05 May 2018  |  Guide

Choosing the Right Pricing Strategy for your Software Launch

22 minute read

Over the last 5 years we've seen hundreds of software businesses launch thousands of products across Mac, Windows and Web SaaS platforms. We're diving into our data - collecting all of our insights and stories into this comprehensive pricing guide for your next software launch, version release or expansion into new markets.

Over the last 5 years we’ve seen hundreds of software businesses launch thousands of products across Mac, Windows and Web SaaS platforms. We’re diving into our data - collecting all of our insights and stories into this comprehensive pricing guide for your next software launch, version release or expansion into new markets.

In our previous guide we looked at billing models and their impact, now we’re going to focus on finding the right pricing framework for your launch. From this you’ll be able to reassess and strengthen your pricing strategy.

In this extensive pricing guide you’ll learn:

  1. How to determine the right pricing
  2. How to calculate value-based pricing
  3. What to do when practically pricing your launch

Section 1: How to determine the right pricing

Pricing your software launch smartly should be your key objective; launch sales are a huge opportunity to make a big splash in a very short space of time. It’s important to be sophisticated when considering a pricing strategy, because you’ll want to avoid wasting all the hard work (and money!) you’ve spent building your product.

Pricing comes in many forms. Here are the three pricing models we see our sellers adopt most frequently; cost-plus, competitor-based and value-based. They each have merits but not all suit every strategy.

Cost-Plus pricing

Cost Plus is as simple as it sounds. You work out your fixed and expected variable costs, and add an appropriate margin on top to get to a fair price.

This model focuses on covering your costs with each purchase. It doesn’t however factor in unexpected variable costs once you’ve started selling, and you won’t be able to change the price everytime a new cost occurs.

It’s the most rudimentary form of pricing, which is why we see a lot of early stage companies pricing this way when they start out, because they don’t have the time to expand their pricing strategy.

Cost Plus also gives you very little flexibility to offer promotions, discounts and other incentives for customers to buy without becoming loss making. Customers also don’t really like to purchase in this way, especially if they realise that’s how the product or service has been priced. It may cover your initial costs but if you’re intending on growing your company past this, you’ll definitely want to consider other models than cost-plus.

Competitor based pricing

Competitor based pricing is a model that uses your direct competitors as a barometer of how to price your software. Through a brief look at your competitors’ pricing, you’ll be able to place yourself potentially in a perfect middle, not losing money but also not pricing yourself out. You won’t be a pricing outlier in the market, as you’ll be following the crowd when pricing during launch.

Mackeeper pricing

Machshiny pricing

But that’s also the limitation of solely using competitor pricing: it’s tailored to your competitors’ needs as a business, not yours. If you stay in the middle, it could lead to your business stagnating - limited by an unwillingness to price your product above your competitors. If you set your pricing unreasonably low to match your more established competitors, it turns into a race to the bottom, trying to cut margins unnecessarily, which could set your company back permanently.

Competitor pricing definitely serves best as theoretical rather than practical pricing strategy, to benchmark what a customer is willing to pay or identify an example price of in your current market.

Value-based pricing

Value-based pricing consists of finding a price relative to how much the customer believes your software is worth. Instead of focussing solely on your costs or competitors, you’ll consider first your customer personas.

We focussed on customer personas in our last guide, but let’s recap. Personas are created to simplify and classify your ideal customers into clearly identified personalities - considering their pain points, perspective, routines etc. This can be informed by talking to existing or potential customers - asking them about their experience with the product, when they had a problem, why they decided to look into it, and how things went from there. There’s also the more positive element to buyer personas - getting them to articulate what it is that wows them about the product - or about how the product has exceeded their expectations.

With your personas created, you’ll now be able to gauge their readiness to pay a certain price - possibly more than your competitors for your software. This means your product has to reflect the needs of what your customers actually want, whilst also having features and product updates they’d be willing to pay extra for. If you believe your software adds more value than your competitors, then you should reasonably charge more for that added value.

