[HN Gopher] Purchasing Power Parity: fair pricing for your SaaS ...
___________________________________________________________________
Purchasing Power Parity: fair pricing for your SaaS product
Author : throwaway888abc
Score : 75 points
Date : 2022-11-07 17:44 UTC (5 hours ago)
(HTM) web link (scastiel.dev)
(TXT) w3m dump (scastiel.dev)
| anfilt wrote:
| I hate this. I also hate that the cost to produce an item/product
| is sometimes quite opaque. I don't care if you think I can pay
| more. Stuff like this just tells me your ripping me off to get a
| larger margin of profit.
| ghaff wrote:
| Why do you care what the cost to produce (and sell and support)
| an item is? Is it worth it to you or not?
| freediver wrote:
| This works only if the product you are selling has near 100%
| margin. If there is COGS involved (cost of goods sold), if your
| widget costs $15 to make it does not matter what target customer
| purchasing power is, you have to sell it at >=$15 or you are
| losing money. This is why you can not go to Somalia and purchase
| a Tesla for $10k or rent AWS compute at 1/10 of price for others.
| paxys wrote:
| Yes you have to sell it for >=$15, but you can still price it
| at $20 in Somalia and $100 in the USA. It doesn't have to be
| 100% margin.
| ignoramous wrote:
| > _If there is COGS involved (cost of goods sold), if your
| widget costs $15 to make it does not matter what target
| customer purchasing power is, you have to sell it at >=$15 or
| you are losing money._
|
| Reason why there's an uptick in SaaS companies in Eastern
| Europe, Asia, and West Africa. They can out-compete on price
| already and will gradually manage to build software of similar
| quality as their counterparts living in higher cost-of-living
| countries.
|
| This has been Freshdesk [0] / Zoho (both based in India) modus
| operandii for one to two decades now. And one I'm keen on
| living upto.
|
| [0] https://archive.is/h1n6z
| clairity wrote:
| yah, this is all econ 101 stuff. what you're talking about is a
| specific application of marginal analysis to a firm's pricing
| policy, namely, making sure marginal revenue is greater than
| marginal cost (or, MC <= MR), ignoring sunk costs (like fixed
| costs). in software, fixed costs are high, but variable costs
| (e.g., COGS) are tiny, which is why software can be priced at
| just about any level (including "free") and still be profitable
| (in the absence of competition).
|
| the other economic concept at play here is arbitrage, which is
| being able to buy low and sell high _risk free_.
| mr_toad wrote:
| > in software, fixed costs are high, but variable costs
| (e.g., COGS) are tiny
|
| In traditional software. SaaS has hosting costs, support
| costs etc.
| clairity wrote:
| in most cases, those (as well as licensing) aren't
| considered direct, variable costs, but rather sunk costs,
| as they exist regardless of the number of customers served,
| even if there's a rough correlation with size. this is akin
| to sales vs marketing costs. the former is usually a direct
| cost, while the latter is not, even though marketing costs
| often scale (roughly) with size too, but most of that cost
| isn't directly attributable to a specific revenue
| opportunity as in the sales case.
| freediver wrote:
| To add to this API and licensings costs too..
| Arubis wrote:
| Good point. Could the PPP concept just be applied to your
| profits rather than your revenues, with a floor under which you
| just don't sell? Or, in the interest of equity at the cost of a
| little more complexity, deliberately round up pricing in
| profitable-after-COGS regimes to subsidize loss-after-COGS
| regimes?
| [deleted]
| libeclipse wrote:
| The marginal cost of digital goods tends to be low
|
| A bigger issue is that anyone with a VPN can access the
| discount
| matchagaucho wrote:
| Not if the SaaS has ongoing hosting bills, or years of R&D to
| recoup.
| TAForObvReasons wrote:
| "years of R&D to recoup" does not affect the marginal cost
| of providing the service to another customer
| Dylan16807 wrote:
| Every SaaS has hosting bills.
