Picking Pricing

0:00Welcome to Rework, a podcast by 37signals, about the better way to work and run your business. I'm Kimberly Rhodes, joined by the co-founders of 37Signals, Jason Fried and David Heinemeier-Hansen. This week, we're going to talk a little bit about pricing and some different pricing models and how you can pick your pricing for a product. We're working on some new things here at the company, and with that comes deciding how that price is going to look. So let's just maybe start with some of the different pricing models that we've used in the past. I know we have different pricing, obviously, for Basecamp.

0:30and hey, what are some of the things you guys are thinking about when you're picking a price for a new product? Well, I think we can go back to historical pricing. We started out as a web design firm. So we were doing price per project. So we never really did an hourly rate, but some people can do that. We did, you know, just here's the project. It's$50 ,000. That's it. That kind of thing. We, so we did that. We also explored this idea called 37 Express, which was a one page redesign for$3 ,500 and it took one week. Oh, interesting. So what we realized was that, you know, companies, basically there's three things.

1:06They want to know what they're going to get. They want to know how long it's going to take. And they want to know what it's going to cost. Everybody wants to know those three things. Yet consulting pricing is none of those things. Basically, it just kind of goes on forever. You don't really know what the deliverables are going to be. And you don't know what it's going to really cost in the end. Kind of sort of know, but maybe not really. So we tried to do this thing where you buy one page at a time. And that worked pretty well for us. We didn't like make a fortune on it, but it was an interesting novel approach.

1:34And we tried that for a while and that worked out pretty well. So we did that. Then we got into SaaS stuff, which is early days. I think we did this product originally called Single File, how David and I met. And that was$12 a month or something. It was just some flat monthly fee. So we started doing that early on. Okay, wait, let's pause right there. When you say it was$12 a month, if that was a price. Did you just pull that number out of the air? Were you like looking at your expenses to determine what that price would be? I mean, I'm pulling out of the air now too, because I don't remember exactly, but I think it was 12 bucks.

2:05I think it was 12. I don't know if David remembers, but maybe there's even three tiers. I don't remember. You know, you don't really know because we didn't know if anyone would buy the thing. So you can't really back out your expense. I mean, you know what your expenses are in a sense, but you don't really know like how many customers are going to need to cover that. Like, is it even possible? Is it even in the realm a possibility that we're going to have that many people? Or do we need to charge, you know, 900 bucks a month to cover like this? It's never going to work. So at some point, you just kind of pick a number that seems reasonable, that you think maybe is possible, that feels affordable, that feels like something you might pay.

2:38And you keep your costs down in general always, and you just try to make it work. I mean, that's kind of what we've essentially done over the years. And luckily, we've had something that hit really big, which is Basecamp, which makes us able to do all sorts of other pricing experiments with other products that may or may not work out, but we have the buffer because we do have one thing at least that really worked out and sort of high rise to some degree. And so it has hay to some degree, but nothing quite like Basecamp. Anyway, the point being that we've tried a bunch of things from fixed prices to fixed smaller project prices to per product pricing, monthly subscription, annual pricing per user pricing we even did a thing with know your company which is a product we launched a number of years ago where it was a sort of a hybrid of one it was a hundred bucks per employee once so this is sort of a precursor to the once idea also which was selling the software just again one price forever but this was uh the idea was like it's recurring in a sense and that employees come and go and so a company will they'll hire someone new enough to pay us a hundred bucks to get them in the system, but there's not a recurring fee for that individual employee.

3:47We've tried many things is what I'm trying to get at. I think it's fun to try a lot of things. This idea that like, there's just one way, which is per seat. And that's just how it is. That's just kind of what people have fallen into. And there's good reasons for it, especially if you're selling 10 ,000 seats. You can charge big customers more than you can charge small customers, but there's penalties to that. And there's cons to that. There's also advantages to that. So lots of different ways to look at it. I think one of the interesting things to look back upon in our history is the things that didn't work out, the things we did not ship.

