
Why cheap customers cost more - sgdesign
http://sachagreif.com/why-cheap-customers-cost-more/
======
patio11
For Appointment Reminder, approximate per-account customer support incidents
per month. I've taken the liberty of scaling them to X, where X represents the
number for the highest publicly available account plan.

    
    
      Personal ($9): 7X
      Professional ($29): 4X
      Small Business ($79): 3X
      Office ($199): X
    

The character of the questions is also different at the various plan levels.
Most common question for Office: "What's the timeframe on integrating this
with ..." followed by "Our $TITLE would like a report saying $NEEDS, can you
make that happen?" Most common question for Personal: "How do I schedule
appointments?" followed by "The system is working exactly the way it says it
does on the screen. Can you please tell me why that is happening? I thought it
would work in a way completely opposite to the way described on the screen. It
would be convenient if you could fix that. No, I didn't read the 'If you want
this to work in the opposite fashion...' text on the screen to change that
setting, I have more important things to do than worry about computers."

Your mileage may vary. If I were doing the math based on phone calls waking me
up in the middle of the night, the numbers get skewed due to one pathological
customer in the $29 bucket, who has literally called me more than every other
customer combined.

P.S. I have fairly exact privileged information regarding this question at a
handful of companies and anecdotal evidence from dozens of my software
buddies. It is our universal experience that the support load for cheap/free
customers crushes the support load for the higher plans, both on an absolute
and per-customer basis.

~~~
zobzu
But I bet you have many more $9 and $29 than $199 customers?

I'm sure the equation still favors your theory, but I'm also sure by a lower
number than what you'd like readers to believe.

~~~
csomar
For Appointment Reminder, approximate _per-account customer_ support incidents
per month. I've taken the liberty of scaling them to X, where X represents the
number for the highest publicly available account plan.

~~~
ibotty
you are certainly right with your scale, but i guess zobzu's point is, that
your non-support costs (say: development) is mostly paid by your 9$ and 29$
customers (in absolute terms).

so you cannot just get rid of every customer but your high paying ones.

~~~
joshuahedlund
Good point. Of course it's possible that 7X is a cost that cancels out the
revenue from those customers, in which case it would be better not to offer
the option, but as long as it's not, it's still profitable to offer the plan.
Depending on the ratios, the cheap customer bracket could even be more
profitable (in absolute terms, as you say). You just have to build the extra
support cost into your pricing.

$9 customer - $5 support = $4 per many customers

$199 customer - $1 support = $198 per few customers

------
citricsquid
I share the view, however:

> So it’s not that cheap people require more support. It’s that people who
> require more support are more likely to make their decision based on price
> alone.

What evidence is there of this? Surely if you have a plan for $10, $50 and
$100 you're going to have more customers at the $10 price point simply because
it's so cheap and therefore more support will go to people at that price
point. Has anyone even actually released any sort of statistical analysis of
price points and support taking into account the pricing, total customers and
the amount they use the product?

Also who the price point is aimed at matters. For example if your product has
a $10 price plan aimed at individuals and a $50 price plan aimed at businesses
you could see the $10 price plan requiring more support (on average) simply
because the personal users use the product more actively, not because they're
paying less. I as a customer won't pay $50/m if your $10/m plan suits my
needs.

~~~
sgdesign
I don't have evidence, sorry. It's just something I've heard repeated often by
many different people. Maybe Patio11 can chime in?

~~~
sequoia
I think the gist of the post is intriguing but I felt that there were too many
of these seemingly thin-air sourced assertions for me to take it without a
grain of salt. I think a lot of the stuff could be true and it makes sense to
me, but my intuition on such complex topics as human behavior is frequently
wrong, so I don't trust it w/o supporting evidence. :)

~~~
sgdesign
You should definitely take it with a grain of salt! I'm not so much saying
"this is the way it is", as "this is the way it could be".

------
jmitcheson
I remember reading somewhere about a theory that people who pay more for a
service end up committing more time and energy into learning it, because it
seems more important to them.

If you signed up for a $50/mo service, you would probably feel pretty special
about it and possibly spend a few hours learning. If you paid $5/mo you would
probably skip through all the documentation as fast as possible, race into
trying something out, and upon encountering a problem would probably fire off
a support request without searching (hey you're a paying customer now, right?)

Of course none of the above is terribly scientific.. but I thought it post-
worthy anyway.

------
gridspy
My take on this was actually that many high end customers

1\. Trial / buy at the lowest possible price point

2\. Ask lots of annoying questions

3\. Master the system

4\. (finally) move to a higher price bracket

5\. Understand the system and stop hassling support.

Perhaps it would be worth correlating support requests with the age of the
account and seeing if that was a better predictor of support burden than the
price plan.

