I did my MSc thesis on SaaS pricing pages. I'll share what I found, since I think many people in this thread may find it useful.
I tested how Mechanical Turkers (N=~400) chose plans on pricing pages with 4-tiered subscriptions plans, for both a file sharing service and a payroll software service. Each respondent was randomly assigned to one of 4 conditions, where the presented pricing page was slightly different. The scenario was framed as choosing a SaaS plan for a company they're employed at.
The first variable I varied was plan order. Half the respondents saw a pricing page with plans in increasing price order (cheapest first), the other half in decreasing price order (most expensive first). There was a statistically significant difference between the plan choices for these groups; respondents in the most expensive plan first condition chose a more expensive plan. This phenomenon has been seen before outside SaaS, and it's called the price order effect.
Another variable I tested was exchanging the cheapest ($5) plan for a free plan. Half the respondents saw a free plan, the other half a $5 plan. There was no statistically significant difference in the plan choice for these groups.
Getting familiar with previous literature, I would surface a couple of general thoughts:
- The most expensive plan first approach may give the visitor a more expensive image of the product, a higher "reference price". If a prospective customer is comparing two products from two different companies, they may favor the one that seems cheaper (has a lower "reference price") even if the offerings may provide similar value.
- The hypothesized mechanism for the price order effect is that you don't look at all the options as a whole, but you begin by assessing the first option, which is the leftmost one for us reading left-to-right, and then judge the next option by comparing it to the previous one, and so on. You compare added (more features/less cost) and lost (less features/more cost) value. Because we weigh losses heavier than benefits, there's an inertia toward the initial options. Only options with benefits that greatly outweigh losses combat that inertia. Hence respondents tended to choose plans more on the left.
Agreed. I think this kind of research can give ideas on what kind of experiments to run on pricing pages, but there are so many factors affecting real life plan choice that everyone should have their own A/B testing setup to see what works for them specifically.
There's probably a flaw in paying people (MTurks) to choose pricing plans for something they don't really care about. Real consumers might act differently.
Thanks. The thesis is really mediocre academically, so I don't feel comfortable putting it out in the public, but if you leave an email address here or contact me through Twitter I'll gladly send it to you.
I think that's natural and OK. I would compare writing my thesis to writing my first full application after learning how to read and write code—even after several iterations under a skilled supervisor, the codebase is still going to have a more or less fledgling and awkward quality to it, even if the functionality proves useful. The second attempt takes less effort and results in higher quality output.
Similar to how few people would put their first application out in public, I prefer to keep my thesis private unless someone finds the information really useful :)
What do you recommend for pricing in SaaS before reaching product market fit?
Pricing is highly specific to the product and the market, so it is hard to give general advice.
But if I were to give general advice, I’d say that we see far more SAAS startups underpricing their product than overpricing.
The problem with overpricing seems obvious—we in our daily lives as consumers are more likely to buy products if they are cheaper, and so pricing higher is presumed to reduce sales.
But that’s not how business markets tend to work—in business markets, where customers make what’s called a considered purchase, the result of a reasonably objective and rigorous analysis of options, startups that underprice tend to have the problem I call “too hungry to eat”—by pricing too low, they can’t generate enough revenue per deal to justify the sales and marketing investment required to get the deal at all. In contrast, by pricing higher, the startup can afford to invest in a serious sales and marketing effort that will tend to win a lot more details than a competitor selling a cut-rate product on a shoestring go-to-market budget.
Totally agree. At GitLab we doubled pricing and then introduced two tiers with higher pricing. Or highest tier is 50x what we started with. Turns out it is very expensive to market and sell to the enterprise. SDR, pre sales engineers, technical account managers, and strategic account executives are all involved.
This is great advice. Especially for larger companies, price is a minor factor compared to whether a product really solves a problem and solves it well. Often, when people complain about price, it actually means they just aren't that interested and are looking for something to use as an excuse.
The screenshot in the article is actually the updated pricing, after I followed advice from @patio11. Here's a screenshot of the original pricing: https://imgur.com/a/3JtUU
That was definitely too many plans. I also really like the copy suggestions, and have started using that in some AdWords campaigns: "Save weeks of development work on PDF generation; fits easily in the budget for any project."
That’s a great question. I’ve been trying to decide if that’s the best way to go. I’ve built a metered plan internally that has the following tiers:
• 0 - 100 PDFs: $0.20 per PDF
• 100 - 1,000 PDFs: $0.10 per PDF
• 1,000 - 10,000 PDFs: $0.05 per PDF
• 10,000 - 100,000 PDFs: $0.02 per PDF
• 100,000+ PDFs: $0.01 per PDF
I don’t like that the customer is invoiced at the end of the month, instead of paying at the beginning. I was worried that someone would generate a lot of PDFs, and then their card would be declined. I might have spent a lot of money on hosting and wouldn’t be able to collect payment. For brand-new customers, I could also collect payments at certain intervals (E.g. $50, $100, $500, $1000, $5000.) After 2 months, I could trust them more and just have one charge at the end of the month.
I could continue to have monthly plans with quotas, and add the pricing tiers based on usage. If a customer knows that they will generate at least 100 PDFs per month, then they could pay a discounted rate at the beginning of the month, and save 30% on the first 100 PDFs.
I was also thinking that customers could buy “credit packages” at a discounted rate. This would useful if they are running a one-time batch job, and wanted to get a discount for the next 1,000 PDFs. The credits would also roll over to the next month, and I don’t think I would set an expiry date. I paid for some credits on KeyCDN, and it was really annoying when they expired after a year.
I’ll continue to think about this and A/B test different pricing over the coming months.
