Episode 153: SaaS Pricing Tactics

Show Notes

  • The data behind purchasing behavior at UserVoice – Article link

Transcript

[00:00] Rob: In this episode of Startups for the Rest of Us, Mike and I will be discussing software as a service pricing tactic. This is Startups for the Rest of Us: Episode 153.

[00:08] Music

[00:16] Welcome to Startups for the Rest of Us, the podcast that helps developers, designers and entrepreneurs be awesome at launching software products, whether you’ve built your first product or you’re just thinking about it. I’m Rob.

[00:25] Mike: And I’m Mike.

[00:26] Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week Mike?

[00:30] Mike: Well it’s been about three minutes since we recorded our last podcast episode so I’ve got nothing new this week.

[00:35] Rob: Alright. Let’s dive into the topic today which is SaaS pricing tactics. This is based on an article written by Richard White who’s the founder of UserVoice. We’ll obviously link it up in the show notes. But his article is titled The Data Behind Purchasing Behavior at Uservoice – Pricing for Conversion. He did a two parter. We’re looking at part one and these are basically all the tests that they’ve run at UserVoice over the past couple of years.

[01:02] UserVoice is essentially a system to get feedback from your customers and they branch now into online help desk software. What’s cool about Richard’s article is that it’s not a lot of theory. It’s a lot of practical things that they toyed around with and that they struggled with in their early days. So the first thing, we’re going to cover five or six different points.

[01:22] The first one is his take on free plans. Basically for the first 10 months of UserVoice it was entirely free. There were no paid plans. He called it a public beta. And they had 39% month over month growth in account signups during that time. So what they found thought was that as soon as they announced they would be having paid plans at some point in the future, just announcing them, it cut their growth in half. He makes a note, he says you couldn’t even sign up for them. You could just fill out a lead form. And it should be noted that these new plans for the most part included features that weren’t currently available in the existing app.

[02:01] But what they noticed, that makes it sound like oh, well as soon as you introduced paid plans you’re going to cut those sign ups in half. What they found though is after 30 days the percentage of active accounts have doubled during that mite. So they basically cut growth in half but it was essentially the tire kickers who stopped signing up. So the takeaway that Richard White talks about is launching pricing earlier can help you find the real customers of your service and not be distracted by tire kickers.

[02:26] Mike: I find this interesting that one of the things that I think might be a little bit difficult to kind of differentiate is between who are the tire kickers that are using your product versus the ones that are actively looking for a solution to the problem. Because obviously you want to reach out to these people and understand how it is that they’re using it, how you can help them better. But at the end of the day you also have to be charging them for the service because otherwise you’re not going to stay in business for very long.

[02:51] I think that one of the ways you can do that is to figure out whether or not they’re actively using their account. I’m struggling to figure out what other ways you could use to figure out is somebody actually going to pay for this in the future or they’re just kind of playing around with it or using it for a free product that they have and they’re not necessarily willing to actually pull out their credit card and pay for it.

[03:11] Rob: Right. Basically trying to decide of all the active users who are actually using the product and getting value out of it, which of those are going to pay us if we do introduce paid plans? And I agree. That’s a tough question. My gut feeling is that unless you’re in like a real consumer niche or a niche where there are a lot of free options out there, that especially if you’re going B to B that if people are activated and they are actually using it that the vast majority of them would in fact pay you for the service.

[03:41] I can’t say that blanket across the board but if you’re actually saving them time or making them money, I don’t see why that you’re not going to be able to get quite a few of those folks to pay you once you start charging.

[03:56] Mike: Yeah. But even with UserVoice for example, I can see a lot of startups signing up for it and say oh, well I would like to have some sort of help desk or knowledge base for my products but I haven’t launched yet or I’m in the process of launching and trying to get it started. So I’m going to sign up for this free service over here but I wouldn’t be willing to pay for it if they were asking me money for.

[04:14] Rob: Yeah.

[04:15] Mike: So they’re using it in a business like setting but they wouldn’t be willing to pay for it. And that’s kind of what I’m getting at because I can definitely see scenarios like that but maybe that’s just a very specific scenario.

