Fun with pricing

December 29th, 2005

Yesterday, while our team was working on a pricing model for a new product we’re developing, I found myself dreaming of split payments again. If you have ever read this blog, you’re probably aware I am a big proponent of split payments, and think PayPal would benefit a great deal by providing this functionality.

When you’re selling a product or service to a small business owner, one thing you always have to think about is how many bills that business owner pays each month. When we’re conducting user research with SMB’s and the subject of pricing bubbles up, small business owners often tell us the same story about their monthly bills and how they relate to their decision to buy new services.

“Well, ten dollars a month for this new service is reasonable, but the problem is, I have ten other business expenses to cover each month. By the time I pay for my office space, my cell phone, and my DSL, I don’t have much cash left for myself. “

The bottom line here, is that every time a business owner shells out some cash for a new tool or service to help them run their business a little better, it gets incrementally more difficult for you to sell that business owner your product or service. Creative pricing models are key to helping you sell a product to a business owner who thinks he should be pinching his pennies.

Ok, so now we’re getting back to my pipe dream of PayPal offering split payments. The other day, we were sitting around the office talking about a pricing model for one of our new products. We’ve chosen a fairly common pricing strategy. Our product will offer a way for lots of people to use it free-of-charge, but to get all the bells and whistles and use our product to accept online payments, we’re going to charge a little something each month.This is when we got to thinking about split payments again, and how they could be used to build creative pricing models that could really help us sell our product.

Imagine if instead of telling a business owner that your new web application will cost them $19 a month, you told them “There’s no monthly fees, we’ll just skim fifty cents off the top of very fifth payment”.

“Every fifth payment?” Sound strange? Well, that’s the point. It’s supposed to sound a little strange and it’s supposed to get their attention. By charging fees that fluctuate based on business volume and are imposed less than twenty five percent of the time, you’ve created an interesting pricing story that’s fun to tell and will get peoples’ attention. With split payments functionality courtesy of PayPal, it would have been possible for us to experiment with this pricing model. Too bad. Do you have any examples of creative pricing models? If so, send us an email.

I’m cheap

December 19th, 2005

There’s been a lot going on around here the past few months. In addition to Coinbridge, my consultancy business, I’ve been working on a brand new startup. We started working on the idea three months ago and are still yet to write a single line of code. Yes, I know what you’re thinking. “Three months and no one is coding?” “Are you guys lazy?” “Are you stupid?” Nope. We’re just doing lots of user research.

The idea of young entrepreneurs rolling up their sleaves, throwing caution to the wind, and pushing a new idea onto the market as soon as possible is as old as startup culture itself. Most everyone I know who has ever started an Internet company has done things this way. So, why buck tradition if it’s working so well for so many other guys? First, because I’m cheap. Second, because I care deeply about creating things that people will love to use.

By front-loading our product development process with multiple cycles of design iteration and a ton of low-cost usability and user research — which is the opposite of what most startups do — we’re able to save tons of money, and code a product that we’re confident people will love.

One of my smartest friends followed a similar strategy while he was creating his latest idea. BJ Fogg came up with the design for Yackpack by conducting hundreds of hours of user research, largely using just paper prototypes. Yackpack’s current design is simple, but incredibly innovative. I can only imagine how much extra time and money BJ would have spent had he rushed to code his original design, and done his user research later instead of earlier.

Well, gotta run. I have a usability session starting in an hour!

When PayPal becomes the back office, too

December 18th, 2005

An article from today’s New York Times about how SMB’s are using PayPal to handle their invoicing and online billing needs.

I’m spoiled

December 17th, 2005

When I was a kid, growing up in Palo Alto, California, my Dad used to always tell me, “Son, you’re lucky that we live in Palo Alto. There’s nowhere better than this”.

As an entrepreneur who lives in Palo Alto today, the more I think my Dad was right. Palo Alto is the world’s best place to live if you’re an entrepreneur because you’re always surrounded by new ideas, and lots of other entrepreneurs. It’s so exciting to discover something new online, only to realize it was created by someone who lives just blocks away.

Today, I’m at home getting over a cold. It’s raining, and instead of trying to find something to watch on TV, I’m laying around listening to some new podcasts. I just discovered John Furrier’s for the first time and I’m really digging it so far. Of course, I wasn’t surprised at all to read that John is an entrepreneur and lives somewhere in Palo Alto, too. I just reminded myself that I’m spoiled living in Palo Alto, and put on my shoes to head out for a cup of the world’s best coffee.

