Tag Archives: pricing plans

How Lifetime Value (LTV) Affects Your SaaS Business

packs-163497_1280The lifetime value of your business is an important, if not the most critical metric, that your subscription based SaaS business should be monitoring. While the monthly income of your business is vital, the subscription model makes it hard to determine whether the acquisition of customers is cost effective.

Where Monthly Sales Will Fail Your SaaS Business

Monthly sales can cloud assessment of your success. For instance, you could have 1,200 regular subscribers who are paying $25 per month to use your system. This would create monthly revenue of $30,000. At the same time, if it costs $50 to attract and convert a prospect into a customer, then after three months you are making a profit on each customer.

This might seem like you’re in a good position; but it masks several financial facts from your accounting team.

The most important factor is customer churn. If you are turning over a quarter of your customers each month (i.e. 300) and replacing them with roughly the same, you aren’t going to gain any business growth. Yet this might not seem too troublesome, after all, by three months the customer has effectively paid back their acquisition costs through their lifetime value.

It isn’t just the lifetime value costs that are important to consider though. Each subscriber will have a delivery cost. You might have to pay for staff, hosting, administration, office fees, transaction fees etc to maintain your service.

While the average gross profit margin is approximately 95.12% and the lowest recorded margin recorded is 86.27% – this is still money removed from your profit. As a worst case scenario, the profit from each customer is $21.57 and a monthly total of $25,884.

However, gross profit does not include important measures such as marketing and employee salaries. Businesses on average spend between 40 and 80% of their gross profit on salaries. For most companies, including salaries in their profit margins would be challenging as different customers need different service levels to deliver their unique orders. With a SaaS business, it is much easier because the average cost can be spread across all the customers as they all are paying the same amount. So your company could only be gaining $8.44 per client per month.

Then we need to take off the marketing costs. This is calculated by evaluating how much you spend on acquiring each customer. If you use social media marketing, pay per click, display adverts and direct mail – you might be spending $50 or more per client.

If a client is only staying with your services for three or more months, then they are only contributing $25.32 towards those marketing costs. Your SaaS business is therefore under serious financial strain as it is spending more to obtain customers than it is collecting from them.

By not knowing the lifetime value of your business, you might have not realised why your business is not making enough profit.

Where Can Lifetime Value Help Your Business?

Generally speaking there are three main problems that your customer lifetime value can identify. Once identified, you can then find solutions. The three main aspects are:

Profit Per Customer: If your customer is providing you with limited profits, then you aren’t going to have enough to pay for salaries or marketing. Find ways to reduce costs and increase this value.

Lifetime: This is the length of time that a customer spends with your service. If this is short, then there must be an issue with your product or customer service.

Retention Rate (customer churn): The rate at which customers leave. In our example it was 0.75. This is similar to Starbucks.

How To Calculate Lifetime Value

There are three main ways to calculate the lifetime value of your customer. The best for most businesses is:

Lifetime value X Subscription Price X Profit Margin

In our example that would be:

3 months X $25 X 0.3373 = $25.30

Conclusion

The lifetime value of your customers is one of the most important metrics for your SaaS business. By using it, you can determine the health of your business and areas that need to be supported.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

How To Attract New Clients Without Offering A Free Trial

ID-10088235One of the most common ways that subscription services attract new clients is by offering a free trial of their services. One of the best examples of this is Netflix who offer a free month’s subscription to their film and television database for all new clients. While this is an attractive offer for customers, for some businesses this can be too expensive.

For instance, a business that ships expensive food or clothes should not offer a free trial as they are likely to lose a lot of money when sending out free products. Alternatively, those where clients might only need to use the service periodically might find their free trial offer is abused. Clients might sign on for a free trial, use it for a month and then leave. Then when they need the service again, sign up for another free trial with different details to get more time free.

Therefore, some businesses need to consider other options for attracting new clients without giving away their services and losing too much. But what are the options for subscription services and how can you ensure that it is still profitable for your business?

1. Reduced Rate

Another common option for subscription businesses is to offer a special discount for new customers for their first month. This is usually very good when there is a physical product involved or a customer could use the whole system in a short period and then quit. One example would be a membership site offering a period where they reduce the membership rate. After a certain period it would raise up again to normal pricing.

2. Free Gifts

Offering to give out small gifts for signing up is another common tactic for attracting new clients. This tactic has been in use for a number of years by those in the insurance industry by offering free pens, toys and even televisions.

