October 16, 2019

How Software Gets More Expensive

The ways apps quietly raise prices over time

by @maguay

Writer. Amateur photographer. Information architect. Frm. founding editor @racket and @capiche, senior writer @zapier, Mac and Web editor @AppStorm. Personal blog: @techinch.
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It starts with a shiny new app in beta, free while you try it out. It sticks, and its paid plans make sense. You happily upgrade and bring your team onboard.

Then one day you get an email about amazing new features and their associated rise in price, or add another team member and notice the price has jumped. When did a couple dollar plan turn into such a sizable bill?

A few cents here, a few dollars there, then an annual “discount” and before you know it, that cheap app now costs far more than you originally anticipated.

As business software pricing went up 62% over the past decade, here’s how those increases tended to play out.

The Software Pricing Challenge

VisiCalc pricing

What would you pay for software that saves you $30,000? (VisiCalc ad in InfoWorld via Google Books)

Software is hard to price. It costs time to make something people want—but how badly they want it and how much they’ll pay is hard to judge, much harder than when you make a widget from $5 of metal and sell it for $10.

VisiCalc, the world’s first spreadsheet software, cost $99.95 when it was first released in the late 1970’s, only to rise to $250 a couple years later, then to fall back under a hundred dollars by 1985. Today’s new apps often follow a similar path, jumping around to find the price that makes sense.

What would someone pay for an online CRM like Salesforce in 2000? $50 for the first five users, then $50 per user after felt right—only to go up to $65 per user the next year, where Salesforce kept their core app price until 2016 when it went up 15%.

HubSpot entered the CRM market from the opposite direction. They first built marketing automation software that started at $3,000 per year, then added a free CRM to attract customers. Today HubSpot offers both a basic free CRM and a base plan that at $50/user is strikingly close to Salesforce’s pricing.

If you start a new market like Box did, you’ll likely have to experiment a bit more to find the right price/value fit. Their pricing went from $2.99 for 1GB of storage in 2005 to offering five times as much storage for the same price the next year, only to more than double the price the following year. If you come into a new market with some existing competition as Dropbox did when it entered the market later, you can often charge more as long as it seems like you’re offering more value. At their launch in 2009, Dropbox charged $9.99 for 50GB of storage, $2 more than Box but for 10 times as much storage.

Then, over time, the pricing will converge, as cheaper and more expensive competing software often end up costing much the same. Today, you’ll likely spend around $10/month for file storage, $25/month to send email newsletters to 2,000 contacts, $37/month for a reasonably unlimited form or survey app, and $65/month per user for a CRM.

Unless you enjoy jumping to the newest app every time your once-free app starts charging, the invisible hand will likely get you to pay the average price for the software category you use over time.

The Tricks to Raise Prices

As markets for a category mature, software vendors often raise prices at least to adjust for inflation. Sometimes those changes aren’t so obvious or transparent, though.

Switch to Subscriptions

The switch to subscriptions, of charging you monthly for what you formally bought and owned, often strikes users as being the best example of software being more expensive today. That could be true if you bought boxed software, say Microsoft Office 2007 Professional, then used that same software for a decade. Your $499 purchase then worked out to $4.50 a month—or if you bought the cheaper Home and Student edition, perhaps as little as $1.24 a month.

If, instead, you bought Microsoft Office in 1990 and upgraded to every version, you would have spent around $15 per month—nearly the price Microsoft Office 365 for Business costs today. That’s in real dollars; adjusted for inflation, your original purchase cost far more than today’s subscription.

Today’s subscriptions very often work out cheaper or similar to traditional software pricing. The difference is, you don’t have a way to opt out of the upgrade cycle. Where in the past you could have skipped every other version, or used old software for years to save money, today’s software ensures you always upgrade—and keep paying. Web apps started the trend, with Salesforce’s early online subscriptions in 2000 leading the way. Ever since Adobe and Microsoft Office switched to subscription pricing in 2012 and 2013, respectively, most business software charges monthly.

Restrict Free Plans

It’s easy to be generous when you’re new, as any press is good press and you need all of it you can get. But once the bills start coming in, those free users look like a cost object at worst, and a chance to gain new paid users at best.

And so come the restrictions. It’s rare for an app to keep a free plan forever that’s far more generous than others in the same category offer. What’s more common is pricing like Typeform, which started out offering unlimited forms and entries for free, only today to offer the same 100 entries for free that Wufoo offers (albeit with unlimited forms to still look like there’s more for free). Evernote and Dropbox now restrict how many devices you can sync for free. Google only lets you store standard resolution photos for free.

You’re only the customer if you’re paying, says the adage, and that’s never more apparent than in maturing software categories.

Remove Cheap Plans

When comparing pricing, we compared plans that were the most similar. But one thing easy to overlook there is smaller plans that are now unavailable. Basecamp, for instance, formerly had a $29/month plan for a limited number of projects. Their sole $99/month plan today for unlimited projects is far cheaper than their old Unlimited plan—but now, you have to buy unlimited projects. There's no way to buy the smaller plan today, something that's a common way prices subtly rise over time.

Nickel and Dime—Literally

Every dollar counts, but you might not notice if the dollar’s disguised as 99¢. That’s one way a 6% of the apps we looked at raised prices over the years. They started out with plain dollar pricing such as $9 per month. Then they added .99 to the end, which adds nearly 10% to lower priced plans without having to change their headline price.

