4 ms·

I recommend anyone trying to decide pricing for their SaaS, or any product in general, to study a bit about Consumer Surplus. There is a very classical paper "

I recommend anyone trying to decide pricing for their SaaS, or any product in general, to study a bit about Consumer Surplus. There is a very classical paper "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly" that discusses, amongst other things, two part "tariffs" (admission + ride) which allow "the sellers to capture part of the residual surplus through an appropriately chosen fixed fee." Which is exactly what the Article has ended up rediscovering at the end. Quite a few economists and companies have given this problem a lot of thought, so it might very beneficial to study the body of literature that developed over the decades.

clairity 9y ago
to get a little deeper, two-part pricing is considered a good-enough optimum to the pricing problem, not the absolute optimum. the base price is high enough to get most people to pay it, but not so high to deter the "cheaper" customers. the incremental part of the pricing is designed to extract as much of the delta between the base price and the customer's willingness-to-pay (their max) as it can. the absolute optimum to capture maximum consumer surplus would be infinite-part pricing, i.e., charging each customer their maximum willingness-to-pay price. but it's very difficult, if not impossible, to determine that price in an efficient way. why not three-part (or higher) pricing? because you increase the complexity of the buying decision without enough of a payout.
- pmalynin 9y ago
  You're right, And essentially the only way to achieve the optimum (maximum price discrimination?) is to know that specific consumer's demand curve -- which is also the whole idea behind "contact us" pricing pages. I also think there is a limit to how complicated you can make the payment system before the user just gets confused. So that definitely should be considered. But two-part seems to be a familiar model for most people.
  - _red 9y ago
    There are ways to find analogs for their demand, particularly if they are using your software directly to make money. For my company, we try to target our monthly pricing to be between 1-2% of what our estimated costumers revenue is for the same period. This method only works if use of your software is directly tied to the production of their product. It falls apart if your software is merely ancillary.
pedalpete 9y ago
A link to 'A Disneyland Dilemma': http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organisation/Papers/Oi%20-%20Disneyland%20%281971%29.pdf http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organi...
- gknoy 9y ago
  The typical HN convention seems to link directly, or use a zero-indexed footnote. For example, if all you are doing is providing a link, there's no need for extra markup: A PDF of "A Disneyland Dilemma": http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organisation/Papers/Oi%20-%20Disneyland%20%281971%29.pdf http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organi... If you are writing more than just the link, it's common to use a zero-indexed footnote: The pdf [0] was originally published by MIT press, and can be found online [.... pretend I wrote more prose] 0: http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organisation/Papers/Oi%20-%20Disneyland%20%281971%29.pdf http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organi...
caffeinatedwes 9y ago
Tomasz Tunguz wrote a nice piece about the 2-part tariff: http://tomtunguz.com/three-part-tariffs/ http://tomtunguz.com/three-part-tariffs/ Actually, he mentions that academics argue that 3-part tariffs may be the most optimal. From his article: "Linear Pricing (LP) - Each analytics event costs $0.10." "2 Part Tariff (2PT) - The analytics software has a base platform fee of $10,000 and each analytics event processed by the system costs $0.10 more." "3 Part Tariff (3PT) - Again, the software has a base platform fee but the fee is $25,000 because it includes the first 150k events are free. Each marginal event costs $0.15." It can be a pain to implement "tariffs" on the billing system side, but it can be well worth it in the end. Props to you all at Canny for pushing through. BTW, if anyone is interested in building tariff/metered billing into their product, you might want to check out Cheddar's Billing API: https://gtchdr.com/2CjFrpv https://gtchdr.com/2CjFrpv
tomcam 9y ago
Disney reversed their pricing scheme described in the paper about a decade after it was published

clairity 9y ago

to get a little deeper, two-part pricing is considered a good-enough optimum to the pricing problem, not the absolute optimum. the base price is high enough to get most people to pay it, but not so high to deter the "cheaper" customers. the incremental part of the pricing is designed to extract as much of the delta between the base price and the customer's willingness-to-pay (their max) as it can. the absolute optimum to capture maximum consumer surplus would be infinite-part pricing, i.e., charging each customer their maximum willingness-to-pay price. but it's very difficult, if not impossible, to determine that price in an efficient way. why not three-part (or higher) pricing? because you increase the complexity of the buying decision without enough of a payout.

pmalynin 9y ago
You're right, And essentially the only way to achieve the optimum (maximum price discrimination?) is to know that specific consumer's demand curve -- which is also the whole idea behind "contact us" pricing pages. I also think there is a limit to how complicated you can make the payment system before the user just gets confused. So that definitely should be considered. But two-part seems to be a familiar model for most people.
- _red 9y ago
  There are ways to find analogs for their demand, particularly if they are using your software directly to make money. For my company, we try to target our monthly pricing to be between 1-2% of what our estimated costumers revenue is for the same period. This method only works if use of your software is directly tied to the production of their product. It falls apart if your software is merely ancillary.

pedalpete 9y ago

A link to 'A Disneyland Dilemma': http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organisation/Papers/Oi%20-%20Disneyland%20%281971%29.pdf http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organi...

gknoy 9y ago
The typical HN convention seems to link directly, or use a zero-indexed footnote. For example, if all you are doing is providing a link, there's no need for extra markup: A PDF of "A Disneyland Dilemma": http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organisation/Papers/Oi%20-%20Disneyland%20%281971%29.pdf http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organi... If you are writing more than just the link, it's common to use a zero-indexed footnote: The pdf [0] was originally published by MIT press, and can be found online [.... pretend I wrote more prose] 0: http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organisation/Papers/Oi%20-%20Disneyland%20%281971%29.pdf http://people.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organi...

caffeinatedwes 9y ago

Tomasz Tunguz wrote a nice piece about the 2-part tariff: http://tomtunguz.com/three-part-tariffs/ http://tomtunguz.com/three-part-tariffs/ Actually, he mentions that academics argue that 3-part tariffs may be the most optimal. From his article: "Linear Pricing (LP) - Each analytics event costs $0.10." "2 Part Tariff (2PT) - The analytics software has a base platform fee of $10,000 and each analytics event processed by the system costs $0.10 more." "3 Part Tariff (3PT) - Again, the software has a base platform fee but the fee is $25,000 because it includes the first 150k events are free. Each marginal event costs $0.15." It can be a pain to implement "tariffs" on the billing system side, but it can be well worth it in the end. Props to you all at Canny for pushing through. BTW, if anyone is interested in building tariff/metered billing into their product, you might want to check out Cheddar's Billing API: https://gtchdr.com/2CjFrpv https://gtchdr.com/2CjFrpv

tomcam 9y ago

Disney reversed their pricing scheme described in the paper about a decade after it was published