4:19And the one that stands out to me is our original pricing plan for Campfire, which was our chat product. We launched it back in, I think, 2005 or 2006. I think 2005. We were going to charge per room. We were going to basically make it very affordable, I think like five bucks to charge per room. And we got quite Quite far down the line of that and not too long before launch, I sort of had the conversation with Jason, like, would we actually do this? Would you put in your credit card to buy a one-off chat room, even if it's relatively affordable? And I think it kind of failed the test Jason was talking about.

4:59Would we buy it? Would I pull out my personal credit card to purchase this thing like that? And we then didn't ship it. So Campfire reverted to the more traditional model of just being per month, but it was not per seat. It was just a fixed price per month. The other one we've done that I find interesting and perhaps we should revisit one day is the pricing model for high rise, which were based around buckets. if you have zero to 15 people on this system, you pay X. If you have 15 to 30, you pay Y. And I think there's something there where you escape this sense that every single time you go to add another user, you're having a conversation about, is that worth it?

5:41It creates some other problems. Now you have step functions, and maybe people are going to try to stay within the bucket. But I've certainly felt this when we review our pricing or our cost when we're using other people's products. In fact, we just reviewed our Zoom setup. And Zoom is an interesting model because they price on the main per seat is for folks who need to host a meeting that lasts for more than 45 minutes. If you allow folks on your account that don't need to go for that long, at least under some models have gotten quite a lot more complicated, they weren't going to charge as much.

6:18So I could see all those dynamics that our customers go through when we think like, well, actually, does everyone really need it? Or maybe this 45-minute limit is actually a feature, a hidden blessing. Maybe more people should be on it. Maybe Jess and I should be on that too. But ultimately, just all that gamemanship that arrives with it, which is one of the reasons I always really liked the pricing we ended up with for Basecamp for many years, which was one price. $99, whether you're three people or you're 10 ,000 people, it's just one fixed price. There's only the buyer don't buy option. But of course, again, nothing is free of trade-offs.

6:57And with that particular model, we ran it for several years after testing the heck out of it before introducing. I think we tested for six months running all sorts of A, B, long run testing, cohorts, blah, blah, blah. And the math looked appealing after that six months passed. It looked like, yeah, we're going to lose some signups or we're more than going to make up for it in the increased per account revenue. And then as these things go, you maybe get a little wiser when you run the experiment for a little longer. There's a lot of these A-B testing, especially around pricing, that's all just based upon, is it going to make sense right now if we switch over, given the traffic that we have?

7:39And I do think there are ways people, including us, can get snookered by that time horizon, where you just look at what's going to happen right now. Now, you don't look at the secondary effects, which when it came to Basecamp was fewer people signed up, which again, all right, in the moment, doesn't matter. Fewer people, but more revenue, that looks like a good transaction. It looks like a good trade. And then four years down the line, there's some secondary viral effects here. Well, that also means then fewer people are going to get invited to other people's Basecams because we have fewer signs of in the first place.

8:13And then they don't learn about and they don't sign up. So sometimes these snowball effects just take a while to show up. Sometimes they take years to show up. And we ultimately ended up reverting partially that model where there still is a fixed price, everything you want model for base cam at the high end. But then at the lower end, we now have per seat. So a million different ways to do it. And also just a million ways where you can get lost listening to other people. I think for all the questions I get on pricing, my answer is usually you got to test it with who's buying your product and why they're buying it and what time horizon they're buying it.

8:53Like, for example, at Basecamp, the majority of the cancellations that we get, they aren't necessarily this is too expensive. I'm going somewhere else. It's my project stopped. I lost my whatever contract. I don't need it right now. I might come back later. And for other companies, it's totally different. So I'd actually say there's very little you can generalize from pricing. There's very little wisdom you can extract that's just total generic rules that apply to everyone all the time. The surest thing is you got to test. And then after you've tested, you got to retest. You're like, is this still true two years in, three years in?

9:27The thing I would add to, and David alluded to it, is that we do have a very unique pricing model with Basecamp, which is we offer both per seat at 15 bucks and also unlimited seats at$2.99 a month flat. There may be some others, but I'm not really aware of any other companies that really kind of cap the high end. Most will be like, hey, you want to pay me 15 bucks a seat for 5 ,000 people? We'll be happy to take that. We've decided not to do that. We feel like the problem with that is that you end up basically chasing whales and you want to chase the companies that give you the most money, of course.