It’s worth noting that although the persona defines the expectations of your ideal buyer, you also need to pitch your product to your market. It’s a balancing act between what you think it’s worth and what the market is willing to pay.

Value-based pricing will be the best representation of what people are willing to pay for your product. However, knowing the value of your product from previous launches will definitely inform how much customers are willing to pay, backed up by the customer personas.

If this is your first launch, you may need time to build up these personas as value-based pricing requires research. You should also beware of pricing yourself too high, as you could be undercut in price unless you offer more value than your competitors.

A value-based pricing strategy allows you to start at a higher price point and if you are increasingly delivering value you can reasonably raise prices. We recommend starting with evaluating your prices every six months when using this strategy.

Let’s compare how CleanMyMac from MacPaw would price according to these 3 models.

Using cost-plus pricing, CleanMyMac would cover their initial costs but would be have to offer a heavy increase in price, especially if they wanted to cover advertising costs or pay for additional staff. There would definitely be pushback from their new customers if a heavy increase was made, unless it was for an upgrade that added something new.

For a competitor pricing model, they’d see that Mackeeper and Macshiny are clear competitors in the Mac optimization market. Let’s take both of their standard monthly plans, which vary from Macshiny’s $11.95 to Mackeeper’s $15.96. If CleanMyMac was using this model to price themselves in the middle-ground, they’d go around the $13.95-14-95 mark, undercutting Mackeeper and gain a premium over Macshiny. They could also price lower, to undercut the competition or higher to market themselves as a premium product.

For new entrants to a market, a low price is a good way to gain market share rapidly versus the competition (even if it’s loss making or at cost). The risk is that the gamble doesn’t pay off, and either you don’t get the market share you expect to (with your low price) or you’re not able to monetize the customers that you capture initially with upsells or additional products.

To demonstrate value pricing, we’d hone on in the benefits of having a clean Mac and the peace of mind this would bring. To save users the hassle of deleting unwanted mail attachments from their email, as well as clearing out their iTunes of unneeded files. Hypothetically, they’d need to segment the ways people would use their software practically and what the main benefits would be.

MacPaw focuses in on the practicalities of what a clean Mac brings and how their product specifically goes about it. This allows them to choose a value-based price when charging their customers.

Value pricing is one of the best ways to price, because:

  • It’s product oriented and focussed on value delivered to the customer
  • Its flexibility enables A/B testing and optimisation
  • It’s dynamic, and enables bundling, bolt-ons, upgrades etc. to change the price as your product evolves

On the other hand cost-plus and competitor-based pricing are driven by constraints, either market constraints (your fixed costs) or competitor constraints (pricing what they’re pricing).

Section 2: How to calculate value-based pricing

Before your launch, a key question should be “what do my customers value?” Especially in terms of pricing, as it’s crucial to learn the ideal price-point to draw them in. But you’ll also need to be aware of what additional offers, plans or discounts you can promote to convert people.

Determining what customers value

To determine what your customers really value, you have to talk to your customers. Gauging their favourite features, you’ll need long answers, from open-ended questions, as yes/no will only get you so far. You really want to highlight what people really value, and their feelings on the product.

You will also be gauging their willingness to pay (i.e the highest price they’re open to pay for your product/features). This allows your to work out what your base price would be. You get to that by finding out at what price your product becomes too cheap / too expensive.

If you’re not able to talk in person, surveys are another method of gathering feedback. Ideally, you want to be using a survey that allows you to find out what features people rank as high and low priority. all of this needs to be segmented by persona: e.g your B2C audience may want something simple with basic stats but doesn’t want to pay much, your B2B audience wants teamwork and configurability and is ready to pay a lot.

For example, Avast could ask respondents to rank these five features:

Feature ranking survey

Combine this with their willingness to pay for these features and you have some valuable data. These can fall into four categories:

  • Essential features: These are ranked as high priority by customers, but they have a low willingness to pay extra for them, because they feel like this is the core of the product.

  • Differentiator features: Useful when finding out what could be swapped between basic and pro tiers. As there is a high value and a high willingness to pay, this will help you differentiate your product from the competition, and justify a higher price.

