7 ms·

Why Real Businesses Don't Charge $5/month

39 points by justinmares 14y ago

venomsnake 14y ago
Poor backblaze ... they are doomed. Call them and tell them they are not real business.
- atYevP 14y ago
  I'm going to have to tell our CTO to close up shop. Here we were, thinking we were profitable...alas and alack!:)
  - brianwski 14y ago
    Backblaze CTO here - this is the beauty of competition, you can't just sit back and CLAIM you can't make it any cheaper when some scrappy company comes to your market and PROVES they can sell it cheaper and make a healthy profit doing it. Yes it's hard on companies that just want to be lazy and not innovate, but it's OH SO GOOD for consumers. More for less, every day, all day long. I say bring it on.
jimzvz 14y ago
Surely the whole point of lowering prices is to reduce cost of acquisition as well as churn. Where is this in your example?
- patio11 14y ago
  The first supposed benefit of lower prices is a wish, the second is a fantasy. Most SaaS companies with the typical four plan structure will find their highest churn on the cheapest plan. (Get them drunk if you don't believe me.) It would be an enormously powerful result for SaaS companies if moving from e.g. $20 a month to $5 a month reduced customer acquisition costs by a factor of 10x, but companies that are able to nail customer acquisition at the LTVs implied by $5 a month are very rare. (They tend to be market-leading B2C companies, and they tend to have customer acquisition strategies which make pay-for-one-extra-customer-at-the-margin to not really be a factor.) By comparison, it is much, much easier to do all sorts of fun things when you can spend $100, $500, or $1k to acquire a customer. (Those are all a) numbers which many SaaS companies could trivially justify paying and b) numbers which many SaaS companies actually pay to get marginal customers.)
  - ahoyhere 14y ago
    What patio11 says is true. Our churn rate is under 1% on our highest accounts, and occasionally double digit on the cheapest. I've gotten lots of other SaaS owners drunk and we all share the same experience. When it comes to low prices, people will make up any random reason they can "logic up" in absence of facts. Sure, "low prices to reduce churn" sounds totally logical, but it's utter bullhockey. Don't believe it. Always ask for the data.
    - jimzvz 14y ago
      Is this due to the pricing or that it is the cheapest offering?
      - ahoyhere 14y ago
        False dichotomy. There are a million other potential explanations. As for what it is in each specific case, quite possibly different. For us, it's a combination of factors: 1. Our lower plan is for freelancers. Freelancers are basically by nature unprofessional, and suck at business. (Saying this as a former freelancer who fit that bill for a long time.) Freelancers go out of business all the time, and they also don't engage in professional practices with any great will. Larger plans -> larger teams -> more professional and more durable as a business. They also tend to evaluate software more carefully and then stick with what they pick because A) they don't get paid to try out infinite software packages, B) they do actually want to get paid and not procrastinate or diddle around pretending to look for the perfect tool, C) getting a whole team off one tool and onto another takes valuable time & energy away from actual work. 2. Cheap customers are always the worst. Always. This cuts across all industries. People who shop on price are not the people you want to deal with… they are the most demanding and again far more likely to quit! You'd think lower prices would mean lower expectations but it seems the opposite is true. These people can scent a low price a mile away through the muddy waters of the internet, and once you attract them, the only way to shake them is to raise your prices. We have friends who run software that's more urgently needed than time tracking — something that couldn't, theoretically, be replaced by a nasty Excel spreadsheet -- and they see exactly the same behavior even though in theory even their smallest, cheapest customers ought to be professional and on the high end of the tech savvy scale. You simply cannot believe how much happier they are since they dropped their lower plans entirely. We too have seen a decline in crazy support emails since we raised our prices across the board.
o0-0o 14y ago
google charges $5/yr for their basic data plan.
- justinmares 14y ago
  Google also makes $100m a day from Adwords. I don't think they're optimizing revenue on basic data..
mjn 14y ago
Sure, if your market lets you charge more, go ahead and charge more. But in some markets, real businesses charge $5/mo, because market conditions don't let them charge $10/mo (or at least don't allow them to meet their other goals at that price). Evernote Premium is $5/mo, Google Drive charges $4.99/mo for 100GB of space, etc. Heck, Fastmail charges $1.65/mo for its "Full" plan (billed as $20/yr), or $3.33 for its "Enhanced".
- ahoyhere 14y ago
  Are any of those companies self-supporting on revenue from those products? There's your answer. It's not about what the market "lets" you do. It's about what you demonstrate to the market your product is worth to them. When in doubt, take responsibility and create agency. Otherwise your business is just a Disney princess waiting to be rescued.
  - Turing_Machine 14y ago
    "Are any of those companies self-supporting on revenue from those products?" http://hostingmatters.com/web_hosting.html http://hostingmatters.com/web_hosting.html They've been in business for 13 years.
    - ahoyhere 14y ago
      That doesn't answer my question. Hosting Matters wasn't in the list. They also have many higher-priced offerings, and their low-priced offerings include 70 megabytes of data and not, a la Google Drive, 100GB.
      - Turing_Machine 14y ago
        All right: which restaurant generates more revenue: McDonald's or The French Laundry? I'm not sure what being "in the list" has to do with it. The notion that raising prices automatically increases profits is just absurd. Sometimes it does, sometimes it doesn't. It's not possible to generalize about it.
ceejayoz 14y ago
Unless I'm missing a paragraph, this pretends charging 3x as much won't ever reduce the number of people who sign up?
- rhizome 14y ago
  The logic is that the cost of acquisition must be constant.
  - Turing_Machine 14y ago
    Unfortunately, that logic is a fantasy.
    - rhizome 14y ago
      Well, yeah. :) Suppose I could have replaced "logic" with "assumption."
- justinmares 14y ago
  But does it reduce it by 3x?
  - Turing_Machine 14y ago
    It might not reduce it at all. It might reduce it by 100%. It's impossible to make generalizations about this.
- n3rdy 14y ago
  I'm guessing he was just trying to explain the overall concept, that or he moonlights at New York or California's tax departments.
halcyondaze 14y ago
While this is definitely a thought experiment, we found the basic premise to be true when we redesigned our product, pricing plans, and free trial strategy. We went from: Free Forever / $29 / $59 / $149 7 Day Trial / $49 / $149 / $249 And we have an overall better customer base (they find more value in our app) and relatively the same signup metrics as we had before.
ebiester 14y ago
It all depends on your service. I am willing to pay $20 a year for cross-device password management for personal use, not $20 a month. I am willing to pay $$$ for a CRM. For businesses, your product must save me more money than if I do it myself. If it's a mere convenience that can be duplicated by an excel spreadsheet, I'm only willing to spend so much. I suggest looking at what your value proposition is: if you think you can provide $50,000 dollars of value to your customer, you shouldn't be charging $5 a month. If your plan provides only a small amount of value, you better hope it provides that value to a large number of people. :) But you're not going to get away with charging more.
keesj 14y ago
Is this article about WHAT TYPE OF BUSINESS to run, or HOW TO PRICE IT? I think it's mixing some logic of the two.
kevinthew 14y ago
this might be the dumbest blog post I've seen posted on HN. why is anyone reading crappy marketing blogs that have no basic understanding of accounting or microeconomics?
brownbat 14y ago
Beware, you Ingvar Kamprads, Karl Albrechts, and Sam Waltons: only poverty awaits.
- Turing_Machine 14y ago
  Likewise Ray Kroc and Jeff Bezos. F.W. Woolworth is gone from the U.S. now, but they lasted for over a hundred years.

