
Don't Blindly Model Your SaaS Pricing on 37signals - rgrieselhuber
http://www.ginzametrics.com/dont-blindly-model-your-saas-pricing-on-37signals
======
jacques_chester
Entire _books_ are written about pricing[1].

It's time for me to point out, again, that _no other business parameter will
affect cashflow and profitability more than your pricing_.

You can adjust your costs all the time.

But prices are sticky. Customers remember that something used to be cheaper.

Really, again, let me emphasise this.

 _Pricing is the single most important business decision you can make_.

Rails vs node.js / Ruby vs Haskell / bootstrap vs foundation / backbone vs
sproutcore / trendoid vs hipster / cats vs dogs?

Only tangentially relevant to your success.

Pricing? Critical. Central. Essential.

Do not leave it to gut feelings.

[1] [http://chester.id.au/2012/09/12/review-the-strategy-and-
tact...](http://chester.id.au/2012/09/12/review-the-strategy-and-tactics-of-
pricing/)

~~~
drudru11
Pricing is secondary to product.

If you don't have a good product, nothing else matters.

Once you have a good product, then you focus on pricing.

Once you figure out the product and pricing, then you ...

------
GavinB
If you want to sell services to large companies--even low cost ones--you need
to offer invoice payment. At a big company, the corporate credit card is for
meals and travel, not for paying vendors.

~~~
jcampbell1
In my experience, if you send a proforma invoice, a W9, a federal tax id, and
a soul sourcing statement, at the end of the signup form, many times a check
will just show up in the mail. It is possible to do invoice payment without
having a high touch sales process. You just have to preemptively provide all
the stuff the AP department needs.

I really think 37 signals is leaving quite a bit of money on the table by not
offering PO payments. I understand they don't want to do a whole bunch of
customer hand holding, but it is possible to accept POs without ever talking
to a customer.

~~~
spatten
Would you not have to customize this for every country that you do business
with, though?

Hmm. Sounds like a complete and utter horribly painful schlep. A schlep that
puts you right in the path of the money. Interesting.

~~~
jcampbell1
You don't have to customize anything. If you don't want them to call, you can
add a sentence that you accept (or don't accept) foreign currency checks at a
market exchange rate. That is about the only question foreign businesses ask.

------
charleshaanel
"Once you get a lead, if it takes even a single phone call to close them,
you’re no longer doing self-service and Customer Acquisition Costs vs. Self-
Service pricing is going to kill you. If you’re not doing that phone call and
you’re also not closing those deals, you need to figure out of if you can
solve the problem through conversion optimization or if you really do need to
be speaking with customers in order to close them. "

Wow, can you bold this? Touchless sale/conversion = win.

David Skok talks about it brilliantly and has an eagle eye on these metrics
when evaluating his SaaS investments -
[http://www.forentrepreneurs.com/business-models/the-
touchles...](http://www.forentrepreneurs.com/business-models/the-touchless-
conversion/)

No one really talks about backing into pricing based on LTV/CAC ratio
(affected by for example measurable inbound marketing or cpc/cpm costs).

Pay back period (ideally CAC < a year) is also a factor.
<http://www.forentrepreneurs.com/saas-metrics/>

------
jwblackwell
I think the OP makes some very important points here. There's definitely a
somewhat fixed mentality when it comes to SaaS pricing and it's easy to fall
into the trap that you should be charging something akin to 37signals.

Pricing isn't actually something that's as easy to change as you'd believe
either. It has huge implications on your actual product, your target market
and sales strategy - as the OP points out.

Imagine you were suddenly told you had to charge 10x more for your product.
You might initially think it would kill you but think about what that would
change. Would it necessarily be a bad thing?

If you're anything like me, it's easy to assume everyone lives in a world
where $10 for Spotify is a pretty big deal. My friends moan about that price
for unlimited music. $200 a month seems huge to me for anything I'd buy. It's
only recently I've fully started to appreciate just how much money enterprise
clients willing drop on "simple" products that meet their needs.

I really think there is a lack of good advice on pricing and how alternative
pricing strategies could be used to open up new markets for SaaS type
businesses. Sure, you may need a slightly "less scalable" sales strategy but
with increasing competition in the web-app marketplace, moving to a different
customer base with more cash may well be worth a few sales phone calls.

~~~
Joeri
"If you're anything like me, it's easy to assume everyone lives in a world
where $10 for Spotify is a pretty big deal. My friends moan about that price
for unlimited music. $200 a month seems huge to me for anything I'd buy. It's
only recently I've fully started to appreciate just how much money enterprise
clients willing drop on "simple" products that meet their needs."

For businesses those SaaS services are a core need. Leisure services like
spotify are the wrong thing to compare prices to. Think about how much of your
budget you spend on housing, food, transportation. $200 / month is peanuts for
those kinds of things. That gives a better idea about what businesses are
willing to spend on software they need for their core activities.

~~~
thenomad
That's a really good way to put it.