~~~
patio11
It is the opposite of the truth that high-end customers start at the cheapest
plan and move up. High-end customers start at the most expensive plan and stay
forever. They will frequently not downgrade even if they have a multi-month
dry spell in using the software because e.g. $250 a month is not a meaningful
amount of money for them.

Free accounts upgrade to premium accounts essentially never. (1% ~ 2% is quite
common.) Cheapo-plans upgrade to higher plans very, very rarely. For
Appointment Reminder, I've had _one_ person ever transition from Personal ($9)
to something higher and then actually pay for a month of it.

~~~
nl
This is fair, but it's worth pointing out that freenium-type plans _can_ be
designed to optimize for the upgrade.

For example, I'd imagine the Dropbox upgrade rate is much higher than for
other apps because people will naturally grow into needing it.

~~~
bartonfink
Sure, but with Dropbox you aren't getting additional functionality - you're
just getting more of the same.

~~~
nl
Yeah, but that is because of deliberate choices on their part.

An alternative product model for Dropbox would be to partition the product on
one or more features. Something like the ability to share files is an obvious
choice, as is things like selective sync.

In retrospect it seems obvious to give all the features to everyone, give away
a base level of storage and sell storage upgrades.

Before anyone says _who'd be stupid enough to sell backup software any other
way_ look at things like Norton Backup[1], where the license is limited on
both the number of computers you can install it on _and_ the size of online
storage available.

Good ideas often are obvious in retrospect...

[1]
[http://buy.norton.com/mf/productDetails/listPriceGroupId/0/p...](http://buy.norton.com/mf/productDetails/listPriceGroupId/0/productSkuCode/20052318/priceGroupId/1000000000000000584/slotNo/-1/)

------
bambax
The "dummy" concept is really interesting. It dwells in "information
asymmetry"; markets where sellers know more than buyers tend to not function
properly (shameless plug: I have written about this here
<http://blog.medusis.com/are-you-a-lemon>).

Now, what can a given small company do about it? I think the two opposite
strategies of trying to "drive away dummies" or "embrace them" are valid; what
isn't as effective is trying to serve both dummies and experts by offering
plans with wildly different pricing.

You probably need to make a choice: choose a positioning in either the
"dummies" or "expert" space and serve only this population.

~~~
sgdesign
Funny, I thought about illustrating the post with 30 Rock's Liz Lemon (as a
famous "dummy") but thought people wouldn't get the reference.

But after reading about this "Lemon Effect", I'm starting to think maybe her
name is not a coincidence…

------
gscott
Going above and beyond on end user self-service support helps.

1\. Mouseover help on every input field

2\. Searchable help system with screen captures, it has to be comprehensive.

3\. Video help, Camtasia style walk throughs.

Your users are not dummies. They need support, on the feature they are using,
when they are using it. You can either provide that support self-service or
you can provide it via email/phone. One is far easier for the user (self-
service) and the other is much harder on you (answer emails on how to use
basic functionality).

I ran a free crm system for about 10 years, it took refining how each feature
worked and creating all of the different ways of self-service support but I
was able to get technical support down to 1 question per week. That was with
about 1,200 unique daily users... users who would be in the system all day
because they had all of their calendars, files, contacts, and other things
online in the system. They didn't want to wait for support, they wanted the
answer right away and I made sure they could get it without contacting me.

