Determining the pricing structure for a product can be challenging, and it’s an area in which a lot of companies stumble, particularly when they find they have set the price too low.
At StartupDay 2010 yesterday in Seattle, Twilio co-founder and CEO Jeff Lawson gave a talk on “Making Money with SaaS.” Twilio is a San Francisco-based startup that offers an API allowing developers to integrate telephone and SMS actions – receiving texts, making calls, playing back messages, for example – into their apps.
Lawson argues that the simple, universal pricing structure should be: “take the value you create, minus some discount, and that’s your price.” It’s a formula that doesn’t come up with the price by adding up the costs and then tacking on enough to make a profit. Rather, it’s one that really demands you look at the measurable value your service offers. After all, if you don’t offer value, it’s “back to the drawing board.”
Noting that, with cloud computing and with a lot of open sources technologies, costs for a SaaS can be next to nothing, Lawson suggests that you ask other questions: are you customers saving money by replacing a more expensive service or by replacing an inefficient one? Are they able to generate more revenue thanks to your SaaS? If so, how much?
Lawson encourages businesses to make the most of customer feedback loops to determine the right price, particularly prior to launch. One interesting suggestion he makes is to create an experimental page where you could gauge potential customer interest without impacting your brand.
In a nutshell,
- Determine your value generated
- Test your product with potential customers
- Offer a free private beta
- Go public with a price tag
The slides from Lawson’s talk are embedded below.
And if you’re a developer whose SaaS uses Twilio’s API, another money-making method may be to apply for 500 Startups’ new Twilio Fund, a $250,000 micro-fund.