SaaS Pricing

In this episode, I discuss SaaS pricing, the 4 pricing models, the Stairstep Method, and revenue reducers.

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Transcript

Building an indie business in the center of venture capital. I am Alex Edmonds people on the internet, call me supremerumham, and this is the building an indie business podcast. Alright. So today, we're discussing says revenue models. I'm going to be talking about caproni.fm and how they can make or how they can apply the four different pricing models tiered pricing. Pricing by users on the account price by usage, and a flat fee pricing. Okay. So the goal of says revenue is to get m, m know Mr. monthly recurring revenue. Right. And they do this by charging monthly. And sometimes for the year. And it's a, they will offer usually a discount for the yearly purchase. So for caproni, they could do. $20 a month. Right. That's $240 a year. And they could offer a discount of 220, if you buy it for the year. And the reason they do this is because that's less credit card transactions. So they're paying less fees on the credit cards. Right. So, they're still saving money. Or no, they're still profiting probably even more on the yearly charge, because for every $20 transaction. That's 3%. Right. So, they would be saving money if it's just a one. Once a year transaction. Right. So, um, price by use is also called tiered pricing. And the way proni could do it is. They could charge people $20 for having zero to 10 downloads, a year, or, a month. And as soon as someone hits. 10,001 downloads, they start charging them. $22, let's say, and then from 10 to 100,000. They charge that $22 and then 101,000. You go to 25 or 50, whatever, that's when you start raising the price so that's tiered pricing. And then, price by use. So, this would be. You have 10,000 downloads total, and you're paying $5. But then as soon as you hit 20,000 downloads, you're paying $10. a month to store those downloads. Right. And then some places. They price by feature set. So, um, like caproni has their own websites right now. So, if I wanted to customize that website. Maybe they charge me like 510 dollars extra a month, to be able to customize the website, or for support. I've noticed that other places on the free tier. If you don't pay. You don't get support you figure things out yourself. So, that's another option for in terms of feature set. Right. And then there's flat fee pricing. You know, it's just $20 a month. Nothing else. Right. Um, there's also optional services like some people will or not some people, but like some companies will charge. Like $5 for, I don't know that they'll offer you like an E book and you buy it for five. Maybe $10. So the way caproni can do that is, they read a book, or they buy someone's podcasting book I don't know, I don't know who's written a podcasting book so where would they get that from, right, or caproni has the ability to list products on the their podcast website that they've created. So, they could charge extra for them. So, I'm like, $18 plus 2% and for every, every product that's sold on their website. Right. So that's optional. Okay, so, revenue reducers. Right. So, one revenue reducer is new technology. So, there was probably a company that had a monthly service of delivering paper. And when Dropbox came by. And then to say cloud. When. All right, so when Dropbox came by. There, there was probably less money coming in because they started to use Dropbox instead of, you know, printing things out, and delivering them. So they. The paper company saw less money coming in, right. So that's how new technology could produce produce revenue. And since I've been using Peroni for examples. When the when podcasting was first introduced. There was someone in the radio that lost some money. I bet. Right. Okay, um, another revenue producer his turn. So, na says model. You will definitely have some people that are turning over, they'll start using your product for a couple months, and then they'll stop using it. Right, and they'll, they'll switch to another platform, maybe, or just stop using entirely. This would be churn. Right. So that's why you have. That's why it says companies keep track of the life time value of a customer, so that way they know how much money to expect from like the average customer. So the lifetime value of a customer would be how much like the average amount of money that customers spend on the platform. So if I'm using proni at $20 a month. And yet, $20 a month, and the lifetime value of a customer is two years. Right. The average, the lifetime value of a customer is $480. Right. Okay. I'm a nother revenue producer is dead credit cards. So they asked for a credit card when you sign up. And that is how you charge money, right. They use that credit card. And, on occasion. Your customers will get new credit cards, but then not realize that with your service. Um, the, the service still has the old credit card on hold. That means that you can't charge the customer. And I think even. The company has to pay a fee, because it was an SF nonsufficient funds transaction. The transaction bounced. So, someone has to pay for that, and the credit card companies eyes. Right. So that is another one, and it's uncool. Okay. And finally, the last one that I could think of. is transaction fees. So I mentioned this, every trend credit card transaction. The credit card company charges 3%. So, that is a lot of fees for transactions. Right. And that's why they give a yearly discount. Because it's less credit card transactions and there are less fees. We should roughly calculate that, that number, do you want to do that. Let's do that. Okay. So, 243%. Right. That's $7.20. And then if we do. Um, what was the one I was going okay so I said $20 times. 