Average Joe user, he looks at this and is just guessing:
[https://dmhx3adjqsy1o.cloudfront.net/assets/marketing/shots/...](https://dmhx3adjqsy1o.cloudfront.net/assets/marketing/shots/1-b954de2035a66bb26761228df51989a9.jpg)
I see a support link but I bet that link goes to a generic support page and
not support for that page in particular. So now the user has to jump through
hoops to find support and might give up.

The user needs to understand the the benefit (of each admin page), what the
page is doing, some ideas of how to read the data, and get the most out of it.
There can be no assumptions that the user knows anything... they are going to
have to be taught and you want that done by self-learning.

The user signed up because of the top 1/3rd of the homepage with the marketing
talk. Just because they sign up doesn't mean they fully understand the system,
how to use it, and how to dig deep into each page and get the benefits.

~~~
sgdesign
Can I ask how you made money if the CRM was free?

~~~
gscott
Sadly I was great at making things easy to use, I was great at making new
features, I had no problems getting into things like Twiistup and being
nominated for the Webware 100, etc... but making money I am not good at. For
example I had a two year head start on Basecamp and they are living high on
the hog and I am just barely living :) I had to just abandon the crm (I just
cut off the signups but all of the old users are on it still using it) and I
am going in a new direction.

~~~
ovi256
Have you tried simply charging for it ? Put in a pricing grid with the
corresponding app restrictions. Of course, grandfather in all existing user to
a free tier with a generous grace period. The free tier may or may not
accessible to new signups. Call it the "end of beta".

Seriously, try it. You obviously are providing value to users. I'd love to
hear from you on how it goes.

~~~
gscott
I have been thinking about making everything super encrypted and charging $100
a month. I have had a number of defense contractors come and try it but not
use it because I could see their data. Then I wouldn't need to upgrade the
interface which is a bit aged. But I am burned out right now, maybe in 6
months. The current users, I hit them up for some donations but I attracted
people who don't really want to pay.

------
casca
With the masses of metrics being collected in all the lean startups, it would
be spiffy if this assertion could be supported by something other than rampant
speculation.

This might feel true because a small number of customers generate the most
support calls and the majority of customers are expected to be on the cheapest
plans so you'd expect an overlap.

~~~
jusben1369
One of the fascinating parts of true startups for many people is that there
aren't concrete definitive answers. Rampant speculation is a fun exercise that
can lead you to discoveries that you never would have found if you didn't
start down that path. Embrace the rampant.

~~~
ktizo
_Embrace the rampant_

But be very careful of doing so in public lest you fall foul of indecency
laws.

------
rmATinnovafy
This is just a sympton of the real problem. A fair amount of startups (and
other small businesses) don't have a clue about who their average customer is.
They go and build their MVP without ever thinking about how the sell the darn
thing. After the code is written they set out to find someone who will pay for
their product.

This just leads to them creating some ridiculous pricing schemes that will
never prove to be sustainable. They think this is some sort of loss-leader
strategy, but its not. Loss-leaders must actually turn a profit to be
considered as such. Add in the highly used but seldomnly tested freemium
model, and what you get is a bunch of people who are great at writing code,
but are pretty bad at selling.

And how can you improve your selling skills if you don't even know who you are
selling to?

Now, Sacha does make a good point. Cheap people are a pain in the behind to
deal with. They have an overgrown sense of entitlement, most of the time they
are rude, and will nickel and dime you till death. But you know whose fault is
that? Yours. You did not do your homework. Cheap people are a market, and they
are profitable if you know how to work them. The minute you offer them
support, the minute they will treat you like their personal punching bag.
Pricing yourself out of the "cheap zone" is the best strategy you can have if
your product is not aimed at them.

I would not call these people dummies either. They are smart. In fact, they
will argue and nitpick every little technical detail so much that it will
leave you thinking if you are the dummy. These people know their stuff. For
them this is not only a game but a way of life. You cannot educate them. They
will not listen. Anything you do will seem like an attempt to raise your
prices. How do they react? They double their complaining. Trying to model
their behaviour will drive you crazy.

