A few more tricks (I call it "red flags") I learned while running my small SaaS:
- if you sell service for $10/month and user says "I would buy it for $5/month" - that means he/she will not buy. Just do an experiment: for each customer which does that just give them discount for $5/month (even $2/month): nobody will come back and pay.
- if you sell service for $10/month and user needs to "to talk to somebody" before committing purchase: he/she will not buy. On other hand, if you have business / enterprise plan (which is like $3000/year) that is a good sign.
- lowering prices will not get you more paying customers
- start with "low" prices and rise it during lifetime of your company. Never go back.
We get lots of I'd be willing to pay X and we always send them a link for exactly that amount. And they never pay. We even follow-up just to give them the benefit of the doubt and they still never do.
Being the low cost provider for software (at least those targeted at corporates) is not the way to go. When people are spending OPM, it's more about the problem you solve for them then the cost. (note: of course, cost can't be insane but you get the idea. OPM = other people's money)
Does that last point include grandfathering in existing users on cheaper plans? If I'm an existing user, I'll be annoyed if my bill goes up, especially if it's a really big jump. But if prices go down, everyone is happy. If you start high, how big of a problem is it to go down? How much of my objection is just because I'm spoiled by the internet and haven't run a business?
A good trick I've heard is to launch at a high price - say $100 per month - and do promos through marketing channels where you are quite liberal with discounts. This gives the perception of high value on a limited time offer while still making it clear what your price point is.
You then make the discounts more and more scarce over time and for smaller and smaller amounts until you settle on optimal pricing.
I think there is a danger of losing existing customers with price increases. I think price increases need to be very carefully thought out and reasoned to existing users. We are raising our rates not to make more money but because we are now offering you more value.
One of the biggest problems I face is determining when the time is right to shift from free to paid. I originally slapped a subscription page on my app[1] thinking "we'll see how this goes". But after a few weeks of 0 conversions, I had a tough time justifying turning down folks who would have at least signed up if there wasn't a payment required - so I made it free.
The way I look at it is that any feedback with a free plan is better than zero feedback with a subscription. I gain a lot of valuable insight observing how users actually use the service. I'm hesitant to give that up by switching back to a subscription plan and watching new signups die again.
I know there's no magic bullet. I suppose this could be solved quickly if I had more time to devote to selling and marketing - admittedly I've been slacking in that department.
Stop coding, pick up the phone and call some of your free users. Ask them if they'd pay for your product and why/why not.
If none of your free customers are willing to pay, then it might be time for a pivot. Such as licensing your app to financial providers as a value add.
If you do pivot, there might be enough return in acting as a broker (/lead generator) for selling financial products to your users.
Once they're paid down their loans (and even before then) you should have a pretty good picture of their financial situation. What are they going to do with that extra cash they have now that their loans repayments are done?
* Take out a loan for a car/holiday?
* Open a share trading account?
* While they're paying down their debts can you get them a better deal on their credit card?
Guilty as charged. But I do appreciate hearing it directly from you as it serves to drive the point home.
As a first-time founder and relatively new developer, I could never really tell when the time is right to stop creating and start pitching. Looking back, I definitely went too far with the build, but better late than never to snap out of it and start soliciting.
I don't see a pricing page anywhere, how come? (Sounds like you removed it; why?)
> The way I look at it is that any feedback with a free plan is better than zero feedback with a subscription.
I wouldn't be so sure. My experience has been that I get very different kinds of feedback from free users versus paying users. Often times even opposite feedback.
Be careful listening to people who are not, and will likely never be, your target paying customers.
> I'm hesitant to give that up by switching back to a subscription plan and watching new signups die again.
Freemium can work reasonably well for this. Takes less courage, and you ideally get some paying users in the process. Not sure what the best pricing breakdown would be for your app specifically though, as I'm not too familiar with the industry.
Alternatively, you can do free trials (2 weeks, 1 month, or 3 months). Take a credit card up-front if you're feeling brave, or defer if you're not. If people don't convert, contact them personally and find out why. Offer a "no questions asked money-back guarantee", it'll probably make you feel comfortable more than your customer. If you really want, you can give them some customers free accounts anyways.
