Why cheap customers cost more

For Appointment Reminder, approximate per-account customer support incidents per month. I've taken the liberty of scaling them to X, where X represents the number for the highest publicly available account plan.

  Personal ($9): 7X
  Professional ($29): 4X
  Small Business ($79): 3X
  Office ($199): X

The character of the questions is also different at the various plan levels. Most common question for Office: "What's the timeframe on integrating this with ..." followed by "Our $TITLE would like a report saying $NEEDS, can you make that happen?" Most common question for Personal: "How do I schedule appointments?" followed by "The system is working exactly the way it says it does on the screen. Can you please tell me why that is happening? I thought it would work in a way completely opposite to the way described on the screen. It would be convenient if you could fix that. No, I didn't read the 'If you want this to work in the opposite fashion...' text on the screen to change that setting, I have more important things to do than worry about computers."

Your mileage may vary. If I were doing the math based on phone calls waking me up in the middle of the night, the numbers get skewed due to one pathological customer in the $29 bucket, who has literally called me more than every other customer combined.

P.S. I have fairly exact privileged information regarding this question at a handful of companies and anecdotal evidence from dozens of my software buddies. It is our universal experience that the support load for cheap/free customers crushes the support load for the higher plans, both on an absolute and per-customer basis.

I share the view, however:

> So it’s not that cheap people require more support. It’s that people who require more support are more likely to make their decision based on price alone.

What evidence is there of this? Surely if you have a plan for $10, $50 and $100 you're going to have more customers at the $10 price point simply because it's so cheap and therefore more support will go to people at that price point. Has anyone even actually released any sort of statistical analysis of price points and support taking into account the pricing, total customers and the amount they use the product?

Also who the price point is aimed at matters. For example if your product has a $10 price plan aimed at individuals and a $50 price plan aimed at businesses you could see the $10 price plan requiring more support (on average) simply because the personal users use the product more actively, not because they're paying less. I as a customer won't pay $50/m if your $10/m plan suits my needs.

I remember reading somewhere about a theory that people who pay more for a service end up committing more time and energy into learning it, because it seems more important to them.

If you signed up for a $50/mo service, you would probably feel pretty special about it and possibly spend a few hours learning. If you paid $5/mo you would probably skip through all the documentation as fast as possible, race into trying something out, and upon encountering a problem would probably fire off a support request without searching (hey you're a paying customer now, right?)

Of course none of the above is terribly scientific.. but I thought it post-worthy anyway.

My take on this was actually that many high end customers

1. Trial / buy at the lowest possible price point

2. Ask lots of annoying questions

3. Master the system

4. (finally) move to a higher price bracket

5. Understand the system and stop hassling support.

Perhaps it would be worth correlating support requests with the age of the account and seeing if that was a better predictor of support burden than the price plan.

The "dummy" concept is really interesting. It dwells in "information asymmetry"; markets where sellers know more than buyers tend to not function properly (shameless plug: I have written about this here http://blog.medusis.com/are-you-a-lemon).

Now, what can a given small company do about it? I think the two opposite strategies of trying to "drive away dummies" or "embrace them" are valid; what isn't as effective is trying to serve both dummies and experts by offering plans with wildly different pricing.

You probably need to make a choice: choose a positioning in either the "dummies" or "expert" space and serve only this population.

Going above and beyond on end user self-service support helps.

1. Mouseover help on every input field

2. Searchable help system with screen captures, it has to be comprehensive.

3. Video help, Camtasia style walk throughs.

Your users are not dummies. They need support, on the feature they are using, when they are using it. You can either provide that support self-service or you can provide it via email/phone. One is far easier for the user (self-service) and the other is much harder on you (answer emails on how to use basic functionality).

I ran a free crm system for about 10 years, it took refining how each feature worked and creating all of the different ways of self-service support but I was able to get technical support down to 1 question per week. That was with about 1,200 unique daily users... users who would be in the system all day because they had all of their calendars, files, contacts, and other things online in the system. They didn't want to wait for support, they wanted the answer right away and I made sure they could get it without contacting me.

