Episode 421 | The “Science” of Why “Charge More” Works

Show Notes

In this episode of Startups For The Rest Of Us inspired by a Patrick McKenzie tweet, Rob and Mike talk about the science of why charging more works.

Items mentioned in this episode:

Transcript

Mike: In this episode of Startups For The Rest Of Us, Rob and I are going to be talking about the science of why charge more works. This is Startups For The Rest Of Us episode 421.

Welcome to Startups for the Rest of Us, the podcast that helps developers, designers and entrepreneurs be awesome at building, launching, and growing software products. Whether you’ve built your first product, or you’re just thinking about it, I’m Mike.

Rob: And I’m the guy that knows the intro.

Mike: Oh, be quiet! And we’re here to share our experiences to help you avoid the same mistakes we’ve made. How are you doing this week, Rob?

Rob: I’m doing good. By my calculation, you’ve done the intro 210 times because we tend to trade off back and forth. How is it that you haven’t memorized it yet?

Mike: I was distracted. You know what, the thing is, I missed last episode. It was episode 420. Marijuana just became legal in Massachusetts. I must have been high.

Rob: That’s what we’re doing? Alright. This is going to be a good show today folks. For me, weeks are going well. MicroConf tickets are on sale inside Founder Café and then when this goes live, it will be on sale to our email launch list.

Mike: Yes.

Rob: Head over to microconf.com if you are interested, get on that launch list. You may have missed the first email, but they’ll get a subsequent one I suppose if they get on the list today.

Mike: Yeah. I think that the episode that comes out today, the people who will be getting that email for MicroConf tickets are going to be previous attendees and then next Tuesday it’s going to be going out to the rest of the list.

Rob: There you go. Growth Edition sales out every year so you want to get on that email list if you’re interested in it. How about you?

Mike: Well, I received my Scotch Advent Calendar yesterday. December is looking fantastic at the moment.

Rob: It’s a family tradition isn’t it?

Mike: Well, it just started last year.

Rob: Two years? In this day and age, I think that’s a tradition.

Mike: Sure. Aside from that, just working on the MicroConf sponsorship. That’s in the works. If you’re interested in any of the MicroConf sponsorship options, drop me an email at sponsors@microconf.com and I’ll send you over the break card and we’ll schedule a time to chat about it and see if it’s a good fit for you.

Rob: Other than that, I am continuing to push forward on TinySeed. Did you listen to the episode last week?

Mike: I have not had a chance to. I was high, remember?

Rob: Yeah, that’s right. All week. That was fun. Einar and I just talked it through, talked about what we’re up to, and why we’re up to it, and just the course we take on the funding landscape and even the landscape of what it takes to bootstrap a SaaS these days. Continuing to move it forward. There’s not so much I can talk about publicly but definitely meeting with a lot of founders and just discussing ideas, and thoughts, and stuff.

It’s a fun time. You know how it is. It’s like the early days of anything. This is literally a startup and we’re kind of bootstrapping it even though it’s weird. It’s like we don’t have any funding for Einar Vollset and I at this point. Eventually, once we raise the fund to actually back TinySeed, we’ll have a small stipend or something coming out of it. But it’s not like, “Oh, yeah. You’re doing a startup and you’re going to raise 5 or 10 million and crank it up.” It really is that, it’s the ethos of everything I’ve ever done where you’re capital-efficient, and you’re scrappy, and you’re just trying to hack your way through it. It’s fun.

I enjoy these days of it. There’s just so much creativity involved. It’s a problem that we’re looking at from a new angle and we so there aren’t overt solutions that others have tried and so we’re really trying to figure it out and to innovate on something that I think we believe needs some innovation.

Mike: You know why I think it’s so fun? It’s because you’re so early on that you haven’t actually run into any real problems yet.

Rob: That’s exactly it. It’s like any startup. It’s fun until you have to actually start writing code or you have to actually start selling to customers or supporting them in whatever. All the headaches crop up.

Mike: I do want to point out that you and I had an “argument” over whether or not it was a startup that you kept denying it and you’ve referred to it as a startup several times already.

