Vova Feldman is the founder and CEO of Freemius, an all-in-one payments, subscriptions, and taxes platform for selling software, plugins, themes, and SaaS. With over a decade’s experience, he’s also an expert on pricing page optimization and the meaningful impact it can have on the sales process. And, because his company works with solopreneurs and SMBs, Vova has developed a deep understanding of his customers’ pricing models that further enriches his knowledge. In the final episode of plugin.fm season 2, Vova unveils common mistakes and shares strategies to optimize your pricing page for results that turn visitors into customers.
Vova Feldman is a self-confessed serial entrepreneur and full-stack developer with a passion for helping software product makers earn a living from their passion projects.
In 2011, while doing enterprise sales, Vova learned the importance of tailoring a price to a buyer and why psychology can powerfully impact the sales process. Years later, Vova experimented with prices and packaging for a micro-SaaS he developed. At Freemius, he’s been actively involved in creating and experimenting with the company’s pricing page to optimize results.
The final episode of plugin.fm season 2 distills a decade of pricing mastery into an insightful hour-long conversation.
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Thanks to Vova for joining us and providing such valuable advice about software pricing pages and the psychology behind them.
Season 2 is a wrap and we’d like to thank all of our guests for the valuable insights and experiences they provided! Look out for news on season 3 shortly 😉
plugin.fm is brought to you by Freemius, your all-in-one payments, subscriptions, and taxes platform for selling software, plugins, themes, and SaaS. If you enjoyed this episode, head over to plugin.fm to check out previous episodes.
Vova: There were two big lessons that I learned, one with my side project, and my perception was, "You know, let's sell the pay plan for $1."
Patrick: We're going to unlock the secrets of effective software pricing with Vova Feldman, the founder and CEO of Freemius.
Vova: Then, I started to experiment, you know, increase it to $2. I had this kind of assumption that if I priced it very low, it would remove the whole price concern in the decision making, but it didn't. This was one kind of lesson learned: that if you sell something for a dollar, it doesn't mean anything.
Patrick: All the way back in 2011, Vova was doing Enterprise sales where he learned how important it is to tailor a price to a buyer.
Vova: Back then, I was CTO. I was in a startup accelerator in the Silicon Valley. The product that we've been building back then was SaaS. I had this meeting with Orange, one of the biggest telecom companies in the world.
Patrick: We're going to talk about the easiest way for you to grow your business.
Vova: And I'm sitting in this room doing the presentation. I'm switching to the prize. The immediate reaction of everyone: they started to laugh, and the presentation was really good until that point. Exactly what's happening? What's going on? The perception is that it was too low. Let's do it again. And I had another meeting with Netflix, added a bunch of zeros. I revealed the prices, and there was a reasonable nudging. That was, you know, another lesson. Welcome to the show.
Vova: Thanks, Patrick. I'm really excited to be here as a guest.
Patrick: Yes, as a guest, you normally get to watch the show and listen to the show, but now you get to participate.
Vova: For sure.
Patrick: So, I want to start with, I gave a little bit of the history, the context. You've been doing something related to pricing for over a decade, but what's interesting to you about software pricing and especially software pricing?
Vova: I think there are many interesting things, but the primary one is the things related to psychology. I would say a lot about putting yourself in the shoes of a buyer and trying to envision their experience. I think, in general, as psychology understanding people think is something that is very interesting to me. I got into pricing kind of by chance. Who mentioned Enterprise sales? I'm not a sales guy or something, but there was a period where I was in a startup accelerator in the Silicon Valley, and my co-founder back then, I was CTO, he was a CEO. He couldn't join the program for personal reasons, and the product that we've been building back then was SaaS for Enterprises. So I had two options, one is sit and code, but we're in a startup accelerator, so it's not the best way kind of to use that time. The second one is to, you know, get into my co-founder's shoes and do whatever is needed with the help of, you know, mentorship from the program and everything. So I jumped into the water. It was scary, honestly, but I learned tons of things from that, and that was kind of my first experience into pricing and seeing how people react when they see numbers in different context, I would say. So, this the story from there was that we had some pricing in mind that we come up with based on, you know, looking at our competitive landscape or something like that. And I went and started to pitch those numbers and, you know, our value proposition to different companies. And I had this meeting with France Telecom or Orange, which is like one of the biggest telecom companies in the world. And I got into this room with six VPs and like crazy, ah, it's Vova, what I'm doing here, you know, I'm a developer, let me code. And I'm sitting in this room and kind of pitching, doing the presentation of what we do. And then we got to the pricing slide in the end, it was kind of in the appendix. And when they switched to that slide, they asked me, okay, what is the pricing? And I'm switching to the price, the immediate reaction of everyone, they started to laugh, and and the presentation was really good until that point, and I was exactly, I'm looking at your face, and this was my face, you know, what's happening, what's going on, you know, but the perception is that it was too low, it was like ridiculous numbers when it comes to Enterprise sales. So that's how we start, and then we, you know, I talked with my co-founder, we did some, you know, Lessons Learned From that, added a bunch of zeros to the numbers, and I had another meeting with Netflix like a few days later, and the same concept, not many VPs, but you know, the right person there, and I revealed the prices, and there was like a reasonable nudging that suddenly everything makes sense, and we simply, you know, added I think like two zeros to all the numbers, there were like a bunch of tiers there, we didn't close the deal, but still, you know, that was kind of okay, there's a lot of meaning to these numbers.
