Reference no: EM132222232
You Be the Consultant: The Benefits of Premium Pricing
The 20-person staff at 37signals, a Chicago-based software company, ran into the same problem every time they collaborated on a software development project: sharing sketches of ideas required multiple steps (drawing, scanning, uploading, and sharing) that slowed the process, limited productivity, and inhibited creativity. To remedy their problem, the software team developed an easy-to-use app for tablet computers such as the iPad that allows users to draw sketches on the screen with their fingers and share the drawings with others instantly via e-mail or other communications software. The beauty of the software, which the company calls Draft, is its simplicity. There are no shape tools, text tools, brushes, textures, or color fills. Draft mimics a person drawing sketches on a piece of paper. “No Sharpie, no paper, no scanner, no waste, no extra steps,” says Jason Fried, cofounder of 37signals. “Just draw, tap, done.”
The software team was so pleased with Draft that they decided other people would like to use it as well and decided to sell it on Apple’s App Store. “If you search the App store, you’ll find dozens of similar drawing apps,” says Fried. “You’ll also find a mix of prices. From free to $9.99, there’s a product and a price to satisfy nearly everyone.” Most drawing apps range between “free” and $4.99.
Only 20 strong, the staff at 37signals devotes most of its time on the company’s four primary software products, and Fried wanted to make sure that the time they invested in Draft would pay off. “We’re a rare company in the Web-based software business,” says Fried. “We actually charge for things. We provide our software like a restaurant provides its food, a cabby provides transportation, and a clothing store offers a shirt—in exchange for money.”
Fried takes a different view of creating a customer base than most business owners. “Most companies seem to want as many customers as they can get,” says Fried. “At 37signals, we don’t want lots of customers. We want lots of the right customers. Our goal is to maximize profits, not market share. We also want to maximize happiness—for our customers and for ourselves. When we set out to put a price tag on Draft, we decided not to pay attention to what the other drawing apps sell for. We didn’t look to compete on price.”
Fried and his team knew that most apps sell for 99 cents but had no intentions of joining what he calls “a race to the bottom.” Instead, they took a fresh approach to selling their software. They wanted to use price to reduce the number of customers who purchased Draft rather than to increase it. “That’s right,” says Fried, “we wanted fewer customers to buy Draft. With a price tag of a buck or two, we could have easily sold 10,000 copies of the software. On the surface, that sounds great but not when you think about the resources required to serve 10,000 customers. A good number of those 10,000 people are going to need help. Some are going to complain. Some will ask a lot of questions.” Fried says that providing customer service is part of being in the software business and that 37signals works really hard at it. He also points out that its four principal products sell for $24 to $149 per month. “At those prices, we can afford to provide excellent service. Could we provide excellent service for many thousands of additional customers paying a one-time price of $1.99? Would that reduce our ability to serve our $24-a-month or our $149-a-month customers? We believe it would.”
The team decided to price the Draft app at $9.99, well above the prices of most competing drawing apps. “Instead of going for a land grab,” says Fried, “we created a small island. We’ve sold nearly 2,000 copies of Draft. That’s about $20,000 in revenue. We are much happier with $20,000 in revenue from 2,000 customers than $20,000 in revenue from 10,000 or 20,000 customers. Given our current resources and team, we can happily serve 2,000 Draft customers, plus all of our other customers.”
1. Do you find Fried’s philosophy of using pricing to create fewer customers rather than more customers to be unique? Do you agree with him? Explain.
2. Why do so many entrepreneurs, especially first-time entrepreneurs, fall victim to the mistake of pricing their goods and services too low? (Scarborough 360) Scarborough, Norman M. Essentials of Entrepreneurship and Small Business Management, 7th Edition. Pearson Learning Solutions, 01/2013. VitalBook file.