It is exceptionally difficult to run SaaS businesses with low price points, principally because you'll often be cash flow negative with regards to marketing spend. e.g. even if the LTV of a customer is a few hundred dollars, to scale the business, you may well be paying $200+ in customer acquisition costs. (Check the price for AdWords clicks on e.g. project management or invoicing sometime. Oofdah.) If you quickly recruit a couple hundred users, you may well be tens of thousands of dollars in the hole for the better part of a year. That can be challenging without receiving external investment. Even funded companies can fall into the same liquidity issues, typically by hiring large sales forces who take years to ramp to the point where LTV from customers exceeds the costs and commission of the sales guy who closed the deal.
Also, with regards to selling to teachers: I know you think they're stingy. I thought they were stingy. Empirically, there are at least 5,000 or so teachers in America who have paid $30 for a bingo game they used once. $1 is not not not not not not not not not not not an appropriate price point. For those teachers who think $30 is a lot of money, wish them happy fulfilling lives and move on.
Have you experimented with monthly subscriptions for BCC? Intuitively, I feel a one-time fee for software is an easier sell. At least I've myself bought some web software impulsively because it was a one-time charge (like early Appsumo deals). But I've also read about some tests where it was just the absolute figure which was important and customers didn't seem to care if it was a one-time charge or a recurring cost!
We're in a similar position at the moment, trying to decide how to price a specialised monthly subscription service.
Our potential global market ranges from people who tend to have very limited time, and who might therefore put a substantial value on services like ours that help them save it, right through to university students with very limited funds (and, let's be honest, a tendency to obtain media content through not entirely legal channels).
We've been working on ideas for pricing plans, and soliciting feedback from people within our market, but you never really know how things are going to go until you launch and ask people to put their credit card numbers into your system. That goes double when much of the informal feedback you get in the early days comes from friends/family who will have a tendency to be kind.
If anyone has any experience of this sort of decision and how they changed their plans over time, I'd love to hear it.
(Shameless plug: We're also interested in any experience of making informed decisions using metrics in the broader sense. Unfortunately my question last week only got a couple of votes before it fell off the New page, but please feel free to comment there as well: http://news.ycombinator.com/item?id=2686151)
Yeah, teachers are stingy, compared to most other B2B. A project manager will spend thousands of dollars on something that most of their team won't even use, it's just company money. Teachers typically have to beg for photocopy use.
However, college students, gamers, and programmers (i.e. HN readers) are some of the stingiest people on the planet. Github charges $7/month for repo hosting, and still gets customers. There's a lot more teachers than programmers, and they won't feel like n00bs for paying for something they could roll themselves, so they will pay more than $7 for a basic service.
I strongly disagree that you need to pay anything to snag customers for an online service. Build a really good initial version, work your heart out to support it, and let word of mouth do the rest. It will be frustratingly slow to begin with but it ensures you are always in the black.
Can you provide some real world examples where this has worked? I'm not saying it's not possible, but I haven't ever witnessed/heard of it working just like that in any scenario I can recall.
Viral word of mouth is nice, but it usually takes years to get there.
Let's not gloss over your success with soft (useless) phrases like "hard work" and "passion."
You launched Pinboard to a crowd which already knew & loved you, at a time when everybody thought Delicious was about to fall over and die. Furthermore, you had novel marketing features - the "the price increases per user" thing, which was clever enough that people checked Pinboard out JUST to see it in action.
That is marketing -- and if you subtracted how much those early customers paid from the amount newer customers pay, that is your advertising cost. A discount is still a marketing expense.
And as for the Bedbug Registry, it's not a product - it's free. Furthermore, you serve desperate and angry and frightened users. They are much more likely to seek you out by Google than any other kind of customer. There is no equivalent level of desperate users for most software.
Obviously, the main argument against a $1 per month is the fact that you need to provide a lot of support. From my experience, this depends heavily on the target audience I guess, but I completely disagree.
I ran a website for a couple of years without thinking about turning it into a business. Finally, shortly before I graduated, I decided that I need to make money from it, otherwise I can't sustain it any more. Over the years, 30,000 people used my "startup" and in the end, I had a round 5,500 active users.
I thought a lot about the pricing model, but turning a free service into a paid one, is not easy and truth is, I'll never find out how it would perform with a different pricing model. So I just made a decision and tried it. I decided against freemium and started charging 1€ at the beginning of this year. The intention was to make it a no-brainer and convert as many users as possible. I converted about 50% of them. People pay either 6 or 12 months in advance (to lower the transaction costs).
