Pricing and Usability

On a morning bike ride, I was pondering pricing. I often ponder pricing. It strikes me as a […]

On a morning bike ride, I was pondering pricing. I often ponder pricing. It strikes me as a bit of a black art. But it’s easy to understand on a grad scale. The larger the market the lower the price. I noticed this with books. A book Philippe might buy on X-Ray diffraction is $150; meanwhile I just bought a detective novel for $5.99. Everyone who does something in business is aiming to make enough money to make the effort profitable; preferably very profitable. Therefore you have a formula that is something like $x=effort/#sold.

For example, a designer writes a whitepaper and it takes him him 3 weeks. He charges 100 dollars an hour. That means he needs to make $12000K to break even (considering most tech books give you a 10K advance, take 9 months + to write and never make over the advance, one should never write books to make money. you make money by double your rates as soon as your published; but that’s another story.)

Now he has to figure out how much to sell the whitepaper. So now it gets tricky– how big is the market for this whitepaper? How much of that market can he capture? Let’s say it’s a paper on some advanced taxonomy thingie. He does the homework and discovers there are 20,000 IA’s out there. But his paper is advanced– maybe only 10% are interested. 2000 might buy it, so he needs to charge 6 bucks a pop to break even. But what if that market is even smaller– some IA’s don’t speak English, some he can’t reach effectively since he has no marketing chops. What if it’s realistically more like 1%? Now the report is $60 to break event. and he wants to make a profit of course. Now the white paper is $120 bucks. And that (as I turn around and begin to bicycle down hill) explains one mystery in my life (why whitepapers are so darn expensive).

Next I start thinking about products, in particular CMS’s. Now, leaving out other factors you can see why Vignette is (if you have to ask you can’t afford it) and why typepad is 5 bucks a month. But I started to wonder why Vignette and friends are so darn hard to use, and why typepad is dead easy. And then the obvious sprang up and bit me on the nose; typepad has to be dead easy or else they are dead. Their entire pricing model is based on hundreds of thousands of users using it. Meanwhile the giants of ECM continue to lumber along the sales cycle, and sell to a company something for thousands of dollars afterward everyone trots off to training. There is no reason the big ECM has to be unusable, but then again there is no reason for them to be usable either. It’s a small market, they do what has to be done, and with an investment that large training doesn’t seem like a bad thing.

Anyhow, if you think about it, there does seem to be a inverse relationship of price to usability I find intriguing, and I’m pretty sure is tied to adoption. Now I’m off to work on my pricing worksheet (from the marvelous Four Steps to the Epiphany) and looking forward to any insights you-all might have.



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  1. 1
    George Girton

    My big “insight” is that you ought to consider obtaining a copy of Nagle and Holden, the Strategy and Tactics of Pricing. The paperback copy of this book used to be priced twice the hardback, dfor reasons which only became apparennt therein. Seriously, though, get it used! This slim tome has been extremely helpful in laying out all the factors I have needed in doing an internal company whitepaper on pricing for a completely new product. I have never recommended this book before, inasmuch as I consider the fact that my competition might come to know it and use it a competitive disadvantage for me. But pricing per se is now a less-important part of the competitive equation (for me right now, anyway) and for you, it’s definitely the right moment (if you don’t have Ngle and Holden already — it’s The Book).

  2. 3
    Jim Meyer

    Tripped over this entry in JP Rangaswami’s blog (via Doc Searls’ weblog) just today:

    When something that was originally scarce starts becoming abundant, something strange happens. You find that you start making money because of that thing rather than with that thing. That�s the Because Effect.
    …Prince understands how he makes money, what�s scarce and what�s abundant about it. Digital downloads are abundant. Concert appearances are scarce. He makes money because of his CDs and not with them.
    …You cannot bundle abundance with scarcity, it�s like trying to implement region coding of the air that you breathe. But then some people will try anything.

    Seems cogent. =]


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