
Doubling SaaS Revenue By Changing The Pricing Model - illdave
http://www.kalzumeus.com/2012/08/13/doubling-saas-revenue/
======
patio11
Happy to answer questions to the extent that I can.

Speaking of which: if it isn't transparently obvious by now, I really, really
like getting feedback about how my advice worked out. If you ever implement a
suggestion from me (particularly with an A/B test), please, drop me an email.
Even if the result was "Well, that was sure an epic failure", because negative
confirmation is useful, too. (If you want to share results I can write up for
the blog, I appreciate that, too, but I'd be just as pleased with a "Keep this
under your hat but we did a first-experience tour and, yikes, engagement
+20%.")

~~~
bravura
Here's what I find really surprising: Making the word "Free" in the call-to-
action much less prominent did not reduce conversion by very much.

The original page prominently says: "Sign up for a free trial" and gets a 6.9%
conversion from visitor to trial user.

The new page unprominently says: "Money back guarantee" and "Free Sign Up" in
the top right corner. Conversion is 5.2%, which is almost the same considering
the scope of the change, even though there was much less use of the word
"Free".

This is surprising in itself.

I'm also curious about how the next stage of the funnel is converting users
from the trial to entering their credit cards.

Also you say that credit card signup is not mandatory. When does the CC enter
the picture? Does the service wait a while (e.g. one month ) and ask you to
enter you credit card? How does this compare to taking a credit-card upfront
and offering a one-month money-back guarantee?

~~~
hythloday
I don't want to be pedantic, but 25% fewer conversions is not "almost the
same", it's quite the loss. You need to increase your funnel 33% _somewhere_
down the line to make up for it (which I'm sure they did - I'm just making the
point that X% -> X-d% is significant if X _and_ d are small).

~~~
dmytton
Depends if you're maximising for revenue or signups. The number of signups
decreased but the revenue increased significantly, making up for the loss in
signups. Of course if you can increase signups now with the new pricing then
that would also show revenue increase.

------
plasma
> "The minimum buy-in for the service is now $99 a month, which will segment
> away customers who are less serious about their server uptime."

I use Server Density (and even blogged about it,
<http://cherrypopapp.com/blog#Server_Provisioning>) and would not pay
$99/month to monitor 1-2 servers.

I don't see how paying more or less reflects a level of seriousness.

~~~
robryan
With the new pricing though you are no longer a targeted customer.

------
true_religion
> The minimum buy-in for the service is now $99 a month, which should scare
> away the idiots.

I'm scared, and as a potential customer I hate to be labeled an idiot.

I'm very happy with New Relics system even though they're priced higher than
you per server, they at least offer a price PER server instead of tiers.

~~~
the_bear
Agreed. I don't doubt that being ruthless about A/B testing pricing increases
revenue, but I'm not wild about the implied attitude that customers only exist
so that we can extract as much money as possible from them. The user
experience should definitely be a factor as well.

I don't think it's possible to support this claim with data, but I'm convinced
that being ruthless and unfriendly with pricing can have a negative impact on
the business in the long term. As a customer, I much prefer usage based
pricing to arbitrary plans.

~~~
adrianhoward
_I'm convinced that being ruthless and unfriendly with pricing can have a
negative impact on the business in the long term_

Optimising for price isn't necessarily being ruthless and unfriendly to
customers.

In my experience more people _like_ pricing models like these. It's easier to
understand. They know what they'll be spending each month. It saves them
effort and work.

I worked with one organisation who just killed out of hand any service that
had variable pricing since it played merry hell with their accounting
processes. They would much rather pay $99 a month every month than deal with
the hassle of figuring out what this random number was on the invoice (because
you had to check that that number was the right number somehow - which cost
them money in admin, tracking, etc.).

Yes - models like this make some customers unhappy. Some of those customers
will be good customers. That doesn't mean that other who go for the new model
are unhappy - or being screwed.

Changing pricing models like this are in many cases more a way to resegment /
target your market. The revenue increase is just evidence that you're doing it
well :-)

