At the beginning of the New Year, we exposed some critical mistakes that 5 SaaS companies were making on their pricing pages (see The Saddest SaaS Pricing Pages of the Year). It was a little scary to put the high beams on those pages, but we felt pointing out their faults in addition to suggesting a few minor tweaks could help many of our readers tune up their own page designs and pricing structures.
But what exactly makes an awesome pricing page? Our 1st Pricing Page Pageant revealed some sweet pointers, but to dive a little deeper, let’s start examining methods for optimizing your page using one great site at a time. This week, we’ll put Ginzametrics under the microscope, who have a simple, attractive pricing page for their SEO and content marketing platform.
Represent Your Buyer Personas
Your pricing tiers are a visual representation of where your buyers fit in your business model, and each tier should align to one type of customer. In the case of GinzaMetrics, it’s very clear who they’re targeting with each tier. The product caters to three different buyer personas, and the product descriptions displayed as well as the amount of product delivered in each tier align to one of those three personas (we’ll call them Startup Steve, Agency Anne, and Enterprise Eddie for the remainder of the post).
As a prospect viewing this pricing page for the first time, you can immediately understand where you fall within these tiers based on the stage of your business. The plan names are fairly bland, but the brief, concise statements below them tell potential customers exactly where to go. The Small plan is “perfect for small teams and startups,” the Medium plan is “for quickly growing businesses and agencies,” etc. The descriptions also ensure customers can easily see how the product grows with them as their own businesses grow.
The bottom line: The ultimate goal in your packaging and pricing strategy is to create an ideal customer profile for each of your plan tiers and clone them over and over in your signups. Being transparent about who your ideal buyers are helps ensure the right customer signs up for the right package.
Define the Value Metrics that Customers Care About
GinzaMetrics specializes in SEO and content marketing - keyword tracking, sites, and the number of competitors tracked per site are the main staples by which customers make their purchasing decisions. The company’s pricing page reflects this perfectly, as each tier communicates exactly how much of those features you’re getting for the price. No massive full feature list, no checkmarks, no worries.
While we can’t be totally sure how they arrived at these drivers (we’re betting on customer feedback and analysis), we can assume that these are the features Ginzametric customers value the most. It’s obvious you’re charged for each unit of value you’re receiving because you get more of those three essential facets of the product as you move up the plans.
In addition, any aspects of the product that all the plans include (unlimited users, for example) are kept below the brackets to reduce confusion. Because a feature like unlimited users isn’t a plan differentiator for Ginzametrics, I’m a big fan of how they place it below the fold.
Custom dashboards also act as a value metric that differentiates the tiers, but you’ll notice you don’t have access to that feature with the Small plan. This omission is probably for two reasons. First, it’s a way to differentiate the tiers and create a clear upgrade path for “super users” looking for additional value from GinzaMetrics (even if they don’t need more keywords, sites, etc.). Second, they may have discovered smaller companies don’t need custom dashboards as much as Agency Anne or Enterprise Eddie. Thus if the Small plan included them Startup Steve might feel like he’s paying for premium features he has no desire to use.
The bottom line: SaaS and software products are unique in that they have feature sets inherent to the product that can be used to scale services and justify prices from one plan to the next. The key to setting effective packaging is understanding what value metrics you have to work with and which are most relevant to each of your buyer personas.
Don’t be afraid to strip out features like GinzaMetrics has done though. You don’t have to give each customer cohort a piece of everything to align your packaging and plans to customer value perceptions. Quantify what each buyer persona actually needs before you decide what to include.
Charge Accordingly for Customer Support
Notice how customer support gets a whole lot better as you move up the tiers? For Agency Anne, it’s an extra $500 a month to have a dedicated account manager from GinzaMetrics take care of the issues that arise amongst her 30 clients, and it’s probably worth it. One of the largest costs in SaaS is support (dedicated employees, help desk software), and usually it’s the customers that pay you the least who need the most help (a highly sophisticated director of IT at a Fortune 500 company won’t need help fixing small bugs like a non-technical Startup Steve might).
Ginzametrics does a great job of using support to communicate and add value to the higher plans. Support has a permanent home in each tier below the value metrics, and the Medium and Large plans each offer something a little different to create additional value.
In particular, I’m a huge fan of the custom onboarding feature in the larger package. Successfully educating stakeholders and integrating the platform into large site portfolios is probably extremely important to Enterprise Eddie, and it’s a superb way to ensure client success and reduce churn amongst Ginzametrics’ highest paying customers.