9:59I get it. It makes sense. but then you become a different kind of company. You become a company that primarily is going to cater to try to sell thousand seat accounts. And that's a different kind of company than a company that's gonna sell to a company of six people. And we are much closer to a company of six people than we are to a company of a thousand people. And so we prefer to cater to small and medium-sized businesses. And then some of those businesses can get bigger over time. And we say, you know what? You don't have to worry. Like these costs are not gonna run on you. The most you can basically pay us is$2.99 a month.

10:31We'd be happy to have your business at that level. You can invite as many people as you want, and you're going to be good to go there. So that's another thing that we do offer with Basecamp is these two tiers. It's still kind of a single price in a sense, single seat pricing and single unlimited use pricing. We don't have multiple tiers of per seat, for example. What's interesting is when we went from the fixed$99 per month to a per seat, It seems like there is an intention of appealing to people that are smaller, because in theory, there's a lot of companies who are paying us less than they were before.

11:05And I think that's kind of abnormal. Usually prices are going up for us. For some companies, prices were actually less. That was literally the mission. the mission was literally make Basecamp more affordable at the low end such that a company of three don't feel like, well, a hundred bucks, that seems like a little much such that you can get them in the door. And I think this was part of the realization over the years is that we'd lost some of the low end because the entry point of a hundred bucks a month was just too high for a whole category of companies that perhaps aren't even companies. This is the other thing.

11:42I mean, And most companies aren't even companies by the time they start, by the time things get rolling. But what is true is that whatever they use, once they get rolling, there's a good chance they'll stick to that for at least quite a while until they're huge and maybe need something else. And we've lost some of that. I mean, we knew that going in. We knew that the folks that were going to get scared off were going to be on the low end. And we rationalized it by saying, well, you know what? Overall, it still makes sense. But I think for us, it just kind of didn't. We have always been philosophically, spiritually, product-wise aligned with the underdogs, with folks who are small, but trying to come up and trying to get ahead.

12:23And just a realization that even$99 a month was a little too high for our primary audience of starters, people who are just getting going. And losing that was not the right trade-off. And as Jason says, just as much on the high end saying, you know what, we don't even want to provoke the temptation. We've been there a couple of times in a couple of situations over the years where for various circumstances, one phony anecdote, the original Twitter was using Campfire, that chat program we were talking about earlier, where they were like, they were a whale. And first they were using just way too many resources and we bumped the price to what I thought was going to scare them off, I think$5 ,000 a month or something.

13:07They didn't get scared off, at least not for quite a while. And we're like, damn it, now we have a whale. What do we do with the whale? And just that one experience was enough to remind me that, yeah, that's not the business I want to be in. I do not want to be in enterprise sales. Because not only does it warp the organization to sales targets, sales departments, key account managers, all roles that we don't have. We have zero people in sales, zero key account managers. Everyone does sales to some extent. I'm doing sales when we're talking right now. Support does sales when they're interacting with customers.

13:45And the product teams are doing sales when they're improving the product. But we didn't have any sort of salespeople in the traditional sense of it. And this is exactly what you're going to get the first time you see that whale come in the door. And you go like, well, let me do the math here. If we could land two whales per salesperson, we should just hire a ton of salespeople. And before you know it, you're fucking Salesforce, right? Like absolutely the last company in the world I would have any interest in being and operating as. And the only way you get around that is by structurally preventing yourself from engaging in that temptation.

14:20And it's not just about the organization that gets warped. It's also the product. I think we talked about this earlier, that a lot of products that have flipped over where they originally get this traction with small to medium-sized businesses because they just have a great idea and they have a great product. As soon as they tip over and they become an enterprise sales company, you can start seeing every deal closed as a checkbox in the settings menu. And if you look at some of these products that's been around for a while, Slack, for example, now I'm really ragging here on Salesforce, you can see all the deals.