[04:28] Rob: Also, just the idea of having a 10 month free product that’s like a public beta, that’s just crazy. I would never even consider that again. Again, I can’t imagine doing that because the chaos of it, the thousands and thousands of free users who are never going to pay you and are never going to provide value but are going to complain that you don’t build features, it’s just going to be overwhelming. That doesn’t even sound interesting to me.

[04:51] So the whole 10 month public beta thing may have worked for UserVoice because maybe it was an innovative product and they really didn’t know who was going to use it and this was a way just to get people and to figure out how they were going to use it. And if that was their goal then cool, but if you have more of an idea of how your users are going to use it and you’re building something that’s I don’t know, more of a standard product or just more of a known entity, I don’t think – like I’ve always said, free plans don’t work. I don’t like premium models, that kind of stuff.

[05:21] Mike: Yeah. I mean they were funded to the tune of $1.8 million.

[05:24] Rob: Got it.

[05:25] Mike: That’s a little different.

[05:26] Rob: Right. So they really wanted the hockey stick to move up into the right and this is one way of doing it. Not in terms of revenue, just in terms of users. So the next tactic that Richard talked about are the specifics of their pricing plans once they introduced them. He said that they originally announced only two paid plans priced at $289 a month and $589 a month. So they went from free to basically $300 and $600 a month and they received a ton of feedback that people wanted sub $100 plans.

[05:55] So they expanded to five plans. They have a free plan, $19, $89, $289 and $589. What they found after they launched s that 77% of their revenue came from two of the plans. It was the most expensive one, the $589 and their $89 plan. The $289 which is in between those two, he calls it a wedge plan. It didn’t have a ton of extra features over the $89 plan and it was designed to make it easier for you to either stay at $89 or justify making the jump to $589 since that $589 had so many more features than the one below it. Why not just pay the extra amount?

[06:32] He also noted that their lowest plan, the $19 plan had a ton of accounts but at such a low price point relative to the others it was never going to be a significant amount of revenue. I’ve noticed this as well with my apps. I know that I remember WuFoo talking about this when they said it was like 90% of their profit was from their top two plans which were the super high end enterprise plans and everything else was more of a around. So his takeaway that some pricing plans exist simply to make other plans look better. That’s what he calls a wedge plan, that’s in between. While lower pricing plans can be a decent entry level for people, in general you are going to make the vast majority of your revenue and profit from your higher end plans.

[07:13] Mike: Yeah. What’s he’s referring to as a wedge plan is classic anchoring where you’re basically anchoring somebody’s concept of how much something is worth to the different price points by just having it in there. If you look around there’s various examples on the internet where you if you have two different plans that are close to each other in cost, let’s say you’ve got one plan that’s $10,000 and another one that’s $15,000. If you introduce a $30,000 or $40,000 plan then people will go for the $15,000 plan and look at it as much more reasonable than it was before. And in addition they won’t try to negotiate you down on some of the different pricing because you’ve got this massive plan out there that costs so much more and it’s obviously geared to other types of people and to look at it and say oh well, that’s just what it costs.

[07:56] Rob: The third tactic that Richard mentions is discounts. He says we had 13% of paid accounts on some sort of discount with an average discount of 52%. Not surprisingly the lifetime values of these discounted accounts were lower, they were 17% lower, the non-discounted accounts. But it was offset by the fact that they were also 17% less likely to have churned. And his takeaway is discounts can be a useful tool for driving conversions without undermining long term lifetime value. But heavy usage might signal issues with your pricing structure.

[08:30] Mike: Yeah. These numbers that he kind of cited are a little bit confusing because he’s saying that some of the paid amounts that had a discount, they paid less than 50% of what the actual price was. But they provided a lifetime value that was 78% lower than the non-discounted accounts. And he said that it’s offset because there’s 17% less likely to have churned.

[08:51] But what strikes me as odd is it sounds to me like by giving them a discount they’re more likely to stick around for a significantly longer period of time because he’s saying here that the lifetime value was 17% lower but they were given a 50% discount. So those numbers just don’t quite make sense to me. It almost sounds like he’s saying that they stuck around for longer.

