Drew Myler is Interaction Designer at Signal, a Chicago-based provider of mobile marketing technology. This article is part of Drew’s series, 12 Days of Ideas: Building and Marketing Web Products, published his personal blog.
Pricing a product is so. Damn. Difficult. Are we scaring people away? Are we leaving money on the table? Could we grow more quickly with a lower price point? What’s the product worth?
A company lives and dies by its revenue stream, especially when trying to bootstrap the business. Signal hasn’t taken VC money, so customers who pay are gold. (It seems ridiculous to even write that, but such are the times.)
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We’ve tinkered with our pricing as much as we have with our UI. Pay-per-subscriber. Pay-per-message. Offline sales only. Online sales only. Bolt-on features. Comprehensive marketing suite.
A year ago, we wanted to see more traction with online acquisition. More people in the product! Growth! After much planning and discussion, we changed our pricing model from subscriber-based (e.g., $29 for 200 subscribers) to message-based ($.01 per text, $.001 per email), and charged a flat fee of $10 for the platform. The product would be really affordable, and word would spread. Customers would beat their way to our door.
Sure enough, our customer numbers started going up. No surprise, right? People like cheap software.
Foolproof? Not quite…
Here’s the problem: our revenue stayed flat, even as our customer numbers grew. Turns out low price software is easy to buy — and easy to leave. Our churn was pretty bad. When the customer isn’t invested in the product financially, they’re not invested mentally, either. This one thing doesn’t work the way I would like… I’ll just take my business elsewhere.
Pursuing the lowest price point for your product is a race to the bottom. It also cripples your ability to grow:
Making real money as a business changes a lot of things. More revenue allows you to build a real business where you have the resources to invest in things like better support and new features.
— Justin Mares, Why Real Businesses Don’t Charge $5/month
Fast-forward to this year
We bumped the base price of our software 5x and created two more tiers at 10x and 25x higher. We added personalized on-boarding for our top price point, and at the two highest tiers we phased in the features we thought would increase the value of the product.
Our total number of customers immediately began falling; fewer people signed up while our churn rate remained the same. In spite of that, our revenue went up — significantly so for the first time in a year.
Let me restate that: with the same amount of churn and fewer signups, we made more money. Most surprisingly: in the first month of our new pricing plans, we receive more signups at our top price point than we did at the lowest.
Just one of those higher-price customers is the equivalent of 25 previous customers — and it takes us much less effort to make one customer happy, versus twenty five. Will we grow more slowly? Yes. Will our growth be more stable? Absolutely.
“…some people look at a low price and think things like:
‘If they can only charge $x, it can’t be that good.’
‘If they only charge $x, they probably aren’t spending on the infrastructure, backups, etc., we need.’
‘If they only charge $x, they will not be able to afford to give us good customer support.’
‘If they only charge $x, they probably won’t be able to stay in business.’”
Are you waffling on your prices? Maybe this sounds counterintuitive, but I’ll make it easy for you: raise them.