The bottom line: Customer support adds value and eats up bandwidth like an elephant, so why not incorporate it into your pricing page? Using support as a value metric that helps determine your packaging and pricing, when done simply like Ginzametrics, effectively demonstrates the increased value of your upper tiers so customers see another reason to upgrade down the road.
Use a Free Trial!
GinzaMetrics is playing a long game here, giving away 14 days of product usage. However, this ensures potential customers know the value of the product before they pull out their credit card. While a freemium offer or free plan would demonstrate value too, that’s where the similarities end. The freemium model provides very little incentive to upgrade to paid, and if you strip many of the features from your free plan to create incentive, the right customers may never get an accurate picture of your product’s worth.
The bottom line: Giving your prospects a chance to test drive your product before they buy is a win-win for everybody. Potential customers get to utilize your features and see the immediate impact on their business/operations, and your sales team gets a list of hot prospects to hand hold through free trials, which will help them uncover pain points and ultimately close the deal after the trial period ends.
A Note on the Prices
The only closing thoughts I have for GinzaMetrics concern the actual pricing structure. A $12,000 annual spend for a startup business seems quite hefty. With that being said, GinzaMetrics is servicing a different segment of the market than their leading competitor Moz.com and their pricing tiers are aligned to some unique value drivers. I do think there is an opportunity to create a more limited version of the product at a lower price point to capture more customers downstream in the market. However, without looking at customer data and testing willingness to pay, this is purely speculation on my part.
All that being said, bravo GinzaMetrics on a beautifully constructed pricing page!
Want to Learn More?
Each company and pricing page is unique, so if you want a detailed analysis of your own pricing strategy, feel free to sign up for a free Price Optimization Assessment with an expert here on the team.
If you want to dive deeper into pricing page best practices, check out our latest eBook, The SaaS Pricing Page Blueprint, which offers in-depth data and analysis on building the perfect pricing page.
Your pricing page is the most important page your company will ever build. Don’t believe me? Well, consider this: every other page and almost every other activity in your company works to lead people to that page and convert them to healthy, paying customers.
To a greater extent, pricing can be thought of as the center of your business. After all, you exist to provide some nugget of value in exchange for cold, hard cash to keep your business surviving and thriving. Pricing is the exchange rate on that value, and your pricing page is the final gateway that ideally works to justify that exchange rate.
After looking at over three thousand SaaS pricing pages and writing about the best ones in our SaaS Pricing Page Pageant, we decided to double down and bring you a resource to make your pricing pages fantastic. Let’s dig into two top level findings that can help everyone before giving you access to all of the study’s insights. Don’t want to wait? Well, go ahead and download the SaaS pricing page study here:
1. Only 1 in 5 Companies Set Prices Based on Customer Value
That’s worth repeating. Only 1 in 5 companies use customer development and perceived value to set their prices, while the rest settle for prices based on a combination of guesswork, competitors’ pricing, and their costs of production.
Guess what? Your customers don’t care about your internal development costs or how much your competitors charge. Be empathetic and realize that your customers are purchasing based on their own value perceptions, which means you need to price by quantifying the value you’re providing them.
Bottom Line: Go out and talk with your customers about how much they’re willing to pay for your product. You’d be surprised how open people are when it comes to chatting about prices.
2. Two out of Three Companies DO NOT Have a Freemium Plan
This was surprising, because any Google search for “Freemium” results in hundreds of articles discussing the pros and cons of such an illusive strategy. We’ve been pretty open about our bias towards a free trial instead of a free plan (86% of companies utilized at least a free trial), mainly because a freemium offering can be a pretty hefty marketing expense .
The Bottom Line: Don’t assume you absolutely need a free plan. If you do choose to provide one (or are already providing one) be cognizant of the fact that freemium is a customer acquisition strategy, not a revenue model (click here for more on freemium vs. the free trial).
Focus on Your Pricing From a Value Based Perspective
While these findings may not be earth shattering to you, much of the other information we found concerned the actual mechanics of the pricing page. For instance, 55% of companies utilize three to four distinct pricing plans. Only 18% of companies offer an annual pricing option. 6 out of 10 companies include FAQs. The list goes on in the ebook.
While these mechanics, facts, and figures are important from a design and setup perspective, the most important factor to continually keep in mind concerns value. You need to continually measure, optimize, and boost the value your customers see in your product. They’re the ones paying you and no amount of backdoor cost analysis, revenue number crunching, or competitor research will reveal what they’re thinking, so talk to them.
