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Why Real Businesses Don’t Charge $5/Month

45 points by enigmatic02 5y ago

shapefrog 5y ago
I am going to really blow his mind and run the numbers for charging $100/mo. only 10x more a month but after a year, 1,567,549x as much revenue.
pqdbr 5y ago
If the author is reading this, the subscribe to the newsletter link is not working.
- pontifier 5y ago
  Didn't work for me either because I had no desire to click it.
  - shapefrog 5y ago
    Just took a look at it, didnt work for me either.
- LinAGKar 5y ago
  Why would anyone subscribe to a newsletter anyway?
dfabulich 5y ago
This article is bizarre. It considers the case where your CAC is $16, then considers whether you should charge $10/mo or $29/mo. And, uh, yeah, of course, if you can raise prices without increasing your CAC/churn, you should obviously do that, but, in the real world, it’s harder to get customers to pay more, and that has to be reflected as higher CAC. Now, in fact, $10 is often too low, because the CAC of $29/mo isn’t usually that much higher than $10/mo, but it definitely is higher, and numbers like “$10/mo = $1,200/mo run rate, $29/mo = $1M/month run rate” should have forced the author to stop and reflect a little harder on whether these numbers make sense. Maybe we should charge $99/mo and make a BILLION dollars in the first year, right? Or, why stop there? At a fixed $16 CAC, why not charge $1,000/mo, $10K/mo? But that’s not how it works. That’s not how any of this works!
- shapefrog 5y ago
  any VC's in here want to invest in this guys billion dollar a year idea?
- cyanydeez 5y ago
  dont think he cares about the velocity argument. hes demonstrating how you need to facto in acceleration when considering your price point. getting your app selling is often a footgun, as you need to understand how maximizing cashflow relates to driving more users to purchase. its definitely an inherent human bias to want to maximize the velocity of sales, and hes demonstrsting that you also need to consider how you accelerate sales.
username90 5y ago
Slack charges $6.67/Month, and is a real business. Pretty sure they would have never gotten big if they charged $20/Month.
- belltaco 5y ago
  Thats for one user, and the product is kind of useless with only one user on the slack instance.
  - wildpeaks 5y ago
    The first user is important, it's the one that will advocate for adoption of the product in their company.
    - deleted 5y ago
      [deleted]
    - TheCoelacanth 5y ago
      It would be the first team using it, not the first user. No one is going to pay Slack to send messages to themselves.
gnicholas 5y ago
As others have pointed out here and in the comments on the blog post, it doesn't make sense to assume uptake will be the same at 3x the price. That's a demand-side issue. There's also a supply-side issue: if you are just getting started and you charge $30/mo, you will attract more competitors than if you charge $10/mo. People will look at what you're selling and think "I could undercut him by 50% and still make money!". So keeping your price relatively low at the beginning can also help on the supply-side, by keeping competitors at bay until you have more of a moat or at least an established user base.
- swagasaurus-rex 5y ago
  Offer our service as free open source software, then charge $300/hr for support. Boom, $500,000 YoY revenue.
dikei 5y ago
Probably should have noted that this article is dated 2013, almost a decade ago.
moneywoes 5y ago
Doesn’t cac increase as prices go up?
whoisjuan 5y ago
Well the problem with this argument is that it totally ignores a basic economic concept. Price elasticity. It’s kind of naive to assume that your CAC will grow linearly and your revenue exponentially if you set a higher price. Maybe if you’re lucky to find a market that doesn’t care about how much you charge them and get equally attracted to your product at any price rate. More realistically price increases will increase you CAC because customers will take a longer thought to decide if they want to pay for that. Maybe $5 a month doesn’t build a real business but you will be launching too late if you’re developing features that justify a $29 a month price. It’s easier to launch at $5 and raise your prices as you build features. If you happen to have loyal early customers who never churned as you build those features, you can grandfather them into legacy plans and develop transition programs for them. If you’re also expanding for their own use cases they will be happy to be moved to newer more expensive plans. They will most likely do it if you have been paying attention to their needs. And if they churn anyway, you’re getting 100% accurate data on the elasticity of your prices and the overall perceived value of your service. Having a $29 a month service with customers doesn’t mean that your service provides a $29 value. It just means that you have a market where people are willing to consider a $29 value proposition until your value is proven to be less or when your customers find some other vendor with better price-value alignment. That’s when they churn.
LinAGKar 5y ago
I don't know if I would take advice on "real businesses" from a site with broken HTTPS.