Patrick: I'm processing this, so two zeros is a lot, right? Like, so in one case you were not laughed out of the room, but you were, you know, it was like, I guess my...
Vova: They were giggling, you know, kind of like, what's going on? It doesn't look serious, you know.
Patrick: It doesn't. That was what I was thinking. In Enterprise sales, I think the assumption is you don't understand how Enterprises work and all the work that goes involved where, and then at Netflix, a couple days later, you added two zeros to the price, and you were taken... serious. No, you didn't win the contract, but you were at least taken seriously. You weren't laughed at. That is wild. That is wild. If you're giving me a price that's way too low or way too high, it kind of... there's an assumption as the buyer that you don't understand what you're talking about. Is that kind of like one of the principle things of pricing? Is anything way too high, anything way too low, and it's like, oh, this is probably the wrong fit?
Vova: Absolutely, and this is the psychology that goes behind pricing. When people look at numbers of something, they have some perception, they have... they already come with some bias because our brains are, you know, we're comparing everything. This is our way to kind of evaluate if something is cheap, expensive, or priced correctly based on historical stuff that we sold.
Patrick: So, sorry, I'm going to take a little tangent here. There's an excellent boy I listen to a podcast about how I think it was the Quakers in the United States. They were the people who standardized prices. So before that, you would go into a grocery store and the grocers would charge the rich people more for the groceries than the poor people, and it was about bartering and how much time you spend bartering and stuff like that. But basically, for most of human history, prices have been variable. Oh, you're the emperor, we're going to charge this much. Oh, you're a peasant, we're going to charge you this much. And it's interesting that I think that's a mindset that not a lot of people break out of is you can have different prices for different people. And of course, you can have, you know, for Enterprise, you can... you get a big Enterprise contract, you hire one or two more support people who only work on Enterprise, but you can still give them a price that's inflated by two zeros for essentially the same service plus, you know, some extra support people to make sure that they're always being tended to.
Vova: I think what you described is still the same, you know, you have luxury products that are targeting rich people because they have a luxury brand, yeah. So you can still buy, you know, top-notch quality products that are not luxury in fraction of the price, yeah, but if you go to buy Prada or whatever, you know, it's adjusted to the audience. You need to understand your target audience.
Patrick: Yeah, so pricing is super interesting to me and super confusing, and I've been involved in a couple pricing conversations at a couple different software companies. And I think my first one of the first things I think about with pricing is how much of this is just guesswork, like just throwing a number at a wall and seeing what happens. Again, I've been in some pricing conversations, and it really feels like maybe we were doing pricing wrong with the companies that I was at, but it seems like maybe 50% of it is just guessing. Do you have any thoughts on that?
Vova: I think it's a great question, and I think that many times, this is how it starts, you know, when we go back to that product and Silicon Valley and what I mentioned, this is how we probably picked our prices. It was guesswork, and then based on the feedback that we received, we started to adjust it. But like today, I understand that there is methodology like how to structure your prices, how to think about it. So I will throw out some ideas, and you know, we can cover them. You need to understand your target audience, we mentioned that, right? We need to understand their budget, we need to understand how they think. Another point that it is worth mentioning is value-based pricing. So if you can quantify the value of your product and charge less than what is valued, then it's also easier to market and make that sell. What I mean by that is, for example, if you know that you target e-commerce stores, for the sake of the example, that are making 10 grand and above because that's your target audience per month, and you know that your solution increases conversion by 5%, so you can literally know how much money, like, what would be the impact on your target audience, so if you charge less than that, it should be a no-brainer. Of course, you need to look at your competitive ecosystem and everything. You can be blind if you have competitors that are charging a fraction of the price. With that said, if you don't have competitors, you can also set up the prices because you're the only one in the market. So the competitive landscape matters a lot in the equation. So very niche products have the privilege to charge higher and it's trivial, you know, the more competition you have, things like you need to be more competitive. So this was one example, you know, the 5%. Another thing, if you know your product is saving time to the people you are targeting and it saves your audience, I don't know, 10 hours per month, so you can quantify what is an hour of an average buyer from your end and offer something that would still make sense to them. So this is just a few ideas of how you can approach pricing in a more methodological way rather than, as you said, guesswork, but at the end of the day, it's experimentation, like you can, you need to see how the market reacts to your numbers and optimize it.
Patrick: So let me share one specific example which I think is interesting. So I was at one company, and we had one basic, so we had a free tier for everything's free, and then there was a premium tier, and then there was an Enterprise tier, but that's like 1% of sales, so let's ignore that for a second. But it's basically free and premium, and then it was, we're like, you know what, there's probably some differentiation here, there's probably some price discrimination here, we want to split these into two separate tiers, so one slightly cheaper and then one that was, I don't know, an extra hundred bucks or an extra 200 bucks or something a month for extra features. Why we spent months of work, we updated the pricing pages, and I was updating all the content on the website and doing all this stuff, and we do run this pricing change and in the end, the revenue is we wanted to see a revenue increase of like, you know, 20% or something and in the end, the revenue increase was zero, it was almost unbelievably exactly the same as it was before, except now we have two different, two different tiers, and to be fair, we have slightly fewer customers, so slightly fewer support requests, right? We're getting paid slightly more per customer on average, but we did all this, it feels, it feels like guesswork, and then we were wrong. So I guess my question for you is if it is guesswork, how do you experiment with pricing because that was months of work and then we didn't quite see the results we wanted, how do you make it go faster so that you can experiment more? Does that make sense?