Average Joe user, he looks at this and is just guessing: https://dmhx3adjqsy1o.cloudfront.net/assets/marketing/shots/... I see a support link but I bet that link goes to a generic support page and not support for that page in particular. So now the user has to jump through hoops to find support and might give up.

The user needs to understand the the benefit (of each admin page), what the page is doing, some ideas of how to read the data, and get the most out of it. There can be no assumptions that the user knows anything... they are going to have to be taught and you want that done by self-learning.

The user signed up because of the top 1/3rd of the homepage with the marketing talk. Just because they sign up doesn't mean they fully understand the system, how to use it, and how to dig deep into each page and get the benefits.

With the masses of metrics being collected in all the lean startups, it would be spiffy if this assertion could be supported by something other than rampant speculation.

This might feel true because a small number of customers generate the most support calls and the majority of customers are expected to be on the cheapest plans so you'd expect an overlap.

This is just a sympton of the real problem. A fair amount of startups (and other small businesses) don't have a clue about who their average customer is. They go and build their MVP without ever thinking about how the sell the darn thing. After the code is written they set out to find someone who will pay for their product.

This just leads to them creating some ridiculous pricing schemes that will never prove to be sustainable. They think this is some sort of loss-leader strategy, but its not. Loss-leaders must actually turn a profit to be considered as such. Add in the highly used but seldomnly tested freemium model, and what you get is a bunch of people who are great at writing code, but are pretty bad at selling.

And how can you improve your selling skills if you don't even know who you are selling to?

Now, Sacha does make a good point. Cheap people are a pain in the behind to deal with. They have an overgrown sense of entitlement, most of the time they are rude, and will nickel and dime you till death. But you know whose fault is that? Yours. You did not do your homework. Cheap people are a market, and they are profitable if you know how to work them. The minute you offer them support, the minute they will treat you like their personal punching bag. Pricing yourself out of the "cheap zone" is the best strategy you can have if your product is not aimed at them.

I would not call these people dummies either. They are smart. In fact, they will argue and nitpick every little technical detail so much that it will leave you thinking if you are the dummy. These people know their stuff. For them this is not only a game but a way of life. You cannot educate them. They will not listen. Anything you do will seem like an attempt to raise your prices. How do they react? They double their complaining. Trying to model their behaviour will drive you crazy.

One company that went through this is Pep Boys. They had an offer for a free oil change with any other service. Cheap people started taking their busted old cars to them. The cheap-o's would buy the lowest priced service that would give them the free oil change. Then come back to complain about unrelated problems. They would even go as far as suing Pep Boys for damages not related to the services performed. But small claims courts always sided with the poor abused customer. Cheap-o's actually made money on this. Go figure. After years of this, Pep Boys finally saw the light and discontinued the practice. But it doesn't stop there. What did cheap-o's do? They complained to corporate HQ about the change.

Another point Sacha makes is that people who pay more ask for less support. Do you know why? Because they are your target customer. They ask for less support because they need the product, and trust you. They know that if something goes wrong you will be there to fix it. They show their trust in you by paying more. Its so simple. They also use your product as intended. And because your prodcut worked, no complaints arised.

When people give you money they are not only buying the product, but they are placing their trust on you. Cheap-o's don't trust anybody. So they complain until they get their moneys worth (in the mind). Your target customer will be glad everything worked out, and will just be silently happy.

I'm going to copy and paste part of the conclusion to make a point.

No matter which strategy you choose, remember to consider the impact pricing will have on your customer base and your support costs. For example, a good strategy might be to start off with high prices, and then only lower them once you’re ready to scale your support infrastructure.

I'm sorry Sacha, but you cannot start with high prices and then lower them. You start with fair prices and then raise them. If your support infrastructure requires higher costs, but your target customer cannot afford it, then the problem began when you chose to build your product. You need to figure out the costs of scaling before even starting. No need to be precise either, you can just make an estimate. Just make sure to err on the high side.

