4 ms·

He Wrote, "No one ever went broke making a profit." I am pretty sure this covers your concerns about covering your costs.

biot 14y ago
No it doesn't cover it. If you're building a trivial software app in a week which costs beer money to get going and maintain via a cheap hosted service, then sure... you should just visit random.org and generate a number from 1 to 100 and charge that (per month, year, one-time, or whatever) because who cares. But let's say you're building a non-trivial product and you've hired 4 engineers to work alongside you for 3 months to get the product off the ground to the point where you can start bringing customers onboard and billing them. These engineers come with a fully loaded cost of, say, $100K/year each. Maybe you're bootstrapping this venture via savings plus a second mortgage on your home to get to that stage and that's $100K you'll need to pay back to the bank plus interest. As you bring paying clients onboard, you're going to need to hire support staff. What ratio of clients to support staff do you figure you will need? You will also need to ramp up your server instances to handle the load. Maybe you'll need to hire a full-time DBA. What is your marketing outlay for acquiring new customers and what's the conversion rate so that you can calculate your cost per acquisition? Do you have a sense of the lifetime value of each customer? Can you guesstimate the CPA and LTV to within a small multiple based on asking people in your network who are familiar with comparable services? How do you factor initial sunk cost into the price? What sort of payback period on your second mortgage should you go with so that you're spreading out the costs over time rather than front-loading it all? How should you factor for continued growth, contingency situations, insurance, office space, potential legal risks, and a whole host of other factors to ensure that you actually are making a profit? There is a science to arriving at a price and having a certain amount of confidence that the price you chose will result in a profit. Saying "pick a number and ensure you're making a profit" does not help anybody in calculating whether there is profit to be had.
- davemel37 14y ago
  I am pretty sure all your calculations are covered by the word "Profit"...His point about testing prices is very sound. How you arrive at what prices to test, obviously requires more insight than picking a number out of your hat.
  - biot 14y ago
    In that case, the entirety of the article, including the title, can be replaced with four words: "Try multiple profitable prices." As an article titled "How to price something", I'm pointing out why it doesn't deliver.

biot 14y ago

No it doesn't cover it. If you're building a trivial software app in a week which costs beer money to get going and maintain via a cheap hosted service, then sure... you should just visit random.org and generate a number from 1 to 100 and charge that (per month, year, one-time, or whatever) because who cares. But let's say you're building a non-trivial product and you've hired 4 engineers to work alongside you for 3 months to get the product off the ground to the point where you can start bringing customers onboard and billing them. These engineers come with a fully loaded cost of, say, $100K/year each. Maybe you're bootstrapping this venture via savings plus a second mortgage on your home to get to that stage and that's $100K you'll need to pay back to the bank plus interest. As you bring paying clients onboard, you're going to need to hire support staff. What ratio of clients to support staff do you figure you will need? You will also need to ramp up your server instances to handle the load. Maybe you'll need to hire a full-time DBA. What is your marketing outlay for acquiring new customers and what's the conversion rate so that you can calculate your cost per acquisition? Do you have a sense of the lifetime value of each customer? Can you guesstimate the CPA and LTV to within a small multiple based on asking people in your network who are familiar with comparable services? How do you factor initial sunk cost into the price? What sort of payback period on your second mortgage should you go with so that you're spreading out the costs over time rather than front-loading it all? How should you factor for continued growth, contingency situations, insurance, office space, potential legal risks, and a whole host of other factors to ensure that you actually are making a profit? There is a science to arriving at a price and having a certain amount of confidence that the price you chose will result in a profit. Saying "pick a number and ensure you're making a profit" does not help anybody in calculating whether there is profit to be had.

davemel37 14y ago
I am pretty sure all your calculations are covered by the word "Profit"...His point about testing prices is very sound. How you arrive at what prices to test, obviously requires more insight than picking a number out of your hat.
- biot 14y ago
  In that case, the entirety of the article, including the title, can be replaced with four words: "Try multiple profitable prices." As an article titled "How to price something", I'm pointing out why it doesn't deliver.