To find out more, check out the whole study in the ebook below.
Recently I moved into a new apartment after living the past year in a school dorm, and let me tell you, transitioning has been a tremendous challenge. For example, I am now the proud owner of a kitchen, which of course means I can no longer rely on an endless supply of ready-made food from the school dining halls. Instead, I have to rely on my meager cooking abilities to make sure I don’t starve to death. Eggs for dinner, anyone?
This experience has forced me to reassess the value of free food offered by the various student organizations on campus. Eating free pizza for dinner a few nights a week doesn’t sound so bad anymore. It saves me the time and trouble of cooking and cleaning dishes, plus it tastes better too!
photo credit: Stéfan via photopin
So what do my college food woes have to do with your pricing strategy? Well, when my previous food supply was cut off, my general appreciation for free pizza (or any other free food for that matter) increased dramatically. In a similar vein, you can boost the value of your product by taking it away from your potential customers. This isn’t to say you should disregard paying customers and discontinue your service, as that would obviously be a detrimental business move. Rather, it refers to implementing a limited free trial of your product, which can help you attract new customers without requiring you to give away the whole shebang indefinitely. Let’s dig a little deeper into the psychology behind this phenomenon before we discuss the benefits of applying free trials and the potential downside of freemium models.
Loss Aversion and the Endowment Effect
Through years of study, researchers have developed two psychological principles that are critical to understanding the effect free trials and freemium offers have on your bottom line.
The first principle is the endowment effect, which states that consumers are willing to pay more for a product when they are able to interact with it. In fact, an experiment was done in the 1990’s where researchers asked two groups of people how much they were willing to pay for a ceramic mug. The first group was only allowed to look at the mug, while the second group was allowed to hold it and inspect it close up. After the trial, the researchers concluded that the second group valued the mug almost twice as much as the first group. It was as if being allowed to touch and take ownership of the mug added sentimental value to the object and increased its overall quality.
photo credit: H is for Home via photopin
The second principle is loss aversion, which refers to the inclination for people to staunchly prefer avoiding losses than acquiring gains. This was illustrated by two college psychology professors, who performed a brief psychological study among their students. They offered their students a variety of bets and found that they needed a payoff of at least $40 before they would take a 50/50 bet that might cost them $20. Simply put, the pain of a loss was twice as intense as the pleasure of a gain.
Enough with the Theory, How Does This Apply to My Pricing Strategy?
The two principles we just discussed allude to three critical implications that you need to consider before using free trials and freemium plans to attract new customers.
1. Freemium and Free Trials Both Demonstrate Value, but That’s Where the Similarities End
Offering potential customers a taste of your product ensures they will appreciate more of its benefits simply because they feel a sense of ownership and have the opportunity to interact with your brand. By allowing customers to experience the value of your product first-hand, you can use the endowment effect discussed above to raise the perceived value of the product. This is similar to the impact physically holding the mug had on the second group of research subjects. No amount of cutesy videos, testimonials, or feature lists can compare to a prospect actually getting a chance to use your product, and it’s the most effective way to fully demonstrate the value of your offering.
However, the problem with using the freemium model is it provides very little incentive to upgrade to paid*. Giving away the value you’ve created for an unlimited time frame can lead to a flood of problematic prospects who will churn out after they lose interest, and if you strip many of the features from your free plan to create incentive, the right customers may never get an accurate picture of all the benefits your product has to offer.
*A caveat here is if you properly set up your freemium throttle to act as a free trial, meaning as soon as the free user starts to get more than a taste of the product (slowly becoming an average user) they are forced to upgrade to a paid plan.
2. The Risk of Loss Makes Free Trials More Effective
The goal for any business is to demonstrate enough of a product’s value to justify a profitable price. Free trials enhance your customer’s understanding and are one of the best ways to demonstrate that value while increasing your customers’ willingness to pay.
Free trials are especially effective because you’re limiting the amount of time a prospect gets to use the product, which forces them to make a purchasing decision once the time is up. At the end of the trial (usually 30 days), they either pay to continue capitalizing on the perks of your service or lose access. Due to the principle of loss aversion, the customer is more likely to buy when the time’s up to avoid being deprived of the value your service provides (that is, if it’s a great product). Just make sure to price your product in accordance with its actual value and engage your customers throughout the free trial period to maintain healthy conversion rates to paid tiers.