One company that went through this is Pep Boys. They had an offer for a free
oil change with any other service. Cheap people started taking their busted
old cars to them. The cheap-o's would buy the lowest priced service that would
give them the free oil change. Then come back to complain about unrelated
problems. They would even go as far as suing Pep Boys for damages not related
to the services performed. But small claims courts always sided with the poor
abused customer. Cheap-o's actually made money on this. Go figure. After years
of this, Pep Boys finally saw the light and discontinued the practice. But it
doesn't stop there. What did cheap-o's do? They complained to corporate HQ
about the change.

Another point Sacha makes is that people who pay more ask for less support. Do
you know why? Because they are your target customer. They ask for less support
because they need the product, and trust you. They know that if something goes
wrong you will be there to fix it. They show their trust in you by paying
more. Its so simple. They also use your product as intended. And because your
prodcut worked, no complaints arised.

When people give you money they are not only buying the product, but they are
placing their trust on you. Cheap-o's don't trust anybody. So they complain
until they get their moneys worth (in the mind). Your target customer will be
glad everything worked out, and will just be silently happy.

I'm going to copy and paste part of the conclusion to make a point.

 _No matter which strategy you choose, remember to consider the impact pricing
will have on your customer base and your support costs. For example, a good
strategy might be to start off with high prices, and then only lower them once
you’re ready to scale your support infrastructure._

I'm sorry Sacha, but you cannot start with high prices and then lower them.
You start with fair prices and then raise them. If your support infrastructure
requires higher costs, but your target customer cannot afford it, then the
problem began when you chose to build your product. You need to figure out the
costs of scaling before even starting. No need to be precise either, you can
just make an estimate. Just make sure to err on the high side.

I would also say that pricing does not impact the customer base. It is the
other way around. The customer base (or your average customer) is the key
metric to set the price. Not your costs, but the customers. Companies in the
make-up industry know this. Most of the makeup out there is made by the same
companies. The big difference is the customer they target. You can pick the
same basic product from two different brands, and the prices will be very
different. In some cases even downright insulting. What does a $200 lipstick
have that a $10 one does not? A customer that will pay the price.

Sacha, good call on getting this point out in the open. This stuff needs to be
discussed more by startups and hackers.

~~~
dmitri1981
> What does a $200 lipstick have that a $10 one does not?

A friend of mine used to work in a cosmetics factory and explained that the
main difference between a cheap and an expensive lipstick is that the
expensive version makes a satisfying click when you put the lid on.

~~~
rmATinnovafy
Yes, that is true. Not only the click, but the mechanism to bring out the
actual lipstick usually requires more effort.

------
GigabyteCoin
"I think cheap plans disproportionately attract a special category of users:
dummies."

I don't think they are "dummies".

They are simply less invested in your venture than the higher paying
individuals, and thus read less of your FAQ and spend less time getting to
know your website before making a purchase.

I run a SaaS, just lowered the minimum payment to $5 the other day, noticed a
large influx of questions to my inbox as a result, and deduced the above.

Somebody who comes along and deposits $100 into my service has probably been
reading the FAQ for a few days, using my free trial, and really getting
into/really liking my website and service.

The person who comes along, see's "backlinks for $5!" and immediately makes
the payment without using the free trial obviously doesn't know or care as
much about my website as much as the guy who just deposited $100.

Most every question I receive to my inbox is from a non paying customer or
somebody who has deposited $5.

It's annoying, but I think it's a necessity for my business. Sales have gone
up across the board and it's not a bad tradeoff if you ask me.

$5 customers do turn into $100 ones eventually.

------
ericfrenkiel
"Cheap" is really a values judgment by the author - a business should consider
every customer valuable. If the customer is 'cheap' for the amount of
effort/support, then the product/service is priced too low.

If competing on price, support should reflect the model, i.e. self-serve
methodologies.

Especially for digital products/services which have essentially zero marginal
cost, the customer is really paying for your time.

If customers are overloading support channels, it probably means the product
is priced too low and the price curve should be accordingly adjusted to lower
the number of paying customers while maintaining profits.

