Lessons Learned Playing With Pricing

When we first started, our pricing by all accounts was absurdly low. In my last post I chronicled the details of our pricing journey at Sucuri. Developers were finding that the cost was low enough that it was easier to send websites to us rather than invest their time, that could, at the time, run $40 to $100 an hour or so.  Also, contrary to the traditional Information Security (InfoSec) domain, focused on the enterprise, there weren’t that many players in the website security domain focused on the everyday website owners. There were a few competitors in name only, not in product or quality of service.

Here are a few things we were working with:

• Didn’t have the capital investment others had (we wanted build something sustainable);
• Weren’t going to go the freemium model (zero sum game that devalues security outright);
• Knew diddly squat about SaaS, selling to anyone (let alone consumers or businesses);
• The market was not established (people weren’t waking up thinking security);
• It was never about building a business (it sounded like a fun project);
• We were focusing on a market in which the expectation was either free or low cost (think open-source and hosting);

When you think about it, these considerations paint a pretty dire situation. How do you penetrate, create, a market that doesn’t exist around something you know is important but is practically impossible to communicate until the pain is felt? Let alone price for it? Our approach was simple, lead with value and worry about revenue later. For us it was easy because we ran the “company” as a project, in which we were working on it part-time while we worked our regular day jobs. We started in 2010, mid 2011 began to have this feeling that it might be more and Quarter 1 of 2012 had our “oh shit” moment.

The focus on value came through the deployment of our free Malware / Security scanner – SiteCheck and though the quality of our service. It was always, and still is, about doing everything we can for our customers. The scanner, while not the prettiest, was highly effective and one of the first of it’s kind focusing on identifying irregularities in how website interacted with end-user browsers. I would later learn that what this was doing was functioning as a lead-generator, who knew!?! The quality of service, especially in such a volatile business (everyone is always experiencing some emotion when under attack or hacked) came as a fresh breathe of air to most website owners. It’s amazing how low the expectation is by most consumers on what they can come to expect from customer support.

What we like to think is that what we did was build trust and authority with a critical audience – developers, designers, system administrators – the people responsible for building, implementing and otherwise maintaining the websites being affected. We helped them solve problems, not just in our scanner or quality of service but in the content we’d share (which I later learned was content marketing); we would lead the pack and change the way people share and distribute website security issues. This gave us more satisfaction than we’d ever realize.

Lessons in Raising Prices

Coming up with the pricing is tricky, think we can all agree to that. I can’t for the life of me however remember how we ended up at $89.99 as the base price, but we did. It had to do with calculations around what people were paying a month for hosting and what we felt we could reasonably get without causing too much heartburn; again it came to, “it kind of feels right”. To say it was pure gut, would be false, there were a lot of other considerations, but most importantly was the fact that we were very in tune with the market we were trying to service. I won’t get too much into billing models, things like annual vs monthly in this post, but it’s important to understand there is a big difference between the two and it can dramatically affect how you price, subject for another post I suppose.

I strongly believe that price changes are dependent on two things: the phase that you’re in as a company and your market.

Price Elasticity

When talking to pricing, you need to be familiar with price elasticity. It’s the idea that we can measure how much wiggle room you have with your product or service and the market you serve. This was something important for us to understand, I talk to this process a little in my last post in which I highlight how we went about testing what the market would work with. The market changes though; where it is when you start might be very different a few years later (as seen in our evolution).

Here is a simple equation to help objectively define price elasticity:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

If the quantity of demand for your service or product changes with a small price change, then it’s considered to be sensitive to change or elastic. If the inverse happens, a large change in price brings about little change in the quantity demanded it generally means your product or service is  inelastic. If the demand for your product doesn’t change as you increase pricing, you’re golden. If you adjust slightly and the demand slows, you might have a problem and it might be worth reconsidering the change.

In Sucuri’s case, the general consensus was that the product would have inelastic demand, so we should definitely increase the prices.

Timing

What price elasticity doesn’t account for however is timing.

Timing in terms of where you are as a company, as well as where your market is. Had we tested the price elasticity early on, I stand firm that Sucuri as it stands today would likely not exist as it’s known. We would have introduced too big of a barrier to entry, and we would have likely noticed it too late, allowing someone else to step in and claim a very critical market share. If you think increasing your pricing is hard, try decreasing it.

This is especially true in consumer-focused businesses.

