Ask HN: Cost-based pricing for hosted web-apps?
Given that..
- building software is getting easier and cheaper [1],
- one can reach a larger segment of small businesses and easily win them over with affordable pricing [2],
- mapping your cost model (based on cpu, bandwidth and storage) to a different pricing model (users, records) is a difficult problem to get right [3].
As software developers, why should we frown-upon or try to avoid cost-based pricing for hosted web apps ?
[1] Enabled by services like Google App Engine..
http://code.google.com/appengine/docs/billing.html
[2] Being low-cost is one of the best options available for start-ups..
Start by writing software for smaller companies, because it's easier to sell to them. ...if you want to win through better technology, aim at smaller customers.
They're the more strategically valuable part of the market anyway. In technology, the low end always eats the high end. It's easier to make an inexpensive product more powerful than to make a powerful product cheaper. So the products that start as cheap, simple options tend to gradually grow more powerful till, like water rising in a room, they squash the "high-end" products against the ceiling.
From : http://www.paulgraham.com/start.html
[3] My thoughts about this mismatch, blogged in "Why freemium pricing model for CRM / Online databases needs to change"..
http://rrajkumar.wordpress.com/2010/10/13/why-freemium-pricing-model-for-crm-online-databases-needs-to-change/
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You should not price based on costs because:
a) customers do not care what your costs are, they care what their perceived value is.
b) costs are cratering, to the point where costs at the margin are so small it is difficult to measure without counting out picodollars (don't use picodollars!)
c) low prices do not necessarily make customer acquisition easier -- prices are a signal (of quality and probable business continuity among other things)
d) businesses have care thresholds for money and all numbers under a particular threshold are identical. If for a certain group of customers the care threshold is $50 / month, picking any price below $49 is insane.
e) pathological customers are disproportionately attracted to the cheap options
f) if you compete on price, you're forever at the mercy of anyone who is either more efficient at cost structure than you or anyone who is stupid and willing to burn money going after your market
We don't frown on cost-based pricing for web apps.
We frown on cost-based pricing for anything.
Pricing and cost are almost unrelated. Things are priced what they cost when they are plucked out of the ground, put on a truck, warehoused, and then delivered to the customer. Add any other step (say, "cooking") and cost no longer has anything to do with price.
This is not some web 2.0 thing. It's a fundamental principle of business.
Your question, as I read it, isn't crazy. It suggests, "if one way I can differentiate myself from my competitors is by being smarter and thriftier, shouldn't I be able to use that to differentiate my business through price?" The problem is that your cost should already be below the noise floor, and most nonzero prices incur the same hostility from customers --- so reducing your competitor's price point by 20% or even 50% might not help your business; it could even hurt.