[09:14] Rob: Yes. He is saying they stuck around for longer. Basically the mental piece of it is if you have a discount, you don’t want to quit and then not be able to get that discount again. So the fact that some people got what I imagined were positioned as one time discounts of 40% or 50% they felt like they were getting a really good deal so they’re more likely to stick around even if they may not be using it for a month or two. Whereas if you’re paying full price what’s really going to keep you there?

[09:38] I’ve used discounts in a couple different ways. I’m always pretty careful to use them. Typically when I do a launch, I always want to give the people who’ve been on the email list definitely give them a special discount because it’s a nice encouragement for them to get in and try out the app. You give it to them for the life of the account. Your grandfather them in. It’s a great way to get them in on the ground floor and like he said it actually reduces churn which is helpful early on.

[10:01] The other place that I’ve done essentially discounts is with affiliates. I don’t discount and do affiliate commissions but in essence, having an affiliate is kind of like discounting because you’re basically paying that affiliate a portion of the sale. And so I have used affiliate programs to just some success on some of my products so it’s another place I’ve used it.

[10:24] The last one is there are a lot of kind of perps, pages behind pay walls. So like in moz.com which used to be SEO MOZ and there’s a bunch of other membership sites. They will contact me and ask about discounts on a particular product and if it’s behind a pay wall and not going to be available to the general public I will typically – and they have enough of volume that it actually makes sense, I will typically go ahead with that. And so those discounts I’m talking about are a little different I think than what he’s talking about.

[10:53] It sounds to me like they were doing more enterprise sales with these really high price points and so they would probably negotiate individual discounts. I haven’t really done that. I don’t tend to want to argue over pricing but then again I don’t have $600 a month plans like he does. I think this is probably an interesting topic. I’d be interested to see more data on it as well as discuss it more in a future episode.

[11:15] Mike: Yeah. I think we definitely have to take a look at what your pricing points are and if you are selling into the enterprise, it’s almost expected that you will have an enterprise plan of some kind that is largely negotiable. I’ve seen enterprise plans get knocked down by 90% before which is just a crazy number to drop it down by. Some of them are really good negotiators and they will pick two different vendors against one another directly and say well this is my price point. Either you beat it or you lose the bid.

[11:42] Rob: The fourth tactic, Richard talks about is usage limits and he talks about that at one point they added usage limits on the number of users who could give you feedback. Since most of their plans were feature based, they saw very few upgrades post trial so they thought usage limits would drive upgrades as a company scale activity. And to quote him he says “this was a huge failure. It created what I call a success penalty: the more successful you were in activating your users to give you feedback the more expensive the product became.” So his takeaway is if you’re going to price on usage, it needs to be on usage that customer has control over such as number of seats, minutes used, etc.

[12:19] Now my take on this is that usage limits can work and that even if it’s something I don’t have control over, I just don’t buy into this success penalty thing. I think that for UserVoice to provide a lot of value to their customers, people have to get a lot of their customers activated and using it and so he’s right. There is a success penalty that’s not great. But if you look at it like analytics packages at kiss metrics or get clicky or there’s a number of them. They base their pricing on usage.

[12:47] And the idea is that as your traffic increases that you’re probably becoming a more successful company. You’re getting more value out of that product and you’re putting more load on their servers. And so you could call that a success penalty but I believe that works. In fact I based Hit Tail’s pricing on this usage model and that has worked out well for us. So I don’t think this is an absolute always works, always doesn’t. I can see how it didn’t work for UserVoice but I do know that it works in other cases.

[13:16] Mike: I think this is very largely dependent upon the very specific offering that you have, what you’re putting that usage limit on. Even within any given products, I mean you can put a usage limit on a ton of different things. And depending on what you put it on, I think it depends a lot on what the end user values and how much they think they’re going to use of something and how easy it is for them to mentally translate that back to their actual usage to figure out what they’re going to end up paying.

[13:43] I really feel like part of the problem that they had was that people don’t necessarily understand or know or have a good way to predict if they start using this, how much are users going to use it and what plan are they going to end up in because there’s a very big difference between $89 a month plan and a $289 plan. So if you’re kind of borderline and you don’t know if you’re going to have $700 or $800 voters then what does that mean on my website? How many votes am I going to get?