3. Zero Risk of Loss Makes Freemium Less Effective
So what about freemium strategies? Like we discussed earlier, freemium offerings can demonstrate the value of your product but they often fail to motivate customers to buy. Unlike free trials, which take advantage of people’s natural tendency to avoid losses, free plans require you to give away a portion or all of your service indefinitely. While this might work for big companies like Spotify that depend on continual rounds of funding and capital investment, it probably won’t work for you.
We’ve said this before, but freemium is a marketing strategy, not a revenue model. While free plans can widen the pipeline and bring in a swarm of leads, they don’t necessarily attract your ideal buyers or ensure you’ll be able to entice prospects to upgrade to profitable products, especially if you haven’t uncovered which features actually drive customers to purchase. In addition, to find a balance between giving away too much or too little of your product is incredibly tricky. Many potential customers won’t see the need to upgrade, either because your free plan doesn’t demonstrate enough value (causing them to abandon ship and look for alternatives) or because it provides them with such a huge portion of your service that they don’t see any benefit in paying for additional features.
In Summary: Don't Give Away the Farm
I know it feels like we’re beating a dead horse, but we’ll keep saying it until the cows come home: freemium is a marketing strategy, not a revenue model. You need to be smart with how you’re opening up your product to increase conversion rates, otherwise mitigating your customer acquisition costs might become a huge obstacle. What’s the alternative? Transition your product from a stripped-down, freemium offering to a full-featured free trial. Not only will you be demonstrating more value in your product with the extra features, but you’ll also increase your conversion rates by tapping into people’s natural tendency to avoid losses.
To learn more about pricing specifics, check out our Pricing Strategy ebook, our Pricing Page Bootcamp, or learn more about our price optimization software. We're here to help!
In case you’ve been living under a rock, Apple’s iPhone 5C has been getting a lot of press lately. Critical examinations of the most recent iterations of the iPhone as well as Apple’s pricing strategy have been clogging up my newsfeed for the better part of the past week (along with the story about the sucker who paid $10,000 for an iPhone 5S). Many expected the 5C to be a major departure for the company in terms of design and pricing, but those hoping Apple would introduce an entry-level iPhone model with an affordable price tag were sadly disappointed. The 5C is basically an iPhone 5 in a colorful plastic onesie, and it costs $550 unsubsidized, which is only $100 less than the flagship 5S model.
Despite criticism that the iPhone 5C is too expensive and won’t penetrate developing markets, Apple CEO Tim Cook has vehemently maintained that the company isn’t “in the junk business” or competing for price sensitive consumers. Translation: We want to offer a slightly less expensive version of the iPhone, but not be perceived as a cheap brand. Got it. Whether or not the 5C is a feeble attempt to capture a piece of the market downriver, introducing a cheaper, stripped-down version of a product can actually be a great strategy. Apple’s approach to offering a “lower quality” version of a product is a tactic worth exploring, and there are numerous applications for companies looking to differentiate their SaaS products and price them effectively.
photo credit: Martin uit Utrecht
Why Should I Care If They Aren’t Willing to Pay a Premium Price?
Sure, it looks as if Apple is implementing its all-too-familiar premium pricing method with regard to the 5C, but the Hulk-like strength of the brand allows it. Your business can cast a much wider net if you adjust your pricing strategy to include customers on the low end. Simple unit economics suggests that a bare bones, lower-priced version of a product or service can boost revenue by bolstering adoption volumes (even Apple lowers prices over time to capture some of the consumer surplus). There are, however, two other distinct advantages some companies can overlook while neglecting these potential customers with a higher price sensitivity.
Advantage #1: Entry-Level Pricing Can Break Down Barriers
If you run a SaaS business, there is a good chance that your product has several pricing tiers. Usually, the structure of the pricing model is scaled based on the number of features offered, user licenses, storage requirements, etc. Price your entry-level product or service too high though, and you risk pushing away potential customers who would happily pay a nominal amount for your product (even if it includes less features or decreased functionality).
Case in point in a different industry: The New York Times. To maintain both cultural relevancy and financial solvency, the newspaper giant offers a limited digital subscription (accessible via web and mobile phone only) for a mere $15 per month. The pricing continues to rise all the way through home delivery options. We criticised the company in a previous post for implementing complex pricing schemes, but for customers who need a cost-effective way to access articles published by the NYT (and don’t need tablet access, multiple user accounts, or a print copy), this plan offers value and helps the Times capture revenue from penny-pinching customers it might otherwise miss.
photo credit: wallyg
Advantage #2: Low End Customers Can Be Cultivated
Rather than simply dismissing an entire segment of customers as “too cheap,” offering a less expensive version of your product gives you the opportunity to persuade these customers to upgrade to premium plans (or more expensive products) in the future. Not to be confused with freemium plans, which can actually limit long term revenue potential, a cheaper version of an existing product gives you the flexibility to promote adoption (freemium’s strength) while also generating some revenue along the way (freemium’s obvious weakness).
