How to Break the Trust of Your customers in Just One Day - Lessons Learned
davidhauser.com
davidhauser.com
From http://chargify.com/blog/why-we-changed-our-pricing/:
"Grasshopper Group has been supporting Chargify for 15 months, and Chargify is now supporting 3,000 merchants - again, the large majority of whom are paying $0."
And from the linked article:
"We should have shared the data we collected for over a year that demonstrated quite clearly to us that only 0.9% of customers were paying us at all, and that there was a direct correlation between those that did not pay anything and a high volume of support requests."
3000 merchants total * .009 paying = 27 paying merchants
Now, these numbers could be off in several ways, but even if they're off by an order of magnitude (and I doubt they are) - ouch!
So many lessons to be learned from this:
- Freemium's applicability is so over-rated. I couldn't be happier that we've had a (cheap) pay-to-play structure at Spreedly since the beginning. Personally I think freemium should always be a strategy introduced post-profitability, never before.
- It's been said many times, but I'll say it again: the "overnight success" is a myth. Most businesses take 2-5 years to reach any kind of profitability. Selling to startups? Better keep that in mind.
- Capital infusion causes market distortion. Not saying that's a bad thing, but it's worth recognizing. Spreedly noticed a definite drop-off in signups when Chargify came out, and why not - wouldn't you take the free option vs. Spreedly's pay to play? And wasn't that some great marketing they poured a lot of money in to? And yet their free option and their marketing were only possible due to the Grasshopper Group's investment.
- Put that all together and you end up with this: you've got to keep your burn low until you find your product/market fit and your scalable sales model. Or you've got to have a sugar daddy. Or you've got to win the investment lottery. Spreedly is still alive because we've only allowed costs to grow as we're able to handle them - that's the nature of the bootstrapped startup, hard as it can be at times.
One more bit of math: if my numbers above are correct, Spreedly has 6x as many paying customers as Chargify. And we've had zero outside investment. And, painfully, we're still not ramen profitable. But: we have a pivot in the works that will blow the doors off of what we've done to date (and it doesn't involve raising prices on existing customers - promise!). So stay tuned - this space is just starting to get interesting.
Oh, and if you're an angel investor: we'd love to have some capital to use to distort the market in our favor for a change :-)
I have hard time believing that in the past couple months they could have found >3k people out there looking for a subscription billing solution like this. I think there's definitely a market for it (since I'm part of that market), but I don't think you're talking about millions of potential customers. And even if it is larger than I imagine, it takes time to reach them all.
We have built Grasshopper Group over 7 years with NO outside capital at all. I am all for talking with competitors and love many of them, but your view of "sugar daddies" and "investment lottery" is just wrong and makes you look bad.
If this comes off as an attack on Grasshopper Group - my apologies. I think what ya'll have done is pretty impressive, and I'd like to duplicate it myself. At the same time - Chargify wouldn't have ever gotten into the situation of supporting so many unsustainable free users if it (as a stand-alone product) was bootstrapped. That's all I'm saying. Calling that a "sugar daddy" was probably overly inflammatory.
This is exactly what I mean when I talk about pathological customers. You will get to deal with them, too, if you try to be the cheap option in your market.
You don't have pathological customers, what you have is a large number of people who instead of paying hard currency for a service will trade time as their currency.
What this means is that a good number of those who stay on the free side of the freemium model are in fact willing to pay. Just not with cash. What they're willing to do is to spend time to learn your service, to participate in your forums, and in any way that is required to get their free service.
When you only expect, want, and cater for the customers who have hard currency you will of course piss off the time-as-a-currency crowd if you've already grabbed them.
Then it should come as no surprise when those pissed off people use their time against you.
I'm not saying that's a reasonable response. But it's certainly to be expected. The best thing to do is to work out how to use the time-as-a-currency crowd to your advantage. Instead of ditching them in a price-hike, ask them to do something for you. Maybe they have to participate in support forums to help others getting on board in return for the service? Maybe they have to just promote your service on their site?
My point is simply that it's naive to ignore this very large set of customers, and even more naive to act in ways that will piss them off if you've already constructed a freemium model that attracted them.
Look, I'm sure they're very nice people, but their extra time is not going to pay for your ramen. They cost more money and pay less money so they cost you money. You may decide that you would like to optimize for lower revenue, but most people would probably disagree.
Suggestions: remove spam from the discussions forums, help the newbies, write tutorials, etc, etc.
This is the exact opposite of my experience. Pathological customers use the service less, spend less time reading the words on the screen, spend less time exploring or reading the documentation and more time asking me questions (in, often, the rudest possible fashions), ask me questions like (I kid you not) "It says that every card will be different. Does that mean every card will be the same? Cuz that would suck.", etc etc.
Patrick, I'm sure you get lots of awful customers. You're targeting not-very-technical people, and when you do lots of SEO/AdWords to get as many people in the door as possible, you'll bring in a lot of good customers and a lot of bad customers.
But I don't think Chargify has that many. Of course they had a few, but for the most part, I doubt that those free customers suck; they just aren't making money yet.
