166 points by a13n a year ago
The one thing I've learned from our pricing inquiries over the last year, is that customers will often pay far more than you suspect, provided the product is packaged correctly.
I'll do a write-up once we are more settled in our pricing about our pricing journey, but in a nutshell.
1) early 'customers' said they wouldn't pay anything, or maybe $50/year - we have no business
2) giving them pricing < $100/year for x number users where they would likely spend $200 / year was a no go.
3) giving them pricing of $800/year with more users than they would likely ever have was interesting to them
4) telling them it was $800/year without limitations on the number of users, and they think it's too cheap.
5) tell them that it's $800 per x number of users so they would need to spend $5000 per year where they are currently spending $3000 on their alternative, and they are still interested.
This is one of our customer segments, the thing is, many of these customers would likely only have paid $150 on a per-use plan. But they want to pay more, and not have to think about per use.
The challenge for us, is our cost for each of their users is high, and as this is a new market, it is very difficult for any of us to forecast usage. We're learning.
Don't undersell yourself, and I've learned that focusing on the packaging is as important as the actual $$.
Also, how many people are charging the same amount in $ and €? We give the same dollar amount to both groups, don't undersell on exchange rate either (I don't think).
People were more excited to pay $500/month when we through in a "white-label PDF quick start guide" than $300/month. Only after being beaten over the head with that request on calls did we change things, now they love it.
Could you clarify what you mean by “white label,” here? Your customers were going to sell the service to their customers?
> with more users than they would likely ever have was interesting to them
I've found that customers are over-optimistic about their own businesses and are happy to pay for higher user limits that they never use. You just need to give them the option.
>how many people are charging the same amount in $ and €?
I keep it simple and charge in US$, even though many of my customers are in the UK. US$ is the "global" currency, and everyone understands it.
I recommend anyone trying to decide pricing for their SaaS, or any product in general, to study a bit about Consumer Surplus.
There is a very classical paper "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly" that discusses, amongst other things, two part "tariffs" (admission + ride) which allow "the sellers to capture part of the residual surplus through an appropriately chosen fixed fee."
Which is exactly what the Article has ended up rediscovering at the end.
Quite a few economists and companies have given this problem a lot of thought, so it might very beneficial to study the body of literature that developed over the decades.
A link to 'A Disneyland
The typical HN convention seems to link directly, or use a zero-indexed footnote. For example, if all you are doing is providing a link, there's no need for extra markup:
A PDF of "A Disneyland Dilemma":
If you are writing more than just the link, it's common to use a zero-indexed footnote:
The pdf  was originally published by MIT press, and can be found online [.... pretend I wrote more prose]
to get a little deeper, two-part pricing is considered a good-enough optimum to the pricing problem, not the absolute optimum. the base price is high enough to get most people to pay it, but not so high to deter the "cheaper" customers. the incremental part of the pricing is designed to extract as much of the delta between the base price and the customer's willingness-to-pay (their max) as it can.
the absolute optimum to capture maximum consumer surplus would be infinite-part pricing, i.e., charging each customer their maximum willingness-to-pay price. but it's very difficult, if not impossible, to determine that price in an efficient way.
why not three-part (or higher) pricing? because you increase the complexity of the buying decision without enough of a payout.
And essentially the only way to achieve the optimum (maximum price discrimination?) is to know that specific consumer's demand curve -- which is also the whole idea behind "contact us" pricing pages.
I also think there is a limit to how complicated you can make the payment system before the user just gets confused. So that definitely should be considered. But two-part seems to be a familiar model for most people.
There are ways to find analogs for their demand, particularly if they are using your software directly to make money.
For my company, we try to target our monthly pricing to be between 1-2% of what our estimated costumers revenue is for the same period.
This method only works if use of your software is directly tied to the production of their product. It falls apart if your software is merely ancillary.
Tomasz Tunguz wrote a nice piece about the 2-part tariff: http://tomtunguz.com/three-part-tariffs/
Actually, he mentions that academics argue that 3-part tariffs may be the most optimal.
From his article:
"Linear Pricing (LP) - Each analytics event costs $0.10."
"2 Part Tariff (2PT) - The analytics software has a base platform fee of $10,000 and each analytics event processed by the system costs $0.10 more."
"3 Part Tariff (3PT) - Again, the software has a base platform fee but the fee is $25,000 because it includes the first 150k events are free. Each marginal event costs $0.15."