Vova: Yeah, so before jumping into experimentation, you also mentioned support, and this one is also important to include in the calculations because some products are very support or attention heavy, you know, from you in terms of resources, so you definitely need to incorporate that into your calculations. In terms of experimentation, I don't know why you spent months on pricing, I don't know if it was about thinking about the prices or adjusting the product itself to facilitate those different tiers, maybe that was the work that went on. I don't know, but honestly, to experiment fast with pricing, you can just, without changing the product, let's say you have one offering, one paid version, right? You just introduce whatever additional, if you want to package or change the numbers and show different marketing materials, you know, maybe you say that this like a lower tier suddenly doesn't include all your features but without really protecting them, you know, just to see how people react, right? So as long as you grandfather your existing customers, it's not like your customers get into your website and check the pricing every day, right? You know, and also it's legit for you to change pricing over time, you don't necessarily have to announce that every time before, especially not during an experiment. So if I were in your shoes in that experiment again, I don't know all the details and why it took two months, I would just go to the page builder that you've been working with, whatever, add that new package and see how people react. So you can fake it until you figure it out, you know, it's the fundamentals of the Lean startup methodology, you know, you don't have to have the backend right, you just want to see or run the experiment as fast as possible, you know, to see how are you how your assumptions to validate your assumptions basically, you know.
Patrick: So I think I'm learning something from this, and I think I'd take something away from this in the future. I think I think the core problem was we were just very confident and if we increase price there's demand for a product so if we increase prices most people will still buy and we just kind of assumed that and so we went we started updating the business for a while and so there's so many pages of content that had to be updated that referenced olds like you know going from one plan to two plans I think they were we might have renamed them too so like we to change the names of all the plans across dozens of pages and you know what here's what we should have done we should have tried the new plan added it and then see if anyone buys it or you know a reasonable amount.
Vova: Exactly.
Patrick: I think we're a little too confident. So that's interesting just to let, you know, as long as your team is well informed to support for a week we're trying this if anyone asks we know it's confusing for this one week but we're trying to learn.
Vova: Moreover, I would do like you know split testing on multiple pricing options at the same time why not and see how those perform man but so at that.
Patrick: So it's interesting about split testing are split testing prices legal I feel like there's been discussions about this with Amazon.
Vova: I don't know man.
Patrick: Okay, great.
Vova: I'm talking from a technical perspective right now, you know. Don't quote me as a lawyer here I know in the past that was a practice, you know.
Patrick: Yes, do some research to make sure
Vova: Disclaimer I'm not a lawyer.
Patrick: But you know you still could do maybe if people aren't if I'm remembering this correctly is you can advertise prices so like let's say you're saying hey this this cell phone is a 100 bucks and you have an ad for that on Facebook you can test how many people are clicking that ad and then you can have another ad that says it's 80 bucks and then you know you can do some conversion rate do some estimates and then on the checkout page they can all be the same price of 80 bucks let's say so the people who clicked on a $100 ad are aren't paying the lower price you can do some things where you advertise prices and then you still give everyone the lowest price but you still get some data on.
Vova: I would argue that it's not the same you know because there's a difference between showing an ad and clicking an ad versus actually swiping the credit card again not a lawyer my intuition that it should be okay because let's look on Enterprise sales right you sell the same thing to different organizations in completely differences of millions.
Patrick: Everyone knows that you need to make your homepage highly relevant to your audience to show them the next step that you want the audience to take, and that makes sense because it's the most visited page on your site. Now, for many businesses, there's another page that's often the second most visited page on the site, and we tend to spend very little time thinking about that page. So we're going to dig into that page, what you need to include on it, and even how you can get feedback from your customers on that page. I don't have a ton of experience in our pricing pages, and there are some best practices, right? And also maybe mistakes to avoid. So I would love to know, like, what are the mistakes you've seen on pricing pages that lose software developers easy money? That by designing a bad pricing page, you were actively losing money. What are the mistakes you've seen?
Vova: Yeah, there are many mistakes. I think the main mistake is that people don't invest in a pricing page at all. They just spend a lot of resources on the homepage and their blog and everything, and then they neglect the pricing page because the assumption is that if you're there, that's it, you know, it's just like you're ready to buy. But like, you need to remember that in most websites, if you have a pricing page and it's not hidden somewhere, it's the second most visited page after the homepage because that's what people want to know, they want to know what is the bottom line, right? But you don't want to, like, one option is just to show them the bottom line, but it's a missed opportunity. And I think that it is critical to think, we mentioned buyer Journey, but the pricing page is the page where you need to think about the buyer's Journey. So if someone already went to a pricing page, there's intent behind it, maybe they're not buying, not planning to buy it right away, but they're clearly interested in whatever you want to sell them, and now they're at this point that you have the opportunity to take them through this journey to show them why they should do it and preferably do it right now. And there are ways to do it. So I think that the main thing is to understand the importance of the pricing page and also understand that many times, even if you have a fancy, you know, homepage that lists down all the features and benefits or like a dedicated features page, people will jump to the pricing page right away, again because of that mindset, tell me, you know, how much do I need to pay, you know? So you need to ensure that like you educate them, you remove all the concerns that they have, add some urgency, right, add social proof, reassurance, and take them through this kind of experience that convinces them, oh, you know, it looks like there's a good product, it's credible, I'm seeing like I don't know influencers, it has high reviews or whatever, the support is great, I'm getting money back guarantee if I don't like it, oh, there's a countdown here, right, a special discount that happening right now. So all these kind of signals to try and convert them at the spot. So there are like a bunch of practices that you need to apply in order to, you know, have that buyer Journey starting with, you know, a little education through reassurance, social proof, etc., and don't just, oh, the price is $100 per year, okay, just give them that reassurance that let's say if they commit to buy, it's okay, you know, they can get their money back, like all these different signals that will help them to make the purchase decision.
