I do not mean here Dropbox should not practice non-linear pricing by reducing unit prices for larger customers. Worse, the effects of these costs do not end after version selection.

The costs may not be incurred in the form of dollars but there are definitely cognitive costs and opportunity cost to the customer. These are also the costs you have least control over. This is the cost incurred by your customers in understanding all your many different versions to make a choice. But after two tiers the costs to customer starts to go up. If the non-linear pricing requires two (or three) price tiers then most of the versioning costs are manageable.

These costs are incurred in completing the transaction.

These versioning costs should not be confused with costs to make and serve the customer. The many different choices you offer to customers at different price points introduce four different costs (some on you and some on your customers). Non-linear pricing is great but it introduces operational complexity to marketer and cognitive complexity to customer.įor what these costs mean let me take you back to my article from four years ago – 4 Costs of Versioning. You have seen this from cereal packages you buy to the group discounts you get when you register for conferences. This is classic example of non-linear pricing where the total price does not increase linearly with units but curves down as volume increases. The price per user that for all practical purposes starts at $159/user starts sloping down and reaches the lowest value of $127/user with three other price points in between ($132, $128 and $127). While it possible to license for any arbitrary number of users past 5, the tiers act as price boundaries. Having adopted $795 as the base price Dropbox has created multiple price tiers based on different number of users. Makes very good sense as it assures a floor price and makes sure the revenue is aligned with fixed cost to serve these business customers. But Dropbox decided not to unbundle it any further and make $795 the entry price for a 5 member team. However if there exists such a team that values the features available only in the Business edition they would pay. Clearly it makes no economic sense for a 1,2 or even 3 member team to pay for this version. The entry price is $795/year – either you want 1 or 5 users you pay that single price. Take a look at this very nicely done price estimation tool of Dropbox business edition.

Dropbox pricing strategy