|
| Some of them are significant per customer, and some of them
| aren't.
| JimDabell wrote:
| Look at the billing address associated with the payment card.
| A VPN can't mask that.
| niij wrote:
| privacy.com cards allow any billing address to be used
| dalmo3 wrote:
| ... if you're a US resident.
| niij wrote:
| Their terms state you can also be a non-US Resident
| Citizen (expat). But generally yes that service is only
| for US Persons.
|
| I wasn't really making a point about privacy.com
| specifically my comment was more to imply there are
| services that allow for arbitrary billing addresses.
| [deleted]
| encoderer wrote:
| I would consider this if i operated a consumer SaaS. For a b2b
| product you really need to spend all your pricing energy on
| finding ways to charge your best customers _more_ , not find more
| marginal customers that will erode your gross margins.
| shkkmo wrote:
| I think this attempt to rebrand this kind of pricing as
| "promoting fairness" is really unfortunate. Companies do not do
| this sort of thing to be more "fair" they do it to make more
| money. Always.
|
| This tends to lead to consumer hostile behaviors such as (trying
| to) block VPNs and harassment of international travelers and
| migrants.
|
| Automatically basing this on PPP will make governments much more
| interested in gamifying PPP measures (such as what Argentine did
| with the Big Mac Index). This is setting aside all the other
| issues with calculating PPP in a fair way worldwide.
| kevinpet wrote:
| I encourage the author to take an economics class. There's a
| common trend of smart people trying to fumble through what amount
| to the first semester of economics. Even a brief exposure gives
| you enough knowledge to know the name of what you are interested
| in.
|
| In this case, it's an argument for price discrimination --
| charging different prices to different buyers based on their
| willingness to pay. And in fact "textbooks" is one of the
| examples given on
| https://en.wikipedia.org/wiki/Price_discrimination#Textbooks
|
| This allows you to lean on what's already known. Specifically,
| identifying market segments with different elasticity and
| enforcing the scheme.
|
| Have people started using the phrase "purchasing power parity" to
| refer to a pricing scheme that corrects for PPP? I think "parity"
| might be leading people astray because it actually just refers to
| an adjustment to GDP or other indicators for purchasing power. It
| doesn't refer to a pricing scheme. I could suggest the name
| "Purchasing Power Parity Pricing" if you want something you can
| say you "support".
|
| (That said: I think this is isolated to extremely high margin
| goods and will not translate to others.)
| julesmaregiano wrote:
| Hello HN,
|
| I'm Jules, previously working on Exportator, a solution to
| generate Parity Promo Codes, now working on pricery.io to help
| digital products price themselves at PPP prices with Stripe in
| 5min.
|
| Parity pricing combined with selling in localized currencies is a
| MAJOR move to increase international sales. They are 3 ways to
| localize prices:
|
| 1/ Display price in local currencies. Aka "cosmetic pricing". Do
| you know what 670NS is worth? Same for $US for many 2/ Bill in
| local currencies. I wrote an article on how billing in local
| currencies help win precious % https://www.pricery.io/blog/how-
| to-turn-stripe-currency-conv... 3/ Parity pricing. Here is a
| calculator I made to give one an idea of the how a price _feels_
| in another currency: https://www.localizationtools.io/purchasing-
| power-parity-cal...
|
| Love the topic, would love to know how to help the cause
|
| PS: Regarding VPNs. A, very few people use it to cheat. B, if it
| makes you feel better, services like ipinfo.io index IP ranges
| used by VPN providers. Which means to cheat PPP one would have to
| use private VPN. In other words, 99,9% of VPNs can be detected,
| in which case, just default back to a $USD price. Pricery helps
| you offer cosmetic prices, PPP pricing, and VPN protection in
| 5min out of the box with Stripe. Would love to chat
| jules@pricery.io
| paxys wrote:
| The economics term for this is Price Discrimination (https://www.