Patrick: There's something about don't just show them the price because I think if you just show the price, people think of it in one dimension. I think a price can scare away some consumers instantly, and if you say here's all the stuff you get for this price, that's just a different conversation, is a different context. I took some notes Here. I love what you said, remove concerns, that's huge, that's like, does this work on wordpress.org? Yes, it works with wordpress.org, great, you know, like just a couple obvious things of, does this work with my product, add urgency.
Vova: And preferably, those concerns should be removed by reviews from others that are actually using your product, so it's not just saying, oh, you know, it works with wordpress.org because you're biased, right, as the owner of the product, but if you have a quote from the customer that says, you know, I've been using it on WordPress.org for five years, whatever, and never and it works amazingly, it's much stronger with someone else who is like less biased is the one that's selling for you.
Patrick: Yeah, I love that, and I always think social proof is underestimated. If you give me a quote from someone with no name and no image, it's close to value zero, where if you add an image that's more, if you add a name that's more, if you add a link to their website that's better, if you have, and then probably the best stuff, I mean, there's probably just different levels of social proof here, but a video review of someone talking is probably the best. I don't know if that would send people off on a tangent.
Vova: I think in every target audience, there are people who are influencers and known in the community, so if you can get a quote from someone that is respected, right, in that Niche, then it gives it a lot of credibility on top of all the other things. Also, there is the whole art of choosing the numbers and how you present those numbers, like it also depends on how you package it and how many packages you have and what billing cycles you offer, whether it's only monthly or monthly and annual should you show the prices, the annual prices in monthly increments, in annual increment, like there are so many things that are like once you acknowledge those it's like everything it's obvious and it's like, oh, it's a no-brainer, you know, but you need to kind of examine enough pricing pages to have that in your brains.
Patrick: Yeah, so let me go back to the buyer's journey for a second, because I think this is something that I'm always interested in—personas and persona research and the buyer's journey, and trying to map the buyer's journey. I always want data on like, you know, where's the first place you heard about us? So, like, I try to ask those questions. Let's say you validated that people want your product but you don't really know enough; you haven't maybe done customer interviews with them or something like that. How much research should you do on buyers before setting up a pricing page? Or do you, like, do buyer research while also experimenting on the pricing page?
Vova: I think you could do all of those. You know, like, one thing that I do recommend, especially early on or in sensitive times like you said, where you want to change some things, is to have live chat on your website. It's a great way to engage with the person and actually ask questions like, "How did you, like, get into this page? Was it Google? Did you hear about us from some blog post?" Especially if they have some questions, right? So, you first help them, you give them some value, and then you can ask, "Hey, would you mind if I ask you a question?" And usually, people don't have a problem to do that. So, you can do kind of online little interviews with people who are actually on your site right now and see, ask them whatever you want to learn. So, this is a really great practice. It's not scalable, you know. This is why I said you need to do it either early on where you're still kind of exploring, or in sensitive times that you do want to make changes. If you do have the capacity to have a live chat on your pricing page, it helps conversion a lot because people see not only that I have all this credibility, social proof, money-back guarantee, all this good stuff, I have a person here that is ready to help me and whatever concerns I have, I can, like, hopefully, you can address them and convince the person.
Patrick: In just a few moments, we're going to talk about how you can use psychology to build a pricing page around your target price point. We're going to get into some of our favorite books and talk about just a few principles that'll help you motivate users to become customers, so stick around. Okay, so I have the next question here is about psychology and I'm super curious to hear about, you know, so I took some psychology classes in college but I don't think I know that much about psychology. What does a business owner need to know about psychology to help them with their pricing page?
Vova: I'm not a psychology expert, let me put it here, but I think I do understand the psychology behind, you know, buying stuff, and there is definitely a lot of good literature of, you know, like financial decision making and things like that. I highly recommend books from Dan Ariely, he is amazing, all the experimentation, it's like mind-blowing. First of all, you need to really understand your audience, their budget. I think it is also good to understand how they buy products, and you also need to understand fundamental concepts, kind of universal, you know, the smaller the number you show them, the easier the buying decision, right? For example, the fact that we compare everything, you know, this is critical. I've seen some, and Don’t wanna really talks a lot about this stuff, like I've seen pricing pages we just have, you know, one number, that's it, and like the justification is let's make our pricing simple, but when you just show one pricing point and I'm still unsure that this is the company that I want to buy from, it increases the chance that because I'm only seeing one number that I would want to understand whether it's expensive, whether it's cheap, if I still don't have that knowledge. So what I will do is I will open another tab in my Chrome browser, right, and Google for alternatives, so I'm risking losing the person just because I showed only a single price. So I think that there is this whole concept, I don't like this word, but you know, price anchoring, this is the term that in the way that you show numbers, like you can let's assume that your audience is pretty homogenous and it's like the same type of buyers, so there's no like, you know, agencies or freelancers that and things like that, like so, so you can kind of build a pricing experience in a way that when they look on the page they see okay, you know, from all the pricing options this is the best deal, you know, so it's give them some not reassurance it gives them that comparison that point of reference, you know, I can buy for this, I can buy for that, and there's like multiple options, and from this options I see that this deal is the best and it's the best for me. So if you have that on your pricing pages, it will increase the chance that the person will actually buy and won't jump to some other, you know, places to do some study, you know, whether what they get actually makes sense, just because they have that reference on the page already and along, you know, with the other things that I mentioned like removing concerns reassurance it's all psychological concerns, you know, people need to commit and swipe their credit card so there’s a list of things that can go wrong for them starting from this product is not for me or maybe it's like fraudulent, maybe I don't know my credit card is can get exposed for whatever reason, maybe I just want to try it but I don't want to commit. So anyway, there's a bunch of things I can think of that are all kind of related to the things that we already discussed so I don't want to mention the same things yeah twice but if you can narrow down, you know, the question I can be more specific.