3%. Right. That's 60 cents. Multiply that by 12. It's the same. Okay, so the reason why they offer the discount is because they're getting a lump sum. Right, so that's guaranteed money, those customers. Even if they stopped using the platform you get their money. Right. So yeah, even though it's not the same, you're still getting the full amount for the year that you wouldn't get if they were monthly and they stopped using the platform like six months in. Right. Okay. Um, my opinion. Businesses have higher switching costs than humans are consumers, let's say, businesses are less likely to move to competent competition, or get shiny objects, syndrome. Right, because they take so long to make decisions. I remember I was working on a startup, and I was working on the SEO team for a bit, but not too much, I still barely knew anything about SEO all I really knew was about backlinks. And this was like, November. No, this was October. This was October, right, and they were deciding which SEO tool to start using to like, improve the SEO score on domain authority. Not SEO score. And, like I left the company. The week before Thanksgiving. So the third week of November. So, they still haven't decided which SEO tools to start using and give you mine This was a startup and it took them over a month to decide. That was mostly. Part of the problem with that company, I don't even know if it's still around. Right. So think about switching tools, it took them a month over a month to decide, do you think, how long do you think it would take to decide to move to a different product. So, all that bureaucracy means like they're not switching from product to product when a new product shows up, but with a person. They can just decide like hey I don't want to use this tool. So let me use this tool. So that's why I think going business to business in terms of size, or just anything is a better option and humans have less money than businesses. So, when you have a business to business revenue model. You're going to be making more money than humans. Right. And then, to make more money and revenue for businesses, when you, when you have a business to business model. They since they have more money, they're gonna pay more. The switching costs are gonna be less. Right. Yeah. So, I think, going business, business would be better than humans. Although, um, Yeah, that was gonna be my third point actually what I'm going to say right now is, um, when you're paying a higher price. You're gonna need less customers to make a small, like a bigger amount of money to get to get $1,000 in revenue. You're gonna need, let's let's say the prices. So $1,000, and they're paying $20 a month, humans humans, you're gonna need 50 humans, but consumers not humans. Sorry. Let's say you charge the businesses, double that you charge them, you charge them $50. All you need is 20 human 20 companies to make $1,000 right so it's less people, but less customers, but also it might be more work convincing them to use your product because there's so much bureaucracy, to get them to use your product right arm. One. Another thing about SAS is that I think some companies are abusing this pricing model, and they're changing our pricing model from a one time purchase to subscriptions and they're not updating the product that much. Right. So that's why I have, um, I honestly have subscription fatigue, there are products that I don't buy, because I only want to pay a one time fee. And so, I don't use the product at all. Right. And then I think there's also. There's also. So they have my credit card on file. And then just charge it every time my product, or my, my, my subscription needs to be renewed. And I think there's another revenue reducer is the fact that some people just forgot about the, the fact that they paid for the subscription. And they, they want to cancel it. And the company has to pay for that cancellation, because it's a chargeback. So they have to go deal with the credit card company, and the credit card company is going to charge them for that issue. Right. I also like like the subscription fatigue. Imagine if I charge a subscription for my book. And every month, I charge like $10, but I only change some grammar errors. Right. I think that's what some companies are doing like the equivalent of that with their with their products. Right. Um, I also want to mention the ROB walling stairstep approach because this is kind of the approach I took. And this is why I wrote a book, and why I probably will write another book for revenue research. So is stair step approaches. You're going to need to build up to says, like a SaaS product. And the stair step approach is the first ladder or the first step is you have a single one time payment. And so that's like my like my book, right. And then you have the second step which is multiple products, a book, a Chrome extension, things like that. Multiple one time payment products, and then you have your third step which is you move into says, right, so this is my. I'm following this stair step approach. Okay. That's all I have for this episode. Thank you for listening. Have a nice day. Bye.