While I can appreciate the desire for user feedback, I would challenge the assumption that it's "valuable". The very first point of the article touched on the difference between information that you will gather from free VS paying users. One kind is valuable because it can help you develop the product to be more appealing to those willing to pay, whereas the other kind may end up taking you on a very costly goose chase that won't help you generate any revenue.
The article opened my eyes to that. I am treating all feedback as valuable, whereas that might be the wrong way to go about it. It's clearly something I need to think about more deeply and work on discovering the true customer pain points, not just the "it would be nice if you had x, y, z" type of response I'm accustomed to reacting to.
It could be that your target market (people in debt) is one in which people have a lower ability (or willingness) to spend. (Google Ramit Sethi's Pay Certainty test.)
In that case, perhaps an alternate revenue system can be found. Maybe something like Mint.com.
I read (listened) to Chris Anderson's book Free: The Future of a Radical Price [1], which tackles this very subject of creating revenue from free products. (Chris Anderson is the founder of Wired.com and this book debuted as #12 on the New York Times Best Seller List.) You may find his book useful too. I highly recommend it. Best of all, the book is priced appropriately: Free.
Ironically, our target market is actually folks who are the top 60% income earners in the US. Debt and income are directly related, and higher earners have a majority share of the debt in the nation[1]. It makes sense intuitively because these are the people whom are more likely to have tertiary education degrees and a mortgage. So, I'm really trying to find the sweet spot of households with low debt-to-income ratios (high ability to repay), but also large amounts of debt (high need for a solution).
Lower income earners, with primarily unsecured credit card debt for example, are basically faced with two options - spend less or earn more. There's no panacea that software can provide, other than increasing awareness of costs and consequences.
Great read. Obviously there's a lot more to pricing -- which is as much science as it is art -- than can be covered in an article. For those interested, I would suggest an approachable, but comprehensive text on pricing theory and analytics. "The Strategy and Tactics of Pricing" by Nagle, Hogan and Zale is a great resource. (And speaking of pricing: buy it used, if possible; like most textbooks, it's fairly expensive).
One word of caution: tiered and freemium models are, once again, all the rage in software. And that's great. It's good to see people actually trying to make a profit, and many of them succeeding. But it's very easy to go overboard on tiering. Too much tiering and too much customization in your pricing model will create two big problems: 1) customer confusion and resentment, 2) hidden operational and opportunity costs in managing the tiers and customization. Segmented pricing is great if you can do it, but it needs to be simple, manageable, and transparent.
Here's my situation: I have a product that I know 6% of 2000 users who have given me their email address will take for "free," though it requires 15-20 minutes of work for them to participate (so they must see some value here).
I originally priced it at $99, but I haven't been able to get anyone to pay that amount or $19. Do I just keep dropping prices until I can get someone to pay? Is it a fair test to email out varying "discounts" to groups of users to determine a price?
Are you generating $99 dollars worth of value? What makes you say that? And, are you sure it isn't higher?
If your starting point on pricing is too low, you're going to be measuring below your noise floor. Running what is effectively a reverse auction on your price won't help you, because your prices are already arbitrary.
If that's the case, consider solving the problem with some mechanism other than pricing.
Honestly, I'd question whether you've hit product market fit yet. That might sound bad, but just consider it an opportunity. Lots of products start here and go on to make (b|m)illions
The best thing you can do here is talk with some customers that you don't personally know and aren't connected with. Tell them you're going to give them 3 months free in exchange for a frank conversation about how they use your product and what they actually value.
Thanks for the tip. I don't have case studies or even testimonials yet, so that may be hurting me. This is what my sales page looks like: http://cl.ly/image/1a21191A2U16
"Adii Pienaar of WooThemes solved this problem by refusing to support non-paying customers. If they’re not willing to pay you, then they’re not your customers"
Great article all around, but I thought that was the biggest take away for people running web apps & online games, or similar.
For a long time there was this "it's on the internet - it should be free" mentality. There is a difference between freedom of information, and giving away hard work with value.
There are cases where a free plan actually makes sense.
Does the usage increases with time?
