by Adam Juda on Monday, December 15, 2014
The website Pinboard has a special place in my heart - not because I'm a user, but because I wrote about its innovative pricing strategy in my book on how to price software. The firm recently announced a new pricing strategy that is worthy of note for two reasons.
- The firm is simplifying its pricing structure.
- The firm is changing its revenue model from a one time fee, to a recurring fee.
As Leo Tolstoy once said, "There is no greatness where there is not simplicity, goodness, and truth." Pinboard's original pricing methodology increased the price of a membership as each new user joined the website. In a way, this made sense. As a site with social features, Pinboard exhibited strong network effects. The value a user received from the service would increase as the user base grew. Unfortunately (as admitted in the official announcement), the site's owner was a bit too clever for his own good. Rather than gradually raising the price for a membership over time, he invented an innovative formula that raised the price after each and every sign up. The ever-unpredictable price had to be explained to potential customers and added unnecessary friction to the sign-up process.
While the firm's blog discussed the above reasoning, it did not cover the more likely cause for the change.
The majority of the site's functionality is made available to customers who pay a one-time fee. While users tend to love such pricing models, they are never in the best interests of the company that offers them. Charging a fixed price for a service with ongoing costs is a poor business decision at best and a Ponzi-like scheme at worst. Any company utilizing this revenue model will soon find itself bankrupted, as ongoing costs continue to eat away at retained earnings unless the firms can ensure that they continuously and eternally maintain an increasing rate of growth. As we all know, this is impossible.
I won't be too hard on the site's owner. He launched his popular service prior to the launch of my book on software pricing and my guide to revenue models (you can get your free copy by signing up for my email list). That being said, you could always contact me for a consult on all things pricing so that you can get your pricing right the first time.