As a SaaS company, instead of creating a large gap between your free version and your first paid plan (say $50/month), consider offering a lower-priced tier (with reduced features) at $25/month. This not only pads your revenue as more customers switch from the free version to the inexpensive $25/month plan, but it also fosters a relationship between your company and the customers. As the needs of these $25/month customers change or their business grows, you will have already built the communication channel to encourage them to upgrade to a more premium product or service.
But What About My Brand and Cannibalization?
The cries of “brand dilution” and “cheapening your brand” will be inevitable whenever you consider offering a slightly lower quality, less expensive version of an existing product. Critics of a lower-priced iPhone have already made comparisons to branding trainwrecks such as Burberry licensing its pattern to anyone and everyone who would pay. There are significant differences, however, between Burberry totally selling out and Apple’s attempt to offer the iPhone at a slightly lower price point. Primarily, Burberry’s trademark pattern was a singular product, while Apple can differentiate the 5S from the 5C via several features (a fingerprint scanner among them). A somewhat lesser phone should understandably command a somewhat lower price than its standard counterpart, leaving little room for concerns about overall brand damage.
photo credit: make little sharks. via photopin
Cannibalization could be a credible threat, but when the entry-level product is significantly differentiated both on features and price, this usually becomes a non-issue. It would seem illogical for a SaaS company to worry about missing additional revenue on a $50/month product when the customer barely justified purchasing the $25/month product, and capturing a new customer segment with an affordable offering shouldn’t decrease the sales volume of your more profitable services.
A Low Cost Offering Creates an Opportunity for Growth
Introducing a lower priced version of a product or service isn’t the answer for every business, but if you have concerns that your introductory price is stymying sales or preventing growth, it’s something you should explore. Every aspect of your pricing strategy is a process, and experimenting with product differentiation and analyzing the results can be an effective, ongoing component of that process.
Offering a lower tier of service can bring in new customers that have the potential to move upriver as their own businesses grow. Plus, developing and delivering a great service with less features won’t cost nearly as much as the creation of your core product. Simply put, there’s too much cash left on the table if you ignore a whole segment of consumers who might be interested in a basic version of your product with a reduced price.
To learn more about pricing specifics, check out our Pricing Strategy ebook, our Pricing Page Bootcamp, or learn more about our price optimization software. We're here to help!
Note: This post utilizes data from one of our customers, SmartBear Software. We'd like to thank Jeanne Hopkins, their CMO, for letting us release the gist of the findings, in order to let everyone learn from them.
Freemium has gone from an intermittent growth tactic in the software disk days of the 1980s to a strategy that every SaaS company can’t live without. After all, how do you grow a business without giving away the farm for free?
Sarcasm aside, we’ve debated the merits of freemium before in a previous post. Our conclusion is better discovered on that post, but the gist is: freemium is an acquisition tool, not a revenue model. When used correctly, freemium can be wonderful for businesses and that’s why everyone is flocking to barren tiers. Yet, with 5 million downloads of their free tools for developers, one of our customers, SmartBear Software, was thinking about the naming convention of free or lite in labeling their software offerings, positing the question:
"Does calling the free plan “free” (or “lite”, “basic”, etc.) diminish the value of the product?"
The subtext here is that free plans have become such a novelty and so poorly set up that unless your first price point is close to free ($0), you’re essentially shooting yourself in the revenue draining foot, because the delta between the free plan and the first paid tier is too high (especially in enterprise companies). To answer their question, we did what we do best: gathered customer data and determined some willingness to pay magic. Let’s explore the study, the results, and top-level findings to help you boost your revenue right away.
The study: Comparing ordinal names to regular names
Without getting too deep into our software and process (you can hear the pitch on the phone or website if you want), we make value based pricing software that gets to the heart of willingness to pay by collecting data directly from the customer. Part of our software also determines relative preference between features, benefits, or value propositions by forcing the user to make choices between them. Here's some example output from a fun pricing study we did comparing the price of time with Dharmesh Shah or Jason Calcanis:
For this study, there were a few moving parts. We first took different target customers for each SmartBear product, had them price out a full featured product based on its features and value propositions, introduced a less featured free product with the free name, and then had them price out the free tier while knowing full well that the less featured tier was free. We then calculated the difference between those two numbers, and voila we had clear trends on the value of the names. (Side note: We also ran the feature preference studies against the different names.)