[14:11] It’s like well it depends on your traffic, depends on how engaged they are with your site. Depends on how much your support problems are right now. There’s just so many factors that to me, I look at that and I say that’s just confusing and I would have no idea where I’m actually going to fall within those users limits.

[14:26] Rob: Yeah. I’d agree. I think the other thing, look at mailchimp and a lot of the email marketing systems. I mean they base it on how many subscribers you have and that could also be called a success penalty but I would still say that actually works because when your list does hit 10,000 you really should be paying more than when your list was at 1,000.

[14:41] Mike: The different between something like mailchimp is that you have these people going into your mailing list and you can look at that and you can understand on a monthly basis oh I had 600 this month, 700 this month, 800 the next month. Whereas with what UserVoice was doing they’re saying well you get up to 1,000 voters per month. Well it could be 500 one month. It could be 3,000 the next and because there’s no accurate way to predict that, that’s where the problem comes.

[15:09] Rob: Yeah. That makes sense. And it also as you said, their pricing plans, they’re such a big jump between them that with mailchimp you’ll jump maybe $25 or $50 in a month but you don’t jump $200 like UserVoice did. So it seems to come down to you can do it based on usage limits. You can do it based on featured gating and what he’s saying is gating features for them worked better. I still believe there’s a very strong case to be made for usage limits in a lot of cases.

[15:38] The fifth tactic that he discussed is length of trial. He said moving from a 15 to a 30 day trial had no measurable impact on any metric that they track ‘til they kept it at 30 days for marketing reasons.

[15:51] Mike: That seems like a very arbitrary thing to do. You changed it and nothing’s seemed to change in their metrics so we just leave it there for marketing reason which are entirely arbitrary or arguable at that point.

[16:02] Rob: Yeah. It’s tough to measure. I mean if he got data then I can understand him doing that but I do question the logic of going with 30 days instead of 15 because with 15 you can iterate. You can test so much faster. And you essentially, if there really was no difference, I would always opt for a shorter trial because you just move faster. You can only do 12 split tests a year if your trial is 30 days long. If you want to mess with any emails during that sequence or any of that stuff.

[18:31] Whereas if you’re doing 15 day trials, you can do 24 different tests on your trial. I’ve always found that shorter trials worked better. Here’s the next piece of data I would want is to run some ads with 30 day trial lengths and run ad with 15 days trial lengths and see if one gives you more upfront clicks or more conversions or sends more people into your funnel. Because if that’s the case, then he’s right, you would want to go with all the things being equal, if 30 days just sends more people into the funnel then of course that’s going to make you more money in the long run.

[17:03] Mike: Yeah. But from the way you said it, it sounded like you didn’t have any measure or impact on any metric that they tracked and my assumption would be that they do track the number of people coming in and everything else. So like you said, it’s very, very hard to say.

[17:17] Rob: And the sixth and final tactic that Richard discussed is requiring credit card before trial, something we’ve talked about quite a bit on this podcast in the past. He says moving from requiring a credit card upfront to not requiring a credit card until the end of the trial had no effect on overall conversions. To quote him, he says the general view is that not requiring a credit card up front is good for new services where customers don’t quite know the value of a service. So this switch may have been more beneficial if we had made it earlier but by this point UserVoice was pretty well established and you knew what you were getting into. One group that really loved this switch was his support team – they now had a lot less angry emails from customers who had auto-converted and needed a refund which they always gave he says.

[18:00] Mike: It seems to me like you could still ask for that credit card upfront. If he’s saying that it didn’t have any effect on the conversions or trial sign ups, I find it hard to believe that it had no effect.

[18:10] Rob: It depends on what they were doing. Remember we talked about the totango research thing that we’ll link up on this episode as well but they basically said that your numbers are going to be totally different and this has been my experience. If you asked for it upfront, you get fewer people into your trial sequence but you convert a lot more of them in the other end. And if you’re doing more of low touch sales and you’re not actually reaching out to people, then that’s going to be your best approach.