I was also a bit worried about the price change, but people have still been signing up! The service saves a lot of development time, so I think it's very affordable when compared to a developer's salary.
An excellent question! Net on net, removing the CC required upfront decreases conversions in the early life of startup,
until you’re sophisticated with regards to onboarding, in-app messaging, lifecycle email, and reachout by a customer
success team. I would not suggest you remove the CC required from this free trial.
This was exactly our experience as a pretty unsophisticated team with Cronitor. Our 3 month experience in 2015 with no-card-up-front free trials was a total failure, dropping conversion and arpu in that cohort.
Name pricing plans to sell them to the right users
This is something that does work well for us. For us that means Business, Teams and Solo. We do a bit of feature packaging to add value and more or less you get everything you need at your size by buying one of those 3 packages.
> Name pricing plans to sell them to the right users
And make sure the names make sense to them, not you. One thing I hated about buying from Dell was I had to decide if I was a small business, medium business, consumer, etc. Who do I know? And does my choice give me a worse price?
I was very surprised by this one. I will never, ever, under any circumstances, put my CC details in a form hosted on a domain I'm not 100% confident with (s.a apple/amazon). I can't believe I'm an outlier on this one. Maybe it's because I belong to the nowhere-dense set of developers?
But if it's not your credit card, it's your employer's, you've got a job to do, and you know there's an accounting department whose job it is to make sure the bank refunds the charges in the unlikely event there's any funny business?
Most people in that situation will not be deterred by having to enter a credit card for a free trial. And those are the customers you want.
Business don't get refunded when crazy things happen on their cards. That's one of the major difference between being a consumer and a business. You have zero protection as a business.
If I want to buy something I'll put my credit card info in wherever it's asked for. If something happens that's why I have a credit card. Their problem not mine.
I actually found just two options: monthly and annual provide the best conversion.
I've done it across multiple websites, and combined with a half-decent call to action and a quick signup (just 3 fields) you can convert pretty easily.
Personally, my website conversion is ~2% which is pretty good:
Nice site, one suggestion you may want to allow users to search for something in their domain expertise so they can trust it more rather than the canned examples. Just a thought.
Cool service! When I try to visit your blog, I get a certificate error in Chrome. A little frustrating, cause I'd love to read more about your techniques! Check out https://whatsmychaincert.com/?blog.projectpiglet.com
Great article! I have a question though: when you have a Call us tier, what do you actually talk about when they do? I guess you need to judge value they will get from your service, but how? And then what, charge them half of that? What if they don't know what they want or whether they want on premise or not? Should you travel to meet them? What if they want you to sign ndas or other stuff first? How much effort to spend on it if it's just a request for quote?
Don't think of it as a call for a quote, think of it as an initial sales contact. An unsolicited inbound phone inquiry is about the strongest possible lead you can possibly get. The potential customer typically won't expect you to provide a full quote on the spot, but will expect to have a brief conversation and either a follow-up email with pricing details or a follow-up formal sales/demo call scheduled.
In terms of pricing/value, you should already have estimates of value for different customer sizes/use-cases and put together prices based on those estimates. On the call, it's your job to learn as much as you can about their problem so that you can determine how best to solve it with the products you offer and where it falls on your pricing scale.
Don't do on-prem unless they pay you a boat-load more and SaaS isn't an option they're willing to consider. It's way more of a headache.
NDAs are usually fine, but better to pay a lawyer a couple bucks to throw together one for you and try and use that one all the time rather than having to review a bunch of different ones coming from other companies.
Travel is case-by-case. Definitely not necessary for just a quote, and not strictly necessary for sales if your video demos/sales calls are on point, especially if your customers are tech-inclined.
No experience in the area, but I'd ask as many questions as possible and try to avoid providing an indication of price while on the call. Try to give yourself an opportunity to think over what you've learnt and then get them a proposal soon after. Or call back with a ballpark so you can gauge from their reaction whether you're around the mark or miles off.
> $X.99 pricing is not generally used in B2B or prosumer (professional consumers) services because it communicates cheapness; I’d suggest you drop the 0.99 accordingly here, for aesthetic reasons. (No series of A/B tests I’ve ever done generated as many strong opinions as whether it was better to price a product at $49, $49.99, or $50. Despite bikeshedding this to death at several clients, I’ve yet to see it really matter, so aesthetics win the day. If your data says differently, trust the data.)
Interesting, I would have said $X.87 is still the best strategy when talking pricing/extracting value, even for B2B.
I would never go for .87 as it is confusing number and forces the user to go out of the comfort zone. I would always suggest going after 9 or 7 at the end, and the full dollar. I have quite an experience in pricing, and prices ending with "7" helped to convert more on the fence users (and cheap ones too, so if you offer live support, I would avoid that), while with "9" I would get less troubling customers, but I would see a slight dent in revenue numbers (out of every 50 customers buying at price ending with "7" I would probably see around 3 less with prices ending with "9"). The sample for this is few thousands of customers, that I had to cater for personally.
Hazard a guess: where .99 lowers the leading digit and feels "cheap", .87 feels more precise than a round number like X.00. Even if it's entirely arbitrary, it carries weight of apparent calculation behind it.
I will try and find the book, but their is research behind arbitrary pricing. Hardware stores for example often use exact sounding pricing because the consumer is making a rational purchase rather than an emotional one, and a price that seems calculated based on real value aligns well. The 478 dollar drill must cost that much because of the precise materials used to build it. Compared to the 199 dollar one which is obviously made of cheap materials and marked up.
