The Bootstrapped Founder Newsletter Episode 27 – May 15th 2020

Dear founder,

Here is the most profound lesson about pricing I have learned from many years building businesses: You can always change your prices.

You own your business, and you can change everything about it. Most payment providers allow you to have an infinite number of plans, and you can add (and remove) as many as you like at any given time.

There is no reason to stick with what you initially conceived as good pricing. Don’t hesitate to change the prices of your plans just because you picked an arbitrary number of dollars when you first launched the business.

Keep in mind that this can be very disruptive for your customers, so there are a few things to keep in mind.

An important aspect is Honest Pricing and the Perception of Value.

Never be sneaky about changing prices. Inform every customer who will be affected by this change. If you offer a trial period for your product, make it clear when customers need to subscribe to get the prices they were told when they started their trial. If you raise prices for existing customers, inform them way in advance, so they have a chance to commit or complain. Having people frantically scramble to offboard their data because they can’t afford your product anymore will create a lot of bad press and sour the long-time relationships you so carefully built.

With enough value nurturing, customers will understand that a continuously maintained and updated SaaS product warrants a price increase. Some might not like it and protest, but in most cases, it will be a net benefit for your business and your customers: you catch up to the value you deliver, while they benefit from the additional resources this revenue increase generates.

When we increased our prices by 50% at FeedbackPanda, we gave our customers very clear notice upfront, with over a month to make up their mind if they wanted to lock in their current price by upgrading to a yearly subscription. Giving people a heads-up and giving them choices worked very well for us, and it resulted in very few complaints. After all, we explained the why and the how of the price increase, and complaining about straightforward honesty is pretty hard to pull off.

A few words about Budgets and Price Sensitivity.

Keep in mind the budgets of your prospects. There likely is a ceiling, even when you’re selling to freelancers and other positions that determine their own budgets. Find out which leadership is involved in this decision and how flexible those budgets are.

For FeedbackPanda, the budget was pretty clear, as we sold to an audience that, more often than not, was severely financially limited. Online Teachers at that point made $10/month. Initially, we had offered a​ $10 plan. We quickly retired the 5-dollar option, and a year later, we decided that the product had grown so much in value that we could increase the price to $15/month. It turned out the budget of our audience could handle that price increase.

Sometimes, what you sell doesn’t fit existing budgetary categories, so customers might not know if they have a budget at all, if there is a ceiling, or if they could stretch existing budgets to accommodate paying for your service. You won’t know about this until you have talked to your prospective customers in several exploratory conversations.

Price sensitivity is different depending on your customer types. Early Adopters buy the product that your service will provide once it’s finished, mainstream customers buy the product you sell right now. While you’ll want to provide a maximum of value for your price to either group, you can get away with charging  higher prices to the group that expects your product to grow into something bigger than it is at the moment they buy it. Don’t abuse that trust.

I want to mention Price Boundaries and the Fallacy of Pricing too Low too Early too.

I’ve seen this over and over again. Early bootstrapped pricing is often too low. Don’t discount yourself. Just because you’re starting a new business doesn’t mean you’ll have to scrape the bottom of the barrel. This leads to a big problem in the future. If you believe that raising prices is hard but lowering them is easier, then choosing a low price, in the beginning, will prevent you from ever meaningfully increase your revenue through price adjustments.

Pricing is strongly correlated with your positioning. If you position yourself as a professional tool, you will be able to charge more, compared to being perceived as a fun distraction. You may reach fewer people, but the relationships you form with B2B customers are much stronger and more reliable than if you were to sell to a B2C market, where you have more customers with higher churn. If you position yourself alongside other high-priced solutions, customers will accept paying more. If you compete with low-priced products, your upper price boundaries will be perceived to be comparatively low.

That leads me to a crucial point: Pricing is Always Conversational and Influenced by Expectations.