My greatest fear was that there would be a lot of people who are not satisfied and want their money back or that I'll end up spending a lot of time on support emails.
Thruth is, from now 4,000 paying customers. I had exactly 1 person who wanted his money back. I receive about 2-5 emails per day, mostly telling me how great the service is and what kind of features they would like to see.
I literally spend 10 minutes per day on customer support.
Fact is, it depends on your business and something that doesn't get mentioned in the blog is that people don't care too much about a lousy dollar or euro per month to complain about something (some do, however, but rarely).
As a counterpoint, on my site (Obsidian Portal), support is a big drain (both timewise and mentally). Further, it has little to do with paid vs free (we're freemium). Both groups demand support, and the freebies are often the most angry.
For example, every day I'm dealing with someone who is convinced that the login system is broken. It's always user error, but it requires input from me pretty much every time, to the point of "here is a new temporary password. i've tested it and it works. please copy and paste it in"
Yes, we have an automated "forgot password" feature, but no matter how much automation you add there will always be people who avoid all that and demand personal attention.
Have you considered that your login UI (including the "forgot password" feature) isn't intuitive enough for your audience? We take a lot of things for granted as programmers/techies.
Beyond that, I think I'd start "firing" customers who are a huge support drain like that, especially those who are non-paying customers. Unless your site depends heavily on network effects, and a large percentage of visitors have password issues, it sounds like your time could be much better spent elsewhere.
Easy to say, tough to do. I feel personally beholden to all our users, and I want to make sure they can use the site effectively. To that end, I try to help as best I can. It's a drain, but I feel guilty just ignoring someone who is begging for help.
I know exactly the feeling you describe. But I think some posters here are right and there might be a little issue with your design. Maybe you simply lack a little snippet of information somewhere like "Cookies need to be enabled" or something like that. Or they simply don't recognize easily whether they are logged in or not.
Maybe it helps if you ask some people to perform a specific task while you're watching them (for example your friends). You can learn a lot from that about your design.
It really isn't that hard, especially given the relative anonymity of the internet. I've done it before, and while I'm not going to say it's a good feeling actually doing it, I feel so much better afterward knowing that my overall stress level is going to be lower. Some people are just poison when it comes to providing support, and they're not worth the time, money, and stress.
Perhaps this is naive (and you may be doing it already), but do you provide different "QoS" for your paid/free users? Have 2 addresses/contact forms with specific promised return times?
That's precisely what I do -- I have to -- needless to say deprioritized users feel fully "ignored".
That said, you can't please everyone... if you're the one left serving the lowest-IQ users with the lowest-or-no-budget, you just give others an easier time making good money off more savvy software users. Before you know it, you have to close down shop for good...
I've had a few customers like that. What I eventually did was make it possible for them to be logged in automatically by visiting a unique URL. Horribly insecure, but it's not a service that needs high security.
We use an auto-ticketing system that has that feature. They say, "halp i can't log in!! ur site is broke!!!" and see a page that says:
"Do any of these articles answer your question? If not, click the 'Submit my ticket' button below." One of the articles is titled "Can't log in? Try these steps..."
I assume that's catching some of them, but plenty still click the submit button. You will always have some people who navigate through every automated trap you set up. You can choose to ignore if you want, but your customer service reputation will suffer.
> Would it make sense to have an automated email to the effect of "Thanks for contacting us. Here are the frequently faced problems." ?
It depends on the target audience. If it consists of geeks/people familiar with computers from an early age, then, yes, they might read that, otherwise you're going to do what MicahWedemeyer does (and what myself I'm doing, for a Groupon-clone website targeted to women): emailing your users predefined passwords, hoping they'll actually change them after the first time they use them.
I'm not selling diamonds, only spa-coupons, so it's not the end of the world is someone-else somehow cracks other user's account (we don't store or process CC information on our side).
> you should immediately route them into a password-change workflow on login
We already have that by default (we're using Drupal), but, as I said, most of our target audience finds it too complicated.
This is great information. Do you care to talk about your subscription and renewal processes and how much you think they factored in to your conversion rate? Aside from the pricing model you chose, I wonder how important the level of convenience was to your users.
As soon as an account expires, the core functions cannot be used any more and it displays a message asking to prolong the account.
People pay via credit card or with their paypal account (I use PayPal as the payment processor). This gets processed immediately and within a couple of minutes, the account is valid for another 6 or 12 months.
The other option is wire transfer (which is very common in many European countries unlike in the US). The advantage here is that nobody needs to share any personal information. I just receive the money on a bank account. So far, there was no need to process that money automatically. I just wrote a little script, which greps for the transaction ID and the amount of money and prolongs an account accordingly.