| investopedia.com/terms/p/price_discrimination.as...).
|
| I don't want to go into fair or unfair as the author does (that
| is a very complex discussion), but it is definitely the most
| optimal way to price your product. The basic idea is - charge
| every customer the max they are willing to pay. As long as
| everyone is above the break-even point, you will maximize your
| profits.
|
| This is definitely not a new idea ("emerged these past few
| months" as the author states). I remember people would pack their
| bags with boxes of Microsoft Windows and Office when coming back
| from foreign trips. Same goes for subscription pricing. That
| premium $20/mo Netflix plan costs $4 in Turkey.
|
| It's also a bit weird to see a service _advertise_ their price
| discrimination. You are essentially saying "your country has a
| shit economy, so here's a discount" on the checkout page. And
| then are you also going to show the opposite - "you are in the
| USA so need to pay 50% more than average for this product"?
| SQueeeeeL wrote:
| This same effect is why individuals get charged so much for
| healthcare. It's really easy to leverage information asymmetry
| to make a ton of money, rule #1 is to never let the customer
| know how much things cost to you
| tjoff wrote:
| Not sure how knowing I get overcharged by 50X is gonna help
| me? It is not like I have a choice in the matter anyway (when
| it comes to healthcare).
| SQueeeeeL wrote:
| Oh yeah, we don't have a choice in the matter in terms of
| healthcare. You'd need a much bigger actor without a
| financial interest in making you terrified to be involved.
| It's why insurance and pharma really don't want large state
| actors in the health space, they have a proportional amount
| of power to restrict prices to a reasonable amount
| lotsofpulp wrote:
| I think that is backwards. State actors want insurance in
| order to price segment/discriminate.
|
| That is why Medicaid pays less than Medicare, or federal
| government employee coverage. Or Tricare for military or
| Medicare for old. The insurance company becomes the fall
| guy even though the payer is directing them to require
| more extensive prior auths for certain populations, or
| reduced reimbursement such that fewer providers are
| available.
|
| Government leaders can then give different populations
| different levels of healthcare, while simultaneously
| claiming they are giving everyone healthcare.
|
| I bet UK's leaders are jealous now of the US's leaders,
| since they have to answer questions about NHS that they
| cannot deflect onto third parties.
| matkoniecz wrote:
| With ability to compare prices going to hospital 200km away
| with 100 000 $ lower price may become a good idea for non-
| emergency medical services.
| [deleted]
| jihadjihad wrote:
| Airline tickets and hotels, too. You likely paid a different
| amount for your ticket than either of the people sitting (or
| staying) next to you.
| xapata wrote:
| Hotels aren't as good at this as airlines are. The airlines
| have more legal support enforcing that tickets are tied to
| an identity. Hotels can't check the IDs of everyone who
| goes into the room. And there are fewer airlines, so they
| have more data and more market power.
| ghaff wrote:
| Hotels in general do check IDs of people when they check
| in.
|
| _Most_ rooms within a given hotel just aren 't that
| different. (ADDED: And to the degree that a room of a
| given size with a King bed might have a better view/light
| than another room, large hotels basically make it about
| the luck of the draw.) The main price discrimination is
| based on date. Businesses will eat the $400+/night rooms
| in SF when there's a big event at the Moscone. (Though
| there are also room blocks and negotiated rates.)
| Individual tourists will, in many cases, just go a
| different week and/or scour the listings for an AirBnB
| that's hopefully a bargain and not a too good to be true.
|
| Airlines have a lot of levers related to status and
| price-sensitivity for products (seats) that don't have
| markedly different costs to deliver. Airlines _could_
| presumably offer business class seating, even
| internationally, for much less of a markup than they do.
| But the average family going to see grandma probably isn
| 't willing to pay even a 30% markup much less a 2x one.
| So you do different classes and even levels of service
| within classes.
