Lessons learned in SaaS startups: Chapter 6. Price it right.
Being a shy, self-taught, school dropout I never really thought anyone would want to pay for something I had built.
I originally gave one of my first products, a project management tool, away for free. I thought, “Why should people have to pay for this? Google don’t charge to search millions of web pages, so I should let people manage their projects on my app for free.”
It wasn’t long before I realized I had to charge something, or I wouldn’t be able to offer an app at all, given the cost of servers, cloud storage, SSLs and all the other costs that go into running a startup.
I call it a ‘startup’ now, but at the time I didn’t even really know what that word meant and I wasn’t really thinking about making money from the app in those early days. But I had to charge, because it was costing me money.
So I sent out an email to the user-base, which consisted of about 3–4k users. I asked them how much they wanted to pay for the app.
How much would you want to pay for this project management app? Would it be $5, $7, $9 or $15 per month?
People emailed back, probably saying $0-$5 per month, I can’t really remember. I settled on $7 per month because it was a nice number.
Looking back I can’t believe how stupid I was. I’m actually feeling pretty angry with myself now as I write this. But this is ‘lessons learned’ right?
$7 per month it was. It was a really nice number.
I used PayPal, so I got stumped on loads of fees, as you do, plus had the tax to pay on that. I didn’t really know it, but my profit margin was actually tiny to non-existent. I might have even been running at a loss, but I wouldn’t know because I had little to no financial spreadsheets and no bookkeeping.
I just thought, “Wow I’m actually making money from this!”. I was probably making upwards of about $500 per month in those early days. I was gloating in my own ‘success’.
Over time I put my prices up, by creating new plans with less limitations, with the top tier plan being about $35 per month. Again, I thought I was absolutely killing it when one or two users signed up to this plan.
I still felt I was charging too much for my product. I undervalued my app, and I undervalued my own abilities.
I didn’t price the app based on the value I was giving to my customers, I priced it because I liked a number, or because a competitor was doing it like that. That was really dumb.
I finally managed to get a solid pricing model in place, after going to various tech conferences, meeting other entrepreneurs, reading books, seeing webinars and studying my competitors in great detail. I priced it more sensibly based on value, and we ended up making a good deal more money and our customers actually churned less and were happier.
In the years that followed I still hadn’t learnt my lesson though, even though I had a fairly decent pricing model that was growing our revenue, I was still making the same mistakes.
- I didn’t have adequate bookkeeping.
- I didn’t have a handle on my expenses (I had no idea what I was spending).
- I didn’t have any monthly or quarterly P&L reports set up, even a basic spreadsheet.
- I wasn’t tracking conversion rates, or tracking anything at all really.
- I was still basing my pricing mostly on what my competitors were doing.
Plus a bunch of other mistakes that I don’t have time to cover here.
My biggest repeat mistake was probably spending too much time looking over my shoulder at what my competitors were doing. “If 37signals are charging $24 per month, then so should we!”. I actually saw hundreds of other companies do the same thing, so shouldn’t be too hard on myself.
I changed my pricing model quite a few times, which in some ways is no bad thing as Patrick Campbell will tell you. However when I did change it, and the new model wasn’t working and was losing money, I didn’t realize it, due to the lack of good reporting and proper metrics. I lost quite a lot of money.
If I had things right a few years ago, and had a handle on all things I mentioned above, then I would be making a heck of a lot more money now. Perhaps I’d have a few more hires, swankier offices, maybe even a ping-pong table. Of course, ‘woulda-shoulda-coulda’. Hindsight is wonderful.
I’ll touch on expenses in a future article, but again it’s one of those things I should have had a handle on. What you get in is great, but what goes out is more important. How can you pay yourself and your employees if there’s no money left in the pot because it’s all been spent on cloud-apps you don’t use, expensive company lunches, and servers you forgot to switch off and were being billed hourly for.
So price your app right, from the beginning, based on the value you are giving your users. If you are giving them a ton of features that are actually saving your customers lot of time, then that means they can bill more and make more money. How much money are you helping your customers to make? Hundreds? Thousands? Then why don’t you charge a good percentage of that? Is 20% a fair cut? That means you can charge $200 a month no problem. Just make that your price.
One thing that is surprising is that the more you charge, the less the churn seems to be, and also the higher the conversion rate seems to be. I guess I’m finally realizing that my product is actually worth the price that I charge for it. Finally.
Price it right.
