Don't Blindly Model Your SaaS Pricing on 37signals
ginzametrics.com
ginzametrics.com
It's time for me to point out, again, that no other business parameter will affect cashflow and profitability more than your pricing.
You can adjust your costs all the time.
But prices are sticky. Customers remember that something used to be cheaper.
Really, again, let me emphasise this.
Pricing is the single most important business decision you can make.
Rails vs node.js / Ruby vs Haskell / bootstrap vs foundation / backbone vs sproutcore / trendoid vs hipster / cats vs dogs?
Only tangentially relevant to your success.
Pricing? Critical. Central. Essential.
Do not leave it to gut feelings.
[1] http://chester.id.au/2012/09/12/review-the-strategy-and-tact...
If you don't have a good product, nothing else matters.
Once you have a good product, then you focus on pricing.
Once you figure out the product and pricing, then you ...
I really think 37 signals is leaving quite a bit of money on the table by not offering PO payments. I understand they don't want to do a whole bunch of customer hand holding, but it is possible to accept POs without ever talking to a customer.
I think you meant sole, but I had to laugh at this meaning as well in the whole scheme of dealing with finance departments.
Hmm. Sounds like a complete and utter horribly painful schlep. A schlep that puts you right in the path of the money. Interesting.
Do you have an example of a SaaS operation doing this well?
(I think I picked this idea up from Patrick McKenzie -- another one is offering SLAs to expensive clients).
Wow, can you bold this? Touchless sale/conversion = win.
David Skok talks about it brilliantly and has an eagle eye on these metrics when evaluating his SaaS investments - http://www.forentrepreneurs.com/business-models/the-touchles...
No one really talks about backing into pricing based on LTV/CAC ratio (affected by for example measurable inbound marketing or cpc/cpm costs).
Pay back period (ideally CAC < a year) is also a factor. http://www.forentrepreneurs.com/saas-metrics/
Pricing isn't actually something that's as easy to change as you'd believe either. It has huge implications on your actual product, your target market and sales strategy - as the OP points out.
Imagine you were suddenly told you had to charge 10x more for your product. You might initially think it would kill you but think about what that would change. Would it necessarily be a bad thing?
If you're anything like me, it's easy to assume everyone lives in a world where $10 for Spotify is a pretty big deal. My friends moan about that price for unlimited music. $200 a month seems huge to me for anything I'd buy. It's only recently I've fully started to appreciate just how much money enterprise clients willing drop on "simple" products that meet their needs.
I really think there is a lack of good advice on pricing and how alternative pricing strategies could be used to open up new markets for SaaS type businesses. Sure, you may need a slightly "less scalable" sales strategy but with increasing competition in the web-app marketplace, moving to a different customer base with more cash may well be worth a few sales phone calls.
For businesses those SaaS services are a core need. Leisure services like spotify are the wrong thing to compare prices to. Think about how much of your budget you spend on housing, food, transportation. $200 / month is peanuts for those kinds of things. That gives a better idea about what businesses are willing to spend on software they need for their core activities.
Not just enterprise clients - almost any business.
I run a tiny, cash-strapped film production company and do various bits of Internet Marketing stuff on the side. We're about the smallest entity you could imagine that can still be called a "company".
I'll cheerfully drop $100 or more per month on a service that will save me a day a month of work or increase profits on a project by 10% - because in both cases, I come out ahead.
Consumers are buying on "value", on gut feelings and emotion, and all sorts of other things. Businesses are buying on "will this make me more money than it costs?"
Start by explaining a business 'model' which goes like this:
Revenue - Cost-to-deliver = Gross Margin
Gross-Margin - All-other-costs = Net Margin
A business "model" takes the Gross Revenue, and then fractionally allocates it to those other expenses. Maybe 20% of the GM is engineering, 10% is is marketing, 10% is sales commissions, 5% is facilities, 3% is swag/giveaways, maybe 10% goes into a bonus pool that you divvy up among your best performers. The remainder is 'net revenue' or 'free cash flow'.