Switch to Annual by Default

The more obvious change is the switch to annual subscriptions. Often they come in as a discount, where the monthly pricing is shown by default with a tempting “Save with an annual subscription” offer on the side. Then annual becomes the default option, often with the annual plan’s price per month shown instead of what you’d actually pay upfront for a year.

After a while, monthly pricing may disappear (in 3% of the apps we surveyed), or the new annual pricing might turn out to be the same as the old per-month price (also in 3% of the apps)—with monthly plans now costing a premium over the annual plans instead of annual being a discount. Or, even more commonly, the pricing page shows the price per month if paid annually, with the real month-by-month pricing requiring an additional click.

If you will use an app for a year, and the annual price is cheaper, then that’s a good thing for you—but the once-a-year payment of several hundred dollars can easily make the pain of subscriptions more acute. Worse, it’s often unclear if you’ll be charged for the entire year upfront, or each month throughout the year.

Add New Features to New Plans

The old trick to get you to pay more was to bundle software. You could buy Photoshop for $609, or Creative Suite with Illustrator, Acrobat, and InDesign for $1229, little over double Photoshop alone. Perhaps you don’t need all four apps equally, but the bundle looks like a better deal, and you go for it.

Subscriptions often get more expensive with the same trick. You started out with a free or cheap plan, and at the time it had all of the app’s features. But as new things get added, they often don’t come to the base plan. Instead, they fill out the feature lists of newer, fancier plans, ones that might tempt us to upgrade. That’s how Salesforce kept their $65/user per month price for so long—they also have plans that cost $300/user or more with their latest features. Or, features get spun out into new plans, as Xero’s payroll feature did. It was included in subscriptions in 2015, only to later be turned into a separate app with its own subscription fee.

That works if you want to upgrade for more features. It can feel frustrating, though, if your plan originally included all of the app’s features, and today those new things only come to those who pay more.

Put a Massive Gap Between Small and Big Team Pricing

Need to track your development team’s work in JIRA? That only costs $10/month for your first 10 users. But then once you add the 11th teammate, suddenly each new person costs $7 each. Quip offers similar pricing, costing $30 for the first 5 users then $10 per month afterwards. Free plans make the jump even more obvious; Asana’s free plan lets you work with up to 25 people, but once person 26 joins the team, you’ll need to the premium plan for $9.99/month per person—which means you’ll go from paying nothing one month to paying $259.74 the next.

Raise Prices and Remove Features

Perhaps the price change that's most frustrating is when you're charged more for less.

14% of the apps we surveyed included fewer features in the same plans over time—and half of those charge more today for those smaller plans. Apps that formerly offered unlimited users now charge per user, features that were included are now in higher plans or as separate add-ons, or the item billing is based on is changed. Infusionsoft illustrated that most dramatically, with the same plan offering first 10,000 contacts, then 5,000, then 2,500. The price stayed the same, but you got less for your money. With other apps where the price went up as well, you're squeezed twice.

What Matters Is What You Do With It

VisiCalc’s marketing team had it right all along: The real question of what software costs, though, is relative to what it enables you to do. The cheapest app that you pay for but don’t use costs far more than the expensive software you use daily.

And some things really are getting cheaper, despite the price increases. Video calls and file sync are both dramatically cheaper today, at least compared to the number of people who can join your calls or the storage the service offers. Even when software does get more expensive, very often you’re able to keep your same pricing if you’re already using the app.

But then, the real world got more expensive. The average US inflation rate was 19% over the past decade, which means everything from salaries to office space to coffee got more expensive. Sure, hard drives and TVs may have gotten cheaper-the former being why apps like Dropbox and OneDrive can offer more storage today for the same price-but most things have gotten more expensive, and that trickles down to software teams.

Our expectations have gone up, too. Where an app for a single platform may have sufficed in the past, today we expect cross-platform compatibility and support for every new feature that comes to our devices. We’re used to syncing and push notifications, streaming and backup, all of which create ongoing costs for developers. It’s far more expensive to make and maintain apps than it was when we expected less. It's understandable to need to raise prices—as long as apps follow best practices for their subscriptions, including letting us cancel when we want and being upfront about what things really cost.

You can’t assume that software will get cheaper, that your reasonably priced plan today will be even more reasonably priced tomorrow. Software pricing may not fluctuate as much as gas or gold, but sooner or later, odds are your favorite app will raise its price to cover the additional features they’ve added.

It’s up to you to make the most of it.

Our Methodology: We researched similar plans on a hundred popular business apps from 2009 to 2019 via the Wayback Machine to find the software inflation rate and each time the apps’ pricing changed over the past decade.

Image Credit: Money photo by Madison Kaminski via Unsplash

max_hodges's avatar
@max_hodges (replying to maguay )
almost 4 years ago

why comment when they just remove them!

1 point
awwstn's avatar
@awwstn (replying to @max_hodges )
almost 4 years ago

Hey Max -- we noticed that you had posted an identical comment on 2 different posts, so we thought it was a bug and wemoved one of them. Your comment on "It's Not Just You: Software Has Gotten Far More Expensive" is still there. Had you intended to post the same comment in two places?

2 points
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