The Price Anchoring Effect of Distribution Platforms

When building a SaaS product for salespeople, a startup’s price will inevitably be compared to Salesforce CRM’s cost of about $150 per seat. How expensive is this new product compared to Salesforce? In diligence calls, I often hear buyers say: one-half of Salesforce’s price seems expensive; one-third might seem more reasonable. This is the price anchoring effect in the real world.

This is true beyond sales products. For example, a basic server on Amazon costs about $600 per year. Server monitoring companies cost about roughly 30-50%.

Relative pricing comparisons are among the most common method of price rationalization. This is why relative pricing questions are so effective when establishing product-market fit. How much value does this new software provide relative to the value I generate from Salesforce? Or GSuite? Or Amazon’s EC2 and S3?

Most of the time, new offerings distributed on platforms do not command a price premium over the platform. Software platforms are frequently the system of record, the database holding the key data assets of the department. That role is quite important. In contrast, the tools built on top extract some value from that data.

Of course, there are exceptions. Inside Sales, which offers an inside sales acceleration platform including an integrated dialer, often generates $200 or more from a seat.

But price anchoring based on platform pricing is the norm. What is the most you have paid for an app on the iOS App Store or Google Play? Maybe $10? The average app price for iOS is $1.02 as of this writing. And less than 0.05% of applications charge more than $500.

It would be ridiculous to see a Salesforce One mobile 10-pack annual subscription priced at $18,000 on the iOS store, wouldn’t it? At that price, it’s possible to buy with a credit card, but the price level is incongruous with its surroundings. It’s like leasing a new Ferrari at a dollar store. There’s an 18,000x difference in price between products. Talk about cognitive dissonance.

I’ve been wondering whether the price anchoring effect applies to companies built on top of messaging platforms like Slack and Hipchat. At $7 and $2 per month per user respectively, these products are priced to grow uninhibited within enterprises. Will startups building products on top of the distribution platforms of each face pricing anchoring headwinds? I’m hopeful they will break the mold.

I’m looking for additional counter-examples, companies command a greater price than their underlying software distribution platform. I’m curious if there are patterns to be learned. If you’ve come across one, please write to me.

Published 2017-05-11 in

Tomasz Tunguz is partner at Redpoint. I write daily, data-driven blog posts about key questions facing startups. I co-authored the book, Winning with Data. Join more than 20,000 others receiving these blog posts by email.

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