PayPal’s other competitor on Craigslist

December 14th, 2005

I’m no Luddite, but I still think PayPal’s biggest competitor on Craigslist is cash. Receiving checks from strangers is too risky and PayPal does not elegantly support offline transactions. Apparently, the team at Text Pay Me made a similar observation, but they are hoping sms-based mobile payments could be the wave of the future. The idea is that carrying a lot of cash around with you is inherently risky and it’s possible to avert some of that risk by carrying a less-liquid form of payment. I suppose I don’t totally disagree with the logic there. It’s a similar set of advantages as carrying traveler’s checks instead of cash while on a trip. I would like to add one thought, however. If you don’t feel safe meeting a seller you found on Craigslist, don’t just bring your textpayme-enabled cellphone — bring one of these!

See this review of the textpayme service by my friend Russ Jones.

Split Payments Defined (part two)

December 12th, 2005

The concept of split payments is kind of like cc-ing someone in an email, but with a payment. Unlike being copied on an email that allows everyone to view the entire email, a split payment is divided into parts with no single recepient ever receiving the whole thing. The receiving fees due to PayPal would be shouldered proportionally by all recipients, charging each recipient for only the portion of the payment he received.

Currently, splitting payments using PayPal cannot be done. Today a payment must be deposited into a single account before it can be redistributed. For example, if you were to build a payment application on top of PayPal’s platform, and your application required an incoming payment to instantaneously pass through your account before it ended up in a secondary account, it could easily cost over six percent of the payment. Fees this high prevent entrepreneurs from building atop PayPal.

The reason I like the idea of split payments so much, and hope PayPal will someday provide it, is because split payments could support a ton of innovation. With split payments, entrepreneurs could take the PayPal toolkit into new and interesting directions, outside of traditional e-tail applications. Meanwhile, PayPal could stay focused on the big picture of building transaction volume while the leaving the details of product innovation to a community of highly motivated entrepreneurs.

So, what can be done now? I was discussing this topic recently with a friend at PayPal, who passed on an interesting hack that comes close to working like split payments and might be the best way to go.

Using mass payments, it would be easy to write a script that would instanly split a payment between multiple PayPal accounts. Here’s how it would work. A parent account would receive the initial payment and then instantly initiate a mass payment to one or more child accounts. Mass pay is the most affordable way to currently split payments using PayPal, but it’s still not cheap. The fees are paid by the sender of the payment which is contrary to way PayPal’s fees are typically calculated.

Note: Be sure to check out this comment from PayPal’s Dave Nielsen. Dave provides some additional details on how to execute the split payments hack. Thanks Dave!

Split Payments (part one)

December 9th, 2005

A letter to all entrepreneurs with the following interests/aspirations: Web 2.0, payment systems, saving money, executing quickly and being successful.

Dear entrepreneurs,

Please take two minutes out of your caffeine-fueled workdays to consider the following facts:

Fact: Building a payment system that’s similar to PayPal from scratch—even if on a much smaller scale and with only a handful of features—is a bad idea. You’ll get schooled by Nigerian fraudsters before you have a chance to build your risk models, lose all your money, and be forced to avoid returning phone calls from your investors. Do not attempt this.

Fact: There are a ton of opportunities, untapped business models, and extremely interesting mash-up components lurking within the PayPal feature set. If you’re serious about creating a payment application, executing on ideas quickly, and you realize that it’s usually a cash-drain to reinvent the wheel, then consider using PayPal for your backend and continue reading.

Fact: PayPal web services are largely utilized by developers who are working on storefronts and traditional, retail ecommerce projects. There is so much more potential than retail ecommerce sitting within those api’s. Write the functionality of each api down on a note card along with some of the other amazing api functionality that can be found these days (think Amazon, Google maps, etc., etc.), and mix them up all over your kitchen table. Draw 3-5 cards at random and attempt to create a product idea from these combined functionalities. Some ideas will be horrible—others won’t.

Fact: Mash it up. Consider a payment experience that could be better designed, feel safer, be faster, easier or just more fun. Solve your payment processing problems with PayPal, and season lightly with a blend of complimentary 3rd party api seasonings.

Fact: It won’t take long before you come up with a great new business idea. You’ve talked to your partner who has agreed to code it, and he’s fired up because not only is his work going to be pretty easy—he doesn’t have to learn to create risk models. You will begin to calculate pricing, taking into consideration PayPal’s fees and the cost of passing funds between your PayPal account and the PayPal accounts of others. You will figure out how much you’ll need to charge your customers in order to cover all your PayPal fees and still carve out a nice margin for your new business.

Fact: The price you will need to charge to make a buck on your new idea will be way too high! After scratching your head, you will go back to the calculator and come up with the identical numbers. After looking at the PayPal fees more closely, you will start to feel like PayPal is double taxing you. Are they?

