Why Real Businesses Don't Charge $5/month
justinmares.com
justinmares.com
I suggest looking at what your value proposition is: if you think you can provide $50,000 dollars of value to your customer, you shouldn't be charging $5 a month. If your plan provides only a small amount of value, you better hope it provides that value to a large number of people. :) But you're not going to get away with charging more.
We went from:
Free Forever / $29 / $59 / $149
7 Day Trial / $49 / $149 / $249
And we have an overall better customer base (they find more value in our app) and relatively the same signup metrics as we had before.
There's your answer.
It's not about what the market "lets" you do. It's about what you demonstrate to the market your product is worth to them. When in doubt, take responsibility and create agency. Otherwise your business is just a Disney princess waiting to be rescued.
http://hostingmatters.com/web_hosting.html
They've been in business for 13 years.
They also have many higher-priced offerings, and their low-priced offerings include 70 megabytes of data and not, a la Google Drive, 100GB.
I'm not sure what being "in the list" has to do with it.
The notion that raising prices automatically increases profits is just absurd. Sometimes it does, sometimes it doesn't. It's not possible to generalize about it.
Feel free to address how venture capital distorts prices at any time.
Sorry.
Modding me down won't change the facts, either.
It would be an enormously powerful result for SaaS companies if moving from e.g. $20 a month to $5 a month reduced customer acquisition costs by a factor of 10x, but companies that are able to nail customer acquisition at the LTVs implied by $5 a month are very rare. (They tend to be market-leading B2C companies, and they tend to have customer acquisition strategies which make pay-for-one-extra-customer-at-the-margin to not really be a factor.) By comparison, it is much, much easier to do all sorts of fun things when you can spend $100, $500, or $1k to acquire a customer. (Those are all a) numbers which many SaaS companies could trivially justify paying and b) numbers which many SaaS companies actually pay to get marginal customers.)
When it comes to low prices, people will make up any random reason they can "logic up" in absence of facts. Sure, "low prices to reduce churn" sounds totally logical, but it's utter bullhockey. Don't believe it. Always ask for the data.
For us, it's a combination of factors:
1. Our lower plan is for freelancers. Freelancers are basically by nature unprofessional, and suck at business. (Saying this as a former freelancer who fit that bill for a long time.) Freelancers go out of business all the time, and they also don't engage in professional practices with any great will. Larger plans -> larger teams -> more professional and more durable as a business. They also tend to evaluate software more carefully and then stick with what they pick because A) they don't get paid to try out infinite software packages, B) they do actually want to get paid and not procrastinate or diddle around pretending to look for the perfect tool, C) getting a whole team off one tool and onto another takes valuable time & energy away from actual work.
2. Cheap customers are always the worst. Always. This cuts across all industries. People who shop on price are not the people you want to deal with… they are the most demanding and again far more likely to quit! You'd think lower prices would mean lower expectations but it seems the opposite is true. These people can scent a low price a mile away through the muddy waters of the internet, and once you attract them, the only way to shake them is to raise your prices.
We have friends who run software that's more urgently needed than time tracking — something that couldn't, theoretically, be replaced by a nasty Excel spreadsheet -- and they see exactly the same behavior even though in theory even their smallest, cheapest customers ought to be professional and on the high end of the tech savvy scale. You simply cannot believe how much happier they are since they dropped their lower plans entirely.
We too have seen a decline in crazy support emails since we raised our prices across the board.
With regards to the high churn rate on cheap plans, is it that this is due to the quality of the plans and that it is likely that these customers can find a similar service for free or is it the perceived value to customer is lower because they are only paying a small amount each month?
This is one of those "That certainly feels like it could be true" intuitions which data will disabuse you of in a hurry if you run a SaaS business. Within roughly the same tier of customer -- say, all the publicly available plans on any SaaS whose pricing page you have in your swipe file -- I can virtually guarantee you that customer support costs go down as price goes up. (There's a discontinuity between $500 a month and Enterprise, where support costs may or may not actually go up. Prices go up in a hurry at that discontinuity, though.)
Also: do not price SaaS based on costs. The margins are typically very, very high. Customer support is generally a very low portion of both the costs of the company and the marginal costs for bringing on another customer -- at most SaaS companies I'm familiar with, the #1 cost is engineering salaries and the #1 marginal cost (by a long shot) is costs associated with customer acquisition. (Either advertising spend or marketing/sales salaries.)
With regards to the high churn rate on cheap plans, is it that this is due to the quality of the plans and that it is likely that these customers can find a similar service for free or is it the perceived value to customer is lower because they are only paying a small amount each month?
You're trying to fit a rationalization onto observed behavior, which is dangerous, because customers are frequently irrational. Anecdotally -- and again, social lubricant is a great way to get fun stories from your SaaS peers because darn if we're going to repeat many of these stories while sober [1] -- there's a particular segment of customers who you don't want to be in a relationship with at all, and these customers are disproportionately drawn to your/the market's cheapest offerings. That's not necessarily an indictment of the offering.
[1] I am reusing this joke for comedic effect, as I don't drink, but these are very common topics of discussion at dinners among SaaS entrepreneurs. My favorite anecdote ever:
X: "I get 'My business doesn't make any money, so I can't afford to pay you $20' all the time. What do you say to that?"
Y: "'#$#& you, mine does.'"
Generous SaaS operators have been sharing this experience and wisdom for years and still people (usually without experience) refuse to believe it. Why?
Thanks patio11 and Amy Hoy for sharing your experiences.
F.W. Woolworth is gone from the U.S. now, but they lasted for over a hundred years.