But a lot of companies that don't know if they'll ever make $49/month when they start writing their payment code turn into valuable customers.
You need to look no farther than Bingo Card Creator. Would you have been comfortable locking yourself in to paying $49/month so that you could save time writing payment logic when you first started? I doubt it. But today, a billing system that enticed you with a free plan would be extremely happy that that got you to sign up.
The real issue I see for Chargify is that I don't know what their target market is now. They basically have to get new apps, since existing apps will already have something that works. But now they're limiting themselves to new apps with owners that are confident in their success. You're not going to pay $50/month for billing on something that you're just hoping will bring you a few hundred dollars a month, even though some of those apps turn into many thousands a month.
I agree fully. And the first plan is actually $99 month, not $50. $99 as the cheapest option is really pushing it in my opinion.
They are offering existing customers are $39 plan, which I think is fair enough for a starting business for the support you need when you're getting setup. I don't understand why they don't just offer this plan to the public as well though.
If you can turn a non-paying fan into an advocate, they are much more valuable than a paying customer (well, most customers anyways.)
I always thought it is rather common to have free users limited to FAQs and articles/tutorials rather than access to 24/7 phone (and other) support.
(please excuse my ignorance here, but I haven't seen this mentioned)
On top of that your service should not need that much support to begin with.
Are you sure you're not just piling on here?
Are you ?
I didn't see a sign at the door that said that only chargify customers can speak.
> For instance: why should Chargify not need that much support to begin with?
Because every other payments service that I've ever used (and that's quite a few of them) didn't need that either.
Download integration guide, spend a day figuring things out, test, fire & forget.
> Are you sure their business model isn't "get people to pay a premium for support"?
It could be.
> Are you sure you're not just piling on here?
Yes, I'm quite sure. For the record, I built 'webpay', one of the very first web payment services so I have a bit of knowledge in what goes in to a payment service and a bunch of people I know run an IPSP. When this whole thing blew I put up a bunch of things that were not too hot about how this was/is handled and that was before anybody else wrote as much as two lines about it. If you want to accuse me of 'piling on' then I'm sure you could find a better example to make your case.
Nobody incurs this sort of brand damage for research purposes.
It is not reasonable to take offense at a business getting their initial pricing wrong. Everybody gets their initial pricing wrong.
I seriously think Chargify might be making a bigger communications error now than they did by pulling the bandaid off on their new prices. They're creating uncertainty about whether they'll revert to old pricing, or create some "wash the dishes for your meal" freemium model. If they need to be charging this new rate to make the business make sense, it's their business, and it is fundamentally and totally and categorically their call to make.
Self-help timetables are unlikely to be acceptable to the third and fourth parties.Any technical or implementation issue is likely to be high priority for the customer. People tend not to have small payment issues even for nominal amounts.
If you choose to make an apology, you might as well make it sound as sincere as possible.
Pvg says it much better than me below.
Free users are harder to support, more vocal and less likely to upgrade. Even a token amount of money initially is probably enough to discourage the "pathological" customers and the sunk costs mindset might encourage spending more money with your service.
I suppose I could try selling user data or use advertising. Either require massive number of users and a lot of upfront time to get going.
You get fanatical customers everywhere, and they can be good and bad. They've mainly been good in my experience though.
I have heard from many other software developers, and seen in my own life, that charging more money disproportionately chases them away. I had a major decrease in the number I dealt with just when I went from $25 to $30, while sales went up. It is amazing: charge $5 more, see people suddenly have less hard drive failures, virus infestations, and "bad days". (I called you a dishonest SOB thieving from poor defenseless women when I mistyped my password... because I'm having a bad day, you see.) And it wasn't 20% less, it was closer to 80% less.
If you give it away free as ad supported, users tend to be extremely grateful. Once they start paying, even a tiny amount, they start to be more resentful and demand far more.
What Patrick is saying over and over and over and over again is that you have to be willing to let the pathological customers go. One function of your pricing is to chase out the people who aren't driving your business, so you can concentrate on serving the people who derive the maximum value from your work.
Asking for small change is just about the worst thing you can do; pathological customers can afford it, and will immediately feel entitlement.
As soon as you run across a person who values their money more than their time, they'll use up your time and give you no money. And, while they might be nice folks, if you're running a business you have to politely find a way of letting them know you can't do business with them.
If any of you ever does something like this and you make a 'bad' move, revert. Simple. Make a step back and think things over for a long time before changing direction again, assuming that you are not about to go out of business buy yourself some time. It takes a long time to build up a reputation you can lose it in a heartbeat.
Chargify has made a huge step in the right direction by dropping their price to $40 / month but if they had started out with announcing a $0 to $40 increase that would have been just as a big a problem reputation wise. A contract you made should never be broken like this, especially not retro-actively with the people that signed up under the original terms. New terms apply to new customers, especially such dramatic changes.