| ISL wrote:
| I don't know, but I'd guess that the majority of hotel
| room-reservations (not necessarily guests) are for
| individual travelers.
| ralph84 wrote:
| There are also scenarios with airlines where the only way
| for a flight to turn a profit is to price discriminate.
| It's possible to have a demand curve such that if you
| choose any point on the demand curve as the price for
| everyone, total revenue is less than total cost. But if
| you price discriminate you can capture the full area
| under the curve and have revenue exceed cost.
| Ozzie_osman wrote:
| > it is definitely the most optimal way to price your product.
|
| Yes, but it ignores some second-order effects. When you leave
| some money on the table by charging some users less than the
| max they are willing to pay (often referred to as consumer
| surplus), you get some benefits like more word of mouth, higher
| likelihood to get repeat purchases from a customer, and so on.
|
| Think of the feeling you had the last time you bought something
| and thought "oh, this is so expensive i can barely justify
| paying for it" vs "oh my God, this is so worth the money I'm
| going to feel good for the next week and tell all my friends
| it's a no-brainer".
|
| Most people underestimate these effects when they price
| discriminate.
| edmundsauto wrote:
| I can see how people would forget to include them (2nd order
| thinking is hard!). But how would they underestimate the
| effects when there is t really a clear way to accurately
| quantify them?
|
| It makes a big difference if word of mouth was 1% increased
| versus 20%.
|
| (And then there are 3rd order psychological effects - people
| tend to increase their perception of how valuable something
| is when they pay more. that's kind of the BMW strategy!)
|
| What we're left with is a world where we make decisions on
| easy measurements. That does not necessarily mean including
| 2nd order effects would change the calculus. And if you're
| doing 2nd order, how can you make smart business decisions
| that aren't just your gut?
|
| Human psychology is really complex, situationally dependent,
| and cannot be generalized from our own experience. That's why
| companies rely on data, even if it's incomplete.
| RobotToaster wrote:
| >That premium $20/mo Netflix plan costs $4 in Turkey.
|
| Hence the popularity of Turkish and Pakistani VPN tunnels.
| mr_toad wrote:
| > definitely the most optimal way to price your product.
|
| Only if you have no competition. If you do, you can expect them
| to undercut your most profitable markets.
| iso1631 wrote:
| The presence of competitors selling the same or alternative
| goods lowers the "max they are willing to pay"
| jasonpeacock wrote:
| Heh, Amazon tried this back in 2000 and it was very bad for
| customer trust:
|
| https://www.computerworld.com/article/2588337/amazon-apologi...
| maccard wrote:
| The world and internet have changed significantly in 22
| years. Microsoft were too early to the party in 2013 for a
| "digital only console" and 7 years later both MS and Sony
| shipped a digital only console.
| HWR_14 wrote:
| > As long as everyone is above the break-even point, you will
| maximize your profits.
|
| Given network effects, and depending on your horizon, I'm not
| even sure everyone needing to be above your breakeven is
| required.
| antaviana wrote:
| I am a bit contrarian on this. While I do agree that market
| segmentation maximizes revenue, I think that with regards of
| fairness, long term it is best that prices are the same
| worldwide.
|
| The reason is because if someone in a poorer country gets a
| good at a lower price than someone on a richer country, that
| person will have less pressure to raise their prices to
| eventually reach real equality.
|
| So the only real driver for segmentation for prices is to
| maximize revenue, not to be more fair.
|
| I remember that before the EUR, the items in Zara stores had
| the prices in all European currencies (ESP, ITL, DEM, etc). It
| was simpler for production to just have one single ticket will
| all possible prices. If you made some algebra to compare actual
| pricing, you could see that prices were very different, but not
| because of fairness.
|
| For example, at the time, the absolute value of a Zara product
| for Greece was above the absolute value of the same product in
| Spain. The GDP per capita of Greece was lower than the GDP per
| capita of Spain, but at the time in Greece Zara products were
| perceived as luxury items and in Spain were perceived as low
| cost, so Zara capitalized on that perception.
