The Decision Process For Raising The Price Of My Saas App By 66%

(Originally published on October 13, 2015)

So this title may be a bit of click bait; I did recently raise the cost of MoonClerk by 66% but it’s just our introductory price and it just went from $9 to $15. That may not sound like a big deal but I put a lot of thought into this decision and MoonClerk is my livelihood, so it sure seems like a big deal to me.

I’ve stressed over MoonClerk’s pricing since well before we launched. I wouldn’t say that I got it “right” but thanks to a great team, as of the publishing of this post, MoonClerk has well over 2,600 customers and we became profitable about a year a half ago. So, while our pricing may not be broken, I can always improve it. And that’s what I’ve done — set out to improve it. I’ll explain:

1. Our original pricing model and how we arrived at it
2. What I’ve learned about pricing a SaaS app
3. The steps I took to try to improve our pricing
4. And, finally, the good part — the decision I’ve made, how I make business decisions, and how I arrived at this specific decision.

For those of you not familiar with MoonClerk, we’re a web-based software application that helps mostly small businesses and nonprofits accept recurring payments online without them having to do any programming.

Our Pricing Philosophy

It’s Crap If Customers Wont’ Pay For It

Charging for my product helps me find out if I have a valid business. My product is probably crap if customers aren’t willing to pay for it. Maybe if I were a B2C company, like an iOS videogame or a social network, I wouldn’t have this same philosophy. Or, maybe if I were funded by venture capitalists or angel investors, this philosophy wouldn’t apply to me. But, my product serves small businesses and I’m bootstrapped. That means I’m serving businesses that (hopefully) either have revenue or aspire to it. And because I’m funding the business myself, I needed MoonClerk to have revenue from Day 1 so that I could reduce my burn rate until I became profitable.

Why We Chose Tiered, Banded Pricing

I originally settled on the “tiered, banded” pricing model because I wanted to base our price on the value we brought to our customers.

Some of our competitors based their price on the number of subscribers their customers had, some other aspects of their customers’ businesses, or a fixed monthly fee. Charging for the number of subscribers punishes those customers who have a lot of subscribers at a low per-transaction dollar amount and rewards those with a small number of customers at a high per-transaction dollar amount. Also, I love how MailChimp runs their business and they charge on tiered banded pricing, so I figured we were in good company.

Our Tiered, Banded Pricing Model

Here’s how our pricing works:

You can see everything on our pricing page. Traditionally, our base rate to activate an account and start accepting live payments has been $9/month. That base rates would cover from $0/month to $1,000/month in transactions. For $1,000/month — $2,000/month in transaction volume, we would charge $15. For $2,000/month — $4,0000/month, we would charge $30. And so on. As a customer’s volume grows, their monthly fees grow but, generally, as a percentage of the volume, it goes down. We automatically adjust which pricing tier our customers are in on a monthly basis. Stripe, our third party payment processor, charges a per-transaction fee. We don’t charge any additional per transaction fees.

Why We Originally Started At $9/Month

I created MoonClerk to appeal to small businesses and nonprofits that probably didn’t have developers on staff or didn’t have the funds to hire one. That’s the market we decided to go after because we saw it as an underserved market for recurring payments. I didn’t want to price MoonClerk out of that market. I wanted to have pricing that was so low to small businesses, it was a no-brainer.

We originally settled on an introductory rate of $9 because:

1) Our competitors were charging a percentage of sales (additional transaction fees on top of the payment processor) and we thought the rates were high.

2) Our competitors were charging a high introductory monthly fee that left out the small business market that couldn’t afford those high fees.

Also, sometimes our competitors had both a high monthly rate plus an additional transaction fee on top of the processor.

What I Have Learned About Pricing My SaaS App

It Feels Better To Give Than To Have Something Taken

As I mentioned, some companies in our space charge a percentage of the revenue that a customer collects. For instance, they may charge an additional per transaction fee of 2% on all payments their customers receive. We decided not to charge a per-transaction fee but instead to bill our customers’ credit/debit cards a monthly fee. In my observations, even if what someone pays us is the exact same as what they would have payed another company in per-transaction fees, paying a whole dollar amount once a month elicits a different psychological reaction than paying a percentage of their revenue. When they enter their billing information and decide that they are going to allow us to charge them once a month, they feel like they are giving us something in exchange for a product or service we provide. When they are giving up a percentage of their revenue, they feel like the company is taking something from them. There’s a difference. I saw this firsthand with my previous startup, Bellstrike. We charged a percentage of revenue. Customers seemed to be way more upset with the percentage, even if they weren’t paying anything at all, than my MoonClerk customers.

A High Percentage Of Customers Won’t Ever Use The Product

I’ve unofficially verified this axiom holds true, not just for MoonClerk, but also for other SaaS products, through communications with their founders. For MoonClerk, about 1/3 of our paying customers don’t process payments. Another third are what I would call “light” users. If you think about it, the same holds true for gyms. Their customers are set up on recurring payments and pay every month. Some people even keep their gym memberships for years and never go to the gym. I learned that as I’m setting prices, I need to discard the idea that most of my customers will be in higher tiers. Nope — they’ll probably be in whatever lower tier(s) I have available. So, I don’t want to bank on everyone using my product so much that they’re paying me at my highest tiers. I need to plan for the opposite.

