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The Case Against Feature-Based Pricing

Published on 14.09.20234 min read

I'm the CTO at Pistachio, and my goal is to build the best cybersecurity awareness product on the market. My goal isn’t to grow market share, to increase our ACV (average contract value), or to multiply our ARR (annual recurring revenue). My goal is to build the best product.

There are a lot of factors that go into that. We have to get our product vision right, we have to develop exceptional tech, and we have to create a user experience that people love. However, a bad commercial strategy can ruin all of that by fracturing the product into different “tiers” and putting new features behind special pricing plans. And that is why we will never do that at Pistachio. We will never ask customers to pay more for a new feature. Everything we build goes to making the product better for everyone.

The Pressure to Upsell

Companies contort themselves in all sorts of weird directions to justify charging more for features that have zero marginal cost. The logic looks something like this: It costs us money to develop these advanced features that only some customers need. By charging more for these features we can keep prices low for the rest of our customers.

In economic terms, this is similar to third degree price discrimination. A company creates “tiers” of products to sell at different price points to different customer groups. An enterprise might be willing to pay double the price of a normal customer if it really values some special feature like customizable reports or granular access control, so you leave money on the table by letting them pay the normal price. In other words, the seller is able to capture more of the economic surplus by creating product tiers.

That’s the theory, at least. At most companies, the logic is probably even simpler: A customer already bought our product when it didn’t have this new feature, so why give it away for free when we could sell it to them for extra instead? Money goes up.

Your Captured Surplus Is Our Opportunity

The economic theory presented above works great when we are talking about goods and services that have some non-trivial marginal cost to provide. If you are selling desks and you charge customers extra for including a gold nameplate, that is totally fine. Your competition can’t swoop in and offer the same desk at a lower price unless they somehow figured out a cheaper way of making gold nameplates.

However, if your pricing model is just a pure price discrimination play, i.e. an arbitrary attempt to sort users according to willingness to pay, then you have a problem. Yes you can use that model to capture some of the economic surplus, but there is nothing stopping your competition from taking your customers by handing that surplus back. In simpler terms, nothing stops your competition from offering the same feature at a lower price point.

Stepping away from theory, what is really going on is that software companies make their product intentionally worse in order to charge more. They make an amazing product but only give it to the top buyers. Everyone else is left with some out of date service that hasn’t been updated in years because all new development work goes to the top tier.

At Pistachio we will never do that. Not only would it be overtly hostile to the early adopters we relied on so heavily at the start, but it also degrades the quality of the product for most customers. Remember, my goal is to build the best product. Knowing that someone is experiencing less than the best of what Pistachio has to offer would kill me inside, so we would never do that.

This is also bigger than just me. Putting new features behind new pricing tiers is against the very core of Pistachio’s vision. We want to empower digital freedom of movement for everyone, not just the highest paying enterprise customers. And that is why every new feature we build will be added to the product for every customer we have.

Zack Korman
Who wrote this?

Zack Korman is the CTO at Pistachio. He writes about product and tech development, as well as his experience in the cybersecurity space. Prior to joining Pistachio he was the Director of Tech and Product at a large media company in Norway.

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