Many users start using JotForm with very low usage and then after using it for months or years they go over the 100 submission/month limit. I believe Evernote also had a similar pattern. Dropbox probably also has it.
Can you use network effects?
Only a tiny percentage of our users share their forms with others on JotForm Form Templates gallery. Tiny percentage of 1 million users is still pretty good. So, we have all these ready to use form templates for other users. It saves people time to be able to find a form template for any use case. If we only had paid users the number of shared templates would have been very low.
When raising my prices, I'm always worried that my competition will be able to see and roughly gauge how profitable I am. I'm worried that this will give them an incentive offer products that overlap what I offer and undercut me.
Many price-sensitive customers will just leave at that point. Does anybody share the same fears or have experience of this?
I'm always worried that my competition will be able to see and roughly gauge how profitable I am.
Not a chance (or, specifically, not a chance likely enough to concern you). They're focused on their baby, not yours, and 'profitability' as a meaningful factor depends on variables including overheads, business owner salaries, and vision which are next to impossible to guess with any clarity.
I'm worried that this will give them an incentive [to] offer products that overlap what I offer and undercut me.
This is more likely, but is the very definition of competition. If you want to compete solely on price then you (and your competitors) are signing up for a never-ending arms race. Find other ways to compete, and know that success breeds imitators so you must always be a step ahead in regards product or service innovation, or market penetration.
Many price-sensitive customers will just leave at that point.
Yes. That's usually a good thing. Moreover, you will lose far fewer than you expect - switching services requires an investment in research, deliberation, time to change, time to re-learn, and risk of something new. The cost-savings need to fund all of that as well, and often don't.
Thanks Jacob, if anything that was an encouragement to keep me focused on my overall goal of service improvement rather than to get intimidated by the 'business side' of running my website.
Can I tap your knowledge further. How important is it to have a clear division of roles in a startup? What I am asking is, for greater success, can the techy guy really be the business guy at the same time? (I'm thinking about the partnership between Woz and Jobs)
It depends on how often you deliver value and what costs you have.
If you have recurring costs that increase in size with your user base, then charge a proportionate recurring fee.
If it's a game that someone buys, plays for a week and moves on to the next, a subscription won't work, because there's no continuous value. So you charge up front, deliver all your value up front, and get busy working on your second game.
If you're thinking big applications (e.g. Photoshop) then your question becomes about things like distribution, retention, sales channels, competitors etc.
Bluntly You can take $2k every 2-3 years assuming people upgrade to your latest release, or you can take $50 per month every month assuming people stay. Both work out similar.
The advantage of the $2k model is that you get big money up front which you can re-invest in more customer acquisition (or your next release). The drawback is that $2k isn't a "no-brainer" sale, it needs approval, you need a good brand, and you're limiting your addressable market a good bit.
The advantage of the $49 per month is that it's a zero risk try-out, people will convert far far easier. The disadvantage is retention.
Product to product I'd give different advice, but in general, recurring is easier to plan a business on.
What kind of fees are we talking about? Recurring revenue is the best revenue in my opinion, but if you were talking about a $1000 one-time fee vs. $5/month, it's pretty clear which avenue you should take.
Also, if you're talking about offering a service, you're going to have ongoing operational expenses. If your customers pay you only once there will come a time when the profit you've derived from them is exceeded by their ongoing cost.
Good article. I still think a free tier can be beneficial for most SaaS products. At Eventbrite we shared space with Yammer and Zendesk, the three of us with free tiers (Zendesk $20/year "donation") and really making it work. The point is NOT to implement limits but instead to implement features that make sense for those able to pay. For many SaaS services, that's admin tools to manage users. The reality is that there are millions of companies out there with fixed costs well less than $20k per month (don't forget there are non-tech startup companies, too).
It cannot be overstated that it really is very easy to raise prices. It's pretty much impossible to make a pricing mistake in the beginning because for growing companies, the initial users will only amount to a fraction of total users over time.
Readit News
- if you sell service for $10/month and user says "I would buy it for $5/month" - that means he/she will not buy. Just do an experiment: for each customer which does that just give them discount for $5/month (even $2/month): nobody will come back and pay.