Rob: Dang it. Right. Because I said I’d never do another startup again and then I was like, “Well, I’ll never do another SaaS app again from scratch.” and then I have all these caveats. Just never say never—that’s my advice.

Mike: I should get you a new bike so you can backpedal faster.

Rob: That’s right. That’s exactly right. What are we talking about this week?

Mike: Today’s podcast episode is inspired by a tweet that I saw on Twitter from Patrick McKenzie. The episode is titled, The Science of Why Charge More Works. Obviously, we’ll link this up in the show notes exactly where that tweet was.

Patrick has been talking about essentially, charging more for as long as I can remember. His tweet said, “Hacker News comment: I moved into a low-wage area and started freelancing. My clients likely think I’m too cheap, but I’m making double what I did before and overwhelmed with work. Suggestions?” and the second commenter said, “patio11 would tell you to charge more.” and he says, “Well, my work for today is done.”

It’s just interesting to see and I even commented on this that it’s funny how just repeating the same two words over and over could practically make you a career for the rest of your life and just say charge more, that’s your advice in almost any situation. Inevitably, in a lot of them, it’s going to work. I thought we’ve talked through a little bit about, one, why does it work? But also we talked through the science and mindset of this as well.

Rob: Yeah, talk through some specifics because you can’t always just charge more, eventually it stops working. There’s ways to charge more and do you grandfather. There’s specifics on that and that’s what we’ll talk about today.

I hear you, he’s developed the brand. He just said it so much because there are other people saying it. If you look back at MicroConf talks for example, really early on it was like Jason Cohen said it, Hiten Shah said it, I said it in two of my talks, but Patrick McKenzie has said it over and over and over and it becomes a brand and I think it’s a cool thing to have. Each of us develops our own little corners of the startup ecosystem I think.

Mike: The other comment that he had made in that tweet stream was that, “I think that Gmail folder where I keep my thank you for a salary negotiation post is in the upper seven figures in mostly $25,000 chunks, and given that salary is a vector not a scalar and compounds, that blog post has probably moved $X0 million around.” Basically, eight figures.

Rob: He’s saying eight figures.

Mike: Yup which is huge. To be able to have solid data that you can point to that has shown that you have been able to increase personal revenue for salaries for people is just amazing. But there’s also correlations between what he said in terms of charge more, not just as a person who’s employed for a company, but also in terms of raising prices for your software products.

Rob: Yeah, it’s like charge more for your skills. Charge more if you’re salaried employ by negotiating and I liked that post is really good. We should find it and link to it, but he writes a really good post about negotiation. It’s stuff that I had done intuitively, but I hadn’t put it into words in a framework like he did.

I negotiated every job I ever had. I made more money than the people around me. I was just doing it because I was like, “Well, I know that I’m valuable.” It was this internal thing of, “I know that I have chops at whatever it was” being a developer, or project manager, or a tech leader, whatever the role was. I tend to be, in these environments, a little better than the people around me.

Salary negotiation is something that you should do if you have not. And then when you become a contractor then you’ll learn you can just ratchet that rate up especially once you have referrals coming in. When you launch any type of product or service then you’ll learn to do the same thing. It’s all in line with the same idea of it’s not even charging what you’re worth. No, really figure out how to maximize this and charge based on the value that you or your product provides.

Mike: Yeah and that leads to a blogpost that I recalled reading years and years ago, it’s more than a decade ago from Joel Spolsky. We’ll link this up in the show notes as well, but it’s called, “Camels and Rubber Duckies”. In this blogpost, he essentially talks a little bit about economic theory and how to identify pricing for a product and how do you maximize revenue.

Of course, it has a bunch of different charge and as matrix there says, “If you charge this you’re going to make X amount of money and if you charge this other thing over here you’re going to make Y amount of money. It’s that more or less and are you more profitable as a result.” It’s like, “Well, it depends on whether or not you are able to sell just as many as you where before if you’re charging more.” If you charge more and you’re selling more then, if the math works out, yes, you’ll make more money. But at some point you’re going to raise the prices and the number of units that you sell starts dropping as a result and at some point further than that you’re going to start making less money. Where is that point? How do you figure that out?