  • Add-ons features- things that a niche of your customers people want, and that they’re very willing to pay for. You would package these add-ons, for example an automated data backup, and price it separately to avoid appearing too expensive to all other customers who don’t need it.

  • There is also your fruitless features, which add no value to the product and are disregarded when asked if they’d pay extra for them. Simply avoid building or marketing them.

Once you know where their willingness to pay is, you’ll be able to charge more for certain features because you can increase the appeal of your product by focusing your positioning and pricing of key features. You could equally have a pro version or simply charge more for everything and focus on the valuable aspects in your marketing.

Need inspiration for pricing questions? Check out this pricing survey template. It covers willingness to pay, as well as allowing you to figure out what customers need to have and their valued features (what people will pay extra for).

You’ll also need to ask some demographic persona questions asking their age, gender, role in a company (if B2B), how they use similar softwares, etc.

Using Avast’s pricing page we can assess their three tiers figuring out what their customers value:

Avast pricing

  • Essential (Basic - Free)

This tier is for those looking for their first taste of Avast, they’re happy with a basic level of security and are looking to test-drive the product. In our list of features above, Avast has made sure that the “essential features” quadrant would all be in this free tier, to attract as many potential customers a possible.

  • Advanced (Standard - $59.99)

This tier of customer wants some new features, but is willing to wait for everything else. They need to upgrade from free because security has become more of a priority for them. This is where Avast adds most of the “differentiator features” that people will really want to pay for.

  • Complete (Pro tier - $79.99)

This is the tier that wants all the new features, especially those listed as new. They want computer protection on all fronts including email, desktop and webcam. The ability to automatically update other apps is key, because once you’re paying a high price you want to save yourself extra hassle.

Letting customers see the value of your software

There are three main cases of buyer need of potential customers, when arriving at your software:

  • need a fix instantly, no demo needed
  • people with a clear idea of features they want
  • no clear idea, just want to test the product out

For quick fix purchases purchases, buyers might be more willing to take a leap. For spec based decisions, how the product is positioned on the website (and the support to the buyer receives through their customer journey) is what seals the deal. When trying to capture “window shopping” customers, a trial can definitely make the difference.

When choosing between offering a free trial or a product demo, the time incentive of a trial can often speed up the buying decision. In a trial scenario however, you should think carefully about how long it would take a customer to see the value of your product. By ensuring that the customer is immediately able to test out the major features of your product - you’ll maximise the chances of converting them.

Let’s breakdown the pricing page of a successful software product; Framer, an interactive design and prototyping tool to see how they do things. On your first visit to their page, their positioning highlights that you can try the app for free before purchasing. We haven’t even been told a price for the full version yet.

Framer homepage

Framer encourages customers to “try before they buy”, to see what the software is for themselves. If customers are further along in the buying funnel (determined by their journey through the website), the demo video is a great touch to show off Framer’s benefits to any designer looking to use it.

Moving onto Framer’s separate pricing page, which is an essential way to help customers make instant decisions about whether you’re software is in the right price range for them.

This also saves your potential customers the hassle of having to scour numerous pages to simply find the price of your software.

On Framer’s page they’ve streamlined comparing the prices for paying monthly versus yearly billing, allowing potential customers to see that they’d be saving 20% by paying monthly as opposed to yearly.

Framer pricing

If you’re not yet ready to make a purchasing decision, Framer makes its easy to start by utilizing their free trial, which starts downloading as soon as you click the button. This style of trial doesn’t allow you to measure customer conversions through email demo codes, but does allow the more nervous customer (wary of giving their email away) the chance to sample your product first.

Framer have also segmented customers that would be coming for the individual versus enterprise package. Their “Teams” page is eparate, as these 2 personas will easily self-identify as an individual or a company, and not be confused by too many plans on the same page. The team plans then emphasize how much added value you gain, above just getting the Framer software.

Framer team pricing

Framer then allows potential customers to see quotes from industry players, further pushing its value in convincing them that Framer will be a crucial aid to their design problems.