------
rgrieselhuber
Hopefully this is useful. I've seen very little discussion on pricing models
for SaaS in the startup community.

~~~
ChuckMcM
I would have liked it better if you had actually talked a bit about business.
A lot of people who hang out here are engineers / developers who don't get a
lot of exposure to that side of things.

Start by explaining a business 'model' which goes like this:

    
    
        Revenue - Cost-to-deliver = Gross Margin
        Gross-Margin - All-other-costs = Net Margin
    

Its a sad bean countery topic, but really its not that hard to see that if
your revenue is less than your burn rate you die. And your revenue has a
'unit', whether its widgets or users, each 'unit' brings you $X in revenue.
And somethings are dependent on 'units' (how many servers you have, how many
customer support people you need, how many twitter tokens you buy, ...) those
go into your Gross Revenue calculation, because growing revenue means growing
those costs and Gross Margin remains 'constant'. Then there are things like
salaries for engineers, rent on the offices, replacing laptops or servers
every 3 years, maintenance, janitorial, lunches. Those stay the same
regardless of your revenue so your Net Margin starts low and then gets bigger
as you get more revenue.

A business "model" takes the Gross Revenue, and then fractionally allocates it
to those other expenses. Maybe 20% of the GM is engineering, 10% is is
marketing, 10% is sales commissions, 5% is facilities, 3% is swag/giveaways,
maybe 10% goes into a bonus pool that you divvy up among your best performers.
The remainder is 'net revenue' or 'free cash flow'.

If you're a C-level executive and you don't know what every single number on
your tax return means, you're running the risk of having a problem staring you
in the face that you never "see". If you're an engineer and you see a bunch of
patched together spaghetti code that is poorly documented you "see" that there
is a huge amount of technical debt that is going to have to be paid before you
can move on to V2.0 or what not. If you're looking at your taxes and you see
that you're depreciation costs are of the same magnitude as your revenue you
need to be able to "see" that a cliff is coming when you're going to need new
gear and you'll have no money to buy it.

The biggest challenge of "pricing" is that sometimes you realize that you
can't sell your product for what it is going to cost you to produce it. You
have a choice, either innovate around the costs to make it, or put on a really
good show and try to sell it to someone before the truth is out. Hard place to
be but knowing your costs will inform you on whether or not your pricing makes
sense. The 'best' situation is when you can sell it and your costs scale
fractionally with users. That is a very good business to be in.

~~~
drudru11
Agree with most of your point Chuck. However, I think most people on HN are in
the startup phase. They are doing customer discovery/development to find
something that is actually valuable. This post is really optimization in the
execution phase. It is normal for most of the engs/devs to not understand the
business side.

~~~
ChuckMcM
Agreed, but if you're the founder, even if you're just one guy and an idea,
you need to be able to evaluate your options.

Example, founder says "We launched and got 100K users in the first weekend!"
That is fabulous, shows that they have really connected with their target
market, but do they know how much money each user has to generate to pay for
their expected burn rate? They should. You can say "We're build X for Y, and
we're looking to monetize the landing pages with advertising." So what "CPM"
do you need? (clicks per thousand) What RPM (revenue per thousand) do you need
to make that work? Are there other businesses that have similar CPM/RPM
numbers?

We're fortunate that a lot of folks can and do share their numbers with this
community. I'm just encouraging founders to keep the whole equation in their
thoughts between costs + engagement + revenue so they can think about ways to
test against their models.

The three questions every founder has to wonder; Can we build it? Will people
use it? Can we convince them to pay enough for it to sustain it?

------
dllthomas
_"Don't take pricing advice from Hacker News"_

Huh, I've seen more recommendations for higher prices than lower on here
lately.

------
dangrossman
Thanks for the post, it was the push I needed to get off my butt and run a
pricing test, if only a weak one. I've been told I'm charging too little, and
I've been told I'm charging too much.

Just to see if I'm leaving money on the table (and hurting my ability to grow
by undercharging), I made the one-line CSS tweak to hide the cheapest pricing
plan on <http://www.improvely.com/pricing>

If that doesn't hurt signup rates, I'll have this post to thank for it. If it
does, it's easily undone.

~~~
rgrieselhuber
Glad to hear it was helpful. Improvely looks fantastic, btw. I love the UI.

<http://www.improvely.com/demo>

------
lackiem
Really great article and very refreshing to read. We recently adjusted the
pricing on one of our services <http://www.advantly.com> to include a lower
price monthly package and 2 other value added packages that require annual
subscriptions. It has proven to be successful for us and the subscriptions to
our annual packages have increased.

~~~
sirrocco
Hi,

One thing I found really confusing : On the gold package what does select
features mean ? What can I select ? ( I later realized that it's the select
package features but it took me a few minutes :) )

~~~
lackiem
Thanks for the feedback on that. Maybe we need to rethink the name for that
package. Now that you point that out, I can see how that can be confusing.