One of the interesting pieces of Patrick’s charge more philosophy is just the fact that it forces you into situations where you are price testing. You’re checking to see if charging that higher amount of money is going to make you more or if you’re not going to get as many sales.

Rob: Here’s the thing, there are multiple stages of startups. We’ve talk about this over and over. There’s super early days and then there’s right before product market fit, and there’s after product market fit, and then there’s the growth stage. In each of those, you have to approach things differently, your thought process is a little different. In the very, very early days literally, your first 5 or 10 customers, I don’t know that you want to charge more but you should charge something.

I’ve seen startup founders be like, “Yeah, I’m going to comp the first 10 early access users just as thanks for whatever and they get lifetime account.” And I’m like, “That is a terrible idea.” Because those ten people are the people that are most eager to use your product and they’re going to get value from it. Why should they get that for free? Maybe give them a discount, maybe. Maybe. Maybe not.

As you’re getting to product market fit, you should be trying to push that price up. Once you’ve hit it, then that’s where you go every six months or every year your product is getting better. It’s SaaS app, I’m going to assume or something that you’re developing. People are using on-going that you’re developing features for, and it’s becoming more valuable to them, so they should pay more. Unless, the only time you can’t necessarily do that all the time is if you have a bunch of competitors and you’re kind of commoditized or they’re implementing these features that have similar rate to what you are, and you don’t have enough differentiation to basically be able to raise prices for that. Someone’s saying, “Well, I can just switch over here.” Switching customer involve then.

As you scale up, you’ll see these companies once you do become, you’ll look at HubSpot or Salesforce, someone who goes beyond that, their pricing just gets crazy where it’s crazy from our little B to SMB perspective when we typically think, “Yeah, we’ll charge someone $50 or $100 a month.” And they’re charging $5,000, $10,000, $20,000 a month that depending on plans.

All that to say, I like this as a sentiment. I think most people, especially early stages, especially beginners, they just don’t charge enough. I think we’re going to talk about a little perspective here of how to do this or how to increase prices without just making that your default because at a certain point—as you’ve said from Camel’s and Rubber Duckies—it’s a losing proposition.

Mike: I think one of the reasons why see larger companies like HubSpot charging so much more and in amounts that founders of smaller companies look at and say that’s just a ridiculous and absurd amount of money to charge, we’re a little disconnected from large companies purchasing decisions. Me, personally, I’ve worked at an extremely large company that’s 25,000 employees—that was almost 20 years ago at this point—and I was not in any way shape or form involved with any purchasing decision ever at the company.

By the time I’ve moved on, I’ve never really worked for what I would say a large company or been in this position where I’m involved in those purchasing decisions. I don’t have the experience or the mindset of how those decisions are made, and I think that contributes to why we don’t necessarily understand it as well.

If you try to put that in perspective, how big is the company and how much money do they make on an annual basis? If you’re a one-person or two-person company, you’re probably making less than $500,000 a year. If you are a 300-person company or 500-person company, you’re making a heck of a lot more than that, probably talking $50 million or $100 million a year.

For them to spend a couple of $1000 a month is not that big a deal, to you it is because that’s a huge chunk of your budget. To them, it’s a really super tiny percentage and they, for the most part, just don’t care.

Rob: That’s right. Especially if you’re going up market into companies of any kind of size, they’re not price comparing nearly as much as we think they are because they’re not consumers and they’re not anywhere closer. Further you move up the chain from consumers, the less price comparison that goes on, the more I don’t know–it’s like politics in getting this person on board and convincing this whole team to do things and there’s just so many other factors in it. Their price is one but there’s many others. But when you’re working with consumers, price tends to be the highest factors. A lot of price sensitivity selling that.

I met with someone who’s selling software to PC gamers and it’s like, “Ouch.” If someone comes in offering that is $1 less than yours, you’re going to lose people. They will go to the pain of switching to save a dollar or two a month. It’s just a totally different ball game when you’re dealing that.

Mike: I think that the mistake a lot of people make is when you say consumer I would almost lump in like freelancers and companies with less than two or three employees. I know that’s not a direct comparison because if you’re selling consumer products versus business products there, is a very big difference between the actual person who’s purchasing it. But in terms of mindset, those very small business owners have a very close mindset to the consumer. It’s not about what they do, it’s about how they approach their buying decisions.

