MARTIN OMANDER: Hi.
Welcome to "Root Access," the show on Google Developers
Live about startups.
My name is Martin Omander, and I'm joined here
by Don Dodge, longtime investor and startup advocate.
Welcome, Don.
DON DODGE: Thanks for having me back.
MARTIN OMANDER: All right.
So lots of good viewer questions.
We'll go into one specific question this episode
about pricing.
Macovei Vlad-- I'm sorry if I butchered your name-- asks,
what should be the factors determining
the initial price of an app?
And if a correction is needed, what
should be the transition strategy
to a lower or a higher price point
without upsetting current or future potential customers?
DON DODGE: Good question.
There's actually two questions there.
So the first one is, how do you determine the initial price
point?
Look at the competition, and if you're
competing against an entrenched competitor,
then you want to price under them.
So, say, 10% to 20% under the entrenched competitor.
If there aren't entrenched competitors,
then there are alternatives.
Like there might not be a product or service that
is exactly like yours, but there's always an alternative.
If there's a need there, they've figured out some way
to solve the problem.
Maybe it's not as elegant as your solution or as efficient
as your solution, but there are ways to do it.
So you have to look at how are users
solving the problem today?
And how much are they paying to do that?
And if they switch to your product or service,
how much additional productivity or gains are they getting
so that they'll perhaps pay more than the existing solution?
So that's two ways to look at how to price your product.
Either against the competition and come in a little lower,
or against the alternatives that may be inferior
and price a little higher.
MARTIN OMANDER: OK.
So then you get your initial price,
and pretty soon you'll discover that you weren't spot on.
You will need to change it.
What are the strategies for going up or going down?
DON DODGE: Good question.
My experience is it's easier to go up
in price than it is to go down in price.
MARTIN OMANDER: Oh really?
I thought it would be the opposite.
Everybody likes something cheaper.
DON DODGE: Except the customers who already paid for it.
MARTIN OMANDER: Oh.
DON DODGE: So if you take your product out at a price,
say $100, and customers pay $100 and you
start getting customers.
But you're not getting enough, and then you lower it to $75,
well, now you've alienated all of those customers who
paid $100.
They're going to be angry.
You've disrupted the value proposition
that you had going in.
So now where are you versus the competition?
And so you need to think very carefully
before lowering the price.
It's easier to come into the market at a low price
and then raise the price higher and higher.
The reason for that is that typically when
you raise the price, you're giving additional features.
So you're making the product better,
you're making it scale better, you're making it faster,
you're having additional features.
There's more value there, so customers
are willing to pay more money.
So in my experience, it's always easier
to go up in price than it is to go down.
MARTIN OMANDER: Hmm.
Interesting.
About that freemium, there's a lot of talk about freemium.
Is that the way to go, to have a free tier and a premium tier?
DON DODGE: Yeah, that's a great way to go.
Because the idea behind freemium is that if it's free,
you'll get a big user base and lots
of network effects and feedback from users that are free,
and that's OK.
And then you have a premium set.
That's where the "emium" in "freemium" comes from,
the premium set of features that they'll be willing to pay for.
So that's a great way to go.
And then that allows you to have the free, or low price, option
and the higher priced premium option.
You can also do that with no freemium model.
You can just have a base product that's
$100 and an advanced product that's
$150 and a pro product that's $300.
So there are lots of ways to do packaging and pricing,
and you don't need to be tied down to any particular model.
MARTIN OMANDER: And you shouldn't
be too afraid to get it wrong, because you can change it.
DON DODGE: Right.
Exactly.
MARTIN OMANDER: Great.
Macovei also brings up a great question.
What about ads?
That would be great.
Then I don't have to charge any of my users.
DON DODGE: Oh, so an ad supported model?
MARTIN OMANDER: Ad supported model, yeah.
DON DODGE: Yeah.
Ad supported model was very, very popular
about 10 years ago, five years ago.
Lots of web content companies, where viewing the content
was free and it was ad supported or--
MARTIN OMANDER: I started one of those that crashed and burned.
DON DODGE: Well, it's a very good model.
Google itself is ad supported.
MARTIN OMANDER: Mm hmm.
DON DODGE: So Google is an ad supported model.
But ad supported sort of assumes that you have a huge audience.
Lots and lots of page views, lots and lots of users.
Because when you do the math on how many page views
you need to make a million dollars in revenue through ads,
it's billions of page views.
I mean, it's significant.
So you have to have a pretty significant audience
to make ad supported alone work well.
Remnant ads-- and typically remnant ads or run of the house
ads that aren't that targeted, those are the kinds that sell
for $0.10 CPMs-- CPM means cost per 1,000--
or very low kinds of prices.
No one's going to make a lot of money doing that.
Conversely, if you're using Google AdWords or AdSense,
those are very targeted ads, so you
don't need billions of page views.
You just need a very targeted audience and an advertiser
who's willing to pay a very significant cost per 1,000
or a cost per click rate because you have a targeted audience.
So those are the two ways to look at ad supported.
It's if you have a very targeted audience
where you can use Google AdWords and command
pretty high cost per click rates, that
can work very, very well.
If it's a CPM kind of run of the house remnant inventory,
you better have billions of page views to make that work.
MARTIN OMANDER: Billions.
That's a big number.
DON DODGE: It is.
But there are lots of websites out there
that do have that kind of traffic and can make that work,
and that aren't solely ad supported.
Ad supported is one of the revenue streams,
and it can be significant.
So you need to look at your product, your users,
your audience to see whether ad supported will work
as the sole revenue source or as one component of it.
MARTIN OMANDER: So when I see ads all over the internet,
a lot of that is just people generating incremental revenue
on top of what they would otherwise?
DON DODGE: Right.
Yeah, typically it's a nice way to have an incremental revenue
source.
But it's not what their whole business is predicated on.
So it's a nice little revenue stream,
but probably not going to make you rich.
MARTIN OMANDER: Oh, great.
Thanks Don.
DON DODGE: Thank you.
MARTIN OMANDER: Macovei, I hope that answered your question.
Anyone else, if you have questions,
please add them in our YouTube comments.
We love questions, and we'll pick them up
in future episodes.
Also if you're a cloud developer and you
want to run your stuff on Google's infrastructure,
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If you're "Root Access" viewers, check the information
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And that's it for today.
See you next time.