Providing different product packages that are usage and featured gated in order to enable SMBs to use the basic version while giving enterprises the functionality they need in the enterprise version is a core concept in going up market with SaaS. We called it "product assortment" based on a talk that Michael Dearing gave several years ago about pricing. An overview of the concept with some examples can be found here https://www.enterpriseready.io/features/product-assortment/
Can you do an article on reaching out to SMB's and selling them a SaaS? I know most SaaS that sell to SMB's actually do a lot of sales over the phone, but I'd rather not spend my whole day on the phone. (I am thinking about creating a SMB SaaS that solves problems for the retail stores we run now.)
read zero to one by Peter theil. mostly garbage but in it he makes a good point: smbs are nearly impossible to sell to because there's no SMB marketing channel (as opposed to radio/TV/fb for consumers). you're only option is cold calling.
I'm a (fairly expensive) consultant that specializes in marketing to small business owners. You can absolutely reach them on Facebook, AdWords, or Direct Mail at huge scale. Source: Grown campaigns with OnDeck, Zenefits, Segment, many other SMB targeters. Here's a recent case study: http://www.kevinlordbarry.com/facebookleadads1.html
case study would be much more useful if you at least gave a vague description of what the company does (what kinds of widgets they sell). i'm willing to believe that for some sectors this might work but for many others it won't (e.g. pizza ovens to small pizza places).
I have a horrible memory about reading, so don't recall this from Zero to One, but I'd suggest saying there is "no SMB marketing channel" means you haven't defined who your customer is.
Is there really an "enterprise" channel where you can go and find all enterprise businesses? Or s single "consumer" channel.
Look at all the SaaS companies that sell to SMBs. The marketing channels are there, but you have to find the channel that suits your market.
Hacker News is one. We are all being marketed to by Stripe right now.
Startups aren't the only type of business where the people within them congregate in specific areas. So you just have to find those places for your specific customer profile.
LinkedIn, for example, would be one in my opinion. The channels for SMB are smaller and harder to see for businesses with IPO in their minds, but forum boards and business groups are amazing for this.
I was testing once an idea and proposed a free package to all SMB's in a certain community. I mentioned, that I was doing this to help the community and give back. Majority of requests (and I have got few dozens of them) wanted to go for the paid plan right away, which was few hundred bucks and took few hours of my time to complete.
The SMB marketing channels are surely there, but they are small and distributed, so they require much more manual work than regular channels.
I've been trying to figure out the ideal pricing structure for EnvKey[1], a saas configuration and secrets manager. I want something that is affordable for indie devs and smaller teams, but then scales up for larger companies who face this problem to a greater degree and tend to see more value in solving it.
The pricing is currently per user, since I've envisioned it as a tool that you'd invite all your developers onto. For the most part, this has been the case, but there are some companies using it heavily on the server-side and only inviting a small number of users.
To account for this, I've considered charging a small amount per access key (say $2/mo for a base plan) instead of per user. A typical app has an access key for each developer working on it, plus one per server, so for a team of 5 this would work out to ~16/app/month (assuming test, staging, and production server environments; some have more). Most teams seem to have at least a few apps; some have as many as 10.
The good thing is this would scale up with usage, starting very low and then getting pretty substantial as you get more and more use out of the product. The bad thing is... it would scale up with usage, and therefore might disincentive heavy use.
Don’t fall into the cost-plus trap. Figure out typical usage sizes and then provide tiered pricing. Don’t underestimate what people will pay, and don’t try to capture the $2 user. They will not make you rich unless you have mega capital to find millions of them.
You want to charge based on the value that you deliver.
You can have small teams with large per capita usage, and large teams with low per capita usage. You ideally charge a price that each customer is happy with and that makes sense for your business. If you can't survive with 100x or 1000x as many customers at this pricing tier, you either take it off the price list immediately or when you get n additional customers of this tier (if you're still testing for product market fit).
The ideal price list repels potential customers that are a bad fit for your business. Doesn't make anyone greedy or customers bad people - just that a firm has a higher cost base or a specific business/individual won't get enough benefit from the product offered.
> You want to charge based on the value that you deliver.
Charging per key reduces the value in my opinion, exactly for the reason I stated above. It puts blocks at the point where the product is most useful (Adding a key).
I can live with extra cost when a new developer is brought on board. There's already a few things I need to buy to bring them on, and this is a reasonable extra cost. But adding charges when I add key adds friction exactly at the point where I want the product to reduce it.
I have checked your pricing page, and I think you are penalizing larger users without trying even to hide that.
You require large users to pay more for the same functionality, that $5/mo user gets.
I would create 2 plans:
1) Regular, $9/mo per user
2) Enterprise, $29/mo per user with some added functionality, like custom login page, branding and some user management/sub-users.
This way you will give an actual value to enterprises, that justifies paying more, while keeping smaller users happy, by removing confusing pricing.
Yeah, I was curious what people would think of that. My logic is that resource usage for end-to-end encryption scales exponentially, not linearly, and it's also a more expensive problem for a larger company to deal with (either in terms of engineering time or dealing with a breach).
I've been planning to add additional perks to the larger tiers over time though. For example, I'm now working on audit logs, and will likely limit the amount of history for the lowest plan (sort of like Slack).
On the per-user pricing, how do you think about the possibility of a company that signs up with just a few users but manages hundreds of servers through the product?
Just limit the number of environments and keys that can be managed on each tier. 3 environments and 5 keys at the low end, 20 and 50 at the high end with a "call us" option for super heavy use.
Even if you can't rate limit in your current release it's in the license and when you can you move people up to a higher tier. This solves the issue of charging larger customers more without them getting more value.