Rob: I would agree with that. I was talking with Einar the other day and I have the mental classifications for business type or customer type and obviously B2C is one a lot of us think of. Literally, it’s Verizon or if you’re selling software, FTP software to the masses, and then I was like, “You know, there’s this B to Prosumer which is kind of hobbyist.” Let’s say you’re selling to photographers who do it on the side or most or not full time, but it’s this hobby they do on the weekend and they most to it to pay for their gear. They charge people so that they can afford more gear because there’s not so much money in it. It’s a B to Prosumer.

Then there’s B to A. It’s B to Aspirational folks. Frankly, it’s the smart passive in [00:15:08] or it’s folks who aspire to be something. People negatively used the term ‘wannapreneur’ which I feel like it’s a negative thing to say about someone, but it’s folks who want to be entrepreneurs. They’re really aspiring so they are willing to spend some money, but the churn is really high, and they definitely are consumer, but their behavior is different than someone buying a cellphone or cable service because they are trying to invest in a business. I actually think the behaviors of those three are different.

I like what you’re saying, there’s this B to VSB—very small business—which is basically the one that one- or two- or three-person company. They’re still going to have price sensitivity, but I don’t think as much as a consumer. Then there’s B to probably just regular small business and then B to Enterprise. There’s a mid-market in there so you can go all types of categories in there but each of those going to have their own pros and cons in terms of price sensitivity as well as churn, sale cycle, all that stuff.

Mike: I think you can debate all day about exactly where the different levels are whether it’s five employees or ten employees or whatever, but the reality is, as you move from the general consumer upmarket you traverse through that spectrum of purchasers, price sensitivity is a lot less. Going back to the Camel’s and Rubber Duckies trying to optimize your revenue is about doing price testing to see where the different breaking points are.

The simple explanation for charge more is, you increase prices, you’ve measured the total revenue and you repeat doing that until revenue starts to climb. Then you find out why it declined and try to solve that particular problem because it could be that you got your revenue to a certain point and then you try to charge more, and you come to find out that, “Oh! There’s a credit card limit for a maximum purchase on a monthly basis from a single vendor.” Maybe it’s $500 or $1000. Joel talks about in his blogpost, but they’re not just allowed to purchase something that costs more than that without a signature and maybe that’s why your revenue decline. It may not necessarily be directly because your price bar them from, but it could be something ancillary to that. You just have to figure out, why is that? Are you not provided the value? Or is there some other external factor. Once you’ve find out those, see if you can try to solve the problem and if you can raise prices and charge more.

Rob: Again, the mistakes some founders make is people will cancel especially in the early days. You’re trying to find product market fit. I’m trying to get people to use it. People are cancelling saying, “Ah! It’s not worth the money.” That’s not to say it’s too expensive. What they’re saying is you haven’t built something that they actually want to use. If you built something killer that they really need in their day-to-day or really change their workflow, it would be worth that money plus more. This is something I talk about—it’s aspirational pricing.

In the early days of Drip, Drip was very simple. It was before it was really an ESP, and automation, and all that stuff and people are cancelling saying, “Yeah, it’s just not worth the money or I can switch to Mailchimp and this and that.” I said, “Okay! It was $49 a month.” I said, “How can we make this into a product that people don’t say that about? That they say, “Oh! It’s totally worth $49 a month.” and that’s is the thread that I kept pulling to get us to product market fit is, “I don’t want to lower my prices because I don’t want another app that starts at $10 or $20 a month because the churn is high.” It’s so hard to find enough customers to make something worthwhile.

This is one of the big things when I looked at starting Drip, I had these lists of things I wanted with my next idea, it was after HitTail. My next app I want it to be $99 a month was the initial aspiration, but I want it to be in $49 by the time we launch. That was the most important one to be honest. I just wanted to move up market because I wanted to build an app that didn’t have the struggles and tap out because if your lowest plan is $10 a month it’s hard. People are moving up often to the higher plans. It’s hard to grow a SaaS app to the levels that I think a lot of us want to get to, the mid-six and seven figure levels.