Framer quotes

Section 3: Practically pricing launches

So, how can you improve your pricing strategy?

Using practical insights gained from companies who’ve launched a new major version and those who’ve expanded into new territories, we’ve got some learnings to share.

Localized pricing

A situation where over/under pricing might be very common is when you’re considering localized pricing. You may feel like you’ve mastered pricing in your home territory, but what happens when you expand globally to both emerging and mature markets? With conversion rates as much as five times higher or lower depending on where you choose, you really have to tailor your product to the market.

To localize your software to a new territory’s currency and pricing structure may seem daunting, but being able to understand the international markets will be key to increasing sales globally. Your first step would be to find a provider with international coverage, which would take part of the extra hassle you’d encounter when organising how to expand. They should accept multiple payment methods/currencies as well as the ability to localise pricing flexibly.

The next step would to focus in on a pricing strategy. One that is tailored to the market you’re selling into.

We’ve known sellers who were only offering their major currency (USD) to sell to developing countries, and were seeing steady but unremarkable sales. Pinegrow, the website building software, was seeing this problem when selling to customers in Brazil. They then decided to offer Brazilian Real (BRL), Brazil’s national currency on their checkout as well as lowering their prices to reflect what people were able to actually able to pay in Brazil - where the average income is lower than in the USA. This allowed them to acquire many new customers whilst increasing revenue, all despite the discount in price.

The BRL prices that Pinegrow used were over ⅓ lower than their initial USD equivalent. Far from harming their bottom line, Pinegrow saw their sales leap a massive 177%, boosting their revenues despite the discounted rate. Knowing your customer, and their buying power, is a great way to maximise conversion - especially in emerging markets.

As an aside, some of our sellers have expressed concern about “postcode abuse”, where customers spoof their location to claim your product in the lowest-priced territory. We really haven’t found any instances of this going on with our sellers but can recommend some solutions should you experience it:

  • When customers buy the software, they’ll have to enter a postcode to confirm where they’re currently residing.
  • You can check if their IP address matches up with the territory from which they’re buying from.

You can of course go overboard with territorial pricing, for example Spotify has introduced separate pricing for all its territories, which works for a company of their size but could result in a headache for any smaller software company looking to expand more gradually.

The best practice is to research the territory you want to expand in, looking at the currencies that people use, disposable income, local pricing of competitors, gauging the size of your industry in that market and demand.

You should always offer local currency where possible (it has dramatic effect on checkout conversion), but not necessarily a local price. If you decide that would be the best option, then you can test the pricing increase/decrease and whether this makes dramatic shift in sales. That way you’ll have measurable data but also the chance to adjust.

Price sensitivity

We’ve talked a lot about knowing your customer - and getting a sense of how much they’re willing to pay for your software product. Closely linked to to this is getting an awareness of of price sensitivity. It’s a concept that allows you to find how fragile to price your customer personas may be.

Highly elastic customers, will be happy to roll with changes in price over time, perhaps even paying more for your product than they did before (assuming they get clear added value).

To determine price sensitivity with each of your customer personas practically, you have to present them with a raising scale of prices. Working out at what point they will view the price as-

  • Inexpensive but they have worries about its quality (too cheap)
  • Inexpensive but they have no worries about its quality (bargain)
  • Expensive but still worth buying because of its quality (high-cost)
  • Too expensive but not worth buying because of its quality (too high-cost)

Tweakbit sell anti-virus software in a very competitive market. Customers buy the software to solve a particular need (my computer has a virus), but don’t necessarily have strong brand loyalty - they could be categorised as highly fragile.

Tweakbit homepage

Tweakbit

Tweakbit

Tweakbit’s pricing is designed to account for this “fragile” customer type - encouraging them to view the software as a bargain. Heavy discounting, both up front and as the customer moves through the buying journey (in the form of time-based promotions) drives the customer towards a conversion, and reinforces the customer’s sense that they’re getting a bargain. Doubling down on this, Tweakbit also regularly run coupon and promotion campaigns to ensure that customers’ pricing expectations are met.

