You Can’t Make Money Charging $1 Per Month

http://www.softwarebyrob.com/2011/06/27/you-cant-make-money-charging-1-per-month/

by joshuacc • 15 years ago

154 62 15 years ago

patio11• 15 years ago

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.

revorad2• 15 years ago

Have you experimented with monthly subscriptions for BCC? Intuitively, I feel a one-time fee for software is an easier sell. At least I've myself bought some web software impulsively because it was a one-time charge (like early Appsumo deals). But I've also read about some tests where it was just the absolute figure which was important and customers didn't seem to care if it was a one-time charge or a recurring cost!

Chris_Newton• 15 years ago

We're in a similar position at the moment, trying to decide how to price a specialised monthly subscription service.

Our potential global market ranges from people who tend to have very limited time, and who might therefore put a substantial value on services like ours that help them save it, right through to university students with very limited funds (and, let's be honest, a tendency to obtain media content through not entirely legal channels).

We've been working on ideas for pricing plans, and soliciting feedback from people within our market, but you never really know how things are going to go until you launch and ask people to put their credit card numbers into your system. That goes double when much of the informal feedback you get in the early days comes from friends/family who will have a tendency to be kind.

If anyone has any experience of this sort of decision and how they changed their plans over time, I'd love to hear it.

(Shameless plug: We're also interested in any experience of making informed decisions using metrics in the broader sense. Unfortunately my question last week only got a couple of votes before it fell off the New page, but please feel free to comment there as well: http://news.ycombinator.com/item?id=2686151)

jdunck• 15 years ago

One rule of thumb I read here ( http://www.forentrepreneurs.com/startup-killer/ ) is that CAC should be recoverable within 12 months of use, regardless of LTV.

Do you think that's appropriate, or it needs to be even faster?

I get the point cashflow limits rate of growth, of course.

idlewords5• 15 years ago

Another good rule of thumb is not to speak in acronyms.

idlewords5• 15 years ago

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• 15 years ago

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.

kristiandupont• 15 years ago

It only keeps you in the black if you are not taking out a salary.

wisty• 15 years ago

Yeah, teachers are stingy, compared to most other B2B. A project manager will spend thousands of dollars on something that most of their team won't even use, it's just company money. Teachers typically have to beg for photocopy use.

However, college students, gamers, and programmers (i.e. HN readers) are some of the stingiest people on the planet. Github charges $7/month for repo hosting, and still gets customers. There's a lot more teachers than programmers, and they won't feel like n00bs for paying for something they could roll themselves, so they will pay more than $7 for a basic service.

decadentcactus• 15 years ago

There's also Steam, which makes a bunch of sales off gamers, the notorious pirates they are.

dpcan• 15 years ago

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• 15 years ago

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.

xuhu• 15 years ago

At $1 per month, support is through a forum, community driven at best.

WA5• 15 years ago

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).

albedoa• 15 years ago

This is great information. Do you care to talk about your subscription and renewal processes and how much you think they factored in to your conversion rate? Aside from the pricing model you chose, I wonder how important the level of convenience was to your users.

WA5• 15 years ago

As soon as an account expires, the core functions cannot be used any more and it displays a message asking to prolong the account. People pay via credit card or with their paypal account (I use PayPal as the payment processor). This gets processed immediately and within a couple of minutes, the account is valid for another 6 or 12 months.

The other option is wire transfer (which is very common in many European countries unlike in the US). The advantage here is that nobody needs to share any personal information. I just receive the money on a bank account. So far, there was no need to process that money automatically. I just wrote a little script, which greps for the transaction ID and the amount of money and prolongs an account accordingly.

I do not have an automated recurring payment system. All payments are "one shot", like a prepaid service. I can imagine that this is something people really appreciate. They feel more in control of their money and manually entering the payment information once every 6 or 12 months isn't too much of a hazzle.

Furthermore, I ask for as few personal information as possible. I don't store credit card information on my site. Heck, I don't even store real names in my database (but they are shown in PayPal).

MicahWedemeyer6• 15 years ago

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• 15 years ago

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

kelnos2• 15 years ago

Have you considered that your login UI (including the "forgot password" feature) isn't intuitive enough for your audience? We take a lot of things for granted as programmers/techies.

Beyond that, I think I'd start "firing" customers who are a huge support drain like that, especially those who are non-paying customers. Unless your site depends heavily on network effects, and a large percentage of visitors have password issues, it sounds like your time could be much better spent elsewhere.

chadgeidel2• 15 years ago

Perhaps this is naive (and you may be doing it already), but do you provide different "QoS" for your paid/free users? Have 2 addresses/contact forms with specific promised return times?

SteveC• 15 years ago

I've had a few customers like that. What I eventually did was make it possible for them to be logged in automatically by visiting a unique URL. Horribly insecure, but it's not a service that needs high security.

wtracy• 15 years ago

I would point out that elementary school teachers are not likely to be very tech-savvy, and would probably be toward the high-end of amount of support required.

YMMV.

WA5• 15 years ago

Since you posted this as a reply to my post: My customers aren't elementary school teachers. You probably meant patio's post. I'm not sure whether you would call most women tech-savvy, but my customers are mainly women and they hardly require any technical support.

ahoyhere2• 15 years ago

You made the first move - good job.

Now, it's time to consider the extremely likely possibiliy that you could charge 5x the amount and without decreasing conversion by 5x. Which means you could probably be earning 5x than you are now (or more) without any extra work.

WA5• 15 years ago

Thank you. Do you have an idea how I could increase the rate without pissing people off? Would you increase the rate for everyone or only for new customers? How do you justify an increase from 1€ to, say, 5€?

eggbrain3• 15 years ago

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?

JacobAldridge• 15 years ago

"It was something I could probably code in a weekend or so"

I think that's a key point. You look at the solution, think about the effort required for the value it gives you, and $10 feels about right.

For someone who can't produce it themselves, the value is usually much higher - and related to the size of the problem solved, not the amount of effort required to solve it. I don't know whether that applies in your specific case (for example, selling a 'one use' service on a subscription basis may not be the best plan), but it's a useful general point I thought of reading your comment.

MicahWedemeyer6• 15 years ago

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.

eggbrain3• 15 years ago

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?"

revorad2• 15 years ago

You could probably code it in a weekend. Your weekend is worth more than $50. That is the point.

eggbrain3• 15 years ago

My weekend is only worth more than $50 if I didn't enjoy programming it, or it took time away from making money from another job. If I was planning on sitting around watching television, but instead spent it programming this project that wouldn't somehow make the weekend worth less, in fact I would argue that it built value, intangible or otherwise (knowledge learned from building the application that I can put on my resume/maybe a few paying customers that end up actually using it/etc)

jawns• 15 years ago

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.

clark-kent2• 15 years ago

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• 15 years ago

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-kent2• 15 years ago

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• 15 years ago

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• 15 years ago

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• 15 years ago

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.

jconley• 15 years ago

Maybe they don't? Not that I know the details of their business, but I know I was shocked when I first learned how few companies actually make money. :)

falava• 15 years ago

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.

idlewords5• 15 years ago

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.

kevinpet• 15 years ago

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.

jvandenbroeck• 15 years ago

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.

callmeed• 15 years ago

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.

idlewords5• 15 years ago

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.

icebraining• 15 years ago

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

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

You Can’t Make Money Charging $1 Per Month

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