In terms of different names, we tested modified names where we appended “Free”, “Basic”, “Starter”, and “Lite” to an existing name. We also introduced a non-modified new name that was branded similarly, but didn’t have an ordinal prefix or suffix. For example, let’s say we’re pricing a product named PriceIntel. For the study, we would test pricing by determing the willingness to pay for "PriceIntel" (full featured product), then price “PriceIntel Free”, “PriceIntel Basic”, “PriceIntel Starter”, “PriceIntel Lite”, and then “PriceSmarts”, which is the non-modified name.
Hopefully, everyone is with me so far. If not, comment or give us a call and we’re more than happy to walk you through everything. :)
Results: Names have impact on perceived value
The results were exceptionally telling. Essentially, “free” drove the price to pretty much free or $0. Basic, Starter, and Lite all hovered around 50% of the original value, and the non-modified name only drove the perceived value of the product down 15 - 24%. Keep in mind we tested this across some pretty nerdy segments (software engineers, software developers, network engineers, etc.), but every single segment we tested had pretty much the same results. Take a look at the aggregated results:
The relative preference results fell in line similarly, as well. Keep in mind though that this analysis forces the respondent to choose a most valuable and least valuable name, so no matter the frequency of responses, more than likely when people see “free” it’s an easy choice as the least valuable. Here are those results:
How can this help you? Non-Ordinal Names and Value Metrics
1. Skip ordinal names for your free tier
Instead of using cliche ordinal names like "free", "starter", "basic", or "lite", use a real name. Not creatively inclined? Just grab a thesaurus and get cracking. At the very least name the tier after the customer persona using the product. If the free plan is for a single person with the hope you’ll land and expand into the team, then name the tier “solo.” If it’s for small businesses, you’re also hoping to grow with, then name it the “small business plan.” I’m not a creative genius, so I’m sure there are better examples out there.
Just don’t kill your value, conversion rate, and revenue by pricing improperly.
2. Align your tiers along your value metric
A foundational principle of pricing and packaging is that you need to charge your customer for the value you’re providing them. As that value increases, you should charge more. Wistia is a phenomenal example. As you get more bandwidth and upload more videos (get more value from the product), you pay more.
If you don’t have a finely tuned throttle or proper feature differentiation between your free plan and that first tier, then you can’t move your customers up along your value. You’re just giving it away. This is especially scary in the enterprise space where the difference between a free plan and the first premium one can be from $500/month all the way to $1000s per month. As such, make sure that free plan, no matter the tier moves that customer “up the river” efficiently.
Freemium offers are only the silver bullet to a business when you’ve figured out a good portion of the big aspects of your business: customer, marketing flow, user metrics, etc. If you’re taking the free plunge or starting off with it from day one, make sure to start small. You can always add more features or increase the throttle, but it’s a heck of a lot harder to take things away. After all, if you’re not moving those customers up into greater profitability, then you’re just running a really expensive, developer ridden tech charity, rather than a growing business.
To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization software and solutions. We're here to help!
This article is a guest post from Jack McDermott, Co-Founder and CEO of Balbus Speech, one of the market leaders for effective speech therapy apps and tools. Here he writes about his experience in Apple's app store.
Anyone dealing with software pricing knows one thing in particular: it’s really, really tough. Most companies struggle to find the ideal balance between price, value and user acquisition costs. Not to mention most software products come without recurring revenue—so you better make your one sale count and not leave cash on the table.
It’s even more challenging when you’re selling apps on the App Store, where nearly 9 out of 10 downloads are free apps. Price Intelligently has already written a great post on freemium here, but with well over 700,000 apps, the iTunes App Store is a pricing battleground that favors the lowest possible price: free. For independent developers, it’s sometimes impossible to stand out from all the rest. But, just like catchy marketing or a refreshing user experience, pricing is another way to attract new customers.
