There are countless books, articles and courses out there on how to write a business plan, price and sell your product. The stakes for makers are different though: scalability may not be as important as reduced stress, smaller markets may be more attractive. Introducing “Pricing Strategies for Makers”.
If we were to go over every pricing strategy in the world, this article would be too long to enjoy. Instead, we’re going to look at some popular strategies for makers, many of which I can personally relate to, through my own suite of online businesses.
The SaaS Classic: Flat-Fee Pricing
Flat-Fee Pricing is a wonderful thing. You build a product, price it at a certain amount–either on a monthly, annual or one-time basis–and it’s exactly the price (minus processing fees) you’ll hold in your hands once a customer signs up.
No surprise that a classic flat-fee pricing is the most popular pricing strategy amongst makers. It’s incredibly easy to set up, extremely flexible, rewarding and simple. The flexibility may be one of the biggest selling points for makers: You can easily increase your prices by $10 and test your conversion rates to optimize pricing. You can give out discounts to friends and family. It’s easy to run promotions, implement trial periods, et cetera.
The rewarding pricing that puts a good amount of money in your pockets may come with a downside though–especially if your fees are recurring: the expectations. As a customer paying a recurring fee to a company (even a solo-company), I expect that the product is well maintained, simplifies all processes, is designed very well, has quick turnaround on customer support requests and–depending on application–a certain reliability.
This can be difficult for many makers, as they are often swamped with day-to-day work, school, studying and other projects. A good piece of advice is to adjust your pricing, either very low (see carrd.co / $9/yr) to the point where expectations are low, or quite high (see B2B SaaS applications, $100+/month) where it’s at least worth it to have this added stress. This certain level of stress can also be good–it prevents makers from slacking off and keeps them accountable. Nevertheless, make sure that your free time and mind allows this added liability.
|Example||$59 / month $5 / month|
|Pros||Simple Pricing Rewarding ($x in your pocket every month!) Flexible, easy to experiment|
|Cons||Customers expect certain services for their money Stressful as solo-maker Difficult to maximize revenue/customer|
The Scalable: Usage-Based Pricing
A downside of flat-fee pricing? Whether a multi-billion dollar company signs up, or a small startup, doesn’t make a difference on the revenue you make (it may have a difference on the amount of support requests that come in though!). Whether someone uses your product every day or once a year, doesn’t make a difference (as long as they keep paying for it).
The concept is easy, instead of charging a company a flat-fee per month, you charge them based on their usage: the amount of employees they have enrolled in your payroll tool, the amount of emails they sent from your newsletter builder, the amount of API calls they send to your server.
While revenue can be more unpredictable like that, big customers will outgrow your previous pricing very quickly, generating a higher revenue per customer. Especially if your product is labour- or resource-intensive, this pricing strategy can help you maximize the revenue per customer and cover your costs with increased usage.
Optimizing the revenue per customer (ARPU; annual revenue per user) can be an incredibly important step to success: It means that, with the same amount of customers, you make more money.
It’s a worse deal if you build a product that isn’t used a lot though. This pricing surely doesn’t make sense for HR tools that are used once per month, or a bookkeeping tool that prints out a report at the end of the year. For these kinds of products, usage-based pricing can lead to unpredictable revenue jumps, where a customer suddenly uses your product less, decreasing your revenue. However, for products that people use every week or day, this pricing could be worth it.
