Why Real Businesses Don’t Charge $5/Month

This article is bizarre. It considers the case where your CAC is $16, then considers whether you should charge $10/mo or $29/mo. And, uh, yeah, of course, if you can raise prices without increasing your CAC/churn, you should obviously do that, but, in the real world, it’s harder to get customers to pay more, and that has to be reflected as higher CAC.

Now, in fact, $10 is often too low, because the CAC of $29/mo isn’t usually that much higher than $10/mo, but it definitely is higher, and numbers like “$10/mo = $1,200/mo run rate, $29/mo = $1M/month run rate” should have forced the author to stop and reflect a little harder on whether these numbers make sense.

Maybe we should charge $99/mo and make a BILLION dollars in the first year, right? Or, why stop there? At a fixed $16 CAC, why not charge $1,000/mo, $10K/mo?

But that’s not how it works. That’s not how any of this works!

Well the problem with this argument is that it totally ignores a basic economic concept. Price elasticity.

It’s kind of naive to assume that your CAC will grow linearly and your revenue exponentially if you set a higher price. Maybe if you’re lucky to find a market that doesn’t care about how much you charge them and get equally attracted to your product at any price rate.

More realistically price increases will increase you CAC because customers will take a longer thought to decide if they want to pay for that.

Maybe $5 a month doesn’t build a real business but you will be launching too late if you’re developing features that justify a $29 a month price.

It’s easier to launch at $5 and raise your prices as you build features. If you happen to have loyal early customers who never churned as you build those features, you can grandfather them into legacy plans and develop transition programs for them.

If you’re also expanding for their own use cases they will be happy to be moved to newer more expensive plans. They will most likely do it if you have been paying attention to their needs. And if they churn anyway, you’re getting 100% accurate data on the elasticity of your prices and the overall perceived value of your service.

Having a $29 a month service with customers doesn’t mean that your service provides a $29 value. It just means that you have a market where people are willing to consider a $29 value proposition until your value is proven to be less or when your customers find some other vendor with better price-value alignment. That’s when they churn.

As others have pointed out here and in the comments on the blog post, it doesn't make sense to assume uptake will be the same at 3x the price. That's a demand-side issue.

There's also a supply-side issue: if you are just getting started and you charge $30/mo, you will attract more competitors than if you charge $10/mo. People will look at what you're selling and think "I could undercut him by 50% and still make money!". So keeping your price relatively low at the beginning can also help on the supply-side, by keeping competitors at bay until you have more of a moat or at least an established user base.

Slack charges $6.67/Month, and is a real business. Pretty sure they would have never gotten big if they charged $20/Month.

Probably should have noted that this article is dated 2013, almost a decade ago.

I am going to really blow his mind and run the numbers for charging $100/mo. only 10x more a month but after a year, 1,567,549x as much revenue.

I don't know if I would take advice on "real businesses" from a site with broken HTTPS.

Doesn’t cac increase as prices go up?

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