photo credit: PhotoAtelier
At my startup, Balbus Speech, we develop speech therapy iPad apps. In a specialty market like ours, prices on the App Store range from free to upwards of $99. Our apps, Speech4Good and Speech4Good Lite, are targeted at speech therapists looking to spend between $5-20—no easy feat when the entire marketplace is sunken with free to 99 cent apps. As a result, pricing our apps has been a constant evolution of “trial and error”—our prices have moved anywhere from free to $29.99. Yet through the trials (and with a little help from Price Intelligently), we have learned two key takeaways:
1. Be goal-orientated: Turn "free" into "free to download"
Your app pricing should reflect your company’s goals. With our apps, we recognized that our market is highly selective and comfortable paying for therapy resources. Yet, we also recognize that users can only improve their speech if they have access to our technology. Clearly, we need to think of our pricing structure as a combination of affordable value as well as widespread accessibility—which is evidence of our full-featured version ($19.99) and our “Lite” stripped-down version ($4.99).
On the other hand, if you’re marketing a viral game or music/video app, you may want to compete on features and user experience, not price (most are free to download anyway). Unlike special education apps, these apps have different goals: most often, free to download with restricted features or levels that require an in-app purchase—remember: “freemium” is a marketing strategy, not a pricing strategy.
2. Get creative: correct price points and targeted flash sales
It’s time to change how you think about sales on the App Store. Your goal should be minimal: what value in price do I need to portray to get a potential user to make two clicks and type in a password? This is often all that’s needed and it’s how you should think about your App Store product. In fact, by lowering our price 33% from $29.99 to $19.99, app sales increased by over 200%--making this pricing change a valuable long-term strategy.
What about getting creative with flash sales? We tend to avoid quick sales—which usually hope to spike downloads and make your app rank higher on the App Store. Our market is less elastic in this sense, as speech therapists and students typically research and compare apps before purchasing. But if you’re looking to temporarily drop your price, do it with a clear purpose. For instance, we recently partnered with “Apps for Children with Special Needs” to promote a back-to-school app sale—this way we maximized our marketing reach with a partner while also promoting an event or occasion as the reason for our sale.
In summary: Iteration in any pricing strategy is key
So with these ideas in mind, there’s only one thing left to do: try it for your app. We've been able to refine our pricing strategy so we can do less “trial and error” and make more sales. Pricing is a process just like marketing, product development or even sales. The sooner you treat your price strategy this way, the sooner your app sales will exceed your goals.
To learn more, check out Price Intelligently's Pricing Strategy ebook, their Pricing Page Bootcamp (it’s free!), or learn more about their price optimization software.
UPDATE: We clarified some of the language in an example we outline in the middle of the post. The numbers are simply samples strictly to show an example scenario that isolates the impact of freemium. If you're interested in running through the math with your own data, let us know.
On May 26, 2006 famed VC Fred Wilson posted the following about his favorite revenue model:
"Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base."
And thus, modern day freemium was born. Of course as Fred mentions, freemium had been around for quite some time in numerous different forms, from the free calls of Skype to the free storage of Box.net (even before the 2000s software developers have been giving away lite versions on CDs since the 1980s). Yet, at the time of this article, the momentum of freemium began to change from novel to mandatory. Everyone bought into the idea of “just get a bunch of people to sign up and drive them up the river of your plans." Revenue slowly became a secondary goal though with musings of, “we’ll figure out the revenue model eventually” or “we’re just not focused on charging customers right now, maybe in a year or two.”
The success of Skype, Facebook, Flickr, and the like didn’t help, painting freemium as the silver bullet to any entrepreneur seeking a billion dollar exit. Of course, this perspective is a bit gonzo in it’s assertion, but after mentoring some early stage companies at a number of events the past few weeks, we’ve lost touch with the one truth about freemium: it’s a marketing strategy, not a revenue model.
In an effort to clear the misconception around freemium's true purpose, let’s explore why freemium potentially kills businesses, uncover where freemium is appropriate (the big asterisk), before going through some healthy ways to implement “freemium like” strategies.
Freemium is a marketing strategy, not a revenue model
In a freemium model, a business is giving away a portion of the value they’ve created: 1. to gain as much interaction with potential paying users, and 2. in the hopes that the value in a premium tier is so enticing to a customer that they can’t help but drop their credit card digits to upgrade. Yet, pushing a customer up to a premium tier takes an extraordinary amount of intimate knowledge about their behavior and incentives, let alone a direction on who that customer is out of the different personas you could be targeting. Freemium will make your pipeline much wider, potentially leading to a flood, but if your customer and business development aren’t guiding the water through proper canals and ditches, you simply have a disaster of support, hosting, and frustration costs for customers that don’t want to upgrade.