Also - money for the company _should_ mean more resources for building a
better product for the customer, so a long term win for the customer.

~~~
the_bear
Pricing is obviously a complicated issue, and I know there will never be a
"right" or "wrong" way to price a product. I guess all I can say is that I
don't agree that plan-based pricing is good for the consumer. One of my main
objections is that I don't agree that plan-based pricing is easy/simple.

Take a look at Highrise: <http://highrisehq.com/signup> 37signals seems to
have set the standard for plan-based pricing pages, so I think this is a good
example to use. Right off the bat it's complicated because I to choose which
plan I want before signing up. How in the hell do I know how many deals I
need? Then I have to constantly monitor usage to make sure Idon't pass the
invisible threshold. Uh oh, one of my employees added one contact and my price
just doubled. That's the opposite of simplicity.

Now let's look at a more recent 37Signals pricing page:
<http://basecamp.com/pricing> This is still plan-based, but it's much closer
to being a la carte based on the number of projects used. I can't speak for
37Signals, but it would seem as if they don't think that the plan page they
popularized is actually the best approach.

Things can definitely get too complicated if the units you measure with a la
carte become too granular (like charging per byte of storage or something
crazy like that), but there's normally a nice middle ground. Basecamp made #
of projects the metric to focus on. My company charges per user and makes
everything else unlimited which generally makes the cost scale linearly with
usage (roughly) but it's still very simple and predictable so no one has to
spend time checking the invoice.

My company is called "Less Annoying CRM" so we naturally attract people who
are sensitive to the annoying shenanigans that are common with other
companies, and this is one of the biggest things my customers tell me they
like about our service. The pricing has a huge impact on the customer
experience which is largely ignored in this blog post. (Note: I realize there
is selection bias with my anecdotal evidence, so you can say I don't have the
complete picture, although I think after 2.5 years of talking to potential
customers every day, I've got a decent idea)

In addition to all of that, it seems clear to me that the purpose of plan-
based pricing is to get the majority of your customers to pay more than they
should by only allowing them to buy more resources than they need. This is
obviously true with cable subscriptions and cell phone plans, and I think it's
equally true with SaaS apps. This is even more apparent when you read blog
posts like this one and understand how much thought goes into designing a
pricing structure that extracts every penny possible from each and every
customer.

If you want to make more money, then ok, but I don't buy the claim that this
is in the customer's best interest.

------
gizzlon
Couldn't lower pricing be seen as marketing? For example to sell in to
companies that are now poor, but could be successful and profitable later. If
they can't afford SD and pick something else, how likely is it they'll switch
to SD later?

------
jessep
Regarding the question of estimating the error: I don't know a ton about
stats, but can't you use bootstrapping to get a valid sense of the
variability/margin of error of your dataset for non normal distributions?
<http://en.wikipedia.org/wiki/Bootstrapping_(statistics)>

------
salman89
I always wondered how volatile your pricing scheme can be. Suppose you wanted
to A/B test a pricing scheme - is there any potential impact/backlash from
customers? And when a company changes their pricing scheme, what happens to
customers who were paying a former price/scheme?

~~~
patio11
_And when a company changes their pricing scheme, what happens to customers
who were paying a former price/scheme?_

Best practice -- and I'm shamelessly stealing this lesson from Joel Spolsky --
is to grandfather SaaS accounts in indefinitely if you raise prices. This a)
lets you get a nice bump in sales if you announce the incoming price increase
(no reason you can't do the A/B test quietly but announce the conclusion that
prices are going up "loudly"), b) rewards people for taking the risk on you
"early", and c) incentivizes them to keep their account active because if it
lapses then they lose their super-sweet not-available-anywhere deal.

If I were to redo a pricing scheme in such a way that some customers would
benefit from switching, I'd switch them automatically if the new pricing
dominated their existing plan ("More quota for less price!") and tell them to
make the call if it weren't obvious ("More quota for less price _but_ this new
plan doesn't have a particular feature that you may want to have in the
future.")

~~~
salman89
Fair, but what if simple economics/margins do not allow you to offer the old
price/package. Ex, say you license Twitter data at $0.10/1k, and Twitter
decides one day that they want $0.15?

What do you do when your old pricing scheme is no longer profitable?

~~~
patio11
You can head this issue off by charging more, because your margins for a SaaS
should probably be in the 80~95% region, and if you're finding yourself
thinking "I'll just add a 20% markup on top of Twitter's API rates then
compete on price" or "I'll make a payment processing solution which charges
0.25% on top of credit card costs" then you can _reasonably anticipate that
this will eventually happen to you_. So, for anyone thinking they might ever
be worried about this, charge more. Cost-plus pricing has no place in
software.

There's some costs which are difficult to anticipate prior to launch. One is
ongoing customer support, and it is entirely possible to price below
profitability if you get a lot of pathological customers in on the ground
floor. If you've just got a few and the business is fundamentally sound,
consider it a marketing expense and let them get weeded out by attrition. If
you're like Spreedly or Chargify and discover that a lot of the early adopters
in your space are toxic, then it's time to have the "Look, we're not in the
business of subsidizing you" discussion. I'd have the messaging for that
discussion stress that you'd like to continue offer the old terms but
circumstances are tying your hands, and try to be generous on e.g. giving 6
months or so of lock-in to the old prices or assistance in moving them to a
provider which is more suited to their needs. But honestly, at the end of the
day, if the choices are a) not making payroll for my employees and b) ticking
off a bunch of pathological freeloaders, I know what I'd pick every single
time.

