A nice wad of cashWhat ingredients are needed to market your Web 2.0 Application? A quality marketing site, well written content, decent networking skills, unique product features and benefits, understanding your target market, etc.

With all of these elements in place (and a bit of luck!), you should be gaining a steady flow of traffic to your signup page. But once there, one factor exists that will, in most cases, decide if a visitor becomes a customer: the Price.

Often overlooked, the price of a web application invites many questions from the customer during their decision making process:
  • What is the value of this service?
  • Do competitors offer similar for less?
  • What is the opportunity cost of subscribing?
  • Do I have enough money left over to buy x, y and z?
  • Is this the final amount I'll have to pay?
It's quite incredible the power that a few characters can have over your application's success.

So how do you choose a price? Do you base it on your competitors? Is it set by your costs? Or do you just pluck a random number from the air?

There are 4 general, well-regarded methods:

1. The Cost-Oriented Approach

This approach is based entirely on internal factors. In very basic terms, you calculate how much each customer will cost to attract, supply and retain, add on whatever profit you would like to make, and then you have your price. So if each customer costs us, say, $10, and we want to be making a profit of 50%, then our price would be $20.

The advantages and disadvantages of this method lie in the data you are using. Accurate data will lead to steady, forecastable income, which is good news for everybody. However, if your predictions are even the slightest bit off (e.g. cost per acquisition is up by 5%) it may cause you to constantly adjust your costs to maximise your revenue stream, which is bad news for you and your customers.

2. The Demand-Oriented Approach

A good example to refer to here is that of British Airways. For a flight to New York, they don't simply stick one price tag on their fare. They realise that not all people demand the same from a service. This is why they offer top quality features at a premium to first class fliers, while economy users will demand a cheap, no-frills, A to B journey.

We use this approach with our product colaab, too. It allows us to offer a tailor made service that suits the needs of a wide range of organisations, as well as giving the user a greater sense of choice. One disadvantage of this method, however, is that the customer might not necessarily know which feature set they want. Will they make use of the extra 50GB storage space, and is it worth the extra $50? You should always keep uncertainty to a minimum around the signup page (we've done this by stressing our free cancellation and upgrade/downgrade policy).

3. The Value-Oriented Approach

This method asks the question: How much is your app worth? Not it's price or cost, but its value.

Since you've spent so many hours slaving over your app it's become more like a child to you, your value would most likely be highly biased, unrealistic and downright ludicrous. So the question then becomes: How much is your app worth to the customer?

Think of it this way: If your service compares car insurance nationwide, and will actually save customers $50 a turn, then that's what your service is worth. If your service is a high quality game that would most likely cost you $40 in the shop, then that's what your service is worth.

Of course, the above paragraph has a very narrow view as it implies that the customer bases value entirely on how much money they save. On most occassions it includes factors such as enjoyment, time-saving, knowledge or whatever benefits that the customer values. The hard part is putting a price on them, and making sure you get it right!

4. The Competitor-Oriented Approach

To stay competitive, you must keep constant tabs on your competitors' actions; and that includes price.

Startups will often use competitors' prices as their own to begin with, and then go from there. This gives the advantage of being immediately price competitive, while also giving the perception that your application is as valuable as a more experienced rival's.

Using a competitor's pricing strategy as a base and then going higher or lower is also a legitimate tactic. Going lower seeks to undercut your opponent, offering the same high-quality service but at a cheaper price. But watch you don't start a price war, as your experienced rival will likely have the resources and experience to outlast you and cause your app's business to crash.

Offering a higher price might seem a bit counter-intuitive at first, but it does have its benefits. While it does immediately give your opponent a price advantage, some customers may perceive your app to have a higher quality. Plus, if a 10% gain in price only loses you 5% potential customers, then you're revenue will be up too. Just be careful that you don't price yourself out the market.

A Final Few Points

  • When deciding a price for your app, you don't have to stick to just one. At colaab we are using multiple, if not all, of the techniques mentioned above.
  • You will almost never get it right first time, so don't worry! Choosing the right price will come from experience, hard data and circumstances beyond your control or foresight.
  • If you are to err on the side of caution, make sure you set your price higher rather than lower. It is better to be too expensive and then cut prices, than to be making no money and then raising them.
  • Never underestimate the value of odd number pricing. A Swedish denim firm raised the prices of their jeans from $34 to $39... and demand increased! Odd number pricing gives an item a lower perceived price, higher perceived quality and the perception that the customer is saving money.
What experiences do you have with creating a pricing strategy for your app? What techniques did you use? Would you rather follow the methods above or go with your gut? We'd love to hear your comments.