
You Can’t Make Money Charging $1 Per Month - joshuacc
http://www.softwarebyrob.com/2011/06/27/you-cant-make-money-charging-1-per-month/
======
patio11
It is _exceptionally_ difficult to run SaaS businesses with low price points,
principally because you'll often be cash flow negative with regards to
marketing spend. e.g. even if the LTV of a customer is a few hundred dollars,
to scale the business, you may well be paying $200+ in customer acquisition
costs. (Check the price for AdWords clicks on e.g. project management or
invoicing sometime. Oofdah.) If you quickly recruit a couple hundred users,
you may well be tens of thousands of dollars in the hole for the better part
of a year. That can be challenging without receiving external investment. Even
funded companies can fall into the same liquidity issues, typically by hiring
large sales forces who take years to ramp to the point where LTV from
customers exceeds the costs and commission of the sales guy who closed the
deal.

Also, with regards to selling to teachers: I know you think they're stingy. I
thought they were stingy. Empirically, there are at least 5,000 or so teachers
in America who have paid $30 for a bingo game they used once. $1 is not not
not not not not not not not not not an appropriate price point. For those
teachers who think $30 is a lot of money, wish them happy fulfilling lives and
move on.

~~~
idlewords
I strongly disagree that you need to pay anything to snag customers for an
online service. Build a really good initial version, work your heart out to
support it, and let word of mouth do the rest. It will be frustratingly slow
to begin with but it ensures you are always in the black.

~~~
brk
Can you provide some real world examples where this has worked? I'm not saying
it's not possible, but I haven't ever witnessed/heard of it working just like
that in any scenario I can recall.

Viral word of mouth is nice, but it usually takes years to get there.

~~~
idlewords
It's worked very well for both websites I run (Pinboard and the Bedbug
Registry). And it does take years, which means it's not "viral", just plain.

~~~
ahoyhere
Let's not gloss over your success with soft (useless) phrases like "hard work"
and "passion."

You launched Pinboard to a crowd which already knew & loved you, at a time
when everybody thought Delicious was about to fall over and die. Furthermore,
you had novel marketing features - the "the price increases per user" thing,
which was clever enough that people checked Pinboard out JUST to see it in
action.

That is marketing -- and if you subtracted how much those early customers paid
from the amount newer customers pay, that is your advertising cost. A discount
is still a marketing expense.

And as for the Bedbug Registry, it's not a product - it's free. Furthermore,
you serve desperate and angry and frightened users. They are much more likely
to seek you out by Google than any other kind of customer. There is no
equivalent level of desperate users for most software.

------
WA
Obviously, the main argument against a $1 per month is the fact that you need
to provide a lot of support. From my experience, this depends heavily on the
target audience I guess, but I completely disagree.

I ran a website for a couple of years without thinking about turning it into a
business. Finally, shortly before I graduated, I decided that I need to make
money from it, otherwise I can't sustain it any more. Over the years, 30,000
people used my "startup" and in the end, I had a round 5,500 active users.

I thought a lot about the pricing model, but turning a free service into a
paid one, is not easy and truth is, I'll never find out how it would perform
with a different pricing model. So I just made a decision and tried it. I
decided against freemium and started charging 1€ at the beginning of this
year. The intention was to make it a no-brainer and convert as many users as
possible. I converted about 50% of them. People pay either 6 or 12 months in
advance (to lower the transaction costs).

My greatest fear was that there would be a lot of people who are not satisfied
and want their money back or that I'll end up spending a lot of time on
support emails.

Thruth is, from now 4,000 paying customers. I had exactly 1 person who wanted
his money back. I receive about 2-5 emails per day, mostly telling me how
great the service is and what kind of features they would like to see.

I literally spend 10 minutes per day on customer support.

Fact is, it depends on your business and something that doesn't get mentioned
in the blog is that people don't care too much about a lousy dollar or euro
per month to complain about something (some do, however, but rarely).

~~~
MicahWedemeyer
As a counterpoint, on my site (Obsidian Portal), support is a big drain (both
timewise and mentally). Further, it has little to do with paid vs free (we're
freemium). Both groups demand support, and the freebies are often the most
angry.

For example, every day I'm dealing with someone who is convinced that the
login system is broken. It's always user error, but it requires input from me
pretty much every time, to the point of "here is a new temporary password.
i've tested it and it works. please copy and paste it in"

Yes, we have an automated "forgot password" feature, but no matter how much
automation you add there will always be people who avoid all that and demand
personal attention.

