In planning our Subversion upgrade, we looked at some of the competitors, and we saw subscription plans starting as low as $6 per month for two users. It seems that many Web 2.0 style subscription offerings have plans starting around $10 per month for a small group. I started wondering, what is the business case for those cheap-but-not-free packages?
We’re not offering a subscription for under $49/month. If you want low price, how about free? Users often ask us for the cheap starter subscription. We match the competitor’s low cost plans for free, with unlimited users, and we only charge for higher levels of service to more serious buyers.
On the one hand, these low cost plans bring in only a tiny amount of money. They aren’t going to support the level of service or features our customers require. On the other hand, they present a price barrier that keeps people out of the system. If you can get $10 per USER per month, you might be able to build a business. If you are getting $10 per TEAM per month, you are just irritating people. I’d like my readers to comment on this if they have evidence to the contrary.
You might argue that a low cost plan is a good way to qualify customers. If they are willing to pay for the low cost plan, they are probably willing to upgrade. Perhaps. But in my experience, it’s just as hard to get someone to make a small purchase as a bigger purchase. If you are going to do a lot of work to get them over the hurdle, you might as well get real money for it.
Instead of irritating people with low-priced plans, we would rather maximize the number of users, who then learn to work on our projects. We’re building a community of people who already know how to use the tools, and are ready to jump in and get work done in a hurry.
We always offer unlimited team members. In my opinion, any business model that relies on limiting the number of users is a self-inflicted wound. Why tell people NOT to bring in their friends and colleagues? Most of the competitors we looked at do that. Thanks, guys.
Our pricing philosophy is to offer features that are useful for small teams and individuals for free. We charge money for a premium or “Commercial” features that are required only if you are investing real money in a project - extra security, big disk space, captive backups, reporting, email and phone support. If you are doing financially valuable work, you will want these features. Otherwise we won’t bother you.
The flip side of this is that if we are going to charge money, we have to provide great service, and charge enough to provide great service.
I liked
Zoho’s post on pricing.
Collab.net has a similar product line with a much steeper pricing curve. Their hosted service is downright difficult to buy because you have to go through a salesperson, which also adds cost for them. But they can afford it. The list price is $50 per user per month – an order of magnitude higher than the online-signup guys like us. They can also afford to sponsor Subversion development, for which we are grateful.
As we continue to upgrade our availability and add enterprise features like our new portfolio manager, we’ll charge more for enterprise packages, maybe a lot more. But the small team product will still be free.
What works in subscriptions? Salesforce.com is a big winner in the “Software as a Service” space, and a look at their pricing explains why. They get from $50 to $150 per user per month. That’s an order of magnitude more than a Web collaboration product gets, when selling workspaces that are priced by the team and not by the user. The natural price for collaboration is low. When I ran an enterprise software company, I learned that we would get only a low price for collaboration features (although they are incredibly valuable to the users), but we would get a much higher price for reporting features (valuable to the payers). I think that the secret of success at Salesforce is a bias toward providing features, like a permanent record of the customers, that are valuable for managers rather than users.
The problem with a typical Web 2.0 service is that, in order to attract individual users to register and adopt, it offers features that are useful to individuals. Those features have a naturally low price. We aren’t giving up much revenue if we offer those features for free.
A prototype Assembla team will spend $15,000 per month on labor, and $50 per month on the subscription tools – a 300 to one ratio. If staff is worth 300 times what tools are worth, where should we be trying to make our money? Which revenue stream will allow us to support a better application? Staffing seems like a better bet. It’s a per-user revenue stream, not a per-team revenue stream.
It seems likely that in the future subscription-based service providers will have to compete with companies that have better business models, including advertising (the Google approach) and staffing. If you have a better revenue model, you will not only make more money, you will be able to build better software for your customers, deliver more value, and increase market share. You will win.