Archive for August, 2010

Pricing & Profit

Pricing is one of the harder parts of a business to get right. But it’s easier than ever, though, with a SaaS business – because you can iterate!

In the first 2 years at Engine Yard, we raised prices 3 times. And after I left, EY changed pricing a couple of times – not always raising or lowering pricing, but changing *how* things are paid for… for instance, charging for tech support by itself instead of bundling it with hosting.

As someone managing a business, at first you’re trying to find the price that gets customers at all, then the price that makes profit, then the price that maximizes profit.

When you start something new, the best you can usually do is make an educated guess that’s based on other products and companies, as well as past experience. A common fear in just about everyone is that they’ll price too high, but it can be more damaging to price too low.

As others have said, price is the strongest signal you can send to the market. Price affects perceived value! A higher price causes people to assume your product or service is better. Of course, if you go with a high price, you have to live up to customer expectations.

Price attracts some and repels others. Some people seek the cheapest solution. Some seek the most expensive. Most people are comfortable in the middle and are uncomfortable at the extremes, which is why most plan selection pages have 1 or 2 plans in the middle of the range of prices (and usually in the middle of the literal page or layout).

Chargify

I think we guessed pretty well at Chargify. We’ve kept our pricing stable for a year, and if anything, we get feedback that our pricing is a bit low.

We have a large and diverse set of merchants using our platform now. Some need more support than others, some want a Service Level Agreement, some want premium support, etc.

We want to offer the features that the majority of merchants need. And we want to offer top-notch support as well as top-notch people, infrastructure, vendors, and partners.

The cost of features is pretty obvious: we have a team of developers who make the magic.

The cost of the rest is less obvious: we all share responsibility for tech support, so the support cost is somewhat hidden. It shows up in things like feature development taking longer.

Other less direct costs include the sys admin we hired, the fantastic processing facility we moved to, and the support person we’re hiring. And one more very important layer: all the folks at Grasshopper Group who support us in many valuable ways.

So, basically, there’s a whole company to account for :-). And we need to make a healthy profit.

Profit

Profit is good, of course, because it alone allows us to continue indefinitely, to invest in people & technology, to market our services, to repay startup costs, and to make mistakes. Companies that don’t make a good profit are in serious danger from inevitable mistakes & Acts of God. For instance, we will almost certainly spend time developing some wrong features, or we’ll need to pay for insurance we don’t know about yet, or we’ll step on someone’s patent, or a flood will hit our data center, etc.

Healthy profit makes all those things less problematic.

Distribution!

Ooops! I forgot something when I wrote this yesterday… Distribution! Wow, big oversight! Sometimes I’m a bit dense 🙂

There are definitely successful businesses that are mostly (or maybe entirely) direct sales models. Maybe 37signals? I really don’t know. I suspect that many SaaS offerings (especially those aimed at smaller customers) may be direct or mostly direct sales/distribution models.

But my early business experience growing Parallax taught me that allowing others to profit by selling and supporting our products could really widen our reach. After a number of years, something like 50% of our sales came through distributors all around the world.

These distributors maintained inventory of our hardware products and they provided tech support in their local language. They also advertised our products and showed them at conferences. Imagine how cool it was when we saw our products at conferences from Hungary to Japan, fully translated in advertisements, and we didn’t have to do anything except ship product to them occasionally.

Anyway, distribution channels can definitely be a good thing. The kind I described above want 30-50% off the retail price so they can pay for the services I mentioned and make a decent profit. Radio Shack was the granddaddy and they demanded 55% off retail! They also placed really big orders!

For something like Chargify and other SaaS offerings aimed at small businesses, there tend to be fewer layers between producer and consumer, but what about affiliate programs? What about partners (as your business grows)? These parties need to have an incentive to bring customers to you, so your pricing needs to have room for them if you foresee any role for them.

Of course, you can rev your pricing as your business and channels evolve. You may start 100% direct as we did at Parallax and end up 50% thru distribution after a few years.

I love talking about this stuff because it’s fascinating and the journey never ends!

Back to Chargify

We want be very profitable and remain accessible to small startups and provide services that more established businesses need.

If you have a minute, I’d love your input on a short, 5-Question Survey that will help guide our thinking.


Fun Stuff & Business History


@lancewalley
lwalley@chargify.com

Motorcycles
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I co-founded Parallax in 1987 with my best friend. We were both fresh out of high school. We grew from a bedroom operation to a $3M/yr business.

I learned a TON at Parallax! We strugged for several years to find a market we fit, but once we did, were were able to "pivot" (today's term!) into that market and then execute on manufacturing, marketing, and distribution. We didn't even know the term "VC", so we *had* to make money! We took $20K from friends & family and had day jobs to bootstrap those early years.

As I left Parallax in Winter 1996, Radio Shack started carrying our BASIC Stamp computer.

I spent a few years trying to make money in the mobile-messaging space. Unfortunately, I learned lessons about how to spend all of my cash chasing a market that simply was not yet developed enough. I wish I had known about VC :-)! I closed up shop and put up a notice saying "goodbye" to my customers.

Which led to a San Francisco VC-funded startup in 1998. They were in the mobile-messaging space and were on the normal VC route as everyone else back then. Unfortunately, it didn't end pretty, but my friends and I learned a lot through the CEO, who was nice enough to tell us how things worked with his Board, the investors, etc.

I got laid off along with most other tech folks in SF in 2000. What does one do at a time like that? Start Quality Humans, Inc. as a way to offer my programming services to clients. QHI grew to employ 8 guys working around the USA.

My friend and QHI consultant, Tom Mornini, saw Ruby on Rails coming over the horizon, so we started offering Rails consulting. Within a few months, Tom noticed that Rails clients didn't want to worry about details; they just wanted to deploy their apps.

That led me to co-found Engine Yard in 2006 with Tom, Ezra Zygmuntowicz, and Jayson Vantuyl. We built a great business and then took VC after a year from Amazon, Benchmark, New Enterprise Associates, and others. I served as CEO until Jan, 2009, when we started building an executive team who can take EY up a few more notches.

I reflected on major pain points we experienced at EY, and recurring billing was one of them. That led me to Chargify.

In Chargify, I joined great folks from Grasshopper. It's been very cool working with the team as we grow Chargify in 2011.

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