I'm torn. On the one hand, it clearly succeeded as a publicity stunt.
On the other hand, in terms of discovering what users will pay for Creately, the experiment was a failure. By essentially structuring the system as "donate us money", you prime the users to think "Hmm, even $1 is being generous to them. I'm a big spender... I'll go as high as $3." That is, ahem, an insane price point for any service.
You have to convince someone to dig out their credit card to pay you money. There is essentially no differentiation between $3 and $9 at that point, since neither amount is an appreciable amount of money to working professionals. (Students are another case. Since they're going to complain long and loudly about being made to pay, and are going to do their level best to steal your service anyhow, I think you can quite rationally make the decision just not seek their custom. Alternatively, you can segment your plans such that one which is free but helps your marketing meets their needs.) There are tremendous advantages to the business, however, from moving from $3 to $9. (Revenues net of Paypal fees just increased by a factor of four.)
Note that $9 is still VERY VERY cheap. The fully loaded cost of a professional exceeds that for every ten minutes. Also, if you look at any SAAS business they'll tend to tell you the same thing: the most expensive plan, which is typically bought by employed professionals spending other people's money, brings in more revenue than any other plan. This has been mentioned by Wufoo in interviews, it was true of DropSend when they published their numbers, and I know it to be true of three other companies who have not given me explicit permission to make the fact known.
Additionally, as Creately noticed, the kind of people who are attracted by "This only costs a buck!" are the worst customers in the known universe. They cause hugely disproportionate loads on your support resources, and feel entitled to do so because they're Paying Good Money For This, Damn It. They tend to churn like crazy. They'll fail at the most trivial of tasks (like typing in their credit card details) and then blame you for it. (When you spend a buck on something, if something goes wrong it is the merchants fault, the lazy bum. When you spend hundreds on something, you darn well check to make sure it went through alright.)
The payment method matters a lot too, paypal and credit cards are for practical purposes unusable for services under $2 / month, you'd have to charge for a year in one go, and annual renewal rates are terrible, they're much worse than $5 / month because people will no longer remember what that charge was for and they'll cancel, or worse, they'll charge back and it'll cost you more than you made in the whole year ($25 chargeback penalty, even if it isn't your fault), not to mention a hit on your chargeback record which could at some point cost you your merchant account (usually a 1.5% limit on chargebacks).
$10 (or $9.95) is where the game really starts, less than that is really only to get people to subscribe for trial purposes for 3-10 days with an automatic up-sell to the full rate if they don't cancel.
That's a tried-and-true scheme and it is good for a very large portion of all online revenues on services.
The biggest problem - and you address that somewhat in your last paragraph - is that people that pay $1 feel just as entitled (or even more in some cases) to your premium support time, because, after all they are now a paying member, they intend to get their moneys' worth.
On a $1 charge you can afford support on roughly 1 in 50 customers, it had better be a very quick to resolve issue.
You have to convince someone to dig out their credit card to pay you money. There is essentially no differentiation between $3 and $9 at that point, since neither amount is an appreciable amount of money to working professionals.
For a once-off purchase, I totally agree. For a subscription, there's a big difference there.
I know not everyone's like me but I tend to calculate the annual price for subscriptions I have. So even though I almost never use it now, paying $1.99 to the Problogger forum is no big deal. But $9.99? That'd be a $23.88 vs $119.88 - a pretty wide gap. There are lots of things I wouldn't spend $9.99 a month on something that I'd spend $4.99 a month on.. a flowcharting app might well be one of those things.
Did you consider "Free" as ONE OF the amounts in the field? That could conceivably have given you the extent of the gap between "Free" and "Paid" for your product. You could have used the data to figure out your the correct price points.
I tend to agree that this is useless in terms of figuring out the right price point. It may also have a kind of psychological devaluation effect on the service.
As a publicity stunt, it makes sense. Although it would make much more sense for an already well known entity to stir things up a bit (just like Radiohead did with their album).
I have a funny story about this subject. A while ago when we were charging $9.95 per month for the site and I felt pretty good (several thousand members) I was visiting someone that also runs a large for pay website.
He looked at what we were doing and he said 'double your price'.
I laughed at him, and said no way, people will cancel in droves, if more than half cancel it'll be a net loss.
* Generate a random price in the acceptable range (but don't tell the user about it)
* Let the user know that you made up a price and let him enter what he would pay
* If the user entered a higher price than the random one he gets the product, otherwise he doesn't
Of course this only works if you keep the user from trying to do this multiple times, for example by offering an invite-only system and giving every invitee only one chance.
What if this were done iteratively? As they add more features to the premium, one could try creating different tiers with higher and higher starting points, you could then really start to see and breakdown where different segment's fall in the value scale. Anyone that paid more than the next tier, automatically gets in(can donate more if they want)? I am sure this would lead to too many plans (would probably need a moving bar to keep the numbers of plans reasonable).
