Shopify Engineering 08/14/2012

Your App Pricing is Wrong

By David Underwood

Let's say you're an app developer who owns/operates a SaaS product. How much do you charge for it on a monthly basis? Don't tell me, just hold onto that number while you read this article. There'll be a quiz at the end.

Know Your Audience

Most paid services offer some sort of tiered pricing system. Developers want to capture as many customers as possible but they know that their software has different value to different people. The solution is to offer a variety of tiers at different pricepoints and try to funnel those that can afford it into the top tier and those that can't into the lower ones.

The question is, how do you get people to identify with a given plan? A common strategy is to name them something like 'basic' and 'premium' in the hope that serious customers will want the 'premium' experience. That's what Ruben Gamez did with Bidsketch. He had one cheap plan and one expensive plan. What he realized was that customers couldn't identify with either of these:

Premium and Basic doesn’t mean anything to a potential customer, other than saying that one plan is cheap and the other expensive.

After doing some reasearch to find out who his customers actually were, he came up with new plans that catered to specific segments of his audience. Bidsketch now has plans that cater directly to the following customer groups:

  • Freelancers — A one person business that creates one to two proposals a month.
  • Studios — Small business with multiple employees but only one person creates proposals.
  • Agencies — Small business with multiple employees and multiple people create proposals.

Segmenting customers this way allows you to implicitly recommend the plan a given prospect should pick. The rest of the article goes into much more detail on his pricing strategy and is well worth a read, so go check it out on Ruben's blog.

How Much is Too Much?

The biggest lesson with app pricing is that you shouldn't fall into the mindset that your pricing is set in stone. You should tweak your app pricing all the time until you find the sweet spot. Even then, you should repeat the experiments every few months as your audience's ability to pay may have shifted.

Shopify has been doing this for a long time, and we've seen great success with it. Our current pricing tiers are the result of many experiments and changes both in the price and number of tiers available.

We like to think that our current tiers represent our customers well but we're definitely not resting on our laurels. If we detect a shift in our customer's demands, we'll shake things up until we find a new system that works.

Pop Quiz

Still got that number from earlier? Are you as confident with it now as you were when you started reading? If the answer is 'no' then you should strongly consider talking to your customers and running pricing experiments to figure out how much your app is really worth to each of your customer segments.

P.S. What Not to Do

I'm going to speak about Shopify apps in particular for a second. For a while, we thought we'd solved the tiered pricing problem. Our thinking was as follows:

  1. App developers want to identify a merchant's ability to spend money on apps
  2. Merchants have already pigeonholed themselves through their choice of Shopify plan
  3. Let's tell developers to charge based on the merchant's Shopify plan!

This turned out to be a huge mistake. For starters, the list of possible plans merchants can be on is ever-changing (as described above) so maintaining a list of them is difficult. Second, it turns out merchants HATE being railroaded into picking a certain price-point.

We now recommend that developers differentiate on usage (e.g. 1000 orders/month) or feature-sets rather than Shopify plan. These are often reasonable proxies for the Shopify plan but it gives merchants choice, even if it's only an illusion.