It can be a pain to implement "tariffs" on the billing system side, but it can be well worth it in the end. Props to you all at Canny for pushing through.
BTW, if anyone is interested in building tariff/metered billing into their product, you might want to check out Cheddar's Billing API:
Disney reversed their pricing scheme described in the paper about a decade after it was published
This article really resonates with me because we're going through the exact same problem. The most profound thing we've learned is the value of anchoring the users expectations. Our initial price for a consumer product was $2/month. It really only was a finger-in-the-air decision. Now we've grown and companies are starting to use our product. We had a large company with 5000+ employees, ask for the price for 200 users on our product. Since the only price available was the consumer pricing they were expecting a discount on that. Between 25%-50%. 200 employees using our tool daily, for only $200 per month! Now that we have introduced a business option at $15/month per seat, it's impossible to convince them otherwise.
Another learning is that some customers are just not meant for you.
This is the exact reason why we recently changed our price structure. Now the price of a resource increases with the size of the plan. Now discounts won't hurt so much.
Personally I think you're pricing is too high for startups.
UseResponse costs $15/month. And other SAAS products which are at the $50/month mark are products like Intercom (which actually is three products) and are further ahead in terms of more features and polish.
I just don't feel the value proposition is all that great. And for $600 (cost of a year) I could feasibly someone get offshore to replicate your product.
And I am literally right now looking for a product like yours.
Thanks for the feedback! I'd love to learn more about what you're working on. Want to reach out on our live chat?
As we mentioned in our blog post, we tried lower pricing and it didn't work well for us. Customers were less qualified and churn was much higher.
I am just a typical SAAS startup and if we know anything it's that you should trust the numbers over individual customers.
Anyway, I think I am going to tackle the issue from the other side though and go with ProductBoard. It's a product management tool with feedback on the side.
Nice post (and beautiful charts!). One other quick comment: really appreciate that you never excluded single sign-on from your base plan.
I'm always disappointed when I see SaaS where you have to upgrade to an "enterprise" account just to get reasonable security. Props to you and your team for not forcing customers into that dilemma!
Thanks, the charts are from ChartMogul, which is free for under $10k MRR. Can't recommend them enough. https://chartmogul.com
Honestly single sign-on is just a no brainer MVP feature for Canny. Your users shouldn't have to make a separate account to give feedback for your product. That would be like Intercom making your users make a separate account to live chat...
Is that a SaaS for SaaS's? Can we go deeper?
That's some interesting insight. We trialled £7 per user per month for https://usebx.com, but found our corporate clients were our main income source (paying >£500 per month for customised deployments). We've recently decided that we'll try offering the hosted service for free to single users in the hope that it attracts more corporate customers. Pricing really is an art that I didn't give much consideration to before I started trying to run a SaaS! Glad you are finding your optimal pricing structure... I feel we still have a long way to go yet!
Glad to see this! Really stoked to see you guys share all of this with so much depth.
Fantastic write up, and definitely helping me as I'm due to launch my MVP in the coming month or two.
Subscribed to the blog, interested in both business thoughts and digital nomad experiences :D
Thanks for reading and we're glad you liked it! Definitely reach out if you think there's something else we could write about that would be helpful. Content marketing is harddd.
I am going to ask a slightly off topic question. I hope someone could point me some direction.
How do different industry price things? Is there a book or other resources on the subject on how to price different items? Clothes, Disk washers, Food, Software, Services.. etc. Or Phones.
Because different industry and products have different way to do cost calculation, and different margins. Or depends on companies etc. Just wondering if i could learn more on the subject.
I'm interested to know, how did you guys handle pricing changes for existing customers? Did you change their pricing structure too? Or were they left on the old plans?
The article mentions how they handled it.
> While you’re making big changes, take care of your existing customers. If you’re raising prices, grandfather them to their current plan. If you’re lowering prices, give them some alternative options.
Ah, I missed that. I guess I was more interested in cases where they had difficulty in getting existing customers to accept the changes.
Might just be me but I'm finding the axes on most of those charts not quite correct.
Could you be more specific? The survey charts?
Well, the 'Customers' chart which has date as an axis.
But, you weren't running A/B tests so all those pricing pages weren't active at the same time.
I think something like 'time since inception (months)' would be more insightful.
Ditto with 'Average Revenue Per Customer' & 'Churn'