In 2008 DHH (of 37signals and RoR fame) gave a speech to StartUp School. It was titled – the secret of making money online.
While I strongly suggest you watch the entire speech – the key part is that everything has a “Price”.
DHH talking about a secret behind a profitable company - "make sure you charge a price"
He suggests that the secret is to “charge a price”.
The question then becomes, what is the price to be charged – or what is this worth? A friend of mine is running into this issue with a new service he’s developing that will make lives easier for both, his information supplier, and his information consumer. How much this service is worth, is unknown to him though.
The elasticity in price isn’t linear – (image stolen from redeye VC)
Perfectly elastic - Price vs Demand
From the point of view of the corporation/individual who must pay the fee, there are a few things that they will need to consider before agreeing to the fee.
1) Value – what is the ROI on this investment? This usually deals with the hard cost of buying something at $10 a month – what is the value of buying this for $10 a month?
2) Cost – what is the cost of NOT doing something? For example – even if I know that spending $20 for a neon sign isn’t directly going to make me $20 in an attributable way – what does it say about my business if all the other businesses on the block have neon signs?
For a sales lexicon, the words above can be translated into – Greed, and Fear respectively.
If a person/business crosses the initial hurdle – i.e. they decide they want “it” – the next hurdle is whether they build or they buy.
The trade off they are making here, is time vs money.
For example – if you’d like to sell them something that costs $100
- that they can do in under 10 hours
- given that they have 10 hours to spare
- and they value their time at less than $10/hour
- and given that there are no other up front costs that they need to expend, or that they have already spent all the necessary up front costs (i.e. hire a developer etc.)
they might make the decision to build instead of buying.
Given all this information, how do you determine the price elasticity of your product, and where the sweet spot along that curve is?
Remember that free is a price as well – and as Josh Kopelman says – it is much harder to move a customer from $0 to $1 than to move them along past that point.
So, how do you figure out what price to charge?
Well, it depends on what your business model is.
If scale is important – for example – similar to a review site like yelp – your product is only valuable at a certain scale, then getting to that size is the most important aspect. Adding friction to that process, will only make it more difficult. That’s why Yelp will pay reviewers in new markets – as a way to reduce friction and speed up the process of making the site useful.
What can you do with the data?
Let’s say that you could charge each customer $10 per month – and this allows you to acquire 500 customers. You will now be making $5000 per month.
Alternately, you could give it away for free, and this will allow you to attract 5000 customers. This means you will make $0 per month from this revenue source. However, to match the previous revenue stream of $5000/month you only need to figure out a way to make $1 per customer per month as opposed to the previous $10 per month.
Potentially having 5000 customers as opposed to 500 customers will provide an increase in something – data, analytics, usability, etc.
Find a way to monetize that data in order to create a revenue stream. Google 411 – is a free 411 service that quickly became the most popular information call in several metro areas. The “data” they acquired was speech patterns and accents. Now, if they wanted to say – create a speech to text product, for say Voice Messages (Already done) then they might be able to find a way to monetize that instead of charging the 411 callers. The more callers, the more data, the more data, the better the auxiliary product. The better the auxiliary product, the easier to monetize, and possible the higher revenue per user to the first service.
Free is a price – it just means that you need to figure out a second route to revenue, and that route need not always be “advertising”
If scale isn’t important, and the value of your product is inherent in its usage (example – the value of a product like Microsoft Word for a writer doesn’t really increase by all that much if all the writers are using Microsoft Word. If the value of this product is not inherently tied to the number of users using it) then the question of what this is worth becomes much trickier.
It is certainly something I will be thinking about for the next few days.