Patrick: Well, this is great. So you recommended one of the two books I was thinking of, so Dan Ariely's "Predictably Irrational," which is an incredible book and talks about right just how humans like we think we're logical and we are just we're nowhere near as logical as we think we are. We are weird creatures who follow weird patterns, so definitely recommend Dan Ariely's "Predictably Irrational." And then the other one I was thinking of is "Influence: The Psychology of Persuasion" by Robert Cialdini. So there's something called the Cialdini principles, and I think that's the book I was thinking of with this question, which is like there's a foot-in-the-door strategy which is hey we have a $5 mini ebook or a $10 mini course and by offering like that's the foot in the door people are bought into your like they buy this little tiny product and now they're much more likely to buy a $200 product from you because you offer this little tiny thing. Then there's but there's a list of these strategies and literally strategies have like opposite I forgot what the other one's called but it's like you give them a really big number at first is a different strategy and that works for this other psychological reason it's kind of overwhelming but also you just need to go here's my customer I've had 10 interviews with customers for an hour so spent 10 hours researching my customers maybe a couple hours of live chat research of and here's who I think they are and what they're like I read this book here are seven strategies and you probably just want to pick one maybe two and experiment right that's going back to your first point yep you know let's split test it here's the standard pricing page that we have now let's try adding some packages let's try an expensive package and then what you said with price anchoring right it's easy with pricing pages to highlight one of the columns like most of the pricing page software gives you some way to like this is the most popular this is the best deal and it's bigger and bolder and and the first the price on the left or what whatever try each strategy and see which one works for you.
Vova: Practices.
Patrick: Practices, yes. So, anything on Robert Cialdini or any I'm curious if you've heard his stuff or or read his stuff or anything like that.
Vova: I didn't, but I have some thoughts about what you mentioned so I would be happy to share my strategy. You know, like it's usually to choose the price point you want your buyers to buy at and then build everything around that price point to ensure that you funnel everyone. Again, assuming your audience is relatively homogeneous with that assumption, you want to pick a price point and build the entire experience so people get to that point, funnel into the decision, "This is the number, you know, this is the best deal that I want to buy it." And I think that I get that approach of you know, let them subscribe or you know, taste something in a small price like do a trial for $1 or something like that. I think this strategy is definitely valid, but I would keep that as an exit strategy. What I mean by that is you show a regular pricing page and then if you identify and get signals from the browsing behavior that the person is about to leave, then is the time to surface that, you know, exit strategy. So you mentioned before that with your previous company where you did the experiment, you had a free tier, pay tier, and Enterprise tier. I am generally against showing free tiers; it depends on the product, depends on others, there are many disclaimers here, but what you can do is reveal that free tier at the end if you see the person is about to abandon, right? You can show a popup and say, "Hey, by the way, did you know we have a free tier? Why don't you subscribe as a last resort?" Or if you don't have a free tier, show a pricing page and then if they leave, "Oh, you know why don't you want to try to subscribe to a trial?" So you can leave those things like a less resort, but in the end you do want to make money and convert people, so I would not highlight, you know, free things and trials, yeah, and keep them for a later stage.
Patrick: Yeah, I like that. I always think about cash flow is just the lifeblood of a business, and so getting pricing right means getting the right people to buy the right packages for them and for you, so you gotta make sure that you're taking care of your business. There definitely some cases to hide or to minimize the free tier.
Vova: I want to highlight that after you, you, you already have product-market fit and everything, I can't emphasize enough how important it is to run those experiments. I know that, you know, especially technical founders creators love to build features, you know, add because that's our passion, you know, to create stuff. MH But the impact on your bottom line that you can make by those optimizations of the pricing page is far greater than what you can do with any features that you will build, and it will take significantly less time, yeah, it's just the energy because it's yeah, I think it's like creators find it a little like boring, you know, that's not the thing that you want to focus at you want to create thing bring like create value MH but but it's also important to create value for your company because then you can reinvest that value into improving your support into improving like you know many things it's definitely something that you know I can't stress enough the importance of running those optimizations.