Let’s explore a likely scenario and attempt to answer that question:

- A payment is received by your new web application, and subsequently your company’s PayPal account (PayPal charges 2.9% plus $0.30 *)

- You immediately transfer what is left, minus your fees, to a customer account (PayPal charges 2.9% plus $0.30 *)

You can already see we’re up to almost six basis points and some change before you even seen a margin. That’s going to be a tough price point to sell, I think.

You’re probably frustrated and ready to give up on creating the next great thing by now, right? Well, don’t be. There is some light at the end of the tunnel. Read part two where we cover the concept of split payments, how it ties into all this, as well as a valuable hack that can be used to solve some of these problems.

*Note: These pricing scenarious were constucted using PayPal’s most expensive price tier. See PayPal’s fees page for an accurate estimation of what your fees would be.

PayPal Wars are “Cool”

December 7th, 2005

Tom Peters has recently interviewed Eric Jackson, author of The PayPal Wars for his “Cool Friends” web column.

Having had the good fortune to work with Eric at PayPal, I agree with Mr. Peters. Eric is a cool guy and a consummate entrepreneur.

Asking merchants to change

December 2nd, 2005

When you introduce a new online payment solution to merchants, you’re asking them to change. You’re asking them to change the way they handle their payments, change the workload of their IT group (albeit temporarily), and change their customer experience. I’ve never met a merchant who really likes to do any of these things, even if in the end, there’s a good deal or some kind of benefit in it for them (which you better have if you are the one asking them to change). Maybe it’s PayPal, maybe it’s Bill Me Later, maybe it’s some cool new ACH functionality - it doesn’t matter. Implementing any of these things requires some uncomfort today, in hopes of a better, cheaper, more user-friendly payment processing tomorrow. How merchants react to your request for change depends on what stage they’re in.

I like to think of successful SMB’s as being in the growth stage. Their main concern is keeping their server up and their database from crashing, so that they continue to grow and make their customers happy, who will tell their friends about their site, which will enable them to continue to grow. That’s the growth stage.

Larger businesses, that are really too big to be considered an SMB anymore (not sure what the $$ volume is to best define this, but let’s just say at least $10 million a year in payment processing) are in what I consider the cost-cutting stage. Of course they’re still growing, love growth, and really care about it; but their business is now big enough that they can afford to “tinker” and find little ways to cut costs. Tinkering is fun and it’s a luxury. It means having the time to assign teams of people to massage the tiny details of your website’s UI, improve your splash pages using the Taguchi method, or explore payment alternatives that will reduce your processing costs by a percentage of a basis point. These are the things you get to do when you have enough cash, people and luck to be in the cost cutting phase.

So, what does all this mean? Well, I think it means that size dictates the importance that pricing has with online merchants. It’s ironic, but large merchants can afford (no pun intended) to care more about pricing.

That’s not to say that small merchants won’t adamantly tell you, during your usability sessions or focus groups, that price matters to them — because they will. But, you have to remember that they’re lying to you. They say they care, they think they care, but they really don’t. What they care about is finding a way to get their business to the growth stage. If you can sell them a payment product that costs twice as much as whay they have now, but will make their business grow like crazy — they’ll say it’s too expensive and they would never buy it. Then, they’ll leave the focus group, rush straight home to their computer and buy it.

People are liars.

PayPal. Still the best way to pay for lunch

December 2nd, 2005

The first day I started working at PayPal, I was issued a Palm Pilot. I was told it was tradition, so I didn’t refuse it. ;) The second PayPal tradition I was introduced to, was lunch at Jing Jing. Jing Jing serves cheap, spicy Chinese food, and the restaurant was located just 20 feet away from our offices at 165 Univeristy in downtown Palo Alto.

Every meal I ever ate at Jing Jing, with a group from work, always ended the same way. Someone (usually not me) would volunteer to pay the bill. What would happen next always made other diners look up from their steaming bowls of wor wonton soup. A group of 5-10, sleep deprived PayPal employees, sitting around one of those big lazy susan rotating tables, would begin to dig into their pockets for their Palm Pilots. The benefactor (he or she who covered the bill) would position their Palm Pilot to the group. Then, the beaming would begin. “Beaming” was sending money via the infrared transmitter on your Palm Pilot. You would enter your share of the bill, aim, and fire. Once you got back to the office, you would drop your Palm into the cradle, synch, and voila! Your szchezuan chicken was paid for.

This morning I was thinking about this because I noticed an interesting article on Digital Transactions about how PayPal employees are paying for their lunches now. PayPal allows its employees to pay for their lunch in the company cafeteria by swiping their ID badges at the POS. It’s another example of contactless payment, but with the added cost-savings of PayPal’s stored value. Nice! Now, if they could just figure out a way to offer some half-decent food in that lousy cafeteria.