In general, pricing in a vacuum is a questionable approach. In the beginning, you likely don’t have much customer data to anchor on. That’s to be expected, and it makes finding a working pricing model quite hard without reaching out to real people. Customer conversations will help you understand what might work and what might not.

Talking to your customers allows you to find out if they are genuinely committed to buying your product. Pricing feedback from people who wouldn’t buy your product anyway is useless and dangerous to follow, so suspect anyone who is saying, “I would pay $100/month for this” to be overly optimistic.

You don’t need commitment just yet, but you need insight. You’ll need to focus on the prospective customers who will share their expectations with you. You need to understand how they think about the value of software solutions like yours and what they have experienced in the past. That will heavily inform their real price boundaries.

You should price the way people are used to. If they pay per seat for many other tools, you’re likely to get more conversions offering that too. If you introduce an unusual pricing model like API-call-based prices in an industry that usually pays a flat fee for services, you will have to spend more time educating your prospects why this is good for their use cases. Many leads won’t materialize because once they see something novel and complicated, they will go with what they already know.

The same goes for your overall price boundaries. Your customers will compare your solution to the tools they already use and will evaluate you against the tool, position, or team that your service is supposed to replace. While this is mostly a positioning issue, your customer’s prior experience plays into this a lot as well. The more you know about that, the better your messaging can be.

A word about Moving Up-Market.

Moving up-market is a common strategy for SaaS businesses: go after bigger and bigger customers. Find the bigger budgets and get your cut. While this is a great strategy when you have a mature company with a stable revenue stream, it is not recommended while you are struggling to survive. There are many risks to what seems like a lucrative path.

Enterprise customers are dangerous beasts: their purchasing processes are opaque, take a long time, and involve levels of commitment you may not be able to make. If you start in a particular market, stay there. Find more customers like the ones you could already convince to buy. That will be much easier as you already know the methods to sell and market to people like them.

Timelines are longer in the enterprise B2B world. The complexity of the corporate sales process makes conversations take a long time and involve more people than a self-service subscription service that generates revenue at the click of a subscription button. You’ll have to send emails, followups, explanations, maybe even take a few people in your prospect’s company through an extensive demo process. Only go up-market if you know you can still run your business while you or someone in our company does this much more intense sales job.

That leaves you with Subscription Tiers, Paid and Free.

If you have a very clear-cut service offering, your product likely allows you to serve the same kind of customers with the same exact service. While this is great for communicating the value of your product, you are probably leaving money on the table.

At FeedbackPanda, we started our paid monthly subscription offering by having a $10 plan. The cheaper option had a few limitations around the amounts of data that our customers could store in their databases, while our more expensive plan had no restrictions. From day one, most people chose to purchase an unlimited plan, even though they wouldn’t reach the numbers that exceeded the limits of the cheaper plan for months. I attribute this behavior to the fact that we named the more affordable plan “Basic” and the more expensive one “Professional.” Our customers were teachers who took great pride in being experts in their field. Their own psychology made them gravitate towards the more expensive option to retain that self-perception.

Tiers are not just tricks to make customers pay more for the same service. They have to make sense. People understand mind games, and they will harbor very negative feelings towards you if they learn that you’re trying to trick them. If you offer tiers, make them comprehensive. Set usage limits, lock away functionality, but always root those choices in business-related grounds. Coercing customers to upgrade to a higher tier without a justified need is not going to help you build a positive relationship with them.

Don’t make your pricing too complex to understand. A simple pricing structure allows you to plan better and will lead to fewer surprises. Offering three tiers is what seems to work well in most cases. Only very specific kinds of tools get away with complicated pricing structures. Those tools usually are highly technical and work at large scales, so that different use cases warrant diverging ways of paying for the service.

A popular strategy is to offer a free tier with heavily enforced limits. This allows your customers to make a habit out of using your service before they have to commit to a purchase, which often helps convincing prospects of the value of the product. If you offer such a free tier, you will have to pay extra attention to your prices: they need to make sense for those likely price-sensitive customers, or else they’ll migrate away after they start reaching the limits at which you expected them to convert.