Patrick: I love that. So let me ask you a question then because I guess, I think, so you're probably right. Having worked at numerous software companies, let's say I'm going to say five to maybe 10% of features are the features that everyone loves and will buy your product for, but probably 90 to 95% of features are like, "Oh, it's like these. It's 10% of our audience likes this feature or 15% of our audience likes this feature, and there's probably competitors who have those features." So it's like building one more feature generally doesn't help the business. You know, if you look at a random sample of a hundred features, probably five of them will drive your business for the next year. Pricing is definitely an afterthought at a lot of the places that I've been at, and it's something sometimes it's like, "Hey, we here, literally this has happened. We built this incredible plugin. It does all these features. How do we sell it? I don't know. Bob will come up with the price and we'll put it on the website on Monday." Right? Oh, it's like an afterthought, right? Pricing is clearly an afterthought that one random guy did a while ago and now is doing it for the rest of his job. But is that, no one's really thinking about it. You should have someone on your team thinking about it. Yeah, let me ask you who, who should be thinking about that on your team?
Vova: I think it depends on the size of the company. I would say, you know, in the space we're at, which is like lifestyle software businesses, the founders, whether it's a CEO, whatever, you know, name you want to call that, that's usually the founders' role to figure out the pricing. One more point I'm slightly shifting back, but I think it's pretty important and we didn't mention that. One of the mistakes that I'm also seeing in pricing pages is underpricing, and it especially comes from the Eastern side of the world and like more developing countries because there is a perception like we discussed about it a lot, right? Like the way we perceive prices is based on our experience on the prices that we've seen on the cost of living etc. And I've seen so many times people from, you know, less Western countries that for them, they charge this number and they think, "Oh, you know, that's amazing, you know, if I can sell 10 licenses of that per, you know, week, it's incredible." But connecting that to the point that prices have to make sense when it comes to the perception of the potential buyer, like you have to adjust it to the market, you know? If you're selling, let's say we're talking about WordPress plugins, if you price your product for $20 and that's it to a Western, let's say American person, it, it smells fishy, you know, something is wrong here, either the code is broken or they're going to steal my credit card or whatever, even if it's an amazing product, you know, and the fact that you live in, I don't know, in Pakistan, India, Bangladesh, whatever, doesn't mean that the quality of the software is not good there, but the cost of living is so much cheaper. So for them, $20, it's perceived like $200 in the states. So you have to adjust prices and you need to think about, about what is my primary, you know, market? If I'm targeting the Western market, if I do want to sell globally, you know, I can choose different numbers if I do have the tool to actually offer different numbers to different countries.
Patrick: I was gonna ask that, is that I feel like I've only seen bigger companies have, I forgot what they're even called, but geographically like restricted prices where literally if your IP address is in England then we show you this price, and if your IP address is in India we show you this price. I feel like that's far down the line, that's like once you've figured out the basics of pricing and your packaging, then you add geographic.
Vova: Let's call that localization as part of the experience, right?
Patrick: It is, but that's pretty far down the line, right? Like people who are just getting started probably, they probably need to think where is their biggest, where is the biggest collection of customers and use that for all their pricing. Is that maybe the right 80/20 there?
Vova: I think generally, like, yes, you know, start in everything that you start, focus on the primary thing, right? On the biggest market. But there is no reason not to do it early on because in the same matter, if you sell something for $200, right, and you try to also sell it in India, it won't sell there. So if you want to be more accessible to a global market, like, why not? I think there are, like, tools today that it's pretty easy to accommodate that. It's just a matter of set up the numbers, okay? But another problem is that many makers think that they or not think that they're building everything themselves and if you do build everything yourself, it becomes, you know, further down the line. But if you choose platforms and today there are many platforms, Freemius and many others, that you can very easily accommodate these capabilities.
Patrick: Sometimes you'll hear business advice like never sell lifetime licenses and while that may be good advice, there is an argument on the other side and you can make a lot of money if you price your product just right, so stick around for the math on lifetime licenses. Ooh, math, yes, we're getting nerdy in here. I want to talk about lifetime licenses just because I know we've seen that a lot. I feel like everyone sold lifetime licenses, maybe that's, you know, what that's how software was sold, right? Like early editions of Photoshop is you buy the CD of, you know, Photoshop on CD and you have that until the CD breaks, you have that forever. So I think some industries still have lifetime licenses for software. So is that a viable strategy and I guess should businesses offer lifetime licenses and is it a viable strategy?
Vova: Yeah, there's a lot to unpack here. I think it also depends on the type of software. There's a big difference between distributed software like you said, you know, when you get a copy of Windows or whatever, right? You have the CD, it's with you. Even though the support was limited, you didn't get lifetime support, it was still for, I don't know, a year, three years, whatever, versus SaaS where you actually, you know, as long as you use the product, you consume some resources, there are expenses even if you don't offer support, something goes into that. I think generally lifetime licenses can work for some products. It doesn't mean that you need to. So if we're looking at the WordPress ecosystem, right, there is the billing cycle, but there is also the number of activations, like on how many websites you can use the product. So I'm against unlimited, okay, lifetime unlimited because that's a problem. But lifetime is not necessarily bad, and today those are called, you know, LTDs, lifetime deals, which is like the popular term, and AppSumo is the king in lifetime deals, this is what they do in their marketplace. I think for some products, it does make sense. If we're talking about distributed software or any other software, regardless, I would never offer lifetime support, even if you allow using the product forever, I would not do lifetime support. The second point that I wanted to mention is that if you look at different statistical insights, most businesses don't really survive after five years, and it's relatively rare when you sell subscriptions that someone will stick with you for five years, you know, it's usually not happening. So if you price your lifetime license or your product correctly, theoretically you are maximizing your customer lifetime value, right, because you're getting everything up front. Right, you need to price it right, like three, four times your, maybe five times your annual product. I would also say that you don't want to do that to support-intensive products. So if you know that you're getting a lot of, like, technical issues and all of that, you probably want to be extra careful with that. That's the kind of thinking behind that. Can you really price it in a way that will eventually increase your bottom line without risking an abuse?