39 points by justinmares 14y ago

venomsnake 14y ago

Poor backblaze ... they are doomed. Call them and tell them they are not real business.

atYevP 14y ago
I'm going to have to tell our CTO to close up shop. Here we were, thinking we were profitable...alas and alack!:)
- brianwski 14y ago
  Backblaze CTO here - this is the beauty of competition, you can't just sit back and CLAIM you can't make it any cheaper when some scrappy company comes to your market and PROVES they can sell it cheaper and make a healthy profit doing it. Yes it's hard on companies that just want to be lazy and not innovate, but it's OH SO GOOD for consumers. More for less, every day, all day long. I say bring it on.

jimzvz 14y ago

Surely the whole point of lowering prices is to reduce cost of acquisition as well as churn. Where is this in your example?

patio11 14y ago
The first supposed benefit of lower prices is a wish, the second is a fantasy. Most SaaS companies with the typical four plan structure will find their highest churn on the cheapest plan. (Get them drunk if you don't believe me.) It would be an enormously powerful result for SaaS companies if moving from e.g. $20 a month to $5 a month reduced customer acquisition costs by a factor of 10x, but companies that are able to nail customer acquisition at the LTVs implied by $5 a month are very rare. (They tend to be market-leading B2C companies, and they tend to have customer acquisition strategies which make pay-for-one-extra-customer-at-the-margin to not really be a factor.) By comparison, it is much, much easier to do all sorts of fun things when you can spend $100, $500, or $1k to acquire a customer. (Those are all a) numbers which many SaaS companies could trivially justify paying and b) numbers which many SaaS companies actually pay to get marginal customers.)
- ahoyhere 14y ago
  What patio11 says is true. Our churn rate is under 1% on our highest accounts, and occasionally double digit on the cheapest. I've gotten lots of other SaaS owners drunk and we all share the same experience. When it comes to low prices, people will make up any random reason they can "logic up" in absence of facts. Sure, "low prices to reduce churn" sounds totally logical, but it's utter bullhockey. Don't believe it. Always ask for the data.
  - jimzvz 14y ago
    Is this due to the pricing or that it is the cheapest offering?
    - ahoyhere 14y ago
      False dichotomy. There are a million other potential explanations. As for what it is in each specific case, quite possibly different. For us, it's a combination of factors: 1. Our lower plan is for freelancers. Freelancers are basically by nature unprofessional, and suck at business. (Saying this as a former freelancer who fit that bill for a long time.) Freelancers go out of business all the time, and they also don't engage in professional practices with any great will. Larger plans -> larger teams -> more professional and more durable as a business. They also tend to evaluate software more carefully and then stick with what they pick because A) they don't get paid to try out infinite software packages, B) they do actually want to get paid and not procrastinate or diddle around pretending to look for the perfect tool, C) getting a whole team off one tool and onto another takes valuable time & energy away from actual work. 2. Cheap customers are always the worst. Always. This cuts across all industries. People who shop on price are not the people you want to deal with… they are the most demanding and again far more likely to quit! You'd think lower prices would mean lower expectations but it seems the opposite is true. These people can scent a low price a mile away through the muddy waters of the internet, and once you attract them, the only way to shake them is to raise your prices. We have friends who run software that's more urgently needed than time tracking — something that couldn't, theoretically, be replaced by a nasty Excel spreadsheet -- and they see exactly the same behavior even though in theory even their smallest, cheapest customers ought to be professional and on the high end of the tech savvy scale. You simply cannot believe how much happier they are since they dropped their lower plans entirely. We too have seen a decline in crazy support emails since we raised our prices across the board.