I would also say that pricing does not impact the customer base. It is the other way around. The customer base (or your average customer) is the key metric to set the price. Not your costs, but the customers. Companies in the make-up industry know this. Most of the makeup out there is made by the same companies. The big difference is the customer they target. You can pick the same basic product from two different brands, and the prices will be very different. In some cases even downright insulting. What does a $200 lipstick have that a $10 one does not? A customer that will pay the price.

Sacha, good call on getting this point out in the open. This stuff needs to be discussed more by startups and hackers.

"I think cheap plans disproportionately attract a special category of users: dummies."

I don't think they are "dummies".

They are simply less invested in your venture than the higher paying individuals, and thus read less of your FAQ and spend less time getting to know your website before making a purchase.

I run a SaaS, just lowered the minimum payment to $5 the other day, noticed a large influx of questions to my inbox as a result, and deduced the above.

Somebody who comes along and deposits $100 into my service has probably been reading the FAQ for a few days, using my free trial, and really getting into/really liking my website and service.

The person who comes along, see's "backlinks for $5!" and immediately makes the payment without using the free trial obviously doesn't know or care as much about my website as much as the guy who just deposited $100.

Most every question I receive to my inbox is from a non paying customer or somebody who has deposited $5.

It's annoying, but I think it's a necessity for my business. Sales have gone up across the board and it's not a bad tradeoff if you ask me.

$5 customers do turn into $100 ones eventually.

"Cheap" is really a values judgment by the author - a business should consider every customer valuable. If the customer is 'cheap' for the amount of effort/support, then the product/service is priced too low.

If competing on price, support should reflect the model, i.e. self-serve methodologies.

Especially for digital products/services which have essentially zero marginal cost, the customer is really paying for your time.

If customers are overloading support channels, it probably means the product is priced too low and the price curve should be accordingly adjusted to lower the number of paying customers while maintaining profits.

Of course, the product/service can have an artificially low price point to encourage eventual upsell/cross-selling opportunities, but all the more reason to have a measured funnel before losing most of your time to support.

The "dummies" reasoning seems pretty sound. But I've got two comments on the "costs" which have to be factored in to the "total cost" and decide whether "cheap customers really do cost more":

1) Costs should really be calculated relative to your margins. I.e. I would hazard a guess (due to economies of scale) your cheapest price plan would have higher margins than your larger price plans.

2) The actual cost of support issues - I've found (running xp-dev.com, which mind you, should really not have that many "dummies") that while the cheapest customers do submit more support requests, these requests tend to take much quicker in resolving, than say the larger customers.

So, I think its not as easy as saying "Cheap customers cost more". I think its better to say "cheap customers request more support"

Just a thought ...

I'm sure it has something to do with the types of services that might be offered for free as well. Higher priced services are generally more in the domain of business customers who are likely to appreciate how much work goes into a quality product or service.

Free services may apply to either, but you're going to also get customers who are not really in business yet and they may have unrealistic expectations. I think of myself when I was younger and I thought of all companies as faceless corporations, rather than actual people just trying to provide a good service.

Chinese menus should only be offered when you are trying to further segment your core market, not to try and create a market.

A significant issue for companies is not identifying the true costs of serving specific types of customers. Those that require many additional resources (that you are not charging for), particularly for a SAAS product, should be respectfully cut. Sometimes it is cheaper to not serve a client and not have some revenue come in than to serve those that are resource sucks and pull your time/focus away from your primary market.

It's a pretty decent article but:

> Now being a dummy is not the same thing as being dumb.

...

I think if I had found myself about to write the sentence above I would try to find a better adjective and not post something this silly.

Huh. My experience is the opposite. I mean, the smallest plan gets a lot of questions, but that is because, with the default install I give you, it just doesn't work very well (which is why I make ordering it... harder. I guess it was kinda a joke, mostly 'cause I like the feel of the five dollar price point; irrational, but it ended up working out quite well[1]) My second smallest plan (that's all of a dollar more with twice the ram) is pretty quiet, as are the 256 and 512 plans.