Patrick: Yeah, but there's so many businesses that people think they're going to run for the rest of their lives, and they run it for six months and then realize it's hard, and if you offer them a lifetime license, you get four and a half years for free, right? Like, they kind of stop using it at six months, and you get four and a half years for free, and it pays for all the people who lasted six years or seven years and used more than you expected. I love that.
Vova: And I want to get back to what I said in the beginning, which was if your product is something for a short term like immediate use, that's a great product for a lifetime license, like the migration thing, because you don't use it often, right? So the support is something that is relatively, you know, infrequent, so it actually makes sense. Because if you'll sell, let's take to the extreme, something monthly, like, you will have to charge significantly less, but the churn will be huge, because you only need to use it now, right?
Patrick: To me, the biggest and hardest part of pricing is packaging, and it's really like, okay, I know freelancers use my software, and I know agencies use my software. Do I need two plans? Do I have, does it, does that just or do I have like, you know, and you can call one freelancer, call an agency? Or do I have a Pro Plan that could kind of work for both? Again, you can have 100 features, and you know, 80% of your users care about these 20 features out of the 100. Okay, is that a, is that a plan? And how, and then, are the rest of the plans 50 features, 80 features, 100 features? It just seems overwhelming, I guess. Like, packaging seems overwhelming to me. I assume it seems overwhelming to other people who are listening. How do you figure out packaging and pricing?
Vova: Absolutely, I think it's kind of an art, you know, and also a matter of pattern recognition. So if you've seen enough of those and understand the psychology and have a strategy, it becomes easier. So let's go with the strategy of choosing one price point where you want to funnel as many buyers into that price point as possible. So if you want people to buy that, you would want, for example, to put your killer feature in that package, right? So adding pricing psychology. So you would most likely want to have that plan as the middle plan, right? Not the cheapest, but not the most expensive. So let's say we have three tiers, which is kind of the traditional structure. So the killer feature will not be in the cheapest plan, right? Because you want to show the cheapest plan and the middle plan where you're targeting that. The numbers will be pretty close, right? We're talking about comparing things, so they will have that anchor. But the difference will be a slight increase in the price, but the killer feature will be in that main plan. So you know, "Oh, I need this plus the difference is meaningless. I don't know, a dollar a month or something like that, but I get so much more here, plus the killer feature." So this is like one way to package. You talked about different audiences. Let's say I'm targeting freelancers and agencies. So hopefully you have features that are more relevant to agencies and features that are more relevant to freelancers. So you like about the naming, it's another topic by itself, but you can position the relevant feature in the relevant, you know, package. Or another approach is if you know that subset of your audience is using the product on e-commerce and you know that when it's on e-commerce, people usually have a bigger budget, it's clearer the path and the value of what you're offering to them. So you can also charge that, like put the e-commerce specific features in a higher tier. But definitely that practice is just like limiting the number of activations or the number of users, it's not optimal. And the reason it's not optimal, if we're talking about a number of let's say, side activations happening in WordPress, unless your audience is specifically like agencies that do have more websites. If you structure your pricing based, like the only difference is the number of activations, then for sure I can guarantee that 95% of the sales will be the single side license. So immediately most people will buy the cheapest plan or the same thing with if it's like per seat pricing, right? For one. So again, depends who you are targeting, but if your target audience is usually like companies or like a single person, you're immediately pushing everyone to the cheapest plan and people will be blind to the others. It doesn't matter all the pricing practices and psychology things that you'll put in place are simply irrelevant to them. The way I approach those packages is in addition to limiting whatever is the resource there, also differentiate by features. So it's not only by user sites or API codes whatever, but also add additional value to higher tiers and again, preferably put your killer feature in the package that you want most people to buy.
Patrick: So I love all this advice. You know what? I think my challenge is I can think of examples where everyone did all those things, all those best practices were wrong. Let me give you one example. This was years ago. I'm going to pick on a company, but I'm only going to pick on them because they've changed their pricing since. It was this way years ago. I had a WordPress.com account for a hobby site. Like, I paint the little tiny toy miniatures, and I wanted to put pictures of them, and I wanted just to have Google Analytics installed on the website. The pricing for that WordPress.com read. They scanned your brain and they read it, and they said, "You know what? We're going to put a killer feature, Google Analytics tracking, in our highest plan." So I had to decide between no tracking for zero dollars a month or $200 a month for— and sorry, this is basic Google Analytics, this is including a script. So as a developer, you know, it's like one line of JavaScript, add some PHP for the UA code. And I know how unbelievably simple it is. I know how simple it is in WordPress, and I just want to have Google Analytics for, again, this is just a hobby site. And in the end, I didn't buy it, and I didn't buy any plan because they put what I thought was a really simple feature at a $200-month plan because it was the killer feature that probably everyone wants. Everyone wants to track their website data, but I probably would have bought a $30-a-month plan. So I just like, it just seems impossible where I think they were following probably some sort of best practice of the killer feature that everyone wants, let's put it on a more expensive plan. But it was so expensive. And I also, I know how trivial it was to implement that. I never bought anything. So I think that I guess this all comes back to you just have to experiment, right? You put it in the $200 plan for a month, see what sales are like, maybe you move that feature.