------
ricardobeat
> The minimum buy-in for the service is now $99 a month, which should scare
> away the idiots

And bootstrapped startups, etc. This isn't just a pricing change but a market
repositioning?

~~~
Retric
99$ a month is reasonable for bootstrapped company's. It's not reasonable for
most hobby's, but 50$/month or 100$ / month are both rather high for a hobby
website so there is little real loss.

~~~
Silhouette
_99$ a month is reasonable for bootstrapped company's._

I think HN has been collectively in denial on this kind of point lately. Yes,
services offering real value should charge commensurate with that value. Yes,
it's lovely if you're Patrick or Thomas and in B2B world where you can whack
up your prices and hope whoever is paying the bill isn't spending their own
money.

Newsflash: If you're dealing with a bootstrapped business, it might well be
that the person paying the bill _is_ spending their own money.

Newsflash #2: There are _dozens_ of companies pitching useful-but-not-that-
useful tools and services to these bootstrapped businesses. If you spend
$100/month on this one, and $300 over there, and $150 on the next one, and ten
more after that, and then you multiply it by 12... Well, before long you're
spending on the same kind of level that it takes to hire some office help or
to run a long-term marketing campaign with a significant level of funding or
for that matter to hire in a guy who knows what he's doing for a few days to
build your own customised versions of a lot of these services.

In short, if you think the ability to monitor a couple of production servers
is worth $1,000+/year to a bootstrapped company, you're crazy. Yes, it's a
convenience, but you're talking about a service that could be built using a
couple of widely available building blocks with a tiny fraction of the running
costs, and frankly to a business at that stage in its development it is highly
unlikely that a server falling over until the morning is going to cause any
real long-term damage anyway.

When you're dealing with relatively time-rich and cash-poor early stage
businesses (OK, time-poor as well because they're trying to build the
business, but that's not really the point here) you can't just dismiss the
cumulative effect of all these SaaS gadgets. They add up, and if you want to
know why so many small businesses fail, I expect not controlling costs is
probably somewhere around #2 or #3 on the list.

Does that mean bootstrapped companies are bad customers for these kinds of
services? Sure, maybe it does. If there isn't enough in it for both sides to
make it a deal worth doing, it's not time to do the deal yet.

~~~
Retric
With bootstrapping it's not just a question of write and maintain something
myself or use a 3rd party. There is also the option to use something until you
write it yourself. Month to month SAAS means you can add an expensive
monitoring service _temporarily_ while you work on other pieces, or diagnose a
bug. You also get to play with complex features to decide which are useful and
then build out those pieces. Think of it as a DEMO that you pay someone else
to write and suddenly X$/month can look vary cheap.

~~~
Silhouette
The thing is, every time you integrate with another one of these services, you
are spending time, both learning about the service and implementing the
integration. You may also be incurring some degree of lock-in, either due to
direct technical constraints or because of the future costs in time and money
of getting your systems unhooked and any relevant data out again.

These costs are on top of whatever you're paying for the service itself, so if
you're only going to be using the service for a few months anyway, you might
be better off spending the time just implementing something quick and dirty
yourself until you have a chance to do it properly.

The key thing is that in bootstrapping terms, _very_ few of these services are
indispensable: if you're in that environment then you're probably looking for
just enough infrastructure to make a viable product/service, just enough
legal/financial advice not to screw up in the early days, and then throwing
everything else you've got into marketing, R&D, and sales to try and reach a
self-sustaining level of income as soon as possible.

There are decent arguments for integrating certain services early on. For
example, analytics/optimisation tools and billing services that boost customer
retention can easily have a direct, significant, sustained impact on your
income that exceeds the initial investment very quickly. But hardly any of
these trendy SaaS tools aimed at small businesses are in that category.

------
mooktakim
Server Density is a UK company. They use to have pricing in pounds.

They seem to have switched to dollar pricing.

My question: Are they taking payment in dollars? or are they converting the
amount to pound equivalent in last moment and taking that payment?

I've been thinking about pricing on the internet, whether its good to price in
dollars to make it more convenient for the american customers. I feel like
customers from UK are alright with paying dollars, but americans don't like to
pay in pounds.

------
chermanowicz
Someone shared a couple links on this topic before but I didn't see them here

<http://www.erica.biz/2012/pricing-strategies/>

[http://conversionxl.com/pricing-experiments-you-might-not-
kn...](http://conversionxl.com/pricing-experiments-you-might-not-know-but-can-
learn-from/)

------
cfn
When I change pricing I always worry that current customers will be unhappy
because they might have saved some money had they bought it later (I sell a
desktop product).

Is this a problem you have seen youself when you sold desktop software?

~~~
patio11
Give anyone who complains a refund. Problem solved. (P.S. Not many people will
complain, and _you don't want the business of the ones that will_.)

Though I'd wonder why one would be lowering prices when _raising_ prices is
just as easy and generally does better things for revenue.

~~~
cfn
I meant lowering in context of a test but fair point.

