The cup-of-coffee pricing fallacy

If you’re lurking on HackerNews, or are interesting in entrepreneurship, you might occasionally bump into something like this

Starbucks coffee is $2.45 + taxes. $100/mo is less than a cup of coffee a day.

And it’s very tempting — and somehow logical — to consider how much money we might spend without thinking too much about, and conclude that we should be willing to do the same with online services.

This coffee costs just like a cup of a coffee

And for some services, we might actually think in similar terms. Hey, my Netflix is only 4 cups of coffee per month. Amazon Prime maybe 2…

But why aren’t we spending it just as easily on other online services, software licenses and apps?

You’re not Starbucks

First off, I would personally never buy a cup of coffee at Starbucks. But I understand why some people would. When you walk into Starbucks, you know what to expect. You can pretty much guarantee the kind of experience, taste and amenities that Starbucks provides. That’s why Starbucks is a brand name, and people don’t need to think much before buying a coffee there.

But your app on the app store, or your service is, well, not Starbucks. Netflix is Starbucks perhaps. You’re not. So you need to build that trust for people to spend even a cup-of-coffee-worth on you.

I’m not going to buy the same coffee every day

The cup-of-coffee-fallacy becomes much more obvious when it comes to subscription services. I might buy a cup of coffee from my local roaster, and would happily buy many cups, some beans, and snacks on a regular basis.

But nowhere am I asked to “subscribe” to anything. I buy it, enjoy it, and that’s it. I’m not committed to buy another cup ever again.

And yes, technically a subscription can be cancelled. But the point still stands. When I buy a cup of coffee, I don’t buy an opt-out-able subscription.

I might also decide to try another specialty coffee elsewhere in my neighbourhood, or wherever I might be. Your SaaS does not give me that degree of freedom. Or if it does, then, well, maybe I will treat it as just a cup of coffee.

Commitment

As I mentioned before, when I buy a cup of coffee, I get a fairly predictable, positive experience. I might drink it quickly and get a good energy rush, or sit quietly and enjoy the flavour. I can take my coffee with me, or also do a bit of work with my laptop at the coffee shop. I also enjoy a quick chat with the barista, when I get a chance.

With your app? who knows… It might do everything that it promises, but the direct cost is only a small part of it. I might need to import my data into it, to learn how to use it, to configure the app to suit my needs. I might run into bugs, connection problems, UI glitches. Your cool app might make my iPhone as hot as a frying-pan and drink my battery like a thirsty camel on a hot day. Even the best app is going to change the way I do things. And most likely, I will see the benefit only after I use it for a while.

This is a far bigger commitment than a cup of coffee. I risk much more than the cost of a cup of coffee.

… not to mention what happens if version 3.6 of your app breaks compatibility, if I need to worry about vendor-lock-in, or if my data leaks (either accidentally or being sold after being acquihired by evilcorp X).

Anchoring

The concept of anchoring prices makes sense. It’s harder to compare things without a point-of-reference. If I buy a washing machine, I can and will compare it to other washing machines with a similar price-point and brand name. If I buy an online-awesome-as-a-service, what am I comparing it to? … coffee?

But then why coffee? why not some other online service? or another “subscription”, like your mobile phone, water or electricity bill? I suppose the latter are priced less homogeneously and are more abstract (and also, far more essential). I think people do however compare one online service to another. Whether you tell them to or not.

If I buy an email-filtering-as-a-service, or note-sharing-as-a-service, I’m going to compare it to my Netflix subscription, my DigitalOcean/Linode VPS rather than how much I spend on coffee.

B2B pricing

So far I kinda assumed we were primarily talking B2C here. An app or a service for a consumer, with a one-off or recurring fee, that is comparable to a cup of coffee. The analogy loses its strength even further when it comes to B2B. Unless your service is selling coffee to businesses, I suppose.

Businesses don’t really need or benefit from this comparison in any meaningful way, as far as I can tell. They need a business-case, to understand the value proposition. Does your service benefit from being considered “as cheap as a cup of coffee”? I doubt it.

When your service compares to another one — maybe it saves businesses money compared to a competitor. That’s great. Then you’re anchoring against the competitor. Not against coffee.

So what’s the alternative?

The simplest solution is to just drop the analogy and let people figure out if the price is right for them. If your app or service is truly unique, and there’s nothing to anchor against, then go ahead! Knock yourself out on caffeine.

Another alternative is to anchor against another online service. There are plenty of consumer-facing apps and services that people are happy to pay for: Dropbox, Netflix, Spotify, Amazon Prime and many more.

5 Replies to “The cup-of-coffee pricing fallacy”

  1. A similar fallacy I refer to as the toilet paper fallacy. A founding entrepreneur estimates their total addressable market (TAM) like this: Everyone older that 12 needs this product and they will use it up in a month so the TAM in the US is 300,000,000 x 12 x $2.95 = $10,620,000,000. All we need to do is capture 1% of that! ($106 million).

  2. Some of us also just get a jar of instant coffee, because a cup of coffee at that price every day is not really a good investment if you don’t care about coffee that much. In that case, a Netflix subscription will be the equivalent of drinking two cups of coffee every morning instead of just one, and then you just go, “what am I going on about?” and stop thinking so much about the price of coffee.

  3. Also, I can’t help but think that over-reliance on subscription pricing is a temporary crutch of “App Culture” business models. It takes advantage (from my almost-Boomer perspective) of Gen-XYZ’s gaping blindspot for $10 to $20 subscriptions. They think nothing of paying $10 month for a constellation of meditation apps plus 2 or 3 streaming music apps plus premium access to Tik/Insta/Snap stickers, or whatever.
    Some analysts have said that subscriptions thrive because post-Boomers have never enjoyed an economy of real prosperity and so they comfort themselves with small indulgences (like $4.00 daily coffees) instead of durable ones like property, children, investments, etc.
    I’d like to see apps and services adopt more honest try/buy/renewal pricing: You get to try premium features for 1/2/3 months for free. After that you can “buy” the app/service (good for at least a year) with a smaller annual renewal fee. This would allow every customer to assess “Is this worth $50 to me for a year?” rather than trick them into signing up for $10/month for life.

Leave a Reply

Your email address will not be published. Required fields are marked *