Go Ahead, Raise Your Business's Prices
"Are you guys nuts?"
"Is there a gas leak in the 37s offices?"
"You are on crack."
These are just a few of the comments that were posted on our company blog in late June.
What did we do to deserve such scorn? Did we release a lousy product with a system-destroying bug? Did we triple the price of our software? Did we force people to pay us for something they weren't interested in buying?
Nope. Here's what we did: We had the audacity to charge $9.99 for a piece of software. And we make no apologies for doing so.
Here's the backstory: A few months ago, our software company, 37signals, released Draft, our first application for the Apple iPad. Draft lets you draw with your finger and share those drawings via e-mail or through Campfire, our business group-chat tool.
Draft is dead simple -- the background is black, the "ink" is white or red, and your finger is the pen. There are no shape tools, text tools, brushes, textures, color fills, or anything else. It's just like you're sketching on paper.
If you search the App Store, you'll find dozens of similar drawing apps. Some, like Penultimate and Brushes, are fantastic; others, less so. But no matter what you're looking for in a drawing app for the iPad, you'll likely find it in the App Store.
You'll also find a mix of prices. From free to 99 cents to $9.99, there's a product and a price to satisfy nearly everyone. Like most apps in the App Store, many drawing apps tend to cost between free and $4.99.
Given that there are already so many drawing apps on the market and that many of them are available for less than a buck, you might wonder why 37signals would spend the time developing yet another one. We built Draft to solve our own problems -- the same reason we build all our software. The other drawing apps on the market solve different problems than the problems we were having.
Prior to Draft, when one of us wanted to sketch an idea and share it with other members of our team, he'd first sketch the idea on a piece of paper with a Sharpie. Then he'd scan the paper. Then he'd upload the scanned sketch to his computer. Then he'd upload that sketch to the Campfire chat room where his team was collaborating.
Draft cuts out a bunch of those steps and saves a pile of time. Now we can quickly sketch out an idea, tap a button, and automatically upload it directly to a Campfire chat room. No Sharpie, no paper, no scanner, no waste, no extra steps. Just draw, tap, done. Draft is the only drawing app for the iPad that works this way. Other apps let you share sketches by e-mail (Draft does that, too), but Draft is the only one with Campfire integration.
Some days, we may share dozens of sketches. Saving a few minutes on each one has a significant impact on our productivity. This is exactly what we needed. That's why we built it.
We were so pleased with Draft that we wondered: Why not turn it into a product and offer it to our customers? It wouldn't be the first time we decided to market something originally created for our own use. After all, if we're solving our own problem, we're likely solving other people's problems, too. Given the number of people who use our other products, we had a pretty good idea that there were thousands of folks who would be interested in Draft.
At the same time, we're a small company with just 20 employees. We don't have unlimited resources. Our four primary products -- Basecamp, Highrise, Backpack, and Campfire -- consume nearly all of our time and resources. From development to design to customer service, we're pretty maxed out. What would adding another product mean? Would supporting it be a burden to the existing team? Would it be worth it?
That's when we started thinking about price. We're a rare company in the Web-based software business -- we actually charge for things. We think free is a business cancer. Offering some stuff for free is fine as long as you have something else to sell. But "we'll give it all away for free and figure out how to make money later" isn't much of a business model in our minds. We provide our software like a restaurant provides its food, a cabby provides transportation, and a clothing store offers a shirt -- in exchange for money.
That's not the only thing that makes us different. Most companies seem to want as many customers as they can get. At 37signals, we don't want lots of customers. We want lots of the right customers. Our goal is to maximize profits, not market share. We also want to maximize happiness -- for the customers and for ourselves. The more people you have using your products, and the more people you have working at your company, the harder it becomes to keep everyone happy all the time.
So when we set out to put a price tag on Draft, we decided not to pay attention to what the other drawing apps sell for. We didn't look to compete on price.
As App Store consumers, we knew that most apps sell for 99 cents or thereabouts. I think the software industry is killing itself by trending toward a price of 99 cents. Software is more valuable than 99 cents, but as long as software developers say it's worth only 99 cents, then most customers are going to get used to paying only 99 cents.
We have no interest in participating in a race to the bottom. Ninety-nine cents is not for us.
What about $1.99? Or $2.99? We could have gone there, but we wanted to use price as a tool to reduce customer demand for Draft, not increase it. That's right: We wanted fewer customers to buy Draft.
With a price tag of a buck or two, I think we could have easily sold 10,000 copies of the software. On the surface, that sounds great. But not when you think about all the resources required to serve 10,000 customers.
A good number of those 10,000 people are going to need help. Some are going to complain. Some will request a lot of features. Some will ask a lot of questions. That's the software business, of course. And we love being in the software business and making our customers as happy as possible. We work really hard at it.
However, our main products sell for $24 to $149 a month. At those prices, we can afford to provide excellent service. Could we provide excellent service for many thousands of additional customers paying a one-time price of $1.99? Would that reduce our ability to service our $24-a-month or $149-a-month customers? We believed it would.
So instead of going for the land grab, we created a small island. We priced Draft at $9.99 -- significantly higher than most of the products out there. The people who buy Draft know exactly why Draft is valuable to them. And they think $9.99 is a fair price.
So far, we've sold nearly 2,000 copies of Draft. That's about $20,000 in revenue. We are much happier with $20,000 in revenue from 2,000 customers than $20,000 in revenue from 10,000 or 20,000 customers. Given our current resources and team, we can happily serve 2,000 Draft customers, plus all our other customers.
As the outcry over Draft's $9.99 price tag demonstrated, this has not made everyone happy. Plenty of people even think we're nuts. It's certainly not the first time we've been called crazy.
But giving away your products? That's what I call truly insane.
Jason Fried is co-founder of 37signals, a Chicago-based software firm, and co-author of the book Rework.