Vova: Maybe you're not the best buyer for them. I don't know what went into that thought process behind it, but you know, in the end, this is how they decided. Maybe it was just a mistake. Sounds like a mistake.
Patrick: I think they've changed it since then.
Vova: Yeah, but it's all about, you know, the decision. If you know that you are intentionally putting something that is relatively obvious, right? Adding something like Google Analytics in the $200 tier, then maybe that's, you know, the target price that you want to get.
Patrick: Sometimes the simplest changes have the most profound effects on your business. What if you just changed your pricing one day? What if you were selling a product for $5 a month and you doubled it to $10 a month? Would you lose any customers? Vova actually has some history with this, so keep tuning in to hear how we raised prices before customers started to drop off. Looking back, what would you have done differently with any of the pricing pages for your products? Were there any failures, and if there were failures, how would you turn them into successes?
Vova: Yeah, so there were two big lessons that I learned. One with my side project, it was my first kind of small SaaS, you know, side gig that I decided to monetize, guys, and I had a lot of users. And my perception was, you know, let's sell the paid plan for $1, you know, and convert everyone. That was the perception, you know, and that was the first like package, you know, $1, you get all the paid features basically. And I had conversion, but I didn't become rich out of it, you know? I mean, I saw that the conversion was following the benchmarks of the internet, which is, I don't like 2%, something like that, back then. And then I started to experiment, you know, increase it to $2. I see no change in conversion. $3, $4, $5, you know, it's the same conversion, nothing changes until I get to two digits. So that was kind of the experimentation. But I had this kind of assumption that if I will price it very low, it will remove the whole, like, price concern in the decision making. But it didn't. And it's also the same with the Enterprise sales story that I said, like, our perception was we wanted to secure someone like France Telecom, right? So we didn't want to, like, charge crazy numbers or something like that. So we wanted to eliminate that concern. But it's not the way it works, you know? At the end of the day, the person need to make, you don't want to price it too high, right? So there is some range, but whether it's, you know, in the low end or in the high end. And this is why experimentation is so critical to figure out what is this, you know, max number that you can get to without affecting conversion rate. So this was one kind of lesson learned that if you sell something for a dollar, it doesn't mean anything. And the second one is actually with frus. So when it started frus, there was nothing like it in the market. Maybe there are like some of the competitors today that were just starting out. And I was kind of comparing ourselves to the wrong competitors, you know? For me, I looked at Freemius. Okay, we solve a lot of, like, operational hags, similar to what marketplaces are doing. So the initial pricing of Freemius was this. How I didn't get any customers this way, but it just, you know, tells the importance of pricing. I priced it at 30% because my perception was I wanted to target people who have free products. And I said, okay, let's give them an offering, something that will help them very easily convert their free users into paid. And my assumption was that I will have a surge of, you know, developers from WordPress.org jumping to use Freemius. And because they all really passionate about their plugins and, you know, I did like a Discovery, and they all wanted to kind of hope that they had an option to focus on that as their full-time. So for me, it was okay, right now you don't make any money. We can offer you a product that can help you start making money right away from your free users. And we'll charge 30% because that's how marketplaces are charging. And we're solving the same like payments subscriptions billing all the stuff. Obviously, no one subscribed, you know? So that was the wrong pricing, and it was also hard to really understand that it was the wrong pricing. But I went to conferences and sat down with people and, like, why won't you sign up, you know? And I actually think that it was side balky that told me, man, you're crazy, you know, the percentage here, it doesn't make any sense, like no one will buy into that. It was the first one that I think was open and transparent. I know it's hard for Americans, maybe because his roots are not from America, to actually say what you, you know, what you're thinking. And then I started to rethink prices, and we ended up with the price point that we have right now, which is like 7%, a meaningful difference, of course, but it made a difference. So that was, you know, another lesson you need to, if you are looking and the competitive landscape sometimes is when you come up with something new, you can't really replicate existing pricing models. So if it's new, you potentially need to kind of invent, you know, and come up with different ideas.
Patrick: Yeah, you have to compare yourself to the right, the right people, the right companies, the right orgs, yeah, right like Apple and Google. Apple Marketplace and the Google marketplace are kind of monopolies for their own softwares. So they can, they can charge 30% if they want, whereas you are not, so it's super interesting. It's a good lesson. And also a good lesson that I just took away from that is when something doesn't work, just keep asking questions. Like, because ultimately I'm the type of person where I want to know why something doesn't work, and it sounds like you figured it out. It was like, oh, that's a crazy high percentage. Let's drop the percentage. But if you, there's a lot of people who wouldn't go through all that effort and just, they wouldn't ever learn what happened, and they'd probably just give up and try to build something else. So, I love that story, and it's a story about Freemius to end this episode. Vova, this has been great. Thank you for coming on to the show.
Vova: Thanks for hosting me.
Patrick: And thanks to our listeners for tuning in. If you enjoyed this episode, our only ask is that you send it to a friend. We want to help as many entrepreneurs as possible. plugin.fm is brought to you by Freemius, your all-in-one payments, subscriptions, and taxes platform for selling software, plugins, themes, and software as a service. If you're struggling to grow your software revenue, send a note to contact@freemius.com to get free advice from Freemius's monetization experts. My name is Patrick Rauland, and thanks for listening to plugin.fm.