- if you sell service for $10/month and user needs to "to talk to somebody" before committing purchase: he/she will not buy. On other hand, if you have business / enterprise plan (which is like $3000/year) that is a good sign.
- lowering prices will not get you more paying customers
- start with "low" prices and rise it during lifetime of your company. Never go back.
We get lots of I'd be willing to pay X and we always send them a link for exactly that amount. And they never pay. We even follow-up just to give them the benefit of the doubt and they still never do.
Being the low cost provider for software (at least those targeted at corporates) is not the way to go. When people are spending OPM, it's more about the problem you solve for them then the cost. (note: of course, cost can't be insane but you get the idea. OPM = other people's money)
"Conditional" purchases are BS.
The people who buy don't give you conditions. The people who give you conditions never buy.
Can I contact you and ask you some questions? :)
A good trick I've heard is to launch at a high price - say $100 per month - and do promos through marketing channels where you are quite liberal with discounts. This gives the perception of high value on a limited time offer while still making it clear what your price point is.
You then make the discounts more and more scarce over time and for smaller and smaller amounts until you settle on optimal pricing.
The way I look at it is that any feedback with a free plan is better than zero feedback with a subscription. I gain a lot of valuable insight observing how users actually use the service. I'm hesitant to give that up by switching back to a subscription plan and watching new signups die again.
I know there's no magic bullet. I suppose this could be solved quickly if I had more time to devote to selling and marketing - admittedly I've been slacking in that department.
Any words of wisdom would be much appreciated.
[1] https://beanjockey.com
If none of your free customers are willing to pay, then it might be time for a pivot. Such as licensing your app to financial providers as a value add.
Once they're paid down their loans (and even before then) you should have a pretty good picture of their financial situation. What are they going to do with that extra cash they have now that their loans repayments are done?
* Take out a loan for a car/holiday?
* Open a share trading account?
* While they're paying down their debts can you get them a better deal on their credit card?
As a first-time founder and relatively new developer, I could never really tell when the time is right to stop creating and start pitching. Looking back, I definitely went too far with the build, but better late than never to snap out of it and start soliciting.
> The way I look at it is that any feedback with a free plan is better than zero feedback with a subscription.
I wouldn't be so sure. My experience has been that I get very different kinds of feedback from free users versus paying users. Often times even opposite feedback.
Be careful listening to people who are not, and will likely never be, your target paying customers.
> I'm hesitant to give that up by switching back to a subscription plan and watching new signups die again.
Freemium can work reasonably well for this. Takes less courage, and you ideally get some paying users in the process. Not sure what the best pricing breakdown would be for your app specifically though, as I'm not too familiar with the industry.
Alternatively, you can do free trials (2 weeks, 1 month, or 3 months). Take a credit card up-front if you're feeling brave, or defer if you're not. If people don't convert, contact them personally and find out why. Offer a "no questions asked money-back guarantee", it'll probably make you feel comfortable more than your customer. If you really want, you can give them some customers free accounts anyways.
Best of luck! :)
In that case, perhaps an alternate revenue system can be found. Maybe something like Mint.com.
I read (listened) to Chris Anderson's book Free: The Future of a Radical Price [1], which tackles this very subject of creating revenue from free products. (Chris Anderson is the founder of Wired.com and this book debuted as #12 on the New York Times Best Seller List.) You may find his book useful too. I highly recommend it. Best of all, the book is priced appropriately: Free.
[1] http://www.audible.com/pd?asin=B002V5CUHI
Lower income earners, with primarily unsecured credit card debt for example, are basically faced with two options - spend less or earn more. There's no panacea that software can provide, other than increasing awareness of costs and consequences.
Thanks for the link - I'll check it out.
[1] http://www.federalreserve.gov/pubs/bulletin/2012/pdf/scf12.p...
One word of caution: tiered and freemium models are, once again, all the rage in software. And that's great. It's good to see people actually trying to make a profit, and many of them succeeding. But it's very easy to go overboard on tiering. Too much tiering and too much customization in your pricing model will create two big problems: 1) customer confusion and resentment, 2) hidden operational and opportunity costs in managing the tiers and customization. Segmented pricing is great if you can do it, but it needs to be simple, manageable, and transparent.