I do not have an automated recurring payment system. All payments are "one shot", like a prepaid service. I can imagine that this is something people really appreciate. They feel more in control of their money and manually entering the payment information once every 6 or 12 months isn't too much of a hazzle.
Furthermore, I ask for as few personal information as possible. I don't store credit card information on my site. Heck, I don't even store real names in my database (but they are shown in PayPal).
I would point out that elementary school teachers are not likely to be very tech-savvy, and would probably be toward the high-end of amount of support required.
Since you posted this as a reply to my post: My customers aren't elementary school teachers. You probably meant patio's post. I'm not sure whether you would call most women tech-savvy, but my customers are mainly women and they hardly require any technical support.
Now, it's time to consider the extremely likely possibiliy that you could charge 5x the amount and without decreasing conversion by 5x. Which means you could probably be earning 5x than you are now (or more) without any extra work.
Thank you. Do you have an idea how I could increase the rate without pissing people off? Would you increase the rate for everyone or only for new customers? How do you justify an increase from 1€ to, say, 5€?
My site, FAB Apps Bundle (http://www.FabAppsBundle.com), charges $1 a month for individual subscriptions (paid annually).
I think it's possible to make that work, with some caveats.
First, you have to have modest expectations. Maybe you've got a service that you developed for personal use (as in my case) or as a hobby, but you figured it might be useful to other people as well. Maybe you'd be completely content with it making just a couple hundred bucks a month, with no aspirations of making it be anything more than that.
Second, you can't sink a lot of money into advertising your service, at least not at the outset. Which, of course, means you have to come up with more inventive ways to get the word out. Tough, but not impossible.
Third, you've got to primarily target people who understand that for $1 a month, they're not going to get very robust technical support.
And fourth, you're more likely to be able to pull of a $1-a-month price point if you also offer higher price points for premium services. In the case of FAB Apps Bundle, the premium service is targeted to small-business owners and people who manage their organization's Facebook Page.
Not to mention the fact that lower price points often pay higher % fees to payment processors because of per-transaction charges. Even PayPal micropayments is gonna take 10¢ on the dollar. My merchant account with BrainTree takes 30¢ per transaction plus a %. I don't know if some merchants offer different rates for micro payments but at that rate, you're talking about losing 30 to 35% of that $1 payment.
You might as well just build some iOS apps for you niche at those numbers.
It's important to bill for multiple months of service at a time if you sell stuff at the $1/month level to avoid this problem. The transaction fees become prohibitive when you get below $5 or so.
Isn't there a point where the service isn't worth the monthly cost though?
For example, I was looking for a service to do something very specific. It was something I could probably code in a weekend or so, but I figured there was some free or cheap site out there that could do it better. I did find a site that did exactly what I wanted, but it charged $5/month, or $50/year. Now for me, the service was at best a novelty, but I wouldn't have minded $10/year. I figured other people must be like me as well, and figured if I launched a website I could get some passive income and capitalize on that $10/year no-brainer type of thing.
Now, I never expected that I'd be making thousands of dollars each month, but wouldn't it make sense that I could capture a good portion of the market with a low cost point?
"It was something I could probably code in a weekend or so"
I think that's a key point. You look at the solution, think about the effort required for the value it gives you, and $10 feels about right.
For someone who can't produce it themselves, the value is usually much higher - and related to the size of the problem solved, not the amount of effort required to solve it. I don't know whether that applies in your specific case (for example, selling a 'one use' service on a subscription basis may not be the best plan), but it's a useful general point I thought of reading your comment.
You can code it in a weekend (doubtful...but let's assume). Then you'll spend countless weekends trying to attract customers. Nobody attracts "a good portion of the market" by doing nothing.
The technical side is always much easier than everything else involved in running a business.
Since I made no mention of product, nor never specifically said only a single weekend, I would find it hard to believe that you could know what was doubtful to create or not, but I digress.
I think for everyone, there is a level at which they will not pay for something relative to what it actually does and how much they need it. For my example, it was something fairly trivial but still useful, probably the lowest MVP I've seen in quite some time. Even if I couldn't immediately make useable money with it, I feel that a low price point would be a great way to take a piece of the market that it was in, although I will fully admit marketing would have it's place as well.
I guess the better worded question would have been "Given all factors equal, what percent of the market would be swayed by a lower cost point?"