~~~
sid6376
Would it make sense to have an automated email to the effect of "Thanks for
contacting us. Here are the frequently faced problems." ?

~~~
paganel
> Would it make sense to have an automated email to the effect of "Thanks for
> contacting us. Here are the frequently faced problems." ?

It depends on the target audience. If it consists of geeks/people familiar
with computers from an early age, then, yes, they might read that, otherwise
you're going to do what MicahWedemeyer does (and what myself I'm doing, for a
Groupon-clone website targeted to women): emailing your users predefined
passwords, hoping they'll actually change them after the first time they use
them.

~~~
eropple
This is not a good solution. If you're emailing them generated passwords, you
should immediately route them into a password-change workflow on login.

You shouldn't be "hoping" anything.

~~~
paganel
I'm not selling diamonds, only spa-coupons, so it's not the end of the world
is someone-else somehow cracks other user's account (we don't store or process
CC information on our side).

> you should immediately route them into a password-change workflow on login

We already have that by default (we're using Drupal), but, as I said, most of
our target audience finds it too complicated.

------
dpcan
You don't really make $2K per month with just 2K customers at $1 per month.

You have credit card fees - 2.9% + $0.30 (fair?) So that's $0.67 or 2985
customers (round up to 3000)

And IF you ever reach a substantial income, you could be in about the 25% tax
bracket.

Now you take another .17 off of that, and you're down to $0.50 per customer.

You need 4000 customers per month to earn around $2000 per month at $1 per
month per customer.

Now, if even a quarter of those people require even a lick of customer
support, you've worked that money away with your time.

So I agree, at $1 per month, you really can't make any money.

~~~
allwein
Most people who run cheap ($1-3/month) services don't bill monthly. They
usually bill in 6 or 12 month increments for exactly this reason.

------
jawns
My site, FAB Apps Bundle (<http://www.FabAppsBundle.com>), charges $1 a month
for individual subscriptions (paid annually).

I think it's possible to make that work, with some caveats.

First, you have to have modest expectations. Maybe you've got a service that
you developed for personal use (as in my case) or as a hobby, but you figured
it might be useful to other people as well. Maybe you'd be completely content
with it making just a couple hundred bucks a month, with no aspirations of
making it be anything more than that.

Second, you can't sink a lot of money into advertising your service, at least
not at the outset. Which, of course, means you have to come up with more
inventive ways to get the word out. Tough, but not impossible.

Third, you've got to primarily target people who understand that for $1 a
month, they're not going to get very robust technical support.

And fourth, you're more likely to be able to pull of a $1-a-month price point
if you also offer higher price points for premium services. In the case of FAB
Apps Bundle, the premium service is targeted to small-business owners and
people who manage their organization's Facebook Page.

------
callmeed
Not to mention the fact that lower price points often pay higher % fees to
payment processors because of per-transaction charges. Even PayPal
micropayments is gonna take 10¢ on the dollar. My merchant account with
BrainTree takes 30¢ per transaction plus a %. I don't know if some merchants
offer different rates for micro payments but at that rate, you're talking
about losing 30 to 35% of that $1 payment.

You might as well just build some iOS apps for you niche at those numbers.

~~~
idlewords
It's important to bill for multiple months of service at a time if you sell
stuff at the $1/month level to avoid this problem. The transaction fees become
prohibitive when you get below $5 or so.

------
eggbrain
Isn't there a point where the service isn't worth the monthly cost though?

For example, I was looking for a service to do something very specific. It was
something I could probably code in a weekend or so, but I figured there was
some free or cheap site out there that could do it better. I did find a site
that did exactly what I wanted, but it charged $5/month, or $50/year. Now for
me, the service was at best a novelty, but I wouldn't have minded $10/year. I
figured other people must be like me as well, and figured if I launched a
website I could get some passive income and capitalize on that $10/year no-
brainer type of thing.

Now, I never expected that I'd be making thousands of dollars each month, but
wouldn't it make sense that I could capture a good portion of the market with
a low cost point?

~~~
MicahWedemeyer
You can code it in a weekend (doubtful...but let's assume). Then you'll spend
countless weekends trying to attract customers. Nobody attracts "a good
portion of the market" by doing nothing.

The technical side is always much easier than everything else involved in
running a business.

~~~
eggbrain
Since I made no mention of product, nor never specifically said only a single
weekend, I would find it hard to believe that you could know what was doubtful
to create or not, but I digress.

I think for everyone, there is a level at which they will not pay for
something relative to what it actually does and how much they need it. For my
example, it was something fairly trivial but still useful, probably the lowest
MVP I've seen in quite some time. Even if I couldn't immediately make useable
money with it, I feel that a low price point would be a great way to take a
piece of the market that it was in, although I will fully admit marketing
would have it's place as well.

I guess the better worded question would have been "Given all factors equal,
what percent of the market would be swayed by a lower cost point?"

And the second question I would ask would have been "Even though you will not
make money at $1/month, are there not services that are not worth $5-$7
dollars a month, but are worth more than free?" or even "Couldn't there be
money in making cheap apps that together don't make much money, but combined
add up to good income?"