Unlimited number of users, files, etc should never be part of a public pricing tier. Fine for a negotiated agreement with an enterprise that has a definite period - it's a great thing to concede to close an enterprise deal and should be essentially costless. When it is in a public price list it makes larger sales much, much harder.
I think this is a non-problem now. As of now, you want to grow your user base as much as possible. Since all your users are paying, you are not carrying a dead weight of freemium.
Build up user count by any means possible. Only once you will see a significant drop in growth of revenue try to upsell current user base by adding important features.
Keep, for example, Cloudflare in mind. They have first built their user base, and once they were used by thousands of companies, they started offering additional options, Enterprise ($2K+) accounts etc. Focus on growth first, and keep some aces in your pocket for the time your revenue will stall. This way you will be able to be innovative whenever growth is slow, and there is a possibility a competitor will show up and take your business.
Thank you for this comment. I think it's spot on with keeping some aces in your pocket for appropriate time. It's not fun to keep onto unreleased features, but the product should continue to grow with time. If one wants to increase prices, ideally this goes along with added features.
You cannot compare billion dollars established a company, existing years ago, to today's SaaS startup. It is like comparing solutions form 2010 car to 2016 car. Web market changes fast.
My opinion is not binary. While I understand your point of view, I think, that there is much more optimized and valuable revenue models for SaaS startups.
>it communicates cheapness; I’d suggest you drop the 0.99 accordingly here
>I’d probably increase your pricing to $99 / $499 / $2,499
Would the argument that $X.99 implies cheapness not apply to $X99 as well? I feel like 99 anything is an old psychological trick to make the customer feel like they aren't really paying $500... they are paying $499.
No, it's aimed at business credit card authorization amounts. Many companies have policies like 'Tier 1 managers can authorize up to $100, Tier 2 managers can authorize up to $250, Tier 3 managers up to $5000' so you are trying to hit a number that makes the purchaser go 'I can get that purchase done without having to go too far up my chain of command' rather than 'I need to convince my grand-boss, who MIGHT know my name, to buy this software to solve my problem'
While true, it really makes me wish the large companies would add 1 to all those tiers, so we wouldn't have to play along with pricing psychology - as someone else noted, you look at 499 and see 500, but there may be a difference in 500 tier authorization. So while I hate seeing 9's in prices, I understand that's a sensible way to go. At least in the higher range of prices.
>they aren't really paying $500... they are paying $499.
I think most, if not all, business customers know the x99 pricing is a psychological gimmick and since it's well known is it really a gimmick any longer? When I see $499 I immediately think $500
Because it still works. Even if a person knows the psychology hacks behind things they are still susceptible to them. In fact, people that know about them falsely believe that since they are aware of them they don't work on them.
I think the idea that this practice signals cheapness is more theoretical than anything. Does a car priced at $54,990 signal cheapness? Certainly not for me. The practice is just too ubiquitous at this point.
I think the idea is that the nines trick generally works, but having four nines and pricing down to the cents in such a large price makes the trick a little too insultingly obvious.
"$50 per month is not an appropriate maximum price for this product ... the best customers of Humble Dot would spend more on coffee discussing buying it than they would on actually buying it; that seems like a poor allocation of value."
"I would probably use the fact of the call and concierge onboarding to tell everyone that of course you charge for your services, just like they charge for their services, but that as a limited time offer you’ll retroactively waive one month of fees if they can commit to a 15 minute conversation about why the software didn’t work for your needs."
What is the "why the software didn't work for your needs" part? Is this meant to be a call with users who are canceling and offer to waive a month of fees if they explain why? It seems out of place under the "To demo or not to demo?" heading.
Great article, I love it analyses real-world cases.
A small nitpick: there is a section called "Selling to undifferentiated SMBs", but there is no explanation what SMB is and it's pretty tough to google that.
Next time you see an unfamiliar acronym, google "define [acronym]" and you'll get the most common definition. For example, "define smb" shows the correct meaning: A small and midsize business (SMB).
Not to be confused with `define: thing`, which should result in a by-dictionary description, but in this case, gives me "server message block", a term I've never heard of.
Unrelated - Our product is a high touch SaaS that requires some handholding - is there any benefit in online advertising or marketing for this kind of product?
Anyone have recommendations for SaaS sales? I have done a lot of reading of generic sales books, but they don't seem to align much with specifics of selling in tech.
Jason Lemkin has a site dedicated to this: Saastr.com
I should also add that it’s a conference and a community. I’ve found the reading there to be pretty good for quick reference (I don’t really hit the site anymore) but there are some good SaaS pricing references that come up through there, too.
The single best advice Patio11 has given is "charge more". Seriously. It's been one of the scariest thing to do in the beginning, but I've now 4X'd my pricing (from 3 figures to 4 figures a month!) and the customers got 10X better, complain less, I work less and earn more. Please! If you read this, double your prices today. See what happens in the next 3-4 weeks.
Here's a fun stat: a few years ago, I surveyed some of my fund's portfolio companies and asked, "for a similar level of product/service, how much higher or lower are your prices compared to your initial pricing?"
Out of a dozen replies, about 10% were pricing their product lower, 30% were pricing the same but taking higher margins, and 60% companies were charging 2.5x-6x more than they used to. Median was around 3.5x. So the majority of companies had marked up their prices severalfold, and only one company had lowered their prices.
Did you happen to get a timeline from those companies on their price increases? I'd be curious to see if there were any common milestones for when the companies decided to increase prices.