And the second question I would ask would have been "Even though you will not make money at $1/month, are there not services that are not worth $5-$7 dollars a month, but are worth more than free?" or even "Couldn't there be money in making cheap apps that together don't make much money, but combined add up to good income?"
We have a lower cost competitor, and I've never seen that factor into anyone's decision to go one way or the other. Well, maybe once or twice, but it's not a huge differentiator to most people.
By far, our biggest "competitor" is lack of knowledge. People don't know about us or our competitor. We're not trying to steal customers from each other. Instead, we just need to educate people that we exist at all. That's been my experience in most of these cases, especially for smaller apps that do one little thing. A huge amount of our effort in the beginning (and still to this day) involves letting people know we exist. Trust me, that takes a lot more work than just a weekend.
As for the "doubtful in a weekend" comment, I just find it highly doubtful that anyone can build a useful app that includes billing in a weekend. Payment systems are a real bitch. Plus, it's easy to gloss over the fact that "built in a weekend" usually means MVP, or even sub-MVP. From that point you have to keep building, market, promote and make sales. It's not like you just build it, flip the switch, and sit back collecting checks. It just doesn't work that way.
My weekend is only worth more than $50 if I didn't enjoy programming it, or it took time away from making money from another job. If I was planning on sitting around watching television, but instead spent it programming this project that wouldn't somehow make the weekend worth less, in fact I would argue that it built value, intangible or otherwise (knowledge learned from building the application that I can put on my resume/maybe a few paying customers that end up actually using it/etc)
I really liked the Pinboard.in pricing scheme: start with very low prices (something like $1 subscription for life) to get passionate users talking about you and progresively make that price higher based in the number of users you get. No free plan to fight link spam. And a premium yearly plan that archives the content of your links.
So true, I made that mistake with my first business. Somehow, as a little kid, it seemed completely reasonable to provide cheap web hosting with A+ support to my clients. My grand financial plan: 50 clients * 12$ / yr - 60$ = 540$ easy profit - didn't work that well :-)
I was working my ass off, helping these clients, earning next to nothing.
You can still charge $1/month for the basic service with limited support and then charge $5/month for full support.
When you start a new SaaS, a low price point can help you acquire a lot of customers/credit cards on file. Your customers will often tell you more services you can add, that they will be happy to pay extra for.
This mentality kills most businesses. Will it help you acquire customers? Maybe. Will it give you low-end, pain-in-the-butt customers whose support burden is far higher than the value they supply to you? Yep, most likely.
Better for you to actually VALUE your product from the get go, get customers who also value it, and work together to make it better.
Think I'm crazy? Ask Groupon businesses how much repeat business they get from their cheap promos. It's the same problem.
I don't mean $1/month as a cheap promo, I'm referring to a situation were the costs of running your SaaS is very low, were you can break even with a few hundred customers a month. And adding new customers doesn't significantly increase your cost. In this case you can afford to charge $1/month and take advantage of the volume.
You can provide limited support for basic accounts and charge much more for full support like $5-$9/month. The idea is to give your customers the only-pay-for-what-you-need model which is very realistic on the web.
If your cost increases significantly with each new customer you acquire then find what will increase your costs and charge extra for it, maybe bandwidth, computation, disk space etc.
Serious question - Wonder how LastPass makes money then? (free or $1/month)
Or can we say that once you have acquired x number of customers at %5-7/month, it may then be easy/feasible to switch over to $1/month model since you already have a "traction" at this point
LastPass does it the usual way - they've got a premium (enterprise) product which they sell for $12-$24 per user per month. They can then write off any losses from the free product.
That's $12-$24 per year, not month. And they can do it simply because of sheer volume. Everyone has to deal with passwords so their market is humongous. If you sell to teachers that's not the case.
Selling to 100 users inside of one company is a lot different than selling to 100 individual users scattered all over the place. Company IT is likely to be the first point-of-contact for issues, which would decrease LastPass's support requirements by quite a bit.
Maybe they don't? Not that I know the details of their business, but I know I was shocked when I first learned how few companies actually make money. :)
I believe it, because I think the demand side is actually not too different at $1 vs. $5. There's not a lot of difference between the hassle of me getting out my credit card to pay for something at $5/month vs. $1/month. Maybe I value the hassle factor at about $5. So I only need twice the value out of the $5 service, not five times as much.
Also, with regards to selling to teachers: I know you think they're stingy. I thought they were stingy. Empirically, there are at least 5,000 or so teachers in America who have paid $30 for a bingo game they used once. $1 is not not not not not not not not not not not an appropriate price point. For those teachers who think $30 is a lot of money, wish them happy fulfilling lives and move on.