Re: Pricing, thanks will check it out.
I originally priced it at $99, but I haven't been able to get anyone to pay that amount or $19. Do I just keep dropping prices until I can get someone to pay? Is it a fair test to email out varying "discounts" to groups of users to determine a price?
If your starting point on pricing is too low, you're going to be measuring below your noise floor. Running what is effectively a reverse auction on your price won't help you, because your prices are already arbitrary.
If that's the case, consider solving the problem with some mechanism other than pricing.
The best thing you can do here is talk with some customers that you don't personally know and aren't connected with. Tell them you're going to give them 3 months free in exchange for a frank conversation about how they use your product and what they actually value.
That will guide you.
If you're providing them with that much value, maybe you just need to bring their attention to that value.
That goes double if this is a b2b.
But first think about monkeyspaw's answer, not mine.
Great article all around, but I thought that was the biggest take away for people running web apps & online games, or similar.
For a long time there was this "it's on the internet - it should be free" mentality. There is a difference between freedom of information, and giving away hard work with value.
Does the usage increases with time? Many users start using JotForm with very low usage and then after using it for months or years they go over the 100 submission/month limit. I believe Evernote also had a similar pattern. Dropbox probably also has it.
Can you use network effects? Only a tiny percentage of our users share their forms with others on JotForm Form Templates gallery. Tiny percentage of 1 million users is still pretty good. So, we have all these ready to use form templates for other users. It saves people time to be able to find a form template for any use case. If we only had paid users the number of shared templates would have been very low.
When raising my prices, I'm always worried that my competition will be able to see and roughly gauge how profitable I am. I'm worried that this will give them an incentive offer products that overlap what I offer and undercut me.
Many price-sensitive customers will just leave at that point. Does anybody share the same fears or have experience of this?
I'm worried that this will give them an incentive [to] offer products that overlap what I offer and undercut me. This is more likely, but is the very definition of competition. If you want to compete solely on price then you (and your competitors) are signing up for a never-ending arms race. Find other ways to compete, and know that success breeds imitators so you must always be a step ahead in regards product or service innovation, or market penetration.
Many price-sensitive customers will just leave at that point. Yes. That's usually a good thing. Moreover, you will lose far fewer than you expect - switching services requires an investment in research, deliberation, time to change, time to re-learn, and risk of something new. The cost-savings need to fund all of that as well, and often don't.
Can I tap your knowledge further. How important is it to have a clear division of roles in a startup? What I am asking is, for greater success, can the techy guy really be the business guy at the same time? (I'm thinking about the partnership between Woz and Jobs)
My biggest question is do you think its best for applications to charge a one time large fee or a monthly smaller fee?
If you have recurring costs that increase in size with your user base, then charge a proportionate recurring fee.
If it's a game that someone buys, plays for a week and moves on to the next, a subscription won't work, because there's no continuous value. So you charge up front, deliver all your value up front, and get busy working on your second game.
If you're thinking big applications (e.g. Photoshop) then your question becomes about things like distribution, retention, sales channels, competitors etc.
Bluntly You can take $2k every 2-3 years assuming people upgrade to your latest release, or you can take $50 per month every month assuming people stay. Both work out similar.
The advantage of the $2k model is that you get big money up front which you can re-invest in more customer acquisition (or your next release). The drawback is that $2k isn't a "no-brainer" sale, it needs approval, you need a good brand, and you're limiting your addressable market a good bit.
The advantage of the $49 per month is that it's a zero risk try-out, people will convert far far easier. The disadvantage is retention.
Product to product I'd give different advice, but in general, recurring is easier to plan a business on.
Also, if you're talking about offering a service, you're going to have ongoing operational expenses. If your customers pay you only once there will come a time when the profit you've derived from them is exceeded by their ongoing cost.
It cannot be overstated that it really is very easy to raise prices. It's pretty much impossible to make a pricing mistake in the beginning because for growing companies, the initial users will only amount to a fraction of total users over time.