

Why Real Businesses Don't Charge $5/month - justinmares
http://justinmares.com/why-real-businesses-dont-charge-5month/

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ebiester
It _all_ depends on your service. I am willing to pay $20 a year for cross-
device password management for personal use, not $20 a month. I am willing to
pay $$$ for a CRM. For businesses, your product must save me more money than
if I do it myself. If it's a mere convenience that can be duplicated by an
excel spreadsheet, I'm only willing to spend so much.

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.

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halcyondaze
While this is definitely a thought experiment, we found the basic premise to
be true when we redesigned our product, pricing plans, and free trial
strategy.

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.

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mjn
Sure, if your market lets you charge more, go ahead and charge more. But in
some markets, real businesses charge $5/mo, because market conditions don't
let them charge $10/mo (or at least don't allow them to meet their other goals
at that price). Evernote Premium is $5/mo, Google Drive charges $4.99/mo for
100GB of space, etc. Heck, Fastmail charges $1.65/mo for its "Full" plan
(billed as $20/yr), or $3.33 for its "Enhanced".

~~~
ahoyhere
Are any of those companies self-supporting on revenue from those products?

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.

~~~
Turing_Machine
"Are any of those companies self-supporting on revenue from those products?"

<http://hostingmatters.com/web_hosting.html>

They've been in business for 13 years.

~~~
ahoyhere
That doesn't answer my question. Hosting Matters wasn't in the list.

They also have many higher-priced offerings, and their low-priced offerings
include _70_ _megabytes_ of data and not, a la Google Drive, 100GB.

~~~
Turing_Machine
All right: which restaurant generates more revenue: McDonald's or The French
Laundry?

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.

~~~
ahoyhere
Congratulations. You built a strawmen and are now knocking it down. I never
said what you are arguing against - that "raising prices automatically
increases profits."

Feel free to address how venture capital distorts prices at any time.

~~~
Turing_Machine
That "strawman" was exactly what the original post was claiming. It may not
have been what you said, but it's certainly what the original article was
claiming.

Modding me down won't change the facts, either.

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ceejayoz
Unless I'm missing a paragraph, this pretends charging 3x as much won't ever
reduce the number of people who sign up?

~~~
justinmares
But does it reduce it by 3x?

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Turing_Machine
It might not reduce it at all. It might reduce it by 100%. It's impossible to
make generalizations about this.

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venomsnake
Poor backblaze ... they are doomed. Call them and tell them they are not real
business.

~~~
atYevP
I'm going to have to tell our CTO to close up shop. Here we were, thinking we
were profitable...alas and alack!:)

~~~
brianwski
Backblaze CTO here - this is the beauty of competition, you can't just sit
back and CLAIM you can't make it any cheaper when some scrappy company comes
to your market and PROVES they can sell it cheaper and make a healthy profit
doing it. Yes it's hard on companies that just want to be lazy and not
innovate, but it's OH SO GOOD for consumers. More for less, every day, all day
long. I say bring it on.

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jimzvz
Surely the whole point of lowering prices is to reduce cost of acquisition as
well as churn. Where is this in your example?

~~~
patio11
The first supposed benefit of lower prices is a wish, the second is a fantasy.
Most SaaS companies with the typical four plan structure will find their
highest churn on the cheapest plan. (Get them drunk if you don't believe me.)

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.)

~~~
jimzvz
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?

~~~
patio11
_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.'"

~~~
chc
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").

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brownbat
Beware, you Ingvar Kamprads, Karl Albrechts, and Sam Waltons: only poverty
awaits.

~~~
Turing_Machine
Likewise Ray Kroc and Jeff Bezos.

F.W. Woolworth is gone from the U.S. now, but they lasted for over a hundred
years.

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kevinthew
this might be the dumbest blog post I've seen posted on HN. why is anyone
reading crappy marketing blogs that have no basic understanding of accounting
or microeconomics?

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keesj
Is this article about WHAT TYPE OF BUSINESS to run, or HOW TO PRICE IT? I
think it's mixing some logic of the two.

------
o0-0o
google charges $5/yr for their basic data plan.

~~~
justinmares
Google also makes $100m a day from Adwords. I don't think they're optimizing
revenue on basic data..