Mike: The other blogpost that struck me has been highly relevant to this was also another one from Joel Spolsky that he wrote about a year later in 2005, it’s called, Price as a Signal. In this post, he basically talks about how the price that you put on something sends a signal to people about what the quality of it. Low price in relation to other things that are on the market that do the same type of thing, says that it’s a low quality. If it’s a much higher price, it signals that it’s a higher quality and it’s a better product, that does not necessarily mean it’s true. It’s simply the perception that you are putting forth as to why the pricing would be that way. Because there’s going to be some justification for the pricing and to the buyer, they don’t really have any of the inside knowledge so their natural assumption is, “Oh! Well, it must be better.”

They would really have to dig in and try your product and almost do a side-by-side comparison against other products. Not every customers’ going to have that kind of time on their hands. Some of them just need to make a decision and move on and they’re like, “I just want a better product so I’m just going to pay the higher price point for it.” That’s especially true when you get into the higher pricing tiers where those people are less price sensitive and they’re like, “I don’t care what the price is. We just need something. We need it to work, we need it to be good, so we’ll just buy the highest price thing we can find or something that’s reasonably high priced.” You don’t want to spend $50,000 a month when you can spend $5000, but if the pricing is listed on the website and its $300 a month, and you find something else that’s $900 a month, what are going to do? If you don’t care about price, you’d probably go with $900 a month because you’ve got the funds to spare. It’s probably not your money anyway and you need something to work. You don’t want to go to your boss and say, “Hey, this didn’t work because we went with the $300 product.”

Rob: Yup. I think it’s good. I think price signaling is definitely a real thing that folks should consider and being the premium offering. It’s an interesting marketing play; an interesting positioning play. I think WP Engine did this really well in the early days. They just said, “We’re going to be the expensive solution but we’re going to deliver on it.” You have to deliver on that.

Mike: The interesting about what you just said was that I think the price could send the opposite signal as well. If you price too low, it can tell people that your product is not just any good. You can look at a bunch of different industries for that. But I think one that pops-out of my head is the App Store. You look on there and there’s tons and tons of apps that are either free or for 0.99 cents. I personally look at them and say, “Well, if it’s 0.99 cents, how great can it be at this point?” because there’s a lot of things that charge more than 0.99 cents. There was kind of a standard thing to charge and now, it’s not. There’s a bunch of apps that I pay $10 for.

Rob: I still buy apps. I think the App Store is kind of a… How do you say?

Mike: Crap factory?

Rob: It is a crap factory. No. I was going to say it’s not a true market because Apple has artificially incentivized having cheaper apps. You know this thing, you want your complement to be free. Whatever product you have, if your complement is free then you become very valuable. Or you want your complement to be commoditized and as low priced as possible.

You think about Microsoft with Windows, what is their complement? What is the thing you need to use in order to use Microsoft Windows? Well, you need hardware, you need a box to run it on, and it was great for them that there wasn’t just one other provider. There was HP and there was Dell and there’s all these other providers now. It was like, “That’s the way to be.” And if you are a hardware maker, what you want is to have a specific hardware that no one else can use and you want basically the operating system to be commoditized. Your complement is free.

That’s where Apple with its App Store, what is the complement to an iPhone or an iPad? Well, the software component is obviously the operating system which they control, and then there’s apps. They want apps to be as cheap as possible because they want there to be a bazillion of them and they want to have the big ecosystem that everyone comes to. It’s same thing that Amazon has done with Kindles, with Kindles and Kindle books. They artificially depressed the pricing and they’ve had lawsuits about this where there’s class action lawsuits.

If you sell a Kindle book, I think you know, you can make it between 0.99 cents and is it $9.99 and they give you 70% of that. But if you make it $10 or $10.01 then they keep 70% of that. You only get 30% so in order to get the same amount, you have to jack your price up to whatever the math on that is—$30 or $25 bucks or something and it pissed people off because traditionally books have been, when they’re hardback, they’re $25 or $30, then soft cover $15 or $20. Amazon basically came in and said’ “Nope, we want the complement of the Kindle which is the content, which are the books, we want them to be inexpensive.” It’s not something I’m saying in theory, we see this happening.