|Example||$1 per 1000 e-mails $8 per employee $3 per 1000 API calls|
|Pros||Rather flexible Easy to maximize ARPU People pay for your resources|
|Cons||Less revenue from small customers Unpredictability Not suitable for every business (periodically used, seasonal, …)|
The difficult: Marketplaces
If you’re looking at the stock market and recent IPOs right now, you might think that marketplaces are the place to be. A marketplace usually consists of two sides, a provider and a consumer. As a marketplace, you offer an easy way to bring these two together, and take a platform fee when the provider performs a service for the consumer. There are plenty of big companies in this space, which include:
- eBay (provider: seller / consumer: buyer)
- Uber / Lyft (provider: driver / consumer: rider)
- Airbnb (provider: landlord / consumer: guest)
You might also realize that, while these marketplaces are giant, there really aren’t a lot of bootstrapped marketplaces out there. Marketplaces need scale to work, and until you at least have minimal scale, you are going to do double the work of other pricing strategies, for a cut of the reward (i.e. the platform fee). The big value of a good marketplace is the choice and comfort of access to a big network, you’ll have to build that first to succeed and grow.
There are multiple strategies that makers can do to make their own marketplaces work:
- Avoid a two-sided marketplace in the beginning. For example, fill up one side of the marketplace, then sell the services of those people directly to businesses and consumers;
- Be involved with one side of the marketplace (e.g landlords on Airbnb) that’ll attract the other side automatically and;
- Build a community or SaaS product first, then turn it into a marketplace.
Marketplaces are hard to start without outside funding and incredible time investment, however, it’s even more rewarding once you’re over that hill, as your work as a platform is only secondary–the big value comes from your users. If done right, a good marketplace can be a good source of passive income, with possibly lower effort than other businesses.
A downside is definitely the pricing flexibility. As a platform, you’re often limited to a percentage of transactions (or a platform fee). It’s therefore difficult to play around with your pricing strategy, discounts or trial periods. Also, you often can’t do anything about churn. If your providers do a bad job, you will often lose a customer altogether (e.g. bad experience with Airbnb provider, never uses Airbnb platform again). It can be a good idea to look at additional, non-marketplace related pricing strategies and upsells, such as featured spots, advertising or referrals.
|Example||10% of a purchase $100 “platform fee” for each booking|
|Pros||Passive income Incredibly rewarding with scale Less effort in product management & development|
|Cons||Hard to start up More effort in people management Less immediate monetary reward (only percentages of gross volume)|
The friendly: Donations, Sponsorships and Advertising
The internet is used to free stuff and open-source software. If you’re not building a product that can easily be monetized, or you’d rather keep your app accessible to anyone, it can be good to look for other monetization options.
An easy, but often not lucrative way is getting donations. With GitHub accouncing Sponsorships, this is going to become one of the main incomes of open-source projects and developers. However, as Patrick McKenzie (patio11) wrote in a Hacker News comment, getting companies to sponsor or donate to an open-source project can be hard, and is only possible by directly invoicing for a service.
If you experience a big amount of traffic or have a very targeted audience, it can also be helpful to think about selling your own sponsorships, displaying ads or referring products for a commission.
Advertisements come in many shapes and forms. Sponsorships usually entail a publisher to create content that directly or indirectly relates to a sponsor, often with a directed sponsorship messages for a flat fee per post or post package.
Ad banners come in the form of cost-per-click ads (for example through Google AdSense) or by selling them natively (for example through self-built systems or native ad providers). Finally, referrals usually entail the publisher to review or recommend a product, and receiving a percentage of the sale price after every referred purchase.
All these things can earn you a certain recurring income, but it usually doesn’t compare to asking your users to pay $5 for your service. Also, keep in mind that people won’t just donate to your project — you still have to sell. Instead of a product, you have to sell your story, ideas, vision and ambitions.
|Example||$200 for a sponsorship $0.10 per click on an ad placement|
|Pros||Passive income No customers and therefore no customer support is needed Feels friendly|
|Cons||Low recurring income opportunities The product needs a compelling story Not a “real” business -> no acquisition value|
This isn’t a complete list by any means. There are tons of exciting projects that are using service-based pricing, premium subscriptions, freemium models, credits and other monetization strategies.
The next time you’re building an application, ask yourself: what kind of pricing you’re looking for? Would you like to earn passive income & keep stress to a minimum? Or would you like to sell to big enterprises only, where usage-based pricing would make sense?