How to Charge More Than the Competition and Win

Discover how to set premium prices while staying competitive. Strategies for value-driven pricing.

In a world where free software proliferates, one might wonder how businesses can stand out in crowded markets and compete with products offered for free. It's a challenge that many software companies have faced, and surprisingly, the solution is not to join the race to the bottom by offering your product for free. Instead, the key to success lies in charging more than the competition while delivering exceptional value.

The Rise of Free Software

Free products have a strong allure, but in the realm of software, quality and reliability often outweigh the appeal of cost savings. In recent years, the software landscape has witnessed an influx of free offerings, flooding the market with an abundance of choices for users.

Chris Anderson, former editor-in-chief of Wired, noted in his book "Free" that when something becomes abundant, people tend to take it for granted. This phenomenon applies to software, where countless apps flooded app stores, and as a result, prices plummeted towards free.

So, how can a software business compete in a market where free alternatives abound? The answer may surprise you: by charging more.

Standing Out by Charging More

In the early days of software, when options were limited, users were willing to pay substantial amounts for high-quality software. Fast forward a few decades, and the landscape has changed drastically. App stores are teeming with numerous alternatives, each offering similar core features.

Jason Cohen, the founder of WP Engine, aptly pointed out, "You cannot compete only on price because then all a competitor has to do is lower their price." It becomes a race to the bottom, where the competitor with the deepest pockets can outlast the rest. Users easily jump ship to the next free app, perpetuating the cycle.

However, within the free market, there exists a subset of customers who value quality and are willing to pay more for it.

1. Focus on Your Best Customers

Offering a free product can attract a wide user base, but not all of these users may be a perfect fit for your product. They may use your product, provide feedback, and request changes, but the critical question is, would they pay for it?

Charging upfront narrows your audience to those who truly need and value your product enough to pay for it. By listening to the needs of this audience, you can refine your product to better serve them.

Rahul Vohra, the founder of Superhuman, took this approach to an extreme by focusing on the 60% of users who would be extremely disappointed if Superhuman ceased to exist. These early adopters, who were willing to pay, drove the product's development and improved its product-market fit.

Jason Fried, the CEO of Basecamp, emphasized the importance of charging upfront, stating, "If you're looking to get paying customers, ask for money upfront, and you'll have a lot better shot of getting them." Basecamp's experience revealed that free users rarely converted to paid customers, highlighting the significance of attracting paying customers from the start.

Charging upfront ensures that those who choose your product genuinely need it, providing valuable feedback and helping you create an irreplaceable offering.

2. Scale Things That Don't Scale

Paul Graham, the founder of Y Combinator, advised, "Do things that don't scale." When your product is free or offers a free plan to a significant portion of your user base, many aspects of your business may appear unscalable.

However, charging upfront can change the equation. With every new customer contributing revenue from the start, you may find that previously unscalable practices become financially viable. For instance, Superhuman invests in an hour-long onboarding call to help users maximize their product's benefits, an approach made possible by upfront payments from users.

3. Grow Your Business Organically

When a major competitor exits the market, your product should be ready to accommodate an influx of new users, especially if you're charging for your product. Pinboard experienced this when Yahoo announced the discontinuation of Delicious, one of Pinboard's major competitors.

Charging upfront enabled Pinboard to swiftly respond to the sudden surge in new signups, demonstrating the advantages of having paying customers from the outset. Servers and resources cost money, and maintaining services for free users can deplete valuable resources better invested in product improvements for paying customers.

4. Fight Spam and Abuse Automatically

Offering free plans often attracts users who may not fully value your service and can lead to increased support requests and abuse-related issues, such as spamming. Charging a price, even a modest one, can encourage responsible user behavior.

Charging doesn't guarantee immunity from abuse, but it does make it easier to address issues and maintain a user base that respects your product's value. Paid customers are more likely to be committed to your product's success and less likely to abuse it.