~~~
MicahWedemeyer
We have a lower cost competitor, and I've never seen that factor into anyone's
decision to go one way or the other. Well, maybe once or twice, but it's not a
huge differentiator to most people.

By far, our biggest "competitor" is lack of knowledge. People don't know about
us or our competitor. We're not trying to steal customers from each other.
Instead, we just need to educate people that we exist at all. That's been my
experience in most of these cases, especially for smaller apps that do one
little thing. A huge amount of our effort in the beginning (and still to this
day) involves letting people know we exist. Trust me, that takes a lot more
work than just a weekend.

As for the "doubtful in a weekend" comment, I just find it highly doubtful
that anyone can build a useful app that includes billing in a weekend. Payment
systems are a real bitch. Plus, it's easy to gloss over the fact that "built
in a weekend" usually means MVP, or even sub-MVP. From that point you have to
keep building, market, promote and make sales. It's not like you just build
it, flip the switch, and sit back collecting checks. It just doesn't work that
way.

------
falava
I really liked the Pinboard.in pricing scheme: start with very low prices
(something like $1 subscription for life) to get passionate users talking
about you and progresively make that price higher based in the number of users
you get. No free plan to fight link spam. And a premium yearly plan that
archives the content of your links.

~~~
idlewords
Yeah, but the archiving plan only comes out to $2/month per user, which
according to this article means I should shut down the site!

It's a shame, since I was enjoying the profits.

------
jvandenbroeck
So true, I made that mistake with my first business. Somehow, as a little kid,
it seemed completely reasonable to provide cheap web hosting with A+ support
to my clients. My grand financial plan: 50 clients * 12$ / yr - 60$ = 540$
easy profit - didn't work that well :-)

I was working my ass off, helping these clients, earning next to nothing.

------
clark-kent
You can still charge $1/month for the basic service with limited support and
then charge $5/month for full support.

When you start a new SaaS, a low price point can help you acquire a lot of
customers/credit cards on file. Your customers will often tell you more
services you can add, that they will be happy to pay extra for.

~~~
gacba
This mentality kills most businesses. Will it help you acquire customers?
Maybe. Will it give you low-end, pain-in-the-butt customers whose support
burden is far higher than the value they supply to you? Yep, most likely.

Better for you to actually VALUE your product from the get go, get customers
who also value it, and work together to make it better.

Think I'm crazy? Ask Groupon businesses how much repeat business they get from
their cheap promos. It's the same problem.

~~~
clark-kent
I don't mean $1/month as a cheap promo, I'm referring to a situation were the
costs of running your SaaS is very low, were you can break even with a few
hundred customers a month. And adding new customers doesn't significantly
increase your cost. In this case you can afford to charge $1/month and take
advantage of the volume.

You can provide limited support for basic accounts and charge much more for
full support like $5-$9/month. The idea is to give your customers the only-
pay-for-what-you-need model which is very realistic on the web.

If your cost increases significantly with each new customer you acquire then
find what will increase your costs and charge extra for it, maybe bandwidth,
computation, disk space etc.

------
akat
Serious question - Wonder how LastPass makes money then? (free or $1/month)

Or can we say that once you have acquired x number of customers at %5-7/month,
it may then be easy/feasible to switch over to $1/month model since you
already have a "traction" at this point

~~~
mikeryan
LastPass does it the usual way - they've got a premium (enterprise) product
which they sell for $12-$24 per user per month. They can then write off any
losses from the free product.

<https://lastpass.com/enterprise_roicalculator.php>

~~~
plamenv
That's $12-$24 per year, not month. And they can do it simply because of sheer
volume. Everyone has to deal with passwords so their market is humongous. If
you sell to teachers that's not the case.

~~~
ssharp
Selling to 100 users inside of one company is a lot different than selling to
100 individual users scattered all over the place. Company IT is likely to be
the first point-of-contact for issues, which would decrease LastPass's support
requirements by quite a bit.

------
icebraining
Sorry to be pedantic, but how are those price points[1], not just _prices_?

[1]: <http://en.wikipedia.org/wiki/Price_point>

------
kevinpet
I believe it, because I think the demand side is actually not too different at
$1 vs. $5. There's not a lot of difference between the hassle of me getting
out my credit card to pay for something at $5/month vs. $1/month. Maybe I
value the hassle factor at about $5. So I only need twice the value out of the
$5 service, not five times as much.