In a few cases, I've taken the strategy of increasing prices over time as I've solidified and polished my offering. Discounting the product initially to gain enough usage stats to rough out edges, develop an internal support knowledgebase, and suss out unexpected use cases and user segments early on. I'm not sure if those products would have been as successful if I had charged more out of the gate and cut my teeth on those higher-paying individuals.
On the flipside of that I've seen patio11 specifically tell the tarsnap guy to charge more, while his product already costs $0.25/GB while GCP Cloud Storage Nearline and S3 Infrequent Access are $0.01/GB (and falling each year). When I was recently looking at backup solutions I immediately discounted tarsnap due to the pricing.
That doesn't mean it's the wrong pricing, just that you're maybe not the customer they want. A business loses some customers at any pricing level, it's just a question of whether the incremental revenue from the remaining customers makes up for it.
When you charge a penny extra, that's all incremental margin from the customers you keep, but for the customers you lose, some of lost revenue is balanced by not having the costs associated with supporting them any more.
Pushing the most price sensitive customers out the door isn't that bad, because they're also likely to be the least loyal down the road, and maybe the highest maintenance relative to their spend.
Sure, that's a good point especially considering he's a one-man show so it probably makes sense to keep the user base as ruthlessly small as possible just for support reasons alone.
It does make me curious though who the target customer is - somebody who's comfortable setting up a Unix CLI tool for their backups (creating a cron job etc.), yet who wants to cede bucket ownership to a 3rd party and pay a 25x markup for the pleasure? I personally don't mind having to click "Create Bucket" in the AWS console if I get to pay $3/mo instead of $75/mo on my 300GB of data. shrugs
But Tarsnap is much more than that -- it deduplicates, it encrypts, it has settings for restricting network, memory, and CPU usage, it caches and checkpoints, etc. I'm happy to pay the premium for the robustness I get from it.
And let’s not forget and Tarsnap is still dirt cheap even then, because Colin refuses to charge more. I’d happily pay something reasonable for my backing needs, like a $30 or $50 monthly minimum on tiny sets; instead, I pay I don’t know, something like $10 every year or two.
What you're saying is that it's dirt cheap if you have a small amount of data. On the other hand, if for whatever reason you need to back up, say, 1TB worth of video files, it's extraordinarily expensive.
I think it's just the wrong pricing model to have a flat rate per gigabyte. A flat rate looks simple, but far from being transparent or 'honest', it's essentially arbitrary in this case. Other than backend storage, Tarsnap's main non-fixed cost is Colin's time providing support - but that scales mainly with the number of customers, barely at all with the amount of data they're using. Thus, heavy data users are effectively subsidizing light data users, who pay far less than their 'fair share' of costs.
> it's dirt cheap X. On the other hand, for Y, it's extraordinarily expensive.
This may be intentional. Not every service tries to provide an optimal solution for every use case.
> it's just the wrong pricing model to have a flat rate per gigabyte.
I have no axe to grind (I'm not associated with tarsnap in any way, I'm not even a user though I have considered it) but some of the discussion here makes people sound somewhat entitled: "I want X, and I don't want to pay more then $Y for it, and any service charging more is silly/bad/ripoff".
Stating that something ins't the best choice (or even a good choice) in some (or many) circumstances is fine, but "it is wrong for me so I don't see how anyone can think that it is right" is an irritating stance.
The pricing model seems to work for plenty of users, enough that it works for the service as it has been successfully running for some time. If you think he is missing out on a huge amount of money from the users who are put off, why not start your own service priced to be attractive to that userbase, and take the profit you see that service as giving away.
> providing support - but that scales mainly with the number of customers, barely at all with the amount of data
Sometimes having lots of small customers works better than having a few large ones, even if you have a few large ones and lots of small ones. With large customers you are sometimes beholden to their whims at the expense of the smaller majority (or they expect you to be beholden to their whims and get difficult if you refuse!).
> but far from being transparent or 'honest', it's essentially arbitrary
Being arbitrary in no way precludes being transparent or honest.
> heavy data users are effectively subsidizing light data users
Only if they don't go elsewhere, which they are perfectly free to do. tarsnap is not in a monopoly position such that people are effectively forced to use it.
(I'm not intending to pick on you specifically, there are other comments I could have responded similarly to, but this post just happened to be the one that tipped the balance on my rant reflex!)
Glad you're happy with it. I went with BorgBackup which I'm also happy with. AFAIK it also does dedupe, encrypt, checkpointing, and can throttle upload speed (don't know about the rest).
One of the things I value about Tarsnap is that I can set a permission which does not allow data to be deleted. That is, if a hacker somehow gains access to my server, she cannot delete all the existing backups.
More generally, I suspect you are underestimating the number of people who tick one or more of these boxes: (a) Impressed by Colin's security chops and the security focus of Tarsnap such as its Bug Bounty program; (b) Have never heard of BorgBackup; (c) Value customer support; (d) Are worried that an open-source project would not be maintained and prefer a vendor whose livelihood depends on the product (d) Have experience with Tarsnap on previous projects; (e) Only need to store 20 Gb and for whom saving $5 per month is unimportant; (f) Have revenue in the millions and for whom $75 per month is a rounding error.
Even if there were no such people and Tarsnap's new user growth was zero, it might still make sense for Colin to triple the price of Tarsnap in order to maximise the income from existing users.
> ... I can set a permission which does not allow data to be deleted. That is, if a hacker somehow gains access to my server, she cannot delete all the existing backups.
With GCP/AWS, you can copy and paste a bucket ACL that only allows PUT operations, and enable versioning to ensure nothing can ever be deleted by overwrites.