If you're a C-level executive and you don't know what every single number on your tax return means, you're running the risk of having a problem staring you in the face that you never "see". If you're an engineer and you see a bunch of patched together spaghetti code that is poorly documented you "see" that there is a huge amount of technical debt that is going to have to be paid before you can move on to V2.0 or what not. If you're looking at your taxes and you see that you're depreciation costs are of the same magnitude as your revenue you need to be able to "see" that a cliff is coming when you're going to need new gear and you'll have no money to buy it.
The biggest challenge of "pricing" is that sometimes you realize that you can't sell your product for what it is going to cost you to produce it. You have a choice, either innovate around the costs to make it, or put on a really good show and try to sell it to someone before the truth is out. Hard place to be but knowing your costs will inform you on whether or not your pricing makes sense. The 'best' situation is when you can sell it and your costs scale fractionally with users. That is a very good business to be in.
Example, founder says "We launched and got 100K users in the first weekend!" That is fabulous, shows that they have really connected with their target market, but do they know how much money each user has to generate to pay for their expected burn rate? They should. You can say "We're build X for Y, and we're looking to monetize the landing pages with advertising." So what "CPM" do you need? (clicks per thousand) What RPM (revenue per thousand) do you need to make that work? Are there other businesses that have similar CPM/RPM numbers?
We're fortunate that a lot of folks can and do share their numbers with this community. I'm just encouraging founders to keep the whole equation in their thoughts between costs + engagement + revenue so they can think about ways to test against their models.
The three questions every founder has to wonder; Can we build it? Will people use it? Can we convince them to pay enough for it to sustain it?
As you mention, it's hard to know what your costs are going to be when you're just starting out so it's really important to be flexible enough to change your pricing / value prop to your customers as you grow in order to cover your costs and provide room for further growth.
http://chaotic-flow.com/saas-sales-model-and-organization-st...
But, briefly, the transactional model is one in which you require some customer communication in order to close the deal and is typically closed via inside sales reps. Enterprise deals are larger, cost more and typically require on the ground reps and a lot more customer facetime in order to close deals.
Huh, I've seen more recommendations for higher prices than lower on here lately.
Just to see if I'm leaving money on the table (and hurting my ability to grow by undercharging), I made the one-line CSS tweak to hide the cheapest pricing plan on http://www.improvely.com/pricing
If that doesn't hurt signup rates, I'll have this post to thank for it. If it does, it's easily undone.
One thing I found really confusing : On the gold package what does select features mean ? What can I select ? ( I later realized that it's the select package features but it took me a few minutes :) )
That being said, the startups we've spoken with who have switched to annual pricing are able to get paid in advance 60-70% of the time. This helps a lot.
Some companies prefer this as well as it can reduce their own AP and record-keeping burden.
Cashflow, cashflow, cashflow.
Getting paid up front is better for cashflow than getting paid monthly.
Edit: Updated now.
So yeah, if he does his 22 sales / month, at the end of the first month, you're even, and starting from month #2, you're making money.
Combine this with "It's easier to sell one time a $1000 product than 1000 times a $1 one" and you get the main idea.
I also think that there are many service out there that are buying into this 'high pricing' doctrine and are giving prospective customers sticker shock. These starving young companies can't afford to do that so early in the game.
The other day I saw a site on HN selling business ebooks to startups: "how to drive more traffic to your website" $99, a customer segmentation ebook for $39, a copywriting ebook for $49. All this stuff is way overpriced. Dozens of quality articles can be googled up in a few minutes for the same information. I know because I did just that.
The people that tell these young startups to jack their prices are not being helpful or even honest. Maybe its a way of trying to justify their own high pricing.
I suggest young startups get users by any means possible, even if it means discounting heavily. They need habitual users, and that requires making it affordable enough that the enduser uses the tool / service for a long enough time that it becomes a habit and the tool becomes too entrenched in their workflow.
If anything is rude, it's telling young startups how to price their businesses when it looks like they don't have a clue on pricing even their own.
If the answers are "zero" and "none" then is any price I could possibly quote to you giving a potential customer sticker shock?