| mym1990 wrote:
| Maybe I am missing it, but I don't quite understand what
| 'fairness' has to do with cross market pricing. Different
| markets will constitute many variations in variables that
| will affect pricing. The cost of doing business in France is
| different than the cost of doing business in South Africa.
| The brand reputation of a McDonalds is different in China
| than it is in the US. I can go to almost any European country
| and buy groceries for cheaper than in the US, I have never
| thought "this is not fair".
| paxys wrote:
| You don't have to go that far to see this effect. Grocery
| stores in two different neighborhoods of the same city can
| have wildly different pricing for the exact same product. A
| lot of times both stores will be owned by the same company
| and their shelves will be stocked by the same truck.
| danans wrote:
| In this case you are usually paying more for the
| privilege of grocery shopping in a safer neighborhood
| around people with whom you feel more comfortable. That
| sort of pricing discrimination exists for a lot of other
| stuff, for example gasoline.
|
| Most big grocery stores chains would have
| socioeconomically modeled and geographically analyzed
| their customer bases, and are aware of how much people
| are willing to pay for this sort of convenience.
| yamtaddle wrote:
| I usually pay more to shop at Target rather than Wal Mart
| precisely because being in Wal Mart is miserable for
| about a dozen different reasons. I swear, they've even
| done something to the lighting in their stores in the
| last few years to make it worse. It's weirdly _grey_ and
| dingy. I don 't remember them being like that even 15
| years ago, and it's not just one location, it's like some
| memo came down from corporate instructing them to make
| their stores feel as much like being in a county free-
| clinic waiting room as possible.
| lotsofpulp wrote:
| You don't even have to go to different grocery stores.
| The same grocery store will use coupons to sell the same
| product at different prices to different people at
| different times.
|
| The loyalty discount cards enabled them to mail you
| coupons specific to your purchasing habits, but the
| proliferation of apps has even further refined it to be
| on a day to day or even hour to hour basis with push
| notifications of coupons just for you in your app.
| ISL wrote:
| The primary thought I have regarding pricing at grocery
| stores is, "Man, Safeway has these apples on sale for half
| the price they're selling for at QFC. I sure wish I could
| buy apples at Safeway and sell them to QFC."
|
| Unfortunately, that's not how the world works. There's a
| bid and an ask. The bid for outside groceries is usually
| zero. But I still think about it.
|
| Someday, Amazon will let us buy and sell items in their
| warehouses without taking delivery -- that'll be a good
| day.
| lotsofpulp wrote:
| That is how the world works. It is just that an
| individual buying at Safeway and selling to QFC will not
| have the reputation, scale, or timeliness to be able to
| make it worth QFC's time and effort to buy from an
| individual.
| fleddr wrote:
| I was going to write something whiny here, but when I opened the
| course site I reconsidered. I'm from the Netherlands, and based
| on that, got a 20% discount.
|
| Which is only fair, given that we're a developing nation and all
| that, but a first for me. We normally pay +20%. So I'm now
| totally convinced of PPP being fair.
|
| On an unrelated note, SaaS prices can lead to funny situations,
| especially when tangible costs per customer approach zero. At
| work we were negotiating with a SaaS vendor.
|
| Them: our quote for your intended use is 230K/y. Us: Actually, we
| only have 20K of budget. Them: That'll work too.
|
| Makes you wonder how far below 20K we could have gone.
| mike_d wrote:
| This is a huge security flaw that I usually report as "client
| side pricing."
|
| Passing the final price (or even just the currency) from the
| client to your payment processor allows a malicious actor to
| manipulate the price they pay for goods.
| dzink wrote:
| Complexity will invite arbitrage. What happens when someone
| enterprising enters all countries and surfaces the lowest price
| codes on a web site for everyone to find? Or when someone buys
| via VPN and consumes without.