Of course, the product/service can have an artificially low price point to
encourage eventual upsell/cross-selling opportunities, but all the more reason
to have a measured funnel before losing most of your time to support.

~~~
sgdesign
Good points. But what I meant by "cheap" is "customers who choose the lowest
price point", not "customers who have less value".

Although it seems uncommon, it's very possible that the lowest price point
would also be the most profitable. So "paying less" != "less valuable".

------
rs
The "dummies" reasoning seems pretty sound. But I've got two comments on the
"costs" which have to be factored in to the "total cost" and decide whether
"cheap customers really do cost more":

1) Costs should really be calculated relative to your margins. I.e. I would
hazard a guess (due to economies of scale) your cheapest price plan would have
higher margins than your larger price plans.

2) The actual cost of support issues - I've found (running xp-dev.com, which
mind you, should really not have that many "dummies") that while the cheapest
customers do submit more support requests, these requests tend to take much
quicker in resolving, than say the larger customers.

So, I think its not as easy as saying "Cheap customers cost more". I think its
better to say "cheap customers request more support"

Just a thought ...

------
jakejake
I'm sure it has something to do with the types of services that might be
offered for free as well. Higher priced services are generally more in the
domain of business customers who are likely to appreciate how much work goes
into a quality product or service.

Free services may apply to either, but you're going to also get customers who
are not really in business yet and they may have unrealistic expectations. I
think of myself when I was younger and I thought of all companies as faceless
corporations, rather than actual people just trying to provide a good service.

------
crosh
Chinese menus should only be offered when you are trying to further segment
your core market, not to try and create a market.

A significant issue for companies is not identifying the true costs of serving
specific types of customers. Those that require many additional resources
(that you are not charging for), particularly for a SAAS product, should be
respectfully cut. Sometimes it is cheaper to not serve a client and not have
some revenue come in than to serve those that are resource sucks and pull your
time/focus away from your primary market.

------
btipling
It's a pretty decent article but:

> Now being a dummy is not the same thing as being dumb.

...

I think if I had found myself about to write the sentence above I would try to
find a better adjective and not post something this silly.

~~~
sgdesign
That's not a very constructive comment. What's silly about it?

~~~
ableal
<http://www.merriam-webster.com/dictionary/dummy>: "Origin of DUMMY 1dumb +
4-y First Known Use: 1598"

(GP is right, the phrase is clunky and distracts the reader.)

------
lsc
Huh. My experience is the opposite. I mean, the smallest plan gets a lot of
questions, but that is because, with the default install I give you, it just
doesn't work very well (which is why I make ordering it... harder. I guess it
was kinda a joke, mostly 'cause I like the feel of the five dollar price
point; irrational, but it ended up working out quite well[1]) My second
smallest plan (that's all of a dollar more with twice the ram) is pretty
quiet, as are the 256 and 512 plans.

Really, I think it's a matter of setting expectations, and then sticking to
your guns when people want more support than you are selling. "If the service
is unsuitable for your needs, I can cancel your account and give you your last
month's payment back" - most people, especially on the low end, seem to find
this attitude acceptable.

It's really important, I think, to make sure that you don't treat your
difficult customers better than your easy customers... I don't think I'm 100%
on this yet, but I think it's super important. You choose your customers; if
you give better service to people that are hard to deal with than the quiet
easy customers, what sort of customer do you think you will end up with?
That's one of the reasons I'm really generous with the 'if you want to no
longer be my customer, I can give you back your last month' - I also try
really hard in the case of outages that if I give anyone a credit, I give all
effected customers credit.

I find that the smaller customers are much more accepting of my "I handle the
(virtual) hardware, you handle beyond that" support model; usually it's the
higher dollar customers that keep coming back wanting me to tune their apache
config or re-install the os. I mean, they can do all those things (at least if
they could do all those things on a dedicated server with a boot-cd in the cd-
rom drive.)

The larger customers are also (quite rightly, I think) far more likely to make
noise when disk I/O is suboptimal. I mean, to be fair, it is a problem. (I do
not know if it's a worse problem with me than with other providers; I doubt
it. We're all using pretty similar hardware. I do know that it is a big
problem with shared 7200rpm disk in general. Disk shares poorly.) But the
smaller dollar customers? they don't complain nearly as often as my high
dollar customers; if you are using it as a shell replacement, a little disk
latency just isn't that big of a deal; I mean, ram is cheap enough that a
whole lot of stuff can be stuck in pagecache, and that's way faster than the
fastest disk. But if you are running a fifty gigabyte MySQL database that is
under heavy use? well, perhaps a virtual environment is not the best place to
put it.

I also have a much higher margin (cost of goods sold, anyhow) on the small
guests; I charge $1 per 64MiB ram plus $4/account/month, so the total cost per
megabyte drops pretty sharply with volume. When I started, my under $10 VPSs
were unbeatable deals; at this point, my cost per megabyte ram is still pretty
competitive for my larger guests, but I'm getting overtaken on the low end, so
I think it's time for me to drop prices and/or increase resources on the small
guests. I'm not sure what I'll do with that yet, but I do know I need to do
something. I feel like that used to be /my/ market and I want it back.

[1]news.ycombinator.com/item?id=3865250