Framer and Tweakbit have very different customer types, who come to their products with very different needs. What’s important to take away from this is that both companies have strategically determined the right price for their specific customers, using research, market knowledge and customer insights to ensure the right prices and billing models are employed worldwide.

Should I be A/B testing?

Leading on from elasticity of demand, we have A/B testing which is a key way of testing how discounts and promotions perform. Using this method also allows you to see in real-time what is really resonating with your audience.

Here are examples of what we have seen companies A/B testing, with interesting results.

Normal price vs a price with a discount

This helps you to decide whether a discount can bring momentum in the buying decision. If people are choosing discount more frequently you may need to look at whether you’re overpricing.

A/B testing different plans

Instead of basic/pro, you’d have basic, pro and some sort of intermediate plan. If people are choosing certain price bands, it will illustrate whether you should modify your pricing hierarchy.

Risks

A/B testing does have certain disadvantages though, such as statistical significance, whereby any statistical test needs a certain amount of respondents to ensure the test is legitimate and not just random chance (especially if you’re testing for multiple customer personas). This means that you shouldn’t drop prices instantaneously if sales are slowing down, as this may be a momentary blip before an increase. For a deeper look at the concept, check out this article.

Another risk when testing is to offer different users two different prices, which might test their patience when they find out that someone has got a cheaper price for the same product. The best practice is to A/B test exclusive offers instead, seeing which part entices people more.

Major version with upgrade

Once you’re ready for your next major version launch, the only thing left to consider is the pricing and question such as:

  • How do I price my new version vs my current version for new customers?
  • How do I price it for existing customers?
  • What impact would something like intro pricing have, depending on the discount I give?

Grace periods for upgrades?

This leads us into a common dilemma people have when they’ve released the upgrade; what about people who’ve bought the product just before? Should there a grace period to allow them to upgrade? At a reduced price or for free?

A method that worked well for Screenflow, was to offer free upgrades to customers who had purchased a previous version (within a designated promotional period). This was a great way to keep recent customers happy and using the latest version of their software.

Screenflow 7 upgrade email

Tiered upgrades - focussing on existing customers

Let’s delve deeper into upgrade tiers by looking at Smile Software, who released an upgrade to PDFPen,their PDF editing software.

Their method of upgrading was very user-focussed. They sent an email to their customers enticing them to upgrade via the PDFPen app. This was because the in-app experience can automatically validate their existing license and handles free upgrades automatically.

They also offered free upgrades to those who’d already bought their last version in January of that year.

PDFPen Upgrade

However, if they’d bought an version earlier than the year before, a tiered system was created to evaluate how much an upgrade from pro to pro ($30) or basic to pro ($50) would cost them. The cost of buying the software as a new user was $30. This gave clarity to a existing customers, letting them see the cost of upgrading to them specifically.

PDFPen Upgrade Details

Lifetime licenses

Another example of a new product upgrade launch was Folivora, who created BetterTouchTool. Folivora looked at selling perpetual licenses using a subscription style enticement model.

You could pay less for a standard licence ($6.50) but not have the same amount of new features or invest in a lifetime subscription ($20.00) and gain recurring updates. The standard license was priced at less than ⅓ of the price of the lifetime. Over their launch-period 75% of their sales revenue was for the Lifetime License.

This level of lifetime pricing rewards loyal customers, whilst also not neglecting customer who’d prefer a more basic version of your signature product.

An interesting point here is that users were not forced to update and could stay on the version they currently have - this means that purchases so far have been made by users who are invested in upgrading and want to keep it up to date. It will be interesting to see the coming months when more of the casual users purchase a new license because they like some of the new features.

BetterTouchTool plans

In Conclusion

We’ve reviewed the wide variety of pricing models and techniques for finding what people value most in your software and how to price around that.

The next step will focus on launch strategy, what elements to plan first and how to mobilize your audience and gain the widest coverage from your launch.

Stay tuned to our future content on that theme by subscribing to our updates - as a bonus you’ll receive a comprehensive eBook with unique examples and data analysis to help you make the most out of your launch!