
Your SaaS product is too cheap if you never lose customers because of pricing - SteliE
http://blog.close.io/your-saas-product-is-too-cheap-if-you-never-lose-customers-because-of-pricing
======
the_bear
Almost all conversations about pricing make the same mistake: they assume that
we all have the same goals. Your goal might be to squeeze as much money out of
your customers as you can. That's totally fine, and completely ethical, but
it's not my goal. I'm guessing many people are similar to me.

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.

~~~
filearts
This reminds me of a bit of an epiphany I had back in University. At the time,
groups in our class were playing some sort of national business simulation
game. I was sure that I had optimized my business to produce the 'best' widget
at the lowest cost in a market dominated by other high quality widgets. Week
after week, my business' position grew worse.

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.

~~~
wlievens
SimCountry?

~~~
filearts
I honestly can't remember the name, but it was not SimCountry. I hardly
remember the game, only the realization that you can either try and outdo
competitors face-to-face or simply go where they aren't and capture the value
from underserved segments of the market.

~~~
vinceguidry
Sounds like Capitalism / Capitalism 2.

------
tlb
While the title sentence can be true under steady-state conditions, it's not
true for virally growing startups. Growth depends on customers recommending
the product to their friends. For example, if raising prices by 10% cuts your
monthly viral spread coefficient by 10%, it will cut your market share by 90%
after 22 months.

(I'm working on a simulation engine for this kind of stuff.)

~~~
roel_v
"(I'm working on a simulation engine for this kind of stuff.)"

How do you calibrate it for a specific market?

~~~
tlb
There's no silver bullet. Version 1 will at least let you capture your
assumptions about how you think your market works and how your product will
get traction in it. As you gain experience in the market, you'll be able to
refine the model and make better comparisons among alternative growth
strategies.

Eventually I'll try to curate a library of market models and startup plans
that did or didn't work in them.

~~~
roel_v
But what drivers do you model? Consumer behavior and preferences, or just
abstract business metrics? I.e.: do you put into your model what is typically
an indicator on a dashboard - TLV, retention rate, etc, or do you derive a
model of your customers from past data and build scenarios of changes in
customer behavior?

------
sigil
"A high price point is a bounty on your head" \-- a serial entrepreneur friend
of mine.

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.

~~~
tomrod
Absolutely. Finding that sweet spot in pricing is essential.

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.

------
jtheory
This isn't _wrong_ per se, but it doesn't feel like solid advice to me; I
think it's just skipping past a lot of nuances that are really pretty
important.

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.

------
welder
Maybe mine is too expensive because I have a hard time gaining paid customers.

([http://wakatime.com](http://wakatime.com))

btw, your blog post really hits the mark.

~~~
adamio
Not sure what type of service this is, my proxy at work blocks your site as
"Suspicious"

~~~
Mandatum
Odd, hosted on Amazon and running Bootstrap w/ no weird JS plugins aside from
Olark. Maybe some other not-so-legitimate websites are running on the same
server?

~~~
welder
Only one site hosted on that ec2 instance. It's a false-positive.

------
socksy
What about price discrimination? Micro-economics 101 says using price
discrimination is a good way to reduce consumer surplus, so a blanket "don't
have low prices" is all very well, but you could have say, a small-
business/home tier and get more money overall.

~~~
SteliE
That's a good point and I'll go back and clarify in the post :)

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 :)

------
cdelsolar
My company's product is by a fairly significant margin the most expensive out
of the competition, and we've refused to budge -- and I'm fairly certain the
company wouldn't be alive and growing if we'd started out with lower pricing.
It's also somewhat satisfying to see the competition slowly raise their
prices. And yes, the hardest part that we are constantly working on is raising
the value.

------
davmar
i've read a number of comments here who think the goal is to "extract the max
dollar figure from customers". and they make that sound so negative. well, the
truth is that with that extra money, we hire engineers to improve our software
faster so that we can deliver more value to our customers and be more
competitive in the marketplace.

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.

------
yeukhon
I find this really interesting. On one hand EC2 performance sucks to the
bottom if you are running on the t1.micro instance (I have tried above medium
once and it wasn't much better either).

DO ([https://www.digitalocean.com/](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

~~~
stanmancan
You can configure a $5/m DO instance to handle the front page of HN if you
know what you're doing.

------
rglover
I ran into the "your product is too expensive" recently, which in turn also
led me to find out that my pricing model was all wrong (I target freelancers
and usage of my product is limited enough that it doesn't make sense to have a
monthly plan).

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...](https://soundcloud.com/khuram-malik-3/pricing-by-peter-drucker)

~~~
lucaspiller
I think one of the problems with building software for freelancers is you are
targeting both $5/hour Elance and $100/hour 'ninja' workers. In the case of
Proper (nice landing page btw!) both may have the same usage but will get a
different value out of it - meaning you can't charge them both the same price.
One way you could get around that in you product offerings is to offer more
features in the higher plans than just more usage.

------
Ryel
The title of this post should be Adobe's slogan.

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.

~~~
sjg007
I wonder if it would work. Rather than 2 year discount upfront, do it on the
back.

------
kyberias
The same also relates to poker: if your bluffs are never called, you're
playing too tight.

------
richardwhiuk
"We often advice SaaS startups to raise their prices."

I don't normally pick people up on spelling, but that really grates - the word
you want is advise.

~~~
SteliE
Fixed! Thanks. You can tell I'm not a native speaker/writer. Making these kind
of writing mistakes way too often (and some of them still show up even after
having other look over it) :)

------
BlackDeath3
Good old Rollercoaster Tycoon economics!

"Your guests are commenting that the park entrance fee is very cheap, maybe
you should consider raising the price!"

------
iterable
This is on point. Bjoern's Compass will hopefully allow us to set more market-
driven pricing models.

~~~
bjoernlasseh
Yes, among other things we benchmark your profit margin, ratio of CLV/CAC,
Retention and Churn. Those indicators can help experiment on pricing more
effectively.

~~~
shortsightedsid
Interesting. Can you share a link?

~~~
bjoernlasseh
compass.co

------
vonskippy
I guess will see if that strategy works or not - Logmein will be a perfect
case study. Years of free service - now its paid or use something else.

~~~
Mandatum
I've only found large enterprise IT support and cold-callers from 'Microsoft'
who are wanting to 'remove the virus from my machine' use LogMeIn. TeamViewer
seems to be the flavour of choice.

------
farseer
wow! you are charging $59/user/month for a contacts app. Good luck with that.

------
Fasebook
Jew the Jews before the Jews Jew Joo.

