A couple weeks back, VC Josh Kopelman wrote an excellent post titled “The Penny Gap,” where he discussed the difference between a free and paid-for business model. I highly recommend this post to any entrepreneur in the web space as it sheds some real perspective into the minds of consumers.
Josh starts out by talking about the common misconception of how getting users to pay the 1st $1 is the same as getting them to pay the next $1 (difference between $1 – $2).
While both scenarios involve the increase of users paying the same amount of money, $1, they are completely different in the eyes of the consumer. Heck, the distance between the almighty “FREE” and “I have to pay for this thing” is HUGE!!! This is what Josh calls the “Penny Gap.”
He goes on to talk about the different strategies for web startups to choose from that involve free, paid or “freemium”…a hybrid of the 2. The 37Signals guys have weighed in on this discussion before, and they’re right. If you create something of value (real value, not just something for leisure) you should be able to charge for it knowing that people are okay with paying for things that add value to their lives (i.e.- productivity, organization, added convenience, management tools, etc…). Now this is a great topic, one definitely worthy of a whole post in and of itself, but it’s not the point that I want to address in this post.
The question that I’ve been mulling over in my head lately is: What are the pricing points in the minds of consumers and what determines them?
Answer…it directly correlates to other items the consumer could purchase with that same amount of money. Well, that’s the 1st part of it at least…the 2nd is the comparison between the value of the product/serice offered and the value of what it’s being compared to (value in the sense of experience, convenience, fun, etc…).
Simple illustration, if a college student has to pay $10 a month for a subscription to xyz.com, they might compare it to the cost of going to a movie or eating out somewhere. If the subscription doesn’t hold more value than the movie or meal, chances are that they won’t pay for it. Now work with me here…
The point that I’m trying to make is that what you charge for your product is the 2nd most important question after the decision of if you charge for your product. If you’ve decided that consumers have to pay for it but you think that you’ll get a ton of demand since “you’re only charging $2 a month”…I would ask the question if the same demand would be there for $4, $7 or even $10 a month. The biggest gap is the initial one…0 to an amount. From there, there are other pricing points to consider that would greatly affect your demand and profitability.
Simply put, a $.01 fee may kill your service and a jump from $2 to $4 may have no effect at all. The key is to add value to the lives of others. That is something that people will pay for, and maybe even be willing to pay more than you think. There’s more than one way to skin a cat and, just as so, there’s more than one way to build a successful business.
By Micah Davis