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I find this very interesting. What is the best way to find the sweet spot? Am I right in thinking that the more you charge for a service, the higher the cost of support for that customer will be and this can be difficult when scaling. i.e. A million customers at $5/month with 1 support employee/50,000 customers results in a much simpler business than 50,000 customers at $100/month with 1 support employee/500 customers?

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?

Am I right in thinking that the more you charge for a service, the higher the cost of support for that customer will be

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.'"

Thanks for the info.

To add to Patrick's experience: You will find these people at the cheap end of just about everything, not only SaaS. For example, our ad department finds that the people who purchase smaller ads are vastly more likely to cause trouble (e.g. "The ad is nice, but could you make it pop?" "OK, it pops more, but I would like a photo of my pet parakeet in the corner." "Can you move the parakeet up half an inch?" "Find clip art of another parakeet so he has a friend." "I want a discount on my $35 ad because I don't think the parakeet clip art you found is cute enough." vs. "OK, corporate approved it, let's run with it").

In this post from Ryan Carson from six years ago http://37signals.com/svn/archives2/building_a_web_app_dont_f... he says adding a plan that cost "$80 more ($19 vs. $99)" increased revenue by 30% within two weeks. There are many posts like this out there.

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.

What patio11 says is true. Our churn rate is under 1% on our highest accounts, and occasionally double digit on the cheapest. I've gotten lots of other SaaS owners drunk and we all share the same experience.

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.

Is this due to the pricing or that it is the cheapest offering?

False dichotomy. There are a million other potential explanations. As for what it is in each specific case, quite possibly different.

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.

Thanks.