[18:32] But if you are doing more of an enterprise model where you have inside sales people and you’re again, calling people on the phone, emailing directly, you’re really nurturing them along and you’re doing more of a manual intensive thing, then not asking for credit card and just getting people into the funnel then qualifying them to see, only going after the active users and all that stuff, it’s a much more time intensive approach. But the totango study says that results in more customers overall. So without knowing how UserVoice was operating during the trial, you can’t really make a call as to whether he conflicts with the totango stuff or supports it.

[19:05] Mike: If it really didn’t have any effect on those conversions or trial signups, I would probably lean towards not requiring it just so you reduce those support costs because obviously anyone who gets angry and comes in and says hey, I want to refund and not only do you have to pay the refund fee or whatever, but there are also going to be people who dispute the charges as opposed to reaching out to you so that’s going to cost you money. And then you’re going to have to have more support people to deal with those incoming emails.

[19:31] So everything being equal I would say yeah, in this particular case you wouldn’t want to require the credit cards but I think that in general, if you have a new business that you’re starting up, you want to ask for it just so that you don’t have to do these high touch things.

[19:44] Rob: Right. And I think with the new business as well you want people – as long as you’re conveying the value proposition pretty well n your landing page or pre-trial, then the people who give you the credit card are the most qualified and they’re the ones that you really want to engage with as you’re trying to build out those new features.

[20:00] So if you raise $1.8 million and you have to get to X thousand users per month and you just need growth, growth, growth, then yeah, maybe not asking for credit card is fine. As a bootstrapper, you need to get to revenue. You need to get to it quickly and you need to find the people that are really going to use your app and then find more people like them and you need to build out the things that they want rather than getting – if you ask for credit card upfront versus not, you’re going to probably get five times more. These are real numbers, five times more trial users into your funnel if you don’t ask for credit card.

[20:25] Now the question is is that a good thing or a bad thing? It’s a bad thing if you’re doing all your email support and your volume is five times as high or you’re doing all the on boarding and there’s any type of manual process involved in that because in the end you’re going to convert about the same or maybe it’s a few percentage points more but there’s so much more upfront work for you to do there. So there really are a lot of tradeoffs here and it’s about knowing what is best for your particular scenario.

[21:02] And as we’ve said many times, typical bootstrappers where you’re not quite sure what you’ve built yet, you’re not quite sure who should be using it, how to market all that stuff, I would always go to the people that are at least willing to take a chance to on you by entering their credit card and giving the app a try rather than the four other people who aren’t going to sign up but who would if you didn’t ask for credit card upfront.

[21:25] Mike: Something else to point out is that just because you make a decision one way or the other doesn’t mean that you can’t change it in the future. You could always start out by asking for a credit card and then as you scale up the business and you have people who are dedicated to support or dedicated to following up with new customers who’ve signed up for the service, then you can switch over to that sort of model and do more of an outreach program to help bring those people in.

[21:46] Rob: Absolutely. That’s a thing to remember is none of this are set in stone. All of this stuff is fluid especially in your early days pre-launch and probably for the first 3 to 6 months after launch. You will be changing some of these. So I always look at it as what’s my rule of thumb based on my experience and other people’s experience and research reports like totango. Make the best call that you can and see how that works for your business.

[22:10] And if there’s a big outcry from a lot of people who are interested in actually paying you money, then you need to reevaluate that or if your conversion rates are really low, you need to reevaluate that and that’s kind of the bottom-line with it. Without data for your particular instance, your app, your customers, your marketing, these are all just rules of thumb to get you started. But from there, you’re going to have part gut instinct and you’re going to have part a lot of data gathering to determine which direction to go with all these kind of pivot points.

[22:41] Music

[22:44] Mike: If you have a question for us you can call it in to our voice mail number at 1-888-801-9690 or you can email it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from “We’re Outta Control” by MoOt used under Creative Commons. You can subscribe to us in iTunes by searching for startups or via RSS at startupsfortherestofus.com where you’ll also find a full transcript of each episode. Thanks for listening and we’ll see you next time.

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