Value

There is always a common theme when I speak to other business owners and pricing comes up, it’s always about the “value” their service / product is worth. They don’t want to have lower prices because it devalues their service / product. I always listen with curiosity. The arguments are the same, “I want to make sure I price right from the get go” or “I don’t want those problematic customers that don’t want to pay anything” or something along those lines. Here are some things to take into consideration if you find yourself in this situation:

• Pricing high from the get go in an unestablished market leaves a lot on the table;
• Reasonable pricing provides an opportunity to turn your focus on delivering value in the form of service;
• It also teaches you how to be more efficient and creative in the way you tackle problems;

We get so caught up in this “value” discussion, price based on value. This often creeps up in project based businesses, but I’ve seen it on product companies also. The fact is, the only real value is that which your market places on your product or service. What is someone actually willing to pay you? That’s honestly the only real value in terms of price that matters. You can value yourself high all you want, just don’t be surprised when sales are stagnant, or slow. I prefer to hear people complain the price are too low then the reverse.

Market Changes and Barriers to Entry

I briefly mentioned barriers to entry, but this is a real problem you should be ready to account for. Whether you price high out of the gate, or later. Moving the dial one way or another, is always challenging.

Barriers to entry talks to the theory of competition in economics, in which you focus on obstacles that might exist entering a new market (or something like that). Your pricing can be your own barrier to entry into your own market. Price yourself too high, and you might not realize that real potential until it’s too late.

As you move your pricing up, two things will inevitably happen. Your target audience will change, and you will introduce new barriers for yourself, out pricing a segment of your existing market. You have to be ready for this, and be willing to accept some loss.  Your market capture opportunity will undeniably get smaller, and someone will step in to fill the void (if the market is proven).

Protect Your Existing Customers

Whatever you do, when making price changes, especially increases, protect your existing customers. As an organization you will undeniably get tempted, by greed and opportunity, to force higher prices on your existing customer base. Don’t be that kind of organization, don’t penalize your existing customers. Protect those that believed in you and have grown with you as an organization; this will pay dividends.

Yes, some will be pissed and curse you. You can’t make everyone happy, and there are ways to minimize the leakage:

• Grandfather everyone into their existing plans, for life (don’t do this silly nonsense of grandfathered for a year);
• Disallow future upgrades, they can stay at their current plan no plan, but there is no more movement upward;
• Be forthcoming with the changes on pricing when it comes up, especially if you’re making changes that introduce more bang for their buck;

At Sucuri, one of the things we did was everyone that had an old Premium account for $89.99, configured for monitoring and remediation only, automatically got upgraded to the AntiVirus Basic, worth $199.99, and we added the protection platform. Why? Because it was the right thing to do, and it’d introduce more problems than not. All of a sudden there is all this new language about new features and products, and when something happens you have to say, “Oh no, sorry, you’re on an old plan” how horrible is that?

No Need to Tell the World

I say be forthcoming, but only when asked; there is no need to shout it form the rooftops. I’m not a big fan of this new transparency trend with everything, this idea that we have to share everything is just weird. When it comes to price changes, especially if you’re taking care of your customers, there really is no need to make any kind of announcement. What do you achieve? Not much of anything.

The first few weeks you might get complaints from potential customers that didn’t want to buy when they first visited, but then found themselves in need (somewhere in the sales cycle). Some old customers might come back in need of the service and be shocked, use your judgement on when you want to extend the old pricing, but you don’t have to. Don’t be a jacktard though. There might be random blips on it, a random post or reference on social media – just ignore it.

We have attention spans of minnows these days, it’ll be gone in 24 hours.

Price Changes Are Hard, But Achievable

I believe that no blueprints exist in anything, whether that be business, technology, sports, and definitely not in pricing. When thinking through pricing you have to take so many things into consideration, most importantly the business itself, the phase it’s in, and the market (does it even exist?). You can’t dictate prices because someone else does it, or because someone else told you to. Take all things into consideration, to include your own organizations configuration. Higher pricing brings about a different class of user, its own set of problems – they’re demanding in their own way, are you as an organization ready for that type of service?

For Sucuri, while we started relatively low it provided us a great opportunity to truly understand the problems our customers were facing. We were able to gain a level of understanding and appreciation, that few can rival and it’s become apparent in our brand and how we do our business. It gave us a means of connecting with our audience, building a large enough base from which we could expand from – word of mouth marketing they call it. Something exceptionally difficult to do when you’re not built from a freemium configuration.

When starting a business in an unestablished market I would likely start as low as possible with the intent of focusing on our value first, and revenue later. If I can make enough money to keep the lights on, but focus on delivering exceptional service, to the point where we can experience customer evangelism it’s a solid win. This though is because I’m more a long-game kinda guy, those focused on short-term would find this highly ineffective. Whether you stay there or not is completely dependent on the type of adoption your organization gets, if it stalls out or serves no purpose then you’re up a creek without a paddle and the odds of increasing pricing is going to be tough.

If you’re lucky though, you’ll find yourself in a predicament in which you have to increase the prices for no other reason than to slow the growth, cut the fat from the most problematic parts of your market, optimize your product offering and place additional emphasis on the quality of your service.