Mike: But I think that’s a little bit different just because of the ecosystem of–somebody else really kind of controls the pricing in the marketplace. You’d have to go through somebody else. I think that’s the issue versus if you are selling a SaaS app where a book from your own website, you can price it whatever you want. There’s no outside influencers to essentially anchor your pricing or artificially influence it. I would say that it feels like that’s a little different. But I agree that that’s what they do.

Rob: It is different and that’s what I was saying about the App Store. You were saying, if I see an App Store app that’s 0.99 cents, I’d think this is probably crap, and I don’t because I know that’s artificially low because of what Apple has done. If that makes sense. Yes, on the open market, you don’t typically buy FTP apps or whatever it is for 0.99 cents. Before the App Store, they were $10, $20, $30 and then the Apps Store has driven a bunch of them down. That’s what I was saying is I think you can have artificially low pricing if there’s someone manipulating it.

Mike: Yeah. What I was saying was like, that’s my inclination to feel that way, but I also objectively know that it’s not true—is really what it comes down to. Because you can recognize something and feel a certain way, and that’s how I feel when I look at those things, but I objectively know that that’s also not true.

Rob: Right. Because I have plenty of 0.99 cent apps that I use all the time that are good apps

Mike: I do think this kind of brings about the question of, “How do you go about raising your prices if you’re already, I’ll say, entrenched in some customer base where you have traffic, sources coming in, and they’re already accustomed to seeing prices in a certain range?” Let me reframe that a little bit just because I want to be very clear on what I’m trying to say here. If you’re marketing to a certain demographic of people who are anywhere of that prosumer range that we talked about to like four or five employees in the company, how do you then increase your prices such that you can do this type of testing and still be attracting the right types of people? Because at some point, if you start changing your pricing enough, you’re going to put yourself in a position where the only people who would buy it is in this different demographic, but you don’t have the incoming traffic sources from that different demographic. Do you see what I’m saying?

Rob: Yeah. That’d be the hard part if you really want to double, triple, quadruple prices or something. That would be hard. Obviously, if you’re going to incrementally go up, let’s say 20% or 30%, you can email your whole customer base and you can say, “Look, we’re going to grandfather you for a certain amount of time,” and you can email all your trial users and go on social and promote it and say, “Hey, we are about to raise prices. If you’ve been waiting on this then sign-up now.” We did that with Drip a couple of times because we raised prices every 9-12 months. Then you’d get this big influx, you’re going to suck all the air out of the room and you’d get this you’d get this big influx of new trials and hopefully the convert because then it’s like, “Hey, you’re grandfathered in for this amount of time.”

But what you’re saying is different than that. You’re saying you’re going to double prices and the traffic that’s coming isn’t even associated with that. I would almost say if I really wanted to do that, oh, man, that’s be tough. If you’re going to do that, you’re almost pivoting or you’re repositioning as something different.

Mike: Yeah, that’s what I’m saying is like, yeah, you almost have to reposition yourself. If you’re changing pricing dramatically enough that you’re going into that, it’s a 5%, 10%, 20% increase is not a big deal, but when you’re doubling or tripling, if you’re anywhere within halfway to the point where it no longer makes sense for them to buy, you can really hurt yourself.

Rob: Yup, you could. I think it has to be very calculated. You can’t just go and do that one day. You have to probably need a new positioning, you need a new marketing message, you need to justify like, “What’s your reasoning that this is now worth twice what it was last week?” I would drill into that fact like, “It’s worth that because we are now built for plumbers and they should pay a lot of money for software.” Or, “We are now the most premium. We have this feature that no one else has.” You got to drill on what is the factor that is differentiating you that allows you to do that.

Mike: But do you have to justify it? Because if presumably the new market that we’re going into is not a current traffic source and they haven’t really seen your product or pricing before, then they wouldn’t necessarily know. There’s plenty of stories out there and actually it’s what people are saying, “Oh, I doubled my prices and I doubled my profit.” And people were like, “Why don’t you double your prices again or 10X them?” I think Jason Cohen talked about that at MicroConf one day where he was like, “Oh yeah, they 10X their prices.” He’s like, “Sales did not change where we make 10X more money.” He’s like, “Do it again.” They’re like, “What?” I definitely think it’s possible to do it, it’s just a question of do you have a plan for backing off if that goes wrong?

