Your SaaS product is too cheap if you never lose customers because of pricing
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I want my business to be profitable. I want to get rich off of it. But I want my customers to get even richer. I want to know for a fact that I'm leaving money on the table for my customers to capture for themselves. I suspect that in the long run this will actually be a good business decision (happier customers now = more word of mouth) but even if it isn't, I still think it's the right decision for me. That's why I don't raise my prices.
What I'm saying is not "leave zero customer surplus"
I say don't create value purely by lowering prices.
More specifically from the post:
"Focus fanatically on this: offering more value to every single customer than you extract from them with your pricing.
Do that by constantly adding more value to your customers life instead of lowering your prices and discounting your product heavily."
I know I get annoyed when some well designed tool adds a ton of features that don't really make it any better for me, and becomes more expensive in the process. Heck, it often becomes worse overall because all of those extra features make it slow and buggy.
Of course, it could be that you serve such a diverse customer base that adding in "valuable" features creates bloat as a side-effect (Hi Microsoft Excel!), but for a SaaS app that is less than 3-5 years old, I think you'd be hard pressed to fit in this category.
Finally, I spoke to my teacher who had a very simple message (paraphrased, it was ~7 years ago):
"Its not about having the best product, its about finding the untapped segment of the market," he said.
After that, I reoriented my business to attack a segment of the virtual market that was not being heavily targeted. That very week, my company made a complete turn-around.
In other words, I created a product that was well adapted for a specific segment of the market.
In the context of the linked article, I think the message is that there is an equilibrium between value provided by a service and the price at which people are willing to pay. If your product is worth more to your users than you are charging them, then you have not optimized this equilibrium.
Now, IF you are able to offer your service at a cost that is significantly lower than what your target customers are willing to pay, there is a strong likelihood that competition may try and capture some of this margin.
This does not at all violate the equilibrium principle because as new, lower-cost providers arrive, the price-point for users will naturally be lowered.
One thing I know is that if you charge $49/month inevitably somebody will tell you the price should be $9.99/month. If you charge $9.99 then somebody will tell you it should be free.
The point is that there will always be a tiny minority of people who want your service for a price that isn't sustainable. You can't base your business plan off of these people. You have to base your prices off of the value of your service as well as the cost it takes for you to provide that service.
(I'm working on a simulation engine for this kind of stuff.)
It's hard to recommend freemium for most SaaS startups since it depends critically on having a huge potential market and a zero-cost avenue for growth within it.
How do you calibrate it for a specific market?
Eventually I'll try to curate a library of market models and startup plans that did or didn't work in them.
As SaaS businesses, our fear is that all this uncaptured downmarket demand will create a competitor where none may even exist currently. These potential competitors also have an advantage. You've proven the market for them, and they can expend fewer cycles building their SaaS by simply copying the useful features you've already built.
We all know the standard advice here. Find those features or capabilities that don't provide much value to these downmarket customers, then introduce lower price points with pared-down versions of your SaaS.
But this article suggests another approach, and I like it: instead of paring down features, find out what potentially new features add value for your downmarket customers. Build them. Bring their value received up to your price point, instead of bringing your price down to their value.
This may be hard to do in practice, but it's an interesting idea.
One issue I find is when people don't differentiate _enough_. For example--I may have a blackboard killer CMS, but if I don't have any kind of differentiation from blackboard, I'm only competing on price. And, if I introduce new features but never show HOW these help the consumer, they won't value it.
Like: extracting the maximum possible money out of your customers is kind of a shitty goal for a business, as they go. It's not exactly pushed here, either, but it's not identified and discarded.
There's a price point where customers will be feeling pained and possibly taken advantage of, but still recognize the value of the product to them is such that they will still pay. This is not a sweet spot, I think; it's an opportunity for your competitors.
Hustling to add value instead of cutting prices is a good point, but "how do we change our product to add more value to our customers?" is a non-trivial question, though. The default gut responses are usually wrong, and end up increasing value to some customers at a cost to others; more features but severely increased complexity; sometimes broadening the potential target market at the cost of lower value (or a steeper learning curve) for the current user base.
Finally: customers even in a fairly narrow niche are diverse. You may settle on pricing that works great for healthy businesses, but which will force struggling businesses to reluctantly forgo your service, even when they need it the most.
A business relationship is a relationship between people or groups thereof, in the end, even if a numbers game is involved to maintain business health.
btw, your blog post really hits the mark.
Are you sure you're building something that fundamentally is valuable enough to an audience that is willing to pay money for it in exchange?
Have you validated that that's true?
I didn't validate the value before building, and justified it because I wanted to use it for myself. So I built a tool for myself and now let others use it.
"Detects project name from repo- so your work is never XXX"
"See logged time per project or branch- so you can see XXX"
Then tell me why I want the investment: "If you value your time at $50/hr then for the price of 11 minutes you can save yourself hours of lost time each month" or whatever the selling point is.
