Many Start-Ups
The Cinergix team faced this ‘hard’ question 3 months ago when we launched our online diagramming service, Creately, to the public. After being in beta for almost a year, where we spent a lot of time and effort in engineering, we were faced with the question of how much to charge for our service. Of course, we had tons of ideas and projections in our business plan, but now that it was finally time to start generating an income, we weren’t exactly sure how much our customers should be paying for our collaborative diagramming application.
Our customers’ feedback and reviews told us we had a service that was loved and valued by users, but we struggled to quantify this value. Creately was being used in small businesses, software and design companies, startups as well as by students from all around the globe. We felt Creately would be valued differently by each group – depending on what they used it for.
Economic return plays a major part
A web design agency using Creately to work collaboratively on a Web Site project with their clients receives immediate economic value by shortening the turnaround time of designs and raising customer satisfaction. This would make Creately a valued tool – in essence allowing us to charge a “Premium” to this customer. But a student using Creately may not see such immediate economic returns, and hence would not be willing or able to pay the same price.
Faced with this dichotomy of users and our desire to ensure Creately remained accessible to everyone who needed it, we devised a simple Pricing Experiment. This would help us better understand Creately’s perceived value to our customers and help us get a data driven answer to the question “How to price your web app ?”.
The Innovative Pricing Experiment
We set up a new Creately Plus plan and decided we would let our customers choose how much they would pay for Creately each month. We called it the “Pay What You Want” offer and set about putting the plan into action.
We set up a simple Upgrade page (see screenshot below) with sample prices of similar diagramming applications, and launched it with a Press Release and a newsletter to all our beta users. The experiment would run for 2 weeks and we hoped to get a better sense of our customers and how much each of them valued Creately.
Unexpected Marketing Leverage
This also proved to be a bit of a marketing coup. I thought we had an interesting story with our PWYW plan, so instead of putting out a Press Release announcing the launch of Creately – we pitched the unique “PWYW” pricing angle. This lead to stories on TechCrunch, TheInquirer.com and a host of other blogs. We didn’t realize this at the time, but not many people (besides Radiohead) have tried this before.
The Results from Pay Your Own Price Test
I would be lying if I said we were not pleasantly surprised by the initial results of our experiment. This along with the publicity we received convinced us to continue to run the pricing experiment for 2 months instead of the planned 2 weeks.
We received a wide range of offers from $1 (the minimum allowed) to $100, with the mean ranging between $4-$5 and a median of $3.
- Customers who paid $1 were mostly new users who’d heard about the PWYW plan and signed up on the first day. This group of customers was also the most likely to cancel their accounts over a period of time. Many of them did not use the application intensively and would have been fine with a Free plan.
- Customers who paid the Mean Price of $4-5, have made good use of their Creately accounts, including creating multiples diagrams and publishing them. These customers come from a diverse range of industries including small businesses owners, marketers, teachers and students. These users have shown less propensity to cancel their accounts as they were extracting good value from their acts.
- Customers who paid more than the Mean Price provided the most valuable insights. These customers incorporated Creately into their work and business processes and derived significant value from Creately’s collaboration capabilities. Customers in this group included tech-savvy small businesses, software teams, design companies, Webmasters and business consultancies. This group made the most use of Creately to collaborate with co-workers and clients, valuing our visual collaboration platform to communicate and solve real business problems across cross-functional teams, instead of simply using Creately as a diagramming tool.
Another very interesting point that stood out from our experiment is the difficulties that so many of our users faced with completing their subscriptions with PayPal. The complaint emails as well as a large percentage of abandoned transactions – forced us to work on alternate payment methods.
Lessons Learnt from the Pricing Experiment
Understand your users
We’ve learned that it’s very important to understand who your customer is and why someone’s your customer. No two customers are the same so it’s important to learn what each type of customer gets out of your product. This is important if you want to stay relevant to your most valuable customers and helps you focus your marketing and development investment to maximize your returns.
Give Customers What they Need (or To each his Own)
We are even more committed to the idea that Creately delivers differing levels of value to our customer. We don’t want to forgo any customers and will need to continually work to ensure Creately is available where it’s needed.
The PWYW scheme did a good job in helping us gather invaluable data on our customers, but may not be sustainable over a long run. This is due in part to the fact that although we ask people to be Fair, not everyone is. Also, for a startup with limited resources, it becomes very hard to do any real business planning & projections when you add variable pricing to the mix.
We’ve been working on a set of actionable activities that we worked out as a result of our experiment.
- Make it easier for teams to work together on our visual collaboration platform, by introducing Team Projects.
- Introduce Pro Plans that deliver greater value to customers who use Creately intensively.
- Focus on developing a clear market position that resonates with our high-value customers.
- Put in place a new payment infrastructure to replace Paypal. This will be announced shortly.
- Institute a Creately Scholarship program to give access to charities, schools and colleges at deeply discounted prices.
How did you price your web app?
We may not have fixed every concern we had, but this experiment has definitely helped us identify our strengths and understand the market response to Creately. Even though we gave out quite a few Creately Plus accounts for $1, we believe the data we collected over the 2 months has more than paid for itself in terms of lost revenue.
Tell us what you think of our findings. Would you have conducted this experiment in a different way? We’d love to hear from any online service that’s faced this question before.
Some Good References on Pricing Strategies for Startups
- Neil Davidson’s excellent primer on pricing for software – Free eBook.
- Free – Chris Anderson’s valuable insights – Free audio book.
- Malcolm Galdwell’s review of Free in The New Yorker for a refreshing perspective
- Fred Wilson’s take on Freemium
- The Business of Software community on JoelOnSoftware.com