Rob: Yeah, that makes sense. I mean, you can always roll it back. I remember Intercom did this maybe three years ago. I believe they were either doubling or quadrupling. Pricing was huge jump. People got so mad that they just [29:08] it and then just backed away from it and they said, “we’re not going to do that.” Then recently, I think aren’t they doubling prices again? I had heard they’re going up 2 or 3X. I think they’re having the same backlash but they’re so big now, I don’t know if it matters.

Mike: Or they’re just measuring the response and saying, “Well, we’re going to double the pricing but only a quarter of our customer base is going to leave so, we have less strain on our servers and we don’t need to deal with as many customers and we’re making more money.”

Rob: I think they’re grandfathering for a year. I think they may just do it and hope they don’t lose as many.

Mike: That seems like the Netflix tragedy. They’ve announced it and then they grandfathered everybody in for two years and there was an initial uproar but they’re like, “Hey, but your price isn’t going to change for two years.” And then like, “Oh, okay.” And then two years later, it silently went up, and nobody cared.

Rob: Yeah. Was it two years? I think it was a year.

Mike: It might have been one year and then they changed it to two, I don’t remember. It seemed like a while.

Rob: Here’s the thing with Netflix though that’s different than most SaaS apps we would run across is, Netflix has—whatever it is, what is it—30-40 million subscribers? I don’t know. It’s tens of millions of subscribers for sure. They add new subscriber each quarter. Let’s say, “Hey, we have 1 or 2 or 3 million new.” But if they grandfathered everyone permanently that would seriously debilitate their business. This is where that B2C comes in. You’re dealing with such a volume play and you already have such a huge customer base that raising it by that $1 a month is again, let’s say, they have 30 million customers, that’s $30 million a month that they are making. If they piss a few people off and they leave, it’s worth it to them because they already have such a huge user base. It’s worth it to them to raise it upwards.

If you’re a SaaS app and you have 1000 customers and you plan to add another 500 this year or something, you got to think about the calculus there.

Mike: Yeah, totally. When you were saying there’s a difference between Netflix and the types of business we run, I was like, “Oh, it’s what, 30 million, 40 million customers.”

Rob: Totally. That’s the difference.

Mike: That’s the difference.

Rob: Our customer numbers are a rounding error to them.

Mike: Yup, basically. On this topic, we talked a little bit about it in terms of the App Store and low pricing, but what is charge more really mean for freemium? Does that mean get rid of freemium? I think you and I are probably in agreement that, “No, that’s not what that means.” Freemium is a distribution strategy not a pricing model.

Rob: That’s right. It’s a marketing approach.

Mike: Right. You’re not going to be able to sell at a zero which is technically a loss if you’re using server resources and be able to make it up on volume. It’s just not going to happen. But if you’re relying on converting people and using that as a way to attract attention to your app in order to acquire those people, that’s a totally different thing.

Rob: Yep, I would agree with that. By the way, the title of this episode is, The “Science” of Why “Charge More” Works. Science is in air quotes because it’s not true. It’s scientific but there’s a lot of data to back up the observations that we’ve made on this episode. Patrick Mackenzie has been saying it for six or seven years. First time I ever heard him say that was on MicroConf stage.

Mike: I think that’s the first time I had met him in person.

Rob: Yeah, 2011.

Mike: Well, special thanks to Patrick Mackenzie for speaking at MicroConf for all these years and also attending and for being part of the community. Also, thanks for the inspiration for this episode.

Rob: I think that wraps us up for the day. If you have a question for us, call our voicemail at 888-801-9690 or email us at questions@startupsfortherestofus.com. Our theme music is an excerpt from We’re Outta Control by MoOt, it’s used under Creative Commons. Subscribe to us in iTunes by searching for Startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening. We’ll see you next time.

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One Response to “Episode 421 | The “Science” of Why “Charge More” Works”

  1. Really appreciated the section where Rob categorizes different customer types.

    I featured it in episode 39 of the “Build your SaaS” show.