When it comes to setting prices for your web service, the only certainty is that you’ll get it wrong.

A huge number of factors influence how much someone might be willing to pay. These might include:

who your target market is
the prices your competitors charge
the loyalty your brand generates
the perceived value of your service
the scarcity of your offer.

Some of these (such as loyalty) are within your control. Others are established in your sector – and you’ll struggle to change them on your own. For example, people are now used to the idea of paying a small amount for iPad apps, but they’re far less likely to buy a subscription for news content.

Whatever price you choose, it won’t be perfect: you’ll either undercharge for services that customers would pay more for, or you’ll charge too much and turn people away. It’s unlikely you’ll find a happy medium, so all you can do is try to limit your wrongness.

Choosing a payment model

For software-as-a-service businesses, the most common pricing structure is to charge a monthly fee for access to the service. Many businesses offer several different options, charging more for access to extra features or to remove limitations, perhaps with a free plan for people to try the service out. We quickly settled upon this structure for TigerTask.

That still left several vitally important questions to answer.

How many plans?

Research suggests that you shouldn’t overwhelm your potential customer with too many options: they may decide not to take any action at all, in order to protect themselves from making the ‘wrong’ choice.

We settled on offering three paid plans, each with a set of restrictions that would broadly suit a different type of user: individuals or microbusinesses; small businesses or an individual department; and large companies.

What to restrict?

Common factors to limit include the number of users and the amount of storage space offered, but it depends on what your service is. TigerTask is at heart a contact management application, so the obvious choice is to restrict the number of contacts. We also limit the number of individual users on each account – it seems fair that big companies with lots of users should pay more than an individual.

As we develop new features, such as an API, we might restrict this to certain plans too.

Should you offer a free plan?

In short, yes – unless supporting free users is hugely expensive for your company. Free users are great marketing for your business, because they’ll tell other people about what you’re offering – who in turn might sign up for a paid plan. And free users might graduate to a paid plan eventually, too.

You might think that by letting people use your service for free, you’re losing out because a proportion of them would happily pay for it. And you’re right. But on the whole, only about 1% of all users end up paying, and most of them decide to do so within a few days of registering. You therefore have a choice between losing the ‘free’ users altogether, or harnessing their enthusiasm for your service and using them as cheerleaders.

At TigerTask, we decided that a generous free plan would be the best way to spread the word. By offering enough functionality that a small business could comfortably stay on the free plan forever, we’re increasing opportunities for them to tell others how great we are.

What price to choose?

This is the ,000 question – or the question if you get it wrong. In short, customers will pay whatever they perceive the value of your product to be. So if your product offers a clear value to them (like an A/B testing app, which could increase conversion rate on their site by 50%), they’re likely to pay more than they would for a frivolous iPhone app. With TigerTask, we’re developing a suite of apps to build on top of our core functionality, which will focus on specific ways of making money for our users and therefore boost our value in their eyes.

One guideline is to look at what your competitors are charging, and use that to calibrate your own. In our space, Highrise is a dominant player, so we have to be aware of what they’re offering.

Whatever you charge, there will always be some customers who would have been willing to pay more – termed ‘consumer surplus’ in economics. Some businesses, like airlines, have become extremely good at segmenting their customers – up to the point where everyone on the plane has paid a different price. Online, this can be done by offering discount codes, academic discounts and so on.

On the whole, it’s probably not worth it: as Joel Spolsky says, people would rather pay 0 knowing everyone else is paying 0, than pay if they know someone got it for .

Pricing it all up

In the end, there’s only one way to find out how much customers are willing to pay: put it on sale and see what happens. Keep in mind though that businesses tend to underestimate this price, and could generally charge more.

We’ve set our prices so that they’re similar to others in our field, they’re within the reach of our target market and they make it worth our while running the service. They won’t be perfect, but we’ve limited our wrongness as best we can for now. Have you?

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