I will pay for information if it will help me, but the examples I've given is very basic information that's been written about for free so many hundreds of times, I'm surprised anyone would buy those ebooks.
They are ripping off the very startup community they say they are helping.
I think there's a pricing bubble going on with startups. Many monthly subscription rates are too high, especially when there are so many choices available to the consumer, and at a time when the budgets and attention span of buyers is so limited.
There seems to be no imagination in pricing, only to charge more and more. It's bad advice and I'll bet its mortally wounding a lot of young startups and impressionable kids that are trying to make a go of it.
Again, it's a con game and it's trying to gouge and profit off the start up community they say they are helping. It's shameful, but its only time before the herd snaps out of it and realizes what is happening.
If I were completely new to a topic, like copywriting, I would probably look for a book on the topic, rather than blogs. That's because I'd spend more time trying to find free material that's good (there's a lot of free crap out there), than to buy a pre-compiled book from a reputable source.
I agree with you that the materials have to justify their price. I've purchased a $99 information product before that was total crap, and the exact same content on the same person's website, just reformatted. In that case there's no justification, no added value. I don't know what books you're talking about to determine if they're actually any good or not, but to charge for what's normally "free" information there has to be added value.
Maybe there is a rash of startups with inflated pricing without any added value. However, as soon as the first competitor comes in that truly adds value for the same price (or less), then everyone will jump to it.
I will say this though: certain opinion leaders on HN are taking advantage of the readers and the prevalent herd mentality that prevails here.
I suspect your google-fu is stronger than most. Many people don't have the skills or time to do this. Should I spend 2 or 3 days searching and building a marketing strategy that works in 2012 by filtering through all the stuff written over the last 4 years and half of it is out of date or should I pay $99 dollars to get it in my inbox in PDF form. For many the $99 makes sense.
They are certainly not ripping off the startup community! If you even value your time as a startup founder at $100, it's cheaper just to by the dumb book.
Most startups doing subscriptions are doing b2b or b2h (business 2 hacker examples: github, seomoz, etc) business. Businesses and to a much lesser extent hacker don't care about the cost, but look at the value provided.
RE: "There seems to be no imagination in pricing, only to charge more and more. It's bad advice and I'll bet its mortally wounding a lot of young startups and impressionable kids..."
This is absolutely absurd! This is like saying "There seems to be no imagination in cars today, only to get better gas milage more and more". Of course, that's the point of a business is to charge so much your customers complain, but still pay you none the less. You're capturing the most value possible, while they still enjoy a net gain.
I'd argue even if this is bad advice for a majority of people, it's still good to get it out there that it is possible. Once we know it's possible, much like the 4 minute mile, we can achieve it. When it's locked away and only a choosen few know it is possible that is the real danger to impressionable kids.
Stop drinking the Jonestown kool-aid that's been going around my friend. Your time isn't so valuable that you can't spend 15-20 minutes doing a diligent search online.
The ebooks I mentioned in the previous post were college textbook stuff. As basic as the stuff gets. You would need to be already under the influence of the kool-aid getting passed around here to think that's an honest price. It's not.
My point is this: the people trying to sell you stuff here are not your friend.
If you can find 40-pages of well documented information and condense it down into clear, actionable information that you can then form a plan from in 15-20 minutes you are a much better man than I am.
For those of us that lack that particular skill set, these are screamingly good deal even at $99. For even more of us who don't personally pay for this, but put it on the company credit card, our company should fire us for wasting company time by trying to do it ourselves and not spend the $39.
Clearly, we disagree, but all I'm saying is that there are a lot of people for which these are a screamingly good deal.
There is a lot of choice out there. Everybody is executing nowadays, and it's the same sort of apps that are flooding the market. The advice in this post is not helpful.
Producers can and do pay a lot more for goods and services if it helps them to make a profit.
The market for todo apps and other consumer software is, you're right, absolutely a mad scrabble for volume.
The market for intelligently targeted vertical segments is juicy and prime for picking.
I know where I'm aiming my current venture.
And many copywriting books I've bought had 2 or even more useful ideas in them.