Nivi: Are there any other microeconomic concepts, outside of zero marginal cost of replication and scale economies, that are important to understand?
Naval: Price discrimination is important. It means you can charge people based on their propensity to pay.
Now, you can’t charge people different amounts just because you don’t like them. You have to offer them something extra. But it has to be something rich people care about.
Business-class seats routinely cost five or 10 times more than economy seats. But it costs the airline much less—maybe two or three times more than a standard seat—to provide perks like wider seats, more legroom and free drinks.
Rich people and large enterprises are willing to pay more
Price discrimination works because rich people are willing to pay more. You just have to give them the extra little things they need to signal they’re rich or that little bit of comfort they want.
A lot of enterprise software companies use price discrimination, especially with freemium products. The free or low-price version will do almost everything you want. But if you want the version that’s extra secure or hosted on your site or has multiple-user administration so the IT person can monitor everything, you’ll find yourself paying 10 or 100 times more.