------
rdudekul
Pricing is complex in general, but for SaaS companies even more so. Enterprise
SaaS companies spend a lot of resources to acquire customers. Annual billing
to a large extent helps offset these costs. However a question remains: How
does a new unfunded SaaS company acquire customers, when annual billing can be
a big obstacle for sign ups?

~~~
rietta
You remove as many barriers to the purchase as possible. Allow monthly credit
card billing, but incentivize longer term payments. For example,
PivotalTracker.com charges monthly. However, I personally paid them for an
entire year to get the 2 month discount! 12 months for the price of 10 months
is enough encouragement for me to pay for the entire year.

------
jcampbell1
The discussion around annual pricing seems misguided. You should charge
customers in whatever method they prefer to pay. For some customers, putting
$400/month on a card is much easier to deal with than a $4800 check. The
oposite is true in other organizations. Requiring pre-payment for software and
using customers to fund working capital to pay sales associates seems myopic.
Get the working capital from somewhere else and do whatever is best for
revenue.

~~~
facorreia
His math is completely skewed. 22 sales a month of a service that charges
$200/month will generate $343,200 a year (unless he's assuming 100% churn
rate).

~~~
rgrieselhuber
Good point! I was talking about startup costs for the first few months of hire
as the rep ramps but didn't make that clear at all. I'll update soon.

Edit: Updated now.

~~~
nimblegorilla
Your math is still way off unless you assume 100% churn rate. Assuming a
reasonable churn rate in the 2nd month you will have some fraction 22 existing
customers paying $4400/mo (not really sure how $4400 breaks even with $4800).

------
JacksonGariety
The chart indicates that one can avoid the startup graveyard by raising
prices. Is that okay?

------
bravoyankee
Pricing low has nothing to do with being rude. That statement is a major
disconnect from reality.

I also think that there are many service out there that are buying into this
'high pricing' doctrine and are giving prospective customers sticker shock.
These starving young companies can't afford to do that so early in the game.

The other day I saw a site on HN selling business ebooks to startups: "how to
drive more traffic to your website" $99, a customer segmentation ebook for
$39, a copywriting ebook for $49. All this stuff is way overpriced. Dozens of
quality articles can be googled up in a few minutes for the same information.
I know because I did just that.

The people that tell these young startups to jack their prices are not being
helpful or even honest. Maybe its a way of trying to justify their own high
pricing.

I suggest young startups get users _by any means possible_ , even if it means
discounting heavily. They need habitual users, and that requires making it
affordable enough that the enduser uses the tool / service for a long enough
time that it becomes a habit and the tool becomes too entrenched in their
workflow.

If anything is rude, it's telling young startups how to price their businesses
when it looks like they don't have a clue on pricing even their own.

~~~
patio11
How many copywriting ebooks have you purchased in the last quarter? What is
your budget for enterprise software?

If the answers are "zero" and "none" then is any price I could possibly quote
to you giving a potential customer sticker shock?

~~~
bravoyankee
It's probably over $100 this year that I spent on copywriting books, and
almost that the year before.

I will pay for information if it will help me, but the examples I've given is
very basic information that's been written about for free so many hundreds of
times, I'm surprised anyone would buy those ebooks.

They are ripping off the very startup community they say they are helping.

I think there's a pricing bubble going on with startups. Many monthly
subscription rates are too high, especially when there are so many choices
available to the consumer, and at a time when the budgets and attention span
of buyers is so limited.

There seems to be no imagination in pricing, only to charge more and more.
It's bad advice and I'll bet its mortally wounding a lot of young startups and
impressionable kids that are trying to make a go of it.

Again, it's a con game and it's trying to gouge and profit off the start up
community they say they are helping. It's shameful, but its only time before
the herd snaps out of it and realizes what is happening.

~~~
caw
There's a difference between free information and compiled free information
with a bit of extra. You pay for the premium of having it all put together and
not having to spend the time to go find it all. Why buy a programming book?
There's lots of tutorials on the internet. Still, many people buy books.

If I were completely new to a topic, like copywriting, I would probably look
for a book on the topic, rather than blogs. That's because I'd spend more time
trying to find free material that's good (there's a lot of free crap out
there), than to buy a pre-compiled book from a reputable source.

I agree with you that the materials have to justify their price. I've
purchased a $99 information product before that was total crap, and the exact
same content on the same person's website, just reformatted. In that case
there's no justification, no added value. I don't know what books you're
talking about to determine if they're actually any good or not, but to charge
for what's normally "free" information there has to be added value.

Maybe there is a rash of startups with inflated pricing without any added
value. However, as soon as the first competitor comes in that truly adds value
for the same price (or less), then everyone will jump to it.

~~~
bravoyankee
I'm not going to link to these ebooks because it doesn't deserve more
attention, but it was front page HN only a day or so ago.

I will say this though: certain opinion leaders on HN are taking advantage of
the readers and the prevalent herd mentality that prevails here.