|
| To ensure this system is not abused, you need to match
| consumption IP location and purchase IP location. If you have
| consumption via wildly varied IPs that would be a red flag as
| well. By letting the price difference be known, you encourage a
| normally willing and able customer to use you via VPN instead.
| pc86 wrote:
| This is all true but the question is at what point of scale
| does the cost outweigh the benefits?
|
| At small scale, you get more money (in absolute terms) using
| price discrimination with no validation on the back end. As
| your scale grows, you reach a point where it's worth the
| monetary and time investment to add validation and things on
| top.
|
| At the end of the day someone using a VPN to get your product
| for $5 instead of $20 doesn't matter that much unless you're so
| wildly popular that people are clamoring for it, at which point
| you theoretically have the staff to start adding in some
| protections.
| ghaff wrote:
| Another factor is considering how difficult you're making
| things for your legit paying customers just to may sure you
| _keep someone somewhere from ripping you off._ A lot of
| companies strike the wrong balance.
| RektBoy wrote:
| This!
|
| How people here in Europe, for example CZ. Can buy things for
| even higher price in EUR than in USD, yet median salary here is
| 4x smaller than median salary in US. Ridiculous.
| ipince wrote:
| How do you prevent people from spoofing or using VPNs to get a
| lower price? Or do you not, and let it be just another cost of
| doing business?
| FormFollowsFunc wrote:
| Could you not check against the country that the credit card is
| issued in?
| kevincox wrote:
| But you get complex UX flows if your guess at the start is
| wrong. You think the user is Canadian but puts in a US card
| what do you do now? IIUC Stripe doesn't have options for
| dealing with this. Maybe you can reject the payment and make
| them restart, selecting the country of their payment card.
| Beltalowda wrote:
| Yes, that is what many platforms do.
| ghaff wrote:
| Pretty sure that's what Netflix does. I pay on the basis of
| my billing address but, if I'm in another country, (or come
| in through a VPN) I get the content based on where I'm
| located in my experience.
| HideousKojima wrote:
| I'd assume you just go based on billing country instead of
| geoip.
| mrtksn wrote:
| In Apple's case, you as a customer, need a valid payment method
| from the country your account is going to be.
|
| PS: Apple, probably Google too, have tiered pricing where you
| choose the price of your app or your content will cost and
| Apple takes care of the local pricing which is adjusted to your
| users purchasing power.
| HWR_14 wrote:
| I do not think Google has a similar "tier" concept. It has a
| "recommended price", which is a conversion to the local
| currency maybe, but maybe not, taking into account PPP. But
| you can go in and override those prices if you want to make
| your product particularly cheap or more expensive in a random
| country.
| scastiel wrote:
| Hi, post author here!
|
| I was aware of this potential issue when I implemented PPP on
| my course. It turns out almost nobody uses this trick, although
| a few told my about it. I guess when you are transparent with
| your users, they are actually happy to pay the fair price? Or
| maybe I'm too naive ;)
| Beltalowda wrote:
| For a "niche product" like this it's probably not a big deal,
| but for larger platforms like Steam, Spotify, Netflix, etc.
| it kind of is. I used to live in Asia and had a lot of
| trouble with this. I ended up resorting to just buying the
| vouchers in the store than deal with "you used to be in
| Europe but are now in Asia, you're probably committing
| fraud!" stuff. I was earning local salary so the 4x price
| difference was kind of a lot.
|
| Some companies even make a fuss when you move between Western
| countries with similar economies for some reason. Lots of
| businesses are stuck in a "you were born in a country, live
| your entire life in a country, and will die in that country",
| which to be fair is true for _most_ people, but far from all
| and there is often no resort.
| throwaway888abc wrote:
| Really enjoyed your article (thank you) so posted here. I'm
| currently researching more about the topic. And thanks
| everyone for great discussion.
___________________________________________________________________
(page generated 2022-11-07 23:00 UTC)