When you are running a subscription-based web app, cancellations are a part of everyday life. At Skritter, we realized early on that knowing why people cancelled would be of critical importance. We ask everyone who cancels to let us know why, and a surprising 50% of people actually do. We get these missives via emails and I track them to keep a pulse on what we need to improve. And so it was a fairly routine morning a few weeks back, while reading one such cancellation email, that I was struck by what the user had written:
"I have no money these days. Great program, but $10 is a bit too expensive. Would sign up and keep it for 1/2 the price. Netflix costs less than you guys."
Comparing prices between products is nothing new of course, and the big players in any space will always influence prices for the little guys, but this was personal for two reasons. First, I use Netflix all the time and personally love the company and their product. Second, I also happen to run a small startup which charges more per month than the big red giant I so adore. This user's comment was damning because while Skritter helps people a lot, it was hard to argue that Skritter is more fun or better value than renting 20,000 streaming movies.
This got me thinking about web app subscriptions as a whole. For founders, choosing a price for your product is difficult. It's also one of the most important decisions you will make as a business owner. So it's no surprise, faced with such an important decision, that many founders--ourselves included--look to the market for pricing clues.
The market for subscription services is homogenizing and falling. Back when monthly subscriptions were relatively unusual, there was less consensus regarding what an online web application should cost per month. Was it $50? Or was it $2? There was and is no one right answer for all teams. Unlike the market 2 years ago, however, customers seem more certain today how about much web apps should cost. This certainty is being driven by relative giants, the Netflixes and Xbox Lives of the world, who seem to be settling on a base price between $5-10/mo.
Just as people browsing the App Store expect paid apps to be a few dollars [1], so too do customers now expect to pay a certain amount for consumer web applications.
Big companies are providing customers with price anchors which will increasingly impact customer perceptions of value. While individual web apps will always have unique aspects that enable variable pricing, I don't think the day is far off when a young entrepreneur starting a B2C web app will unthinkingly set his price at $8.95/mo because that's what everyone expects.
The trend, however, is worse still. Because large consumer internet brands--like the industrial widget manufacturers of old--can leverage similar mass production economics, the perceived "correct" cost of a web app is likely to decline over time. Netflix already benefits from a virtuous cycle of user adoption, which allows it to reap more profit by lowering prices. There will be some basement price at which Netflix will no longer want to lower their price, but given that it used to cost $14.99/mo to get worse service than I currently get for $7.95/mo, I suspect that price is lower still. [2]
For those of us in the far remote niches of the internet, I believe that companies like Netflix have an increasing ability to ruin the perceived value add of B2C products through increasingly lower prices. And here I thought the selection was the worst part of Netflix streaming.
[1] $4.03 for iPhones, and $4.37 for iPads, according to marketing firm Distimo.
[2] And perhaps more importantly, the predictability of revenue streams.