This is why companies like Wistia and MailChimp are around for 5 and 10 years (respectively) before they launch a free plan. By that time they’ve figured out what drives their customers, at least to a point where they’re ready to step on the gas. Essentially, freemium didn’t lead them to being a good business. Being a good business drove them to freemium.
When you launch a freemium plan you should have clarity as to the purpose of that plan and how it will lead to an increasing amount of revenue across your bottom line. You should be so excited that your CTO busts out a legendary rap launching the plan (see Wistia below). It should be an event worthy of a ticker tape parade.
Enough with the philosophical stuff, what’s the data show
OK, all of that was philosophical, so I’m sure some trolls will find some exception or tautology to explain how I’m generalizing and completely wrong. As such, let’s do an impact analysis using some sample data. Let’s say you’re a SaaS company with three tiers and your software pricing as follows:
Let’s make some assumptions for this scenario, too. I repeat, we're making these numbers up to outline a scenario to show some data around the impact on freemium. (If you want to test out the impact of freemium on your own product with your own data, let us know.) You’ve done a phenomenal job marketing your $49 product and start with 100 customers (and 0 customer in the other two tiers), growing the base by 30% while churning at a rate of 10%. You’re also able to move your customers to upgrade at a rate of 5% every month from tier 1 to tier 2 and tier 2 to tier 3. (lots of numbers involved in the revenue modeling...email me if you'd like to go deeper :)).
If nothing changes, at the end of five years, you’ll have 1,095 customers and a run rate of $900k. Now imagine we drop that bottom tier to $0 and hold everything the same.
The result: your $900k 5-year run rate just turned into $380k. 42% of what you could have had.
Obviously, there are a number of factors to consider here and all of these levers can be optimized and improved. Yet, look at the real dollar impact on your long-term run rate with all things being equal, in addition to the costs in supporting and marketing to free customers that haven’t proven they’re willing to pay for any aspect of your product.
Simply put, freemium is not an insignificant cost to your business. If you're not able to optimize any of the above metrics, then maybe you should develop your marketing, pricing strategy, customer, etc. to grow into a freemium strategy. Big customer databases are only sexy if they’re ponying up cash.
The asterisk: where freemium works
There’s a huge asterisk that shouldn’t be overlooked. For some companies, freemium is viable from day one. Although, I’d really push anyone on this claim. Very few of you will be a Facebook, and even then, they haven’t figured out their ideal revenue model. If you want to build a platform, then be a LinkedIn, charging the power users of the network from day one. Social applications and other platforms like Smarterer need to grow their free user base to a point where the data is valuable to a paying user base. That’s perfectly fine, but really challenge yourself to think about creative ways you can charge right from the get go.
If you’re trying to figure out your revenue model, the answer is rarely “let’s give it away for free until we figure out how to charge.” Instead, test different revenue models. Iterate the pixeled dollar signs on the page quickly and see which maximizes cash.
Finally, tread cautiously, but if you can figure out how to embed viral growth into your free offering, go ahead and offer one. Dropbox brilliantly offered a negligible amount of storage unless you tweeted, shared, or signed up your friends for the service. All of those actions correlate to an actual dollar amount in customer acquisition spend, making the shares, invites, and tweets from “free” users actually correlate to real marketing dollars. Just be careful, because it doesn’t work for every product.
OK, I get it. What should I do though?
1. Diet freemium - the free trial: If you’re selling a SaaS product, then don’t be afraid of the free trial. They’re exceptionally valuable in giving a potential customer a taste of the value you’re creating, while not giving away everything and the kitchen sink without an upside.
2. Follow business fundamentals: If you practice the fundamentals, your freemium time will come. Double down on finding product/market fit or at least moving as close to it as possible before flooding the business. Take the time to also find out what drives the customers coming through the pipeline. Usage from current customers is exceptionally enlightening. Plus, you'll be able to optimize retention, upgrades, and costs to a point where you'll be making enough cash to seriously consider whether freemium is for you.
The goal of any business is to create some sort of value that someone is willing to buy. Whether weeks or months go into that first dollar of revenue or your cash flow begins trickling in from day one, someone exchanges cash for the efficiency you’ve created. Business at its core is that simple. If no one is buying, then you haven’t justified your value for that price to that particular customer. Of course, if practice were as good as theory, we’d all be driving maseratis right now, right? Developing your customer and your product takes time and energy. You can still move quickly, but don’t be reckless by giving away the farm. Cash is the real validating king.