14:52Double Whale wanted something out of your product. It didn't make sense necessarily to anyone else. But like, it's 12 ,000 seats, man. And we're just at it. It's not a big deal, is it? And every single time you just accumulate all this cruff, cruff, cruff, cruff, because you can't afford to say no. For us, the customer for Basecamp is going to pay us$299. We can afford to say no if someone comes with an idea and we don't think fits for us or for the broad customer base, we can say, thank you for that idea. But usually we just say, thank you for this. That's the kind of thing to do. In the olden days, when Jason was doing customer support, he just said, yeah, no, we're not doing that.

15:33And thankfully, we have customers who have people now who are more helpful in their rejections of feature requests. Although I still sometimes wish we did the old way. I always actually love it when I talk to someone who runs a business like Jason used to run it at customer support. And like, I'll ask for something, you know, what do you think? Is that a good idea? And he's like, no, that's not a good idea. That's a terrible idea. Let me tell you why. Oh yeah. Actually, sometimes there's this flip where you gain more respect for someone who does not believe the customer is always right. At least when it comes to like the vision of their product and so forth.

16:06But just not letting the business drive your product towards the optimization of those whales means that over time you end up in a very different place. And I think this is why when we continue to attract people as a small, medium-sized business, we'll come to Basecamp. The message, the feedback is always the same. This system is so easy to use. We were using ClickUp or we were using one of these other things that's gone down that mega seats route. And it was just too much. There were just too many things. And with Basecamp, I don't need to teach anyone anything. You're like, yes, that's exactly right.

16:42Like that structurally comes from that fork in the road that we're not going to put... crap into the product because there's one whale who needs it, which is also why historically, all the way back in the day, people said like, oh, basically, it's great. But aren't you afraid that Microsoft is going to come eat your lunch? And our arrogant answer was always, no, Microsoft's going to build the kind of product that takes Microsoft to build it, which is a completely different kind of product than what we're trying to build. If you throw 500 engineers at something at Microsoft, you're going to get a monstrosity that takes 500 engineers to build.

17:16And at the time, Basecamp was built by like six people. And even to this day, it's built closer to six than it is to any other number. So you just end up with very different products. And having the conviction to stick with that is partly downstream from all these other decisions that we've made in the business, like not taking venture capital, like not having certain growth expectations. because I will say now as an investor into other startups, especially here in Denmark, I could totally see the appeal. If I was going to juice my return on some of these investments, I'd probably tell them like, hey, listen, here's the playbook.

17:51It's called the enterprise sales. Hire some salespeople. Go that route. Close some deals. Add some checkboxes if that's what they want. And I always think of that like, oh, my God, I have that temptation now. And I would hate it if that was imposed on me. Okay, we have talked about other products. Let's talk a little bit about Basecamp versus Hay. So we've experimented with Basecamp pricing. If I'm not mistaken, Hay pricing has been the same from day one till it is now. Tell me a little bit about that. Why is that? Well, Hay's priced at basically$100 a year,$99,$100 a year. And it's a primarily consumer product.

18:27So, you know, it's still a big ask. Especially when email can be free. Right. It's like, what, about$8 a month, right? And that's right. You're competing against free. so there's a time when you just like have to concede uh like i think hey it's worth 35 a month well it's not going to go anywhere it's just not going to happen i mean maybe it would i highly doubt that it would and so you just have to come up with a number that just feels right signals some degree of quality there's also a thing that can happen when something is too cheap that's always a tricky thing because then you can also look at something like whatsapp which was a dollar per year and it did pretty well.

19:03There's a bunch of psychology here also, but we decided just to make it one price. Now there is a per seat pricing option for multi-user for your own custom domain and for companies, but on the customer and consumer side, it's just like a hundred bucks a year. You pay for it once. There's no monthly fee. So we're not doing the month to month thing. It's annual. And there's a few reasons why we chose to do that. It's just an easier purchase. Do I want this? Do I not want this? Do I want to think about it once a year versus every month seeing a bill, a bill, a bill, a bill kind of thing. It just seems easier all through by just saying it's a hundred bucks a year.

19:36And it kind of, if you like it, great. If you don't totally get it. And that's how we do that. We also have a short free trial as well in the beginning, but because with, Hey, you get a hate.com email address. We can't just like let everyone take up all the email addresses because once an email address is sort of used, you can't kind of throw it back in the pool. You can during a trial period perhaps, but you can't after two or three months, which is another reason why we did the annual thing that you're committing to a year. And even if you paid for your email address for a year and you choose never to use hey again, that email address now does belong to you.