45 points by enigmatic02 5y ago

I am going to really blow his mind and run the numbers for charging $100/mo. only 10x more a month but after a year, 1,567,549x as much revenue.

pqdbr 5y ago

If the author is reading this, the subscribe to the newsletter link is not working.

pontifier 5y ago
Didn't work for me either because I had no desire to click it.
- shapefrog 5y ago
  Just took a look at it, didnt work for me either.
LinAGKar 5y ago
Why would anyone subscribe to a newsletter anyway?

dfabulich 5y ago

This article is bizarre. It considers the case where your CAC is $16, then considers whether you should charge $10/mo or $29/mo. And, uh, yeah, of course, if you can raise prices without increasing your CAC/churn, you should obviously do that, but, in the real world, it’s harder to get customers to pay more, and that has to be reflected as higher CAC. Now, in fact, $10 is often too low, because the CAC of $29/mo isn’t usually that much higher than $10/mo, but it definitely is higher, and numbers like “$10/mo = $1,200/mo run rate, $29/mo = $1M/month run rate” should have forced the author to stop and reflect a little harder on whether these numbers make sense. Maybe we should charge $99/mo and make a BILLION dollars in the first year, right? Or, why stop there? At a fixed $16 CAC, why not charge $1,000/mo, $10K/mo? But that’s not how it works. That’s not how any of this works!

shapefrog 5y ago
any VC's in here want to invest in this guys billion dollar a year idea?
cyanydeez 5y ago
dont think he cares about the velocity argument. hes demonstrating how you need to facto in acceleration when considering your price point. getting your app selling is often a footgun, as you need to understand how maximizing cashflow relates to driving more users to purchase. its definitely an inherent human bias to want to maximize the velocity of sales, and hes demonstrsting that you also need to consider how you accelerate sales.

username90 5y ago

Slack charges $6.67/Month, and is a real business. Pretty sure they would have never gotten big if they charged $20/Month.

belltaco 5y ago
Thats for one user, and the product is kind of useless with only one user on the slack instance.
- wildpeaks 5y ago
  The first user is important, it's the one that will advocate for adoption of the product in their company.
  - deleted 5y ago
    [deleted]
  - TheCoelacanth 5y ago
    It would be the first team using it, not the first user. No one is going to pay Slack to send messages to themselves.

gnicholas 5y ago

As others have pointed out here and in the comments on the blog post, it doesn't make sense to assume uptake will be the same at 3x the price. That's a demand-side issue. There's also a supply-side issue: if you are just getting started and you charge $30/mo, you will attract more competitors than if you charge $10/mo. People will look at what you're selling and think "I could undercut him by 50% and still make money!". So keeping your price relatively low at the beginning can also help on the supply-side, by keeping competitors at bay until you have more of a moat or at least an established user base.

swagasaurus-rex 5y ago
Offer our service as free open source software, then charge $300/hr for support. Boom, $500,000 YoY revenue.

dikei 5y ago

Probably should have noted that this article is dated 2013, almost a decade ago.

moneywoes 5y ago

Doesn’t cac increase as prices go up?

whoisjuan 5y ago

Well the problem with this argument is that it totally ignores a basic economic concept. Price elasticity. It’s kind of naive to assume that your CAC will grow linearly and your revenue exponentially if you set a higher price. Maybe if you’re lucky to find a market that doesn’t care about how much you charge them and get equally attracted to your product at any price rate. More realistically price increases will increase you CAC because customers will take a longer thought to decide if they want to pay for that. Maybe $5 a month doesn’t build a real business but you will be launching too late if you’re developing features that justify a $29 a month price. It’s easier to launch at $5 and raise your prices as you build features. If you happen to have loyal early customers who never churned as you build those features, you can grandfather them into legacy plans and develop transition programs for them. If you’re also expanding for their own use cases they will be happy to be moved to newer more expensive plans. They will most likely do it if you have been paying attention to their needs. And if they churn anyway, you’re getting 100% accurate data on the elasticity of your prices and the overall perceived value of your service. Having a $29 a month service with customers doesn’t mean that your service provides a $29 value. It just means that you have a market where people are willing to consider a $29 value proposition until your value is proven to be less or when your customers find some other vendor with better price-value alignment. That’s when they churn.

LinAGKar 5y ago

I don't know if I would take advice on "real businesses" from a site with broken HTTPS.