The Lowest Revenue Customers Bring The Most Headaches

This is another axiom I’ve verified to be true with other founders. Generally, most of my customer service revolves around those customers who are in my lowest price tier. So, if I had a “freemium” product with a free price tier, I would be doing most of my customer service for customers who aren’t paying me. I’ve been there before with my former startup, Bellstrike. It’s demoralizing. With MoonClerk, if I’m doing customer service for my customers (even if they’re only in the lowest $9/month tier), at least I’m getting paid for the work.

It’s Easier To Lower Prices Than to Raise Them

As a founder, psychologically, it’s hard for me to raise prices. My mind races through all of the worst case “what-ifs.” If I had started off with higher prices and I wasn’t pleased with my conversion rates, I could have always lowered the prices to see if the rates increased. That wouldn’t cause as much internal or external friction and turmoil as raising prices.

Different Price Points Attract Different Customers

If one artist paints a painting and sticks a price tag on it for $10, they’re going to attract a certain type of customer. If another artist paints a similar painting and sticks a $1 million price tag on it, they’re going to attract a completely different clientele. The second artist may not necessarily sell their artwork, but they are appealing to a completely different market. The same is true for software. If you charge a minimum of $9/month, you’re going to attract a different customer than the software company that charges a minimum of $150. I’m not sure where the price break point is for MoonClerk where we start attracting a different type of customer. It may be different for every software company. It could very well be that a $9/month customer is the same basic customer as a $15/month customer. Maybe I’d need to get up to charging $30/month or $50/month before I reach a different type of customer. If we raise our base price, we may have a higher perceived value for the type of customer we want than we would otherwise have had. We may be able to convert more of the right kind of customers by having a higher base price.

Churn Is The Enemy

Churn deserves its own blog post. Put simply, customer churn is the % or number of paying customers I lose every month who had signed up in a previous month. While by running A/B tests, I can have a good idea of what higher pricing will do to our conversion rate, I won’t know how higher pricing will affect my churn rate until after I change the pricing and have some time with the new pricing under my belt. That’s the scary part because churn can break a SaaS business. If my churn rate increases a great deal, my conversion rate can improve and revenue per customer can increase, but my overall growth and revenue could still decrease. After talking to two other founders, one said that raising his prices didn’t increase his churn rate. The other said he didn’t have enough time/data to say. The best I can do is to estimate how much my churn might increase.

How I Am Trying To Improve Our Pricing

Improving my pricing doesn’t just mean just improving my revenue (though that’s one element.) It’s really about finding the right pricing to be able to build a sustainable business so we can ensure we’re around long-term for our customers. It’s about ensuring we’re able to provide great customer service to our customers. It’s ensuring we’re able to improve our product for our customers so it provides more value for them.

I had originally considered raising prices for our larger customers but given that a smaller percentage of our customers are in those higher tiers and that most of our customers are in the lower tiers, doing that wouldn’t have led to any significant increase in revenue. So, I decided to focus on what it would look like to raise prices for our entry-level tier — the one where customers pay $9/month.

A/B Testing

The first thing I did was run some A/B tests. I’d learned to do this from previous experience. It would have been fairly complicated to actually change the pricing in our app — creating two different pricing structures in our billing system. Besides, we didn’t even know if we would change the pricing. So, I decided to just A/B test the pricing changes on our marketing site. I used the A/B testing software, Optimizely. By only changing the displayed prices and not changing the actual prices we charged our customers, I was able to give a pleasant surprise to our customers who received the alternate, higher pricing. We displayed three different introductory pricing levels — our standard $9/month, $15/month, and $19/month. If customers signed up for $15/month or $19/month, we only charged their card for $9/month. I had some people email and ask about this and I just explained to them that we were doing A/B testing and they always understood and were pleased to find out they wouldn’t be charged the higher price (at least for now.)

I didn’t want to tank our signups, so I decided to just send a small amount of our traffic to these higher price points. I started out by sending 10% of our traffic to the $19/month pricing, 10% to the $15/month pricing, and 80% to our baseline $9/month pricing. Once I had enough data (though not significant enough from a statistical point of view) to guesstimate that the new prices weren’t going to run the company into the ground with super low conversion rates, I raised the traffic going to the higher prices to 50%. That way, I’d be able to get more accurate data.

A/B Testing Results

It turns out that raising our introductory prices to $19/month hurt our conversation rates a good bit — they went down by about 38%. However, while raising our introductory price to $15/month did have a negative impact on our conversion rates, it was in the single digits (about 6.5%).

The Pro-Forma Spreadsheet

I wanted to create a spreadsheet that would give me a way to make predictions on how changes in pricing would affect our future revenue. I’ve filled that spreadsheet in with dummy data so anyone can download it:

Sample Pro-Forma SaaS Pricing Change Spreadsheet

You may not be able to use this spreadsheet if you don’t have our pricing structure but at least you can understand what I’m talking about.