20:09We're not taking that back from you. So that is locked in with you and you can set up forwarding to forward it somewhere else if you'd like. But there's a commitment required to have that ability, which is one full year payment. When you guys were talking about hey pricing, were you bouncing around other pricing models? We definitely seriously considered what the trade-off was going to be with the yearly pricing when so many other things, including in the consumer space, are priced on a monthly basis. But the 99 was going to accentuate that pay was expensive compared to Gmail, which is free. But it's also one of those things where on the one hand, Jason said, we're actually selling real estate.

20:48And the value of that real estate is directly tied to its exclusivity. that someone is get at at hey.com account they can get a if my name wasn't david they could have gotten david at hey.com and there's a lot of first names out there and we have such a small pool of customers compared to gmail right like you sign up for gmail now you can't even be probably david 9939 shit that's taken 9934 shit that's taken too just like the real estate has been so plundered in that regard that there's just only truly unattractive options left on that menu. So part of what someone is buying with Hay is they're buying entry to a much smaller namespace, to a much smaller club, and they can actually get a nice sounding email address where they don't like a moron if they have to read it aloud on the phone without having to go all the way of like, I'm going to get my own domain.

21:52I'm going to go through all that rigmarole. And do you know what? Some of that psychology assessment says there's some degree of scarcity where higher prices are better. In fact, with Hay itself, it actually has multiple prices. It has the$99 a year if you have four letters or more in your name. By the time you get down to three letters, that's a really small namespace. D-H-H at hay.com. Yep, I got that. We're charging. How much are we charging for that? 300 bucks i think 300 bucks yeah i totally forgot about that i did too and then for two for two letters like that's a really small namespace right like just to jf at hey.com that thousand bucks a year i don't even know what thousand bucks a year and you know what we've actually sold quite a few of those two letter ones because what other opportunity do you have to be able to get that like what would jf at gmail.com be worth today if you could trade that on the secondary market.

22:48Probably quite the pretty penny because there actually is a deal to that. You can look at the X market or Twitter market because now they let you buy handles. Yes, they're going to make a whole. And all these scarcity plays or marketplace, that's the same thing. Obviously, the main one is domain names. I mean, we have paid hundreds of thousands of dollars over the years for various domain names. Probably at this point, well over a million dollars. And I'm familiar with deals that are obviously way, way, way bigger than that. There are domain names that I've sold for$100 million. So part of this is that's the reality of it.

23:23That's the appeal of it. So sometimes it's not always just better to like, oh, let's make it free. And then the namespace is full of crap and no one who signs up, whatever. What year are we into? 15 years after Gmail started. Not even 20 years after Gmail started. You only have scraps left over. That's not very appealing. But also, as Jason said, it's so hard to generalize. You say, oh, so you should always try scarcity. Yeah, okay, but what if people don't give a damn, right? If it was not called hey.com, if we had not purchased first a scarce piece of real estate that was really unique and appealing, if we were heyemailsolutions.com, like who the fuck would pay for JF at heyemailsolutions .com?

24:05Nobody. That's who, right? So a lot of these things, they rest on subtleties. They rest on momentum. They rest on this fear of missing out when Hay first launched. I mean, people were crazy. People were writing me and Jason like, ah, can I sign up for a waiting list if Fernando at Hay.com doesn't want to complete their trial? Can I be the first one to be notified? It's just really interesting to see how these systems go and how much longevity there can be in some of this stuff. obviously domain names. You could have bought a domain name in 95 when they were literally just chucking them away. And now it's worth a hundred million dollars if it's good enough 30 years later.

24:46Or you could have bought a paper card, a magic the gathering card that's just a piece of fucking cardboard. A lot of this is deeply irrational if you just look at it in this ultra logical sense. Well, it's just a piece of paper. It's just a set of strings. Yeah, but you know what? Humans are way more interested. They're way more peculiar and they react to different things in different ways. And spending$100 million on a domain name may very well be worth it for someone. Okay. Let me ask you guys this because I have heard the theory about pricing high because you can always discount. You can always run a sale.