This will have three effects: It will make your pitch more compelling; it will force you to focus on selling the features that matter; and it will allow you to see the features you should add in order to have a more compelling sales pitch.
If you are looking for something to duckduckgo, this is old news, and it comes down to "selling features vs selling benefits" in marketing.
If that rate is under 1% for active free users moving to paying users then it's definitely a value problem. (Active, not just made an account and a capture). If this is the case then you probably need to working on adding additional features that are paid only and valuable.
If the conversion rate is alright but the total number of users is just too low that your paid users is too low, then it's not value problem, but rather a marketing problem. Two options in this case: your product is useful but the people who would use it don't know it exists, or your product is not fitting a market need. I'm pretty sure it's the first case, but validating that is difficult. As it's useful to you and does seem useful, the best step is to just try to get more people aware of the product. I'd recommend writing (or paying someone to write) blog posts detailing how your product is used. Tutorials on starting up a freelance business using your product to keep track of time for clients, or blog posts on time manegement using your product as a center piece would be good. Post those blogs up to twitter, HN, reddit, etc.
I also wasn't very sure about how it was actually doing the tracking and whether that information was A) accurate or B) useful.
Good luck :)
I'm not sure what "team features" are on the Team plan that would warrant such a huge jump in cost. You might want to elaborate on that.
I know that I've evaluated http://letsfreckle.com/ and other similar options in the past. Their copy appeals to me and it easily lets me know what it is they do and how it is valuable to me. But it isn't what I was looking for.
If you can explain yourself similarly, I suspect you'll have success.
- You only have VIM/Emacs/Sublime, but we use Eclipse. I know that supporting each and every client is unreasonable, but have you considered writing a client that watches for changes in one or more directories? That way, I could use your tracker even if I wrote in ed (which is the standard editor, as we all know ;)
- The paid feature (more than one week of history) is useless to me, because by Friday I need to take all those hours and push them into our internal system.
In any case, good idea and best of luck to your project! Is there anywhere I can subscribe to receive updates?
You can subscribe to updates here: http://eepurl.com/E5olT Although I haven't sent any emails out yet.
I'm working on adding XCode, IntelliJ, and Eclipse plugins in that order. I'll start sending a newsletter/blog post every time a new editor is supported.
This is one IDE where you will find a lot of enterprise devs.
- XCode is not massively used - Eclipse is free and users might carry the same mentality about plugins - IntelliJ certainly has less marketshare than VS
Good luck.
I do think you want multiple pricing tiers. The question here is what's your baseline?
Most SaaS startups start way too low. And once they get even a little tiny bit of push back they go back to their pricing tiers and lower them again.
That's a deadly pricing strategy and I wanted to call it out in this piece :)
our customers need to give us money to keep us in business and so that we continue to add value. if i took the least amount of money from them, i'd be doing them a disservice because they'd adopt my products, i'd fail them after a few years due to a lack of innovation, and then they'd be forced to go through a painful switch to a new platform.
so yes, we do want the max amount of revenue. we want it so that we're paid and satisfied, so we can hire more engineers and acquire more customers, and give them the value and innovation they need over they years.
DO (https://www.digitalocean.com/) really catches my eyes. The whole "SSD", "512MB" at $5 per month is a bargain. If you are running low traffic website (assuming you will not post your article on HN yourself), $5 per month is absolutely enough for personal blog. If you run a Persona IdB that way, it's only $60 + $50 (an IO domain can be as cheap as that plus tax on gandi, which comes with 1 year of SSL/TLS cert).
I really wonder how much profit they can make out of this kind of bargain.
1. maintenance cost is high
2. staff cost is high
3. disk failure is frequent
4. power usage is high
To a degree I'll be lowering my prices based on customer feedback, but also because the goal is to meet the customer's reality (not just my own). I think this is important for a lot of new SaaS businesses to consider as we move to a more niche-based market: is my offering matched to my customers reality?
A friend shared a nice little anecdote about this the other day: https://soundcloud.com/khuram-malik-3/pricing-by-peter-druck...
Here's an example... If I call AT&T right now, or my cable company and say that I want to cancel service to switch to a cheaper company, all of a sudden they will offer me a lower price to keep me from leaving. The ol' a customer is cheaper to keep than to acquire mantra I suppose...
What these people (and you) don't understand is that if you (or AT&T) called me out of the blue and said, hello sir, we've noticed that today makes your 5th year as an AT&T customer, we'd like to take $50 off your bill every month from now on(which is the offer they give me when I threaten to leave) I would be ecstatic.
- As a satisfied customer I would be shouting your name from the mountain top.
I don't normally pick people up on spelling, but that really grates - the word you want is advise.
"Your guests are commenting that the park entrance fee is very cheap, maybe you should consider raising the price!"