~~~
ibotty
i guess you make it pretty clear that you only serve people who know their
stuff in your cheap offerings. that is a different audience than a "send email
cards" audience would be.

~~~
lsc
well, yeah; I'm going for people that know how to use the product I'm selling,
and that understand the line I'm drawing between what I handle and what they
handle.

Without that strong line between my responsibility and yours, every support
question becomes a negotiation; finding people that are both good at
negotiation and good technically is extremely difficult, at least without
spending just gobs of money.

But the important bit, I think, is that I'm concisely explaining "my product
does X" to a certain group, then I'm attempting to exclusively market to that
group. I don't know how you would do that with a email card sending service,
but I bet that if you figured out how to do that, the "concisely explain to a
certain group what exactly your product does and does not do, then market
exclusively to that group" process would lower support costs, by reducing the
number of people expecting non-standard services.

------
famousactress
Woah. I stopped reading at "Patrick McKenzie’s podcast" (but Instapaper'd for
later, promise). I had no idea, but am thrilled and off to iTunes...

~~~
patio11
I have not organized myself to getting it into iTunes yet, but I think you can
import <http://www.kalzumeus.com/category/podcasts/feed/> and that will work.
(Worked for me, but can't read you the buttons you have to push since they're
in Japanese. Alt-A, P, copy/paste?)

~~~
joshuacc
In iTunes, just click the Advanced menu, click Subscribe to Podcast, and paste
the RSS feed url into the box.

~~~
famousactress
Perfect, thanks!!

------
clickzilla
How about not including support for the cheapest price plan?

------
billpatrianakos
The reason that the ones who make their decisions based on price alone require
more support isn't always due to the fact that they're dummies. The article
doesn't really give too clear a definition of support here. It can mean honest
to goodness help required or it could mean complaints and demands (often
veiled as questions). People who pay the least simply don't value the product
as much. They're not willing to put in the time required to learn how to
really work it and they're always the first to complain that the one feature
just out of their chosen plan should be included.

Their lack of perceived value for the service isn't always attributable to
price alone either. The fact that they chose the cheapest usually means that
they're either just plain cheap or they don't understand how valuable what
they're getting is to begin with which leads to the, acting like dummies and
being demanding. Now, when I say value in this case I don't mean money. I'm
talking about their perception of how useful the product theyre getting is.

Besides that minor clarification I totally back this up. The higher priced
item will always have more features and attract people who know the value of
those features because they're already educated about their benefits most
likely because they've used similar solutions before.

~~~
sgdesign
That may be true as well, but I feel like it's easy to resort to blaming the
customer as "cheap" or "demanding". Again this is all speculation, but I think
the fact someone is ready to pay for your product _at all_ already means they
value it a lot.

------
powertower
> when you offer multiple plans for a service, the cheapest plan’s customers
> tends to require the most support.

True in my experience.

> So it’s not that cheap people require more support. It’s that people who
> require more support are more likely to make their decision based on price
> alone.

The reason is simple. Cheapest plans attract people who are just starting out
and don't know what they are doing.

And in turn those plans attract them because they don't _require_ the greater
X or Y or Z of the more expensive plans. They're not at that point yet.

~~~
klodolph
> The reason is simple. Cheapest plans attract people who are just starting
> out and don't know what they are doing.

This sounds like you are agreeing, not disagreeing.