"The PWYW scheme did a good job in helping us gather invaluable data on our customers, but may not be sustainable over a long run. This is due in part to the fact that although we ask people to be Fair, not everyone is."
When fair is defined as "pay what you want", how do you define unfair?
[+] [-] patio11|16 years ago|reply
On the other hand, in terms of discovering what users will pay for Creately, the experiment was a failure. By essentially structuring the system as "donate us money", you prime the users to think "Hmm, even $1 is being generous to them. I'm a big spender... I'll go as high as $3." That is, ahem, an insane price point for any service.
You have to convince someone to dig out their credit card to pay you money. There is essentially no differentiation between $3 and $9 at that point, since neither amount is an appreciable amount of money to working professionals. (Students are another case. Since they're going to complain long and loudly about being made to pay, and are going to do their level best to steal your service anyhow, I think you can quite rationally make the decision just not seek their custom. Alternatively, you can segment your plans such that one which is free but helps your marketing meets their needs.) There are tremendous advantages to the business, however, from moving from $3 to $9. (Revenues net of Paypal fees just increased by a factor of four.)
Note that $9 is still VERY VERY cheap. The fully loaded cost of a professional exceeds that for every ten minutes. Also, if you look at any SAAS business they'll tend to tell you the same thing: the most expensive plan, which is typically bought by employed professionals spending other people's money, brings in more revenue than any other plan. This has been mentioned by Wufoo in interviews, it was true of DropSend when they published their numbers, and I know it to be true of three other companies who have not given me explicit permission to make the fact known.
Additionally, as Creately noticed, the kind of people who are attracted by "This only costs a buck!" are the worst customers in the known universe. They cause hugely disproportionate loads on your support resources, and feel entitled to do so because they're Paying Good Money For This, Damn It. They tend to churn like crazy. They'll fail at the most trivial of tasks (like typing in their credit card details) and then blame you for it. (When you spend a buck on something, if something goes wrong it is the merchants fault, the lazy bum. When you spend hundreds on something, you darn well check to make sure it went through alright.)
[+] [-] jacquesm|16 years ago|reply
$10 (or $9.95) is where the game really starts, less than that is really only to get people to subscribe for trial purposes for 3-10 days with an automatic up-sell to the full rate if they don't cancel.
That's a tried-and-true scheme and it is good for a very large portion of all online revenues on services.
The biggest problem - and you address that somewhat in your last paragraph - is that people that pay $1 feel just as entitled (or even more in some cases) to your premium support time, because, after all they are now a paying member, they intend to get their moneys' worth.
On a $1 charge you can afford support on roughly 1 in 50 customers, it had better be a very quick to resolve issue.
[+] [-] petercooper|16 years ago|reply
For a once-off purchase, I totally agree. For a subscription, there's a big difference there.
I know not everyone's like me but I tend to calculate the annual price for subscriptions I have. So even though I almost never use it now, paying $1.99 to the Problogger forum is no big deal. But $9.99? That'd be a $23.88 vs $119.88 - a pretty wide gap. There are lots of things I wouldn't spend $9.99 a month on something that I'd spend $4.99 a month on.. a flowcharting app might well be one of those things.
[+] [-] prakster|16 years ago|reply
I'm sure most hackers in this discussion have heard of the famous article by Fred Wilson 3 years ago, but here it is anyway: http://redeye.firstround.com/2007/03/the_first_penny.html
[+] [-] k7d|16 years ago|reply
As a publicity stunt, it makes sense. Although it would make much more sense for an already well known entity to stir things up a bit (just like Radiohead did with their album).
[+] [-] thegeekster|16 years ago|reply
[+] [-] jacquesm|16 years ago|reply
He looked at what we were doing and he said 'double your price'.
I laughed at him, and said no way, people will cancel in droves, if more than half cancel it'll be a net loss.
Sales went up.
We basically doubled our income overnight.
[+] [-] chandika|16 years ago|reply
What happened to the existing users when you doubled the price? Did your cancellations go up? Or did you freeze the price for the old users?
[+] [-] jules|16 years ago|reply
[+] [-] ciex|16 years ago|reply
* Generate a random price in the acceptable range (but don't tell the user about it)
* Let the user know that you made up a price and let him enter what he would pay
* If the user entered a higher price than the random one he gets the product, otherwise he doesn't
Of course this only works if you keep the user from trying to do this multiple times, for example by offering an invite-only system and giving every invitee only one chance.
[+] [-] ohashi|16 years ago|reply
[+] [-] gcheong|16 years ago|reply
When fair is defined as "pay what you want", how do you define unfair?
[+] [-] robryan|16 years ago|reply
If your app gets the job done better than visio for a company why shouldn't they pay you a comparable amount?
[+] [-] trevelyan|16 years ago|reply