With tarsnap there is one person who can delete all your existing backups - Colin, because he owns the bucket. And he will for sure within 7 days of your account falling below a $0 balance.[1]
That might be a feature in case you got killed in a car accident and you want some secret to be buried forever. But for me, I'm archiving my family photos/videos and I'd rather AWS keep charging my account and keep my data alive until my estate can sort out my digital data, which could take months.
> it might still make sense for Colin to triple the price of Tarsnap in order to maximise the income from existing users
And there's the rub. I don't like the idea of somebody holding my data hostage. I'll gladly contribute to a Patreon if an open source developer needs recurring support.
Those are good reasons to choose BorgBackup over Tarsnap, but they aren't related to your original claim about pricing. There are two questions here:
1. What are the benefits and market size of Tarsnap compared to other backup solutions like BorgBackup + GCP?
2. Would Tarsnap make more profit it it raised its prices?
We seem to be arguing about question 1, but Patrick's advice to Colin is about question 2. Earlier you pointed out that Tarsnap is 25 times more expensive than GCP which indicates that Tarsnap's target market is not very price-sensitive. If Tarsnap doubled its prices for new customers would the rate of new signups really drop by more than 50%?
To be fair, GCP/AWS also don't have unlimited grace periods if you fail to pay. At some point everyone deletes. That's why you should always have two backups with different providers using different credit cards. A blocked credit card has led to failed businesses in the past.
Right, didn't mean to imply they didn't. But the differences are that Tarsnap is pre-pay[1], while AWS/GCP automatically debit your card.
How many people have several months, or a year, of runway on their Tarsnap account balance? Meanwhile, there have been cases of people being dead for years[2] with their auto-pay agreements keeping everything humming along while they rot. Keep in mind that recurring payment agreements often aren't cancelled when a credit card number or expiration date changes.[3]
Finally, AWS will give you about five months of unpaid bills before they suspend your account and delete your data.[4] I would assume GCP has a similar policy.
Yes, but I can pay $50 once for Arq Backup, which will let me do this with any (= cheapest) data store - currently Backblaze B2, paying cca $5/mo for 500 GB from all computers at home.
If that customer exists - they sound like a great customer. $75 a month might be too expensive for your needs, but it's certainly not a ton of money if someone believes that product is the right fit for them.
You're paying $0.01 to give your GB to Amazon and $0.24 to make it impossible for Amazon to give it to anyone else. If you don't care about Amazon giving your data to anyone else, then you don't have to pay the premium for Tarsnap.
There are plenty of data sets for which that is reasonable. There are plenty of data sets, perhaps not at your shop, where $0.24 laughs in the general direction of the value of a gigabyte. I previously used Tarsnap at a HIPAA-regulated SaaS app. The fines for unplanned disclosure are measured per-record not per gigabyte; my rough guesstimate on proration is $12 million / GB but what's an order of magnitude or three between friends.
"What are you really paying for?" is a great question to ask for any product or service. An even greater one to answer if you are the one marketing said product or service.
But it doesn't cost $0.24 to make it impossible for Amazon to give it to anyone else. I'm using BorgBackup to encrypt my data, and it appears to use the same AES-256 and HMAC-SHA256 algorithms as tarsnap. There are a plethora of open source backup software that will encrypt your data and not charge you monthly for it.
I wish I were at a place in my life where the difference between $3/mo and $75/mo ($36/year vs $900/year) is a non-issue, but unfortunately I'm not. So for now my family photos and videos will have to be securely stored with the (probably) slightly sub-par designs of the open source software I'm using.
So after all that, we're back to "you are not the right customer". The key to business is to charge an amount that gets the customers you want. Ironically, cheaper customers are almost always more work, fullstop let alone per dollar.
This is actually classic patio11 paradigm shift. The point is that nobody (who actually makes business decisions) gives a shit about the per GB cost of backups.
The shift that Tarsnap needs to look at is this: how much is the company willing to pay to never lose this data X probability of data loss without Tarsnap. And then subject that number to a ceiling of hiring competent (this is very important work) developers to replicate Tarsnap.
Take that amount that companies would be willing to pay, and then divide by the actual size of the data. A company with 1TB of super valuable data will likely be willing to pay at least $X000 a year to have it safeguarded, which is really $X per month per GB.
You aren't getting anything resembling Tarsnap's security from S3 or GCP. If you don't care about security (and for some data sets, you totally don't!), you're right, it doesn't make sense to use Tarsnap.
I'm not rsyncing plaintext data to S3/GCP, I'm using BorgBackup to encrypt and dedupe it. I don't know if the encryption is comparable between the two (they both appear to use AES-256 and HMAC-SHA256), but I imagine tarsnap's is slightly more clever?
what do they offer at that higher cost that their target market wants? or is their target market simply the ignorant-to-storage-costs-CIOs/IT-departments?
I did support for networking equipment for a while. It was a similar thing.
If you supported the lower performance edge equipment you got more customers looking for cheap crap, trying to make it do things it absolutely shouldn't, and the customers contacting you were paid less and not that capable of helping you help them... and man were they frustrated.
Higher end data center stuff, routers for big enterprises, you got customers who spent more because they knew what they wanted, knew the product, their company had actual change control, and they were being paid more so they tended to know their stuff and were easier to work with. Granted there was pressure on the high end, but it was more professional pressure.
In a market I used to run a startup in, $1000 was a very common point in our industry at which individuals with purchasing authority and a credit card (i.e: the people we wanted to convince to hit Buy Now) needed to go up to the next level for expenditure approval.
$999 (or in this case $995) meant they could whack it on their card and not go through approvals process etc.
Obviously this price point will vary with industry and time, so suss it out in your industry (if it is applicable at all).
