Amazon’s S3 and AWS platforms, and similar on demand storage and computing services, are becoming increasing popular as core infrastructure for software startups. There is a tendency, because the costs are well defined, to base pricing on “margining up” these services. There are three problems with that:
- Does Not Price to Value: you normally want to price to value and use your costs a test for how inviting your pricing will be to the competition.
- Ignores Opportunity Cost of Your Time: in an early stage startup most of your real costs are the opportunity cost of your time and the need to move down the learning curve on a number of key processes (principally sales and new customer bring up).
- Immediately Positions You As a Commodity: pricing by margining up commodity services immediately positions you as a commodity and may prematurely shut off your search for creating more value for your customers. Reframe “I cannot charge that much” to “what could I do to create enough value for my customers that they would pay that much.”
- Price to Value: If you are going to launch a new SaaS product based on Amazon or a similar hosting service I would try and determine what your customers value about your service that is otherwise difficult to obtain or unique (differentiated):
- What are they doing now to solve the problem? How much is it costing them in time and money?
- How much risk is there in alternatives? Can you substantially lower the risk (or the variance in outcome)?
- Calculate The People Time Needed for Key Tasks: you need to build a full model of the service that includes the time needed and costs for:
- executing all the relevant activities needed to make prospects aware of your offering,
- supporting prospects evaluating your offering,
- bringing them onboard as customers
- supporting them as customers,
- retaining them,
- turning them into a reference.
- Focus on a Niche Where You Offer Premium Value: instead of thinking about charging a lot of people a little, think about who would pay dearly for your service. Focus on them. Targeting a smaller group normally lowers your marketing expense and allows you to laser your message (examples, key benefits, terminology,…) on their situation and benefits.
Two good books on this issue:
- “Free, Perfect, and Now” by Rob Rodin which details some of the challenges of competing against others with access to the same basic technologies (somewhat similar to the challenges of margining S3 & AWS: anyone with a credit card can take a look at your website and decide to leverage Amazon for a similar business.
- The Strategy and Tactics of Pricing” by Thomas Nagle is the test book that I have read on pricing issues.
Trackback from your site.