Why Real Businesses Don't Charge $5/month

http://justinmares.com/why-real-businesses-dont-charge-5month/

by justinmares • 13 years ago

39 38 13 years ago

justinmares.com

venomsnake• 13 years ago

Poor backblaze ... they are doomed. Call them and tell them they are not real business.

atYevP• 13 years ago

I'm going to have to tell our CTO to close up shop. Here we were, thinking we were profitable...alas and alack!:)

brianwski• 13 years ago

Backblaze CTO here - this is the beauty of competition, you can't just sit back and CLAIM you can't make it any cheaper when some scrappy company comes to your market and PROVES they can sell it cheaper and make a healthy profit doing it. Yes it's hard on companies that just want to be lazy and not innovate, but it's OH SO GOOD for consumers. More for less, every day, all day long. I say bring it on.

jimzvz5• 13 years ago

Surely the whole point of lowering prices is to reduce cost of acquisition as well as churn. Where is this in your example?

patio112• 13 years ago

The first supposed benefit of lower prices is a wish, the second is a fantasy. Most SaaS companies with the typical four plan structure will find their highest churn on the cheapest plan. (Get them drunk if you don't believe me.)

It would be an enormously powerful result for SaaS companies if moving from e.g. $20 a month to $5 a month reduced customer acquisition costs by a factor of 10x, but companies that are able to nail customer acquisition at the LTVs implied by $5 a month are very rare. (They tend to be market-leading B2C companies, and they tend to have customer acquisition strategies which make pay-for-one-extra-customer-at-the-margin to not really be a factor.) By comparison, it is much, much easier to do all sorts of fun things when you can spend $100, $500, or $1k to acquire a customer. (Those are all a) numbers which many SaaS companies could trivially justify paying and b) numbers which many SaaS companies actually pay to get marginal customers.)

ahoyhere5• 13 years ago

What patio11 says is true. Our churn rate is under 1% on our highest accounts, and occasionally double digit on the cheapest. I've gotten lots of other SaaS owners drunk and we all share the same experience.

When it comes to low prices, people will make up any random reason they can "logic up" in absence of facts. Sure, "low prices to reduce churn" sounds totally logical, but it's utter bullhockey. Don't believe it. Always ask for the data.

jimzvz5• 13 years ago

I find this very interesting. What is the best way to find the sweet spot? Am I right in thinking that the more you charge for a service, the higher the cost of support for that customer will be and this can be difficult when scaling. i.e. A million customers at $5/month with 1 support employee/50,000 customers results in a much simpler business than 50,000 customers at $100/month with 1 support employee/500 customers?

With regards to the high churn rate on cheap plans, is it that this is due to the quality of the plans and that it is likely that these customers can find a similar service for free or is it the perceived value to customer is lower because they are only paying a small amount each month?

joedev• 13 years ago

In this post from Ryan Carson from six years ago http://37signals.com/svn/archives2/building_a_web_app_dont_f... he says adding a plan that cost "$80 more ($19 vs. $99)" increased revenue by 30% within two weeks. There are many posts like this out there.

Generous SaaS operators have been sharing this experience and wisdom for years and still people (usually without experience) refuse to believe it. Why?

Thanks patio11 and Amy Hoy for sharing your experiences.

o0-0o• 13 years ago

google charges $5/yr for their basic data plan.

justinmares2• 13 years ago

Google also makes $100m a day from Adwords. I don't think they're optimizing revenue on basic data..

mjn• 13 years ago

Sure, if your market lets you charge more, go ahead and charge more. But in some markets, real businesses charge $5/mo, because market conditions don't let them charge $10/mo (or at least don't allow them to meet their other goals at that price). Evernote Premium is $5/mo, Google Drive charges $4.99/mo for 100GB of space, etc. Heck, Fastmail charges $1.65/mo for its "Full" plan (billed as $20/yr), or $3.33 for its "Enhanced".

ahoyhere5• 13 years ago

Are any of those companies self-supporting on revenue from those products?

There's your answer.

It's not about what the market "lets" you do. It's about what you demonstrate to the market your product is worth to them. When in doubt, take responsibility and create agency. Otherwise your business is just a Disney princess waiting to be rescued.

Turing_Machine8• 13 years ago

"Are any of those companies self-supporting on revenue from those products?"

http://hostingmatters.com/web_hosting.html

They've been in business for 13 years.

Turing_Machine8• 13 years ago

Right. Why not charge a million per month? Or a billion? Or a trillion?

ceejayoz• 13 years ago

Unless I'm missing a paragraph, this pretends charging 3x as much won't ever reduce the number of people who sign up?

rhizome2• 13 years ago

The logic is that the cost of acquisition must be constant.

Turing_Machine8• 13 years ago

Unfortunately, that logic is a fantasy.

justinmares2• 13 years ago

But does it reduce it by 3x?

Turing_Machine8• 13 years ago

It might not reduce it at all. It might reduce it by 100%. It's impossible to make generalizations about this.

n3rdy• 13 years ago

I'm guessing he was just trying to explain the overall concept, that or he moonlights at New York or California's tax departments.

halcyondaze• 13 years ago

While this is definitely a thought experiment, we found the basic premise to be true when we redesigned our product, pricing plans, and free trial strategy.

We went from:

Free Forever / $29 / $59 / $149

7 Day Trial / $49 / $149 / $249

And we have an overall better customer base (they find more value in our app) and relatively the same signup metrics as we had before.

ebiester• 13 years ago

It all depends on your service. I am willing to pay $20 a year for cross-device password management for personal use, not $20 a month. I am willing to pay $$$ for a CRM. For businesses, your product must save me more money than if I do it myself. If it's a mere convenience that can be duplicated by an excel spreadsheet, I'm only willing to spend so much.

I suggest looking at what your value proposition is: if you think you can provide $50,000 dollars of value to your customer, you shouldn't be charging $5 a month. If your plan provides only a small amount of value, you better hope it provides that value to a large number of people. :) But you're not going to get away with charging more.

marc• 13 years ago

Is this article about WHAT TYPE OF BUSINESS to run, or HOW TO PRICE IT? I think it's mixing some logic of the two.

kevinthew• 13 years ago

this might be the dumbest blog post I've seen posted on HN. why is anyone reading crappy marketing blogs that have no basic understanding of accounting or microeconomics?

brownbat• 13 years ago

Beware, you Ingvar Kamprads, Karl Albrechts, and Sam Waltons: only poverty awaits.

Turing_Machine8• 13 years ago

Likewise Ray Kroc and Jeff Bezos.

F.W. Woolworth is gone from the U.S. now, but they lasted for over a hundred years.

Why Real Businesses Don't Charge $5/month

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