o0-0o 14y ago

google charges $5/yr for their basic data plan.

justinmares 14y ago
Google also makes $100m a day from Adwords. I don't think they're optimizing revenue on basic data..

mjn 14y ago

Sure, if your market lets you charge more, go ahead and charge more. But in some markets, real businesses charge $5/mo, because market conditions don't let them charge $10/mo (or at least don't allow them to meet their other goals at that price). Evernote Premium is $5/mo, Google Drive charges $4.99/mo for 100GB of space, etc. Heck, Fastmail charges $1.65/mo for its "Full" plan (billed as $20/yr), or $3.33 for its "Enhanced".

ahoyhere 14y ago
Are any of those companies self-supporting on revenue from those products? There's your answer. It's not about what the market "lets" you do. It's about what you demonstrate to the market your product is worth to them. When in doubt, take responsibility and create agency. Otherwise your business is just a Disney princess waiting to be rescued.
- Turing_Machine 14y ago
  "Are any of those companies self-supporting on revenue from those products?" http://hostingmatters.com/web_hosting.html http://hostingmatters.com/web_hosting.html They've been in business for 13 years.
  - ahoyhere 14y ago
    That doesn't answer my question. Hosting Matters wasn't in the list. They also have many higher-priced offerings, and their low-priced offerings include 70 megabytes of data and not, a la Google Drive, 100GB.
    - Turing_Machine 14y ago
      All right: which restaurant generates more revenue: McDonald's or The French Laundry? I'm not sure what being "in the list" has to do with it. The notion that raising prices automatically increases profits is just absurd. Sometimes it does, sometimes it doesn't. It's not possible to generalize about it.

ceejayoz 14y ago

Unless I'm missing a paragraph, this pretends charging 3x as much won't ever reduce the number of people who sign up?

rhizome 14y ago
The logic is that the cost of acquisition must be constant.
- Turing_Machine 14y ago
  Unfortunately, that logic is a fantasy.
  - rhizome 14y ago
    Well, yeah. :) Suppose I could have replaced "logic" with "assumption."
justinmares 14y ago
But does it reduce it by 3x?
- Turing_Machine 14y ago
  It might not reduce it at all. It might reduce it by 100%. It's impossible to make generalizations about this.
n3rdy 14y ago
I'm guessing he was just trying to explain the overall concept, that or he moonlights at New York or California's tax departments.

halcyondaze 14y ago

While this is definitely a thought experiment, we found the basic premise to be true when we redesigned our product, pricing plans, and free trial strategy. We went from: Free Forever / $29 / $59 / $149 7 Day Trial / $49 / $149 / $249 And we have an overall better customer base (they find more value in our app) and relatively the same signup metrics as we had before.

ebiester 14y ago

It all depends on your service. I am willing to pay $20 a year for cross-device password management for personal use, not $20 a month. I am willing to pay $$$ for a CRM. For businesses, your product must save me more money than if I do it myself. If it's a mere convenience that can be duplicated by an excel spreadsheet, I'm only willing to spend so much. I suggest looking at what your value proposition is: if you think you can provide $50,000 dollars of value to your customer, you shouldn't be charging $5 a month. If your plan provides only a small amount of value, you better hope it provides that value to a large number of people. :) But you're not going to get away with charging more.

keesj 14y ago

Is this article about WHAT TYPE OF BUSINESS to run, or HOW TO PRICE IT? I think it's mixing some logic of the two.

kevinthew 14y ago

this might be the dumbest blog post I've seen posted on HN. why is anyone reading crappy marketing blogs that have no basic understanding of accounting or microeconomics?

brownbat 14y ago

Beware, you Ingvar Kamprads, Karl Albrechts, and Sam Waltons: only poverty awaits.

Turing_Machine 14y ago
Likewise Ray Kroc and Jeff Bezos. F.W. Woolworth is gone from the U.S. now, but they lasted for over a hundred years.