Let’s take a moment and look at the Intention Behind the Price.

At this early stage of your business, ask yourself this question: What is your price supposed to do?

Are you trying to get established first? Are you trying to get your foot in the door? Your very first customers are validation and multiplication opportunities. You’ll price differently for those customers than for later customers. Deliver custom prices to the early ones, then reevaluate later.

Are you trying to maximize revenue? Look into the unit economics of your existing customers and find ways to segment the customers that are likely to be highly profitable and offer them more extensive plans with more functionality and better guarantees.

At any point in your business, prices are in motion. Don’t set them in stone. Take it as a starting point; don’t treat it like a fixed decision. Just like you hope to improve your product, you should look at your prices.

At FeedbackPanda, we increased our prices by 50% a year after going to market. We softened the blow by simultaneously introducing a referral system. We had great success in two ways: our monthly revenue grew as customers agreed to pay more for their monthly plans, and we receive a large influx of cash from the customer who chose to lock in their prior pricing by committing to the discounted yearly plan before the deadline.

While it was a scary moment, we were glad to have experimented and increased our prices. Nothing shows that your customers value your product than when they choose to pay more for it than before.

You can read this article on the blog or listen to the podcast episode, where I also a number of listener questions about initial pricing, grandfathering, cost/value/aspirational pricing, and more.

Links I Found Interesting

Since we’re already talking about selling things to people, I’d like to share a few links that relate to a growing and empowerment-focused audience today: no-coders. Channing Allen of Indie Hackers asked about if no-code founders are making money. The responses have been very mixed, and a few common problems have emerged: the inability to scale, too much focus on tools (and too little on innovation), overwhelming complexity, and many more. Kameron Tanseli suggests taking a long hard look at the problems that happen at the intersection of those services, which are often glued together with tools like Zapier. Why not build a custom SaaS to solve this pre-validated need, much better, much less hacky, and solve a problem that the whole no-code community is experiencing?

And if you’re not interested in solving the problems of an existing community, why not start it from scratch? John Saddington shared his personal take on how to start a community this week, and he is not holding back sharing what worked for him building YEN. Sometimes, even a community needs to pivot, as Charlie Ward of Weekend Club realized with the pandemic in full swing. There is a lot of movement in the community space, lots of knowledge is being shared, and the bootstrapped founder community is benefitting from this on every level.

Now, let’s get back to you, the founder, and do some introspection. We often are quick to judge when we encounter something that is different from our expectations. At the same time, we expect our customers, partners, and prospects to give us the benefit of the doubt. While these two patterns obviously clash, we develop a level of cognitive dissonance that allows us to hold them both for true. Maybe we should consider being slow to criticize, particularly when it comes to others’ products. And maybe we should also reflect on why it is so hard being comfortable with being uncomfortable. Both concepts are looking at the same opportunity for growth: empathy with ourselves and our customers, allowing for a willingness to listen and learning without judging—food for thought.

Bootstrapping Success Stories I Noticed

Hakan launched his first proper product after working as a developer for ten years: Dytto has been made available to the public. The blog post tells the story of how much work went into all of this, how hard it is to start a marketplace, and how finding a co-founder made it possible to build a product with a future. In an almost surprising amount of helpful commentary, the Hacker News crowd gave good advice to the founder duo in the comments, and I recommend to read those insights if you’re looking at launching your own product very soon.

Finally, Miguel of Sitesauce has a big win to celebrate: within a week, the project had reached $630 MRR, and within 12 days, it’s at $1000 now. Miguel has been building an audience over the last few years, and he has been sharing updates about what he was building regularly. This is not an overnight success; it’s disciplined work and resilience being rewarded—a true inspiration.

Thank you for reading this week’s edition of The Bootstrapped Founder. If you like what I wrote about, please forward the newsletter to anyone you think would enjoy it too.

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See you next week!

Warm Regards from Berlin,