Completely agree with this, $5 can be the difference between a middle manager swiping a credit card and a tough conversation with a GM and procurement (ever had to procure AdWords before?)
And, although in these days of Stripe & PayPal, etc, it's not such a big deal, the ability to take credit cards for bills is the difference between being paid immediately vs. waiting 6-9 months for the invoice to be paid because you're not an Approved Supplier and Purchasing needs to get a waiver to pay you.
Most of the purchase departments need one plus additional level approval for say 500, 1000 limits. So if you keep pricing at 999, the department purchasing your product need to go through one level less approval, hence chances of you as a vendor getting paid earlier is better.
Maybe sometimes. Purchasing cards sometimes have limits per line item, and you want to be able to slide under it as strictly less than comparison.
500 limit? $499
1000 limit? $995
While this could sound sketchy, business absolutely love it. If that monthly charge is $1000 or $1001, now I need another level of approval and signatures.
I don't think there is a logical answer to this question. Why is everything priced either 1 cent or 5 cents below round numbers (9.99 or 9.95 or 3.99 ...)? Human brain is weird I guess. It would be better logically if things are priced whole numbers (including tax) like 10, 50, 100. We don't have to worry about pennies and it will probably be easy for accounting purposes too.
One additional motivation is a historical approach to reduce losses due to employee theft. In a cash economy "rounder" numbers would make it easier for employees to take payment without having to ring up the transaction on the till. For example if a magazine was offered at a price of $5 the employee could simply ask for the $5 from the shopper who is more likely to have a $5 bill on hand, the exchange of goods for cash could then take place with the employee pocketing the money and the customer walking away having happily made he purchase (not necessarily aware of the employee's malfeasance). If the goods purchased are not nice round numbers, there is more of a likelihood that the customer will be more invested in the transaction being run up in order to get their change from the transaction.
The same psychological pricing cues also apply to businesses. After all - there's people making the purchase decisions and they're affected by this as much as anyone.
The single best advice Patio11 has given is "charge more".
It's certainly good advice in the right context, but it does very much depend on that context. For a B2C business, particularly one involving discretionary spending on something your customers enjoy rather than something they need, even a slight price rise can also backfire horribly, and equally a significant reduction can result in disproportionate user growth and retention and ultimately much better returns.
As far as I can tell, the best thing you can do in that sort of environment is test in your own particular situation, study your data, and be very careful about making dramatic changes that you will find difficult to wind back if they don't pay off.
It does seem like if your SaaS product is truly "just for fun" and does not save anyone time or make or save anyone money, or teach a skill, or otherwise help the user be more productive, then you are right. What is an example?
Almost anything recreational and subscription-based seems to fit -- Netflix, for example -- unless we're arguing that this sort of thing isn't really a SaaS and different economics apply. Even if content-centric services are excluded, presumably all the recreational apps with some sort of tracking component would still qualify.
I agree, if you have a consumer product and are trying to get a place in the customer’s monthly budget for entertainment/recreation, a different set of rules probably apply. These cases probably aren’t as central to what is thought of as “SaaS.”
One thing I enjoy about charging more is the retention rate, it might be counter intuitive, but if you have a product worth keeping people will pay for it. Those customers will likely stay on longer, wont complain (as you pointed out), etc.
When you go for the lower price point, you're getting people less in your niche and thus want more bang for their buck, or really want a different product entirely.
This. I once ran a SaaS for $7/mo. Churn rate was horrible. People never stayed longer than 3mo. Now I do something with a 4 figure / mo price tag and people stick around for 7/mo on avg. it’s totally counterintuitive
that's true but also it depends on the customer
is it b2b or b2c, something for 7$ could be something trivial, like a premium package for a note taking app, but something like a 1000$ is probably a b2b that the company needs.
If pricing was as simple as "charge more” then business would be so much easier. You really want to charge the price that maximises your net present value. This is not a easy number to calculate as there are so many moving parts.
I have often wondered if there was a business in just feature copying a well known SAAS business and selling at exactly 50% the price. The selling pitch would be "identical product, but half the cost because we don’t have the massive SV overheads." I have seen quite a few examples of this in practice, but none where it is blatantly stated.
I think you missing the point. As you say there is no way to know for sure what the ‘correct’ price is for your product. One customer may be willing to pay $X and another $5X for the same features, but you need to find the number that maximises your profits across your whole customer base. As such most companies effectively just pluck a number out of the air and see what works.
Patio11’s argument is that most companies are charging a safe number that works, however that number is too low. By charging more, yes you will scare away some customers, but the customers who are concerned about price aren’t the customers you want.
In your case, say you cloned something like SendGrid and charged half the price. Their big customers like Airbnb or Uber effectively don’t care how much an email costs to send, they just want to guarantee that it is sent. So if you manage to score a customer like that, you are leaving a lot of money on the table.
On the other hand, the customers that do care about price are likely going to be lower quality, maybe they are sending bulk newsletters which if marked as spam will damage your company (as your IPs will end up on blacklists) - meaning more work, and more cost, cleaning up their mess.
Yes there is a way of knowing what is the correct price and it is the one that maximises your NPV. The fact that many times companies charge too little does not change the fact that there is an optimal price. It is not found by just increasing your prices. You need to treat pricing like the hard problem it is.
I tend to think the mantra of charging more has gotten a little too popular and I suspect that many companies are now charging too much.
The big customers like Airbnb and Uber very much care how much it costs to send emails. The most price sensitive customers are the largest and they will try to screw you down on price much harder than smaller customers. When you are sending a billion emails the price per email is much more important than if you are sending a hundred.