Really, I think it's a matter of setting expectations, and then sticking to your guns when people want more support than you are selling. "If the service is unsuitable for your needs, I can cancel your account and give you your last month's payment back" - most people, especially on the low end, seem to find this attitude acceptable.

It's really important, I think, to make sure that you don't treat your difficult customers better than your easy customers... I don't think I'm 100% on this yet, but I think it's super important. You choose your customers; if you give better service to people that are hard to deal with than the quiet easy customers, what sort of customer do you think you will end up with? That's one of the reasons I'm really generous with the 'if you want to no longer be my customer, I can give you back your last month' - I also try really hard in the case of outages that if I give anyone a credit, I give all effected customers credit.

I find that the smaller customers are much more accepting of my "I handle the (virtual) hardware, you handle beyond that" support model; usually it's the higher dollar customers that keep coming back wanting me to tune their apache config or re-install the os. I mean, they can do all those things (at least if they could do all those things on a dedicated server with a boot-cd in the cd-rom drive.)

The larger customers are also (quite rightly, I think) far more likely to make noise when disk I/O is suboptimal. I mean, to be fair, it is a problem. (I do not know if it's a worse problem with me than with other providers; I doubt it. We're all using pretty similar hardware. I do know that it is a big problem with shared 7200rpm disk in general. Disk shares poorly.) But the smaller dollar customers? they don't complain nearly as often as my high dollar customers; if you are using it as a shell replacement, a little disk latency just isn't that big of a deal; I mean, ram is cheap enough that a whole lot of stuff can be stuck in pagecache, and that's way faster than the fastest disk. But if you are running a fifty gigabyte MySQL database that is under heavy use? well, perhaps a virtual environment is not the best place to put it.

I also have a much higher margin (cost of goods sold, anyhow) on the small guests; I charge $1 per 64MiB ram plus $4/account/month, so the total cost per megabyte drops pretty sharply with volume. When I started, my under $10 VPSs were unbeatable deals; at this point, my cost per megabyte ram is still pretty competitive for my larger guests, but I'm getting overtaken on the low end, so I think it's time for me to drop prices and/or increase resources on the small guests. I'm not sure what I'll do with that yet, but I do know I need to do something. I feel like that used to be /my/ market and I want it back.

[1]news.ycombinator.com/item?id=3865250

Woah. I stopped reading at "Patrick McKenzie’s podcast" (but Instapaper'd for later, promise). I had no idea, but am thrilled and off to iTunes...

How about not including support for the cheapest price plan?

The reason that the ones who make their decisions based on price alone require more support isn't always due to the fact that they're dummies. The article doesn't really give too clear a definition of support here. It can mean honest to goodness help required or it could mean complaints and demands (often veiled as questions). People who pay the least simply don't value the product as much. They're not willing to put in the time required to learn how to really work it and they're always the first to complain that the one feature just out of their chosen plan should be included.

Their lack of perceived value for the service isn't always attributable to price alone either. The fact that they chose the cheapest usually means that they're either just plain cheap or they don't understand how valuable what they're getting is to begin with which leads to the, acting like dummies and being demanding. Now, when I say value in this case I don't mean money. I'm talking about their perception of how useful the product theyre getting is.

Besides that minor clarification I totally back this up. The higher priced item will always have more features and attract people who know the value of those features because they're already educated about their benefits most likely because they've used similar solutions before.

> when you offer multiple plans for a service, the cheapest plan’s customers tends to require the most support.

True in my experience.

> So it’s not that cheap people require more support. It’s that people who require more support are more likely to make their decision based on price alone.

The reason is simple. Cheapest plans attract people who are just starting out and don't know what they are doing.

And in turn those plans attract them because they don't require the greater X or Y or Z of the more expensive plans. They're not at that point yet.