Of course if you have customers that you can't make any kind of payback on then you will have to do something about them (assuming they're pulling you under). But to change direction 180 degrees from your previous 'pitch' overnight is not good and this new revised plan is still not going to undo the damage.
My plan of action would be:
- stop the influx of new customers at the 'free' plan by
changing the tos: free for 6 months, then pay
- measure the effect of that and if it is good reduce the
'free' period
- if it is free, no support other than the public
documentation + a forum
- if you want support you will have to sign up for the
paid plan
Disclaimer: I've been operating a freemium website for a long time that went through the free to premium step during the .com crash, we solved it by selling our customers new features that were not in the site before and we made sure that the 'free' users pay us back with content. There always is a way out if you look for it hard enough.
On the other hand, if you just charge customers off the bat, there are many people who can't overcome the activation energy of pulling out a credit card and will leave your site. I've come across quite a few services where even if they charged a penny, I'd probably pass just b/c I don't want to give you my credit card without knowing how useful your service really is.
It's perfectly believable that free customers were an unsustainable burden or that the press (and its consumers) love disaster stories. These things are also perfectly fine things to write about. But the timing is awful - do you really want to be calling your customers a bunch of loud whiners with too much time on their hands just days after everyone on the net was calling you ham-handed and tone-deaf in customer-relations matters?
- Our free customers are really bad for our business. They complain a lot in really visible ways, they make up a lot of our support burden, and they never end up paying us anyway.
- Once we figured this out, we decided we don't want them as customers.
- We gave all our free customers an option to start to paying. Those that aren't willing to pay we don't care about.
- OMG!!1! What a shit storm this created. All those free customers that we don't care about sure complain a lot when you screw them, way more than they used to. This really sucks, and makes us look really bad. Oh, and fuck you tech crunch for covering Square and not us, and then kicking us when we're down.
- Boy, I really wish we'd sugar coated getting rid of all those pesky free customers so they didn't complain so damn much.
I see a lot of remorse for the outcome and lack of sugar coating, but not a lot of remorse for the actual underlying action. When you build something people rely on, and then take it away from your most vocal userbase, what exactly do you expect the outcome to be?
Just because you got your use out of the free customers (their time dealing with your buggy early release software) doesn't mean you can jettison them. You have to ease them into a new pricing system, stop future people from being free, etc.
I wouldn't go with chargify now on the theory that they will continue to do these things in spite of themselves. Their mental model of how people react is flawed, and the underlying love of their audience is missing, which inevitably leads to more mistakes.
As a counterpoint--someone who's got the love, like Peldi of Balsamiq, won't run into these problems continually, and when they do, can recover trust faster.
I'm not saying it's all their fault. It's your responsibility (as someone who chooses freemium as a business model) to make sure you don't allow them to be jerks to you. That means putting limits on how much resources you allocate to supporting them and having clear revenue channels that allow you to make your revenue goals.
Still, many freeloaders can be plain jerks at times.
LRMGFY ?
But I was wrong. If you really think that in 6 months your application for which you need a billing system, can't at least cover the cost of a latte per day... maybe you should stop right now and don't waste your time with it. Do you need more than 6 months because of any reason? Fine, that means you will have to give up your Startbucks habits for a while. If you don't trust your product to ever reach those 50 customers that would make you into a paying customer, why would Chargify?
1) Free customers DO PAY for Chargify, just not to them directly. It cost us several days of development time + testing to integrate with them.
2) You lost trust because you weren't fair. Change the prices and grandfather existing users. If the free customers fail, you will not need to support them for that long.
Your pricing policy is = "you pay X/mo. until we raise it"
This post reaffirms my choice to leave Chargify and investigate the alternatives: http://recurly.com http://spreedly.com, http://cheddargetter.com & http://FreshBooks.com
For the record, I understand why they are raising prices, I cannot understand how anyone could trust them again.
Never piss these people off.
They are insanely helpful in getting early traction for your business. But piss them off, and they feel personally offended and make it their personal mission to 'get back at you'.
I can't find the thread right now, but there was a guy on reddit who made a post like this. His insurance company screwed him out of a few bucks. He then told the agent he'd tell all his friends to leave their company. The agent laughed it off. This guy went on a vendatta against the company emailed all his friends (A LOT) and ended up costing this company a few hundred thousand dollars a year (at least) in lost revenue. He could have made it worse by naming the company in his thread on reddit, but I guess he called a truce at that point.
Find these mavens in your business and treat them well. Even if they're "pathological"
Grandfathering existing customers seems like the only logical path if you really want to hike costs of a subscription.
As a counter example, I signed up for Backupify during their beta. I recently checked their site and saw that their free plan is fairly limited, but my account shows I'm at the premium level, which currently has a monthly fee, though I pay nothing. They grandfathered in my account without even telling me there was a pricing change. In other words, only new customers were affected, not existing customers. There was no uproar because it didn't really affect existing customers.
NOTE: I haven't used your company before but it seems like it would be useful so I'll certainly consider it if I'm in need of this type of service in the future.
Perhaps it's because I didn't follow any of this yesterday, so this is the first I am reading of it.