There were two main price changes I wanted to test:

1. Changing our base price to $15 for $0 — $1,000 per month in transaction volume.
2. Changing our base price to $19 for $0 — $2,000 per month in transaction volume $19.

Within each of these price changes, I also wanted to test two scenarios:

1. Grandfathering all of my existing customers into the original pricing.
2. Switching all existing customers to the new pricing immediately.

There were three main variables that I wanted to play around with:

1. First Month Churn Rate — This only applies if I’m switching existing customers to the new pricing. It’s likely that if, all of a sudden, I announced higher pricing, that first month after the announcement I would have a much higher cancelation rate.
2. Ongoing Churn Rate — With higher pricing I would like to make an assumption that my churn rate is going to be higher.
3. Conversion Rate — I wanted to play around with how different conversion rates might affect revenue.

To arrive at all of our baseline numbers for the original pricing, I averaged all of the months during 2014.

This pro-form wasn’t really about figuring out profit since that’s fairly easy to predict for my business because the majority of costs are fixed and not variable. I really only wanted to know three things:

1. How does the price increase affect my MRR (monthly recurring revenue)
2. How does the price increase affect the number of customers I will have
3. How does the price increase affect my MRR per customer?

I wanted to know the last two because there could be a scenario where I’m fine with a lower MRR (or only slightly increased) if it means I have significantly fewer customers. That would mean I would have to do much less customer support.

Pro Forma Spreadsheet Observation

As I was creating the spreadsheet, one interesting observation was that it wouldn’t do much good to rely on or compare whole numbers — whether I’d have 4,000 customers after 16 months or 3,500, whether I’d have $X amount in MRR after 6 month or $Y amount, etc. So much depended on circumstances that were out of my control and/or inaccurate. For example, I was using averages for growth and there’s no way to know if that growth will hold. Even numbers like my baseline conversion rates were inaccurate. For example, if you compare my baseline conversion rate calculated from Google Analytics and my own dashboard (New Paid Customers in a Month/Unique Visitors) you would get a different baseline conversion rate than what Optimizely gave me during the same time period. I can’t explain why, but that’s the case.

So, what I needed to do was focus on relative changes that price and the variables it affects have on the main thing I want to know — Monthly Recurring Revenue. I needed to answer the question, “By what percentage does changing my price affect conversion rates, churn, MRR, etc.” That way, if I’m comfortable with the percentage change versus the baseline rate, it doesn’t matter if the whole number is inaccurate — I would still know that I stand to be better or worse off than my original pricing.

The Decision

Lessons I’ve learned About Decision Making

Over the years, I’ve learned that even if, in hindsight, my decision turn out to be incorrect, if I follow these lessons, I can at least rest in the fact that I made the wisest decision possible at the time.

The lessons are:

• I’ll never have all of the data I want.
• I will have some of the data I want.
• I can make educated guesses on some of the data I don’t have.
• Wise counsel can help me make a better educated guess on the data I don’t have.
• If there is no way to make a best guess on certain data, don’t let that data factor into my decisions. Ignore it.
• Few of my decisions are irreversible.
• Reversing my decisions usually has consequences but they are rarely nuclear.
• If making or reversing a decision does have nuclear consequences, seek more wise counsel because these lessons may not apply.
• I need to make my decisions based on the real data I do have + my best guess of data I don’t have.

How I Decided To Raise Our Introductory Price

So, here’s how I made my decision to change my introductory pricing to $15/month and grandfather my existing customers into the old pricing:

• I know that I want to have higher MMR/customer to build a truly sustainable business.
• I know from A/B testing that my conversion rate for $15/month is close to the same as for $9/month.
• I know from A/B testing that my conversion rate for $19/month drops by more than a third. That negatively affects my future MRR.
• Other founders have told me that raising their prices a commensurate amount (from $9 to $15) didn’t greatly affect their churn rate. I can therefore make an educated guess that though my churn rate may increase, it probably won’t increase a great deal.
• I’m not sure what my growth rate for unique visitors will be and I don’t think it will be affected any by a price change, so I won’t factor it into my decision.
• Even though I may be able to raise revenue quicker by not grandfathering my customers into the old pricing, long term, it doesn’t make a huge difference in MMR. Also, I’ve grown much of my business on positive word of mouth. I can make an educated guess that by not grandfathering my customers into the old pricing, I will damage the goodwill I’ve built up. I want to keep that goodwill.
• If this higher pricing doesn’t work out, the only consequences will be the conversions I lost while it was in place. I can always go back to my original pricing.

Overall, I’m comfortable with the estimated increase in revenue that $15/month will give me versus the risks associated with raising the price. I don’t know if raising my pricing is the correct decision — time will tell. But, I believe it is the wise decision.

I owe a debt of gratitude to other SaaS founders who’ve shared what they’ve learned — either through what they’ve written or through conversations. Much of what I’m doing to try to improve our pricing is based on their advice and insights. Some of the resources that have been most helpful:

Originally published at blog.doddcaldwell.com.