Taking your example, there is no reason to think that charging less would result in more spammers using your service provided that you maintained equivalent quality controls. Spammers are probably the least price sensitive mass email customers as they are professionals who are most concerned about deliverability and ROI.
> You really want to charge the price that maximises your net present value.
This goes both ways. You can definitely also increase net present value by pricing higher as long as value > price. Even better would be to create segmented/dynamic pricing that would maximize value capture up and down the demand curve.
If the market pricing is apparently so inefficient that a lot of potential value on the high end isn’t being captured (in economics speak we call this the consumer surplus), then this means there is also potential for arbitrage on the high end. Clone any service and charge 4X!
Yes that is certainly another approach to take. Same service at 4x the cost so it must be better.
Probably a more useful approach to take is for the original service to do this - set up your own competitors and see where the customers go. This approach is pretty common in the non-SAAS world.
Why only charge 50% though? You only need to lower the prices to the point where the alternative is less desirable. That being said the point about getting lower quality customers remains.
In my personal experience, I once chose a host for a game server for my friend group because it was by far the cheapest option. However, one day with only a couple hours warning the host shut down. I didn't even have a chance to download a backup. Had I been running a for-profit server, my entire business would have vanished overnight and choosing the cheapest option would have shot me in the foot. Often paying more is worth the guarantee that stuff you depend on won't vanish overnight.
50% was just an example, but it has a nice round number about it that makes a compelling pitch. The key to making this idea work is to have much lower costs so that quality of the service doesn't suffer.
Totally agree. I run a little side business where I sell digital study guides, and when I initially started I had my prices set in the sub $5 range. A while back I decided to play with my pricing a bit and see how creating a tiered pricing system would affect sales. I went from a flat fee to a $10/$15/$20 tiered system (for the same product) and sales tripled within a month.
At some point though, you have to make a decision on what type of customer/client relationship you want. I'd wager in many cases you get more customers at a lower price point. If so, then it is more of a 1:many relationship. If you have significantly fewer, I consider them to be more like a "client" in the sense that you likely have a more personal relationship with them.
The way to develop and manage those relationships would likely be very different, and that has implications throughout a company including support, marketing, sales, etc.
Anecdotally at teachable (course creation saas, listed paid plans are 39/mo-299/mo) , we’ve grandfathered people into lower pricing and offered a couple weeks to get in on the lower price when we raised prices, which was a nice forcing function that drove a lot of upgrades.
We did and and we'll always grandfather pricing. Rewards and keeps your earliest adopters (and likely best cheer leaders) happy, whilst focus remains on delivering value to attract new Customers.
I always wonder how to handle existing customers with such raise. Have you just sent a mailing and started charging double price from their CC the following month?
I ask first. If they say "no", I just let them stick with the old price. I may then ask again in 6 months and see if I get a different answer. I also sometime just cancel the billing and let them continue to use the service with the understanding that there will be no support. You gotta experiment.
It's not just SaaS. All technical work should cost more. Does that translate to higher costs for goods? Yep. Is that a problem? Nope (though it will mean inflation obviously).
Keep doubling until you're down to just one customer, then pull back and double your customers until you charge nothing. Graph that out and write an article on Medium about bell curves.
We went from $100 to $1000.
The first month, people were all angry. Within 3 months, we quadrupled our revenue. Some guys said, yea we looked at your product initially but we thought you guys weren't serious. Our design, sales pitch were not changed. So, how we started appearing more serious?
It's quite amazing (and I've read that before) that increasing prices usually increases perceived value of the product. If you charge too low, users may consider it as "it can't be good if it's that cheap".
There is no fair in a market. If you've survived in a market for over a year, you are already at the probabilistic impossibility.
You price your product by looking at the resources you consume. We did that initially too but it's a wrong way to price a product.
You are not taking into account that resources are available to everyone, you are simply not factoring the "luck". Don't devalue your luck, I attribute 99% of the prize we charge to luck.
Customers pay for the luck. We've made impossible possible, those who do not agree can choose a different supplier.
I tested how Mechanical Turkers (N=~400) chose plans on pricing pages with 4-tiered subscriptions plans, for both a file sharing service and a payroll software service. Each respondent was randomly assigned to one of 4 conditions, where the presented pricing page was slightly different. The scenario was framed as choosing a SaaS plan for a company they're employed at.
The first variable I varied was plan order. Half the respondents saw a pricing page with plans in increasing price order (cheapest first), the other half in decreasing price order (most expensive first). There was a statistically significant difference between the plan choices for these groups; respondents in the most expensive plan first condition chose a more expensive plan. This phenomenon has been seen before outside SaaS, and it's called the price order effect.
Another variable I tested was exchanging the cheapest ($5) plan for a free plan. Half the respondents saw a free plan, the other half a $5 plan. There was no statistically significant difference in the plan choice for these groups.
Getting familiar with previous literature, I would surface a couple of general thoughts:
- The most expensive plan first approach may give the visitor a more expensive image of the product, a higher "reference price". If a prospective customer is comparing two products from two different companies, they may favor the one that seems cheaper (has a lower "reference price") even if the offerings may provide similar value.
- The hypothesized mechanism for the price order effect is that you don't look at all the options as a whole, but you begin by assessing the first option, which is the leftmost one for us reading left-to-right, and then judge the next option by comparing it to the previous one, and so on. You compare added (more features/less cost) and lost (less features/more cost) value. Because we weigh losses heavier than benefits, there's an inertia toward the initial options. Only options with benefits that greatly outweigh losses combat that inertia. Hence respondents tended to choose plans more on the left.