The biggest issue with this tactic is that you have to be certain that the free gift you are offering is less than the average customer lifetime value. Otherwise you might need to put in some strict terms and conditions to determine who receives the free gift. For instance:

  • Do they need to be a member for so long?
  • What level of membership do they need?
  • Do they need to sign up before a certain date?
  • Will you allow those who are signed up by affiliates to claim the free gift?

At the same time, you need to consider how the gift is delivered and what if there is something wrong with it? If the product is a television, for example, and it breaks after six months – will you be willing to repair it?

3. Affiliate Links

Another opportunistic way to attract new clients is to use affiliates. Affiliates market your subscription services for you, in return for commission when someone signs up. This can be highly effective because an affiliate builds trust between their audience and themselves, which is one of the key steps in achieving a sale.

By offering affiliates a commission, you are allowing them to endorse your product to their contacts. This will be more effective than you marketing to them without any prior contact.

However, this can reduce your profits significantly, especially for the first payment, so ensure your pricing model supports an affiliate commission.

Conclusion

If you want your business to grow you’ll have to attract new customers. Most businesses use a free trial, but this is not always the best option. Therefore, consider some of the options that have been highlighted above. By using these you’ll find more clients and not have to worry about giving your product away.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

5 Advantages Of Subscription Based Pricing

coins-431537_1280Subscription based businesses are on the rise. There are numerous organisations that having previously used the pay once, use forever model, have now switched over to the subscription business model. This is because there are a lot of advantages of the system.

By taking these advantages, your business could see substantial and sustained growth as well as higher revenues and customer lifetime values. This all helps you to move your business on to the next level.

So what are the advantages of subscription based pricing?

1. It Can Attract More Customers

Charging customers $25 per month is going to be more attractive to them than charging $500 once. This is because the higher price is a barrier to entry for your products; the more expensive your product – the fewer customers that will be able to make a purchase.

Subscription payments lower the barrier and allow more potential customers to purchase your product. So while they may pay more over the long term, at least they will able to take advantage of the benefits you can provide them.

For you, it allows you to have greater monthly revenue and more customers to service.

2. It Offers A Reliable Income On A Regular Basis

When you are operating a pay once model you have to constantly draw in customers in order to earn revenue. This can be troublesome, one poor month and you can make a loss and it can be harder for you to make payments yourself which can incur additional charges.

With a subscription based business model, the customers are paying you a regular income. This allows you to determine how much you will get each month and ensures that you aren’t ordering more supplies than you need.

3. It Increases The Return On Customer Acquisition Costs

When you have a pay once model there is a set rate of return you receive on your customer acquisition cost. With the subscription model there is no standard return on the customer acquisition cost. That is because while the customer acquisition cost will remain similar (depending on marketing and conversion route), the lifetime customer value will increase depending on how long they are with your organisation.

The length of time they remain with your business can vary, but many subscription based businesses find that customers stay with them longer.

4. You Can Earn More Through Up And Cross Selling

Because you have continuous contact with your client base, you are building a strong bond of trust. This makes it easier to market additional and complimentary services as you have an audience that will be fairly receptive to them. Also, because they are only paying a small subscription fee, they have more disposal income and are better positioned to take you up on the offer.

5. Easy To Offer A Proof Of Concept

When you run a pay once business concept you are rarely able to offer a trial period or taster session. With subscription services it becomes easier to offer this and it can allow you to also offer free versions in the hope to lure the clients into subscribing to the full package.

This may require a lot more work, but it can be beneficial in a number of ways. Even if the customer doesn’t sign up straight away, they are likely to have provided you with their contact details which can be used for keeping in contact and selling to them your premium subscriptions services.

Conclusion

A subscription based model is one of the best available to business owners. It allows them to have highly successful companies that offer affordable but high quality products. One of the best aspects of a subscription business is its pricing, which presents advantages to both your business and your clients, such as those labelled above.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

How To Determine What Your Subscription Pricing Should Be

You went into business because you wanted to make a profit. Achieving that goal relies on a couple of key elements. Firstly, that you provide a high quality service your customers will want to use continuously. Secondly, that your subscription service is priced so you are able to make a profit.

Profit is very important because it allows you to enjoy your lifestyle as you like and fuels growth within your business. If you do not charge enough, then you may not have enough income to cover your costs. On the other hand, if you charge too much, your customers may not see the value in your product and leave your business. It will therefore be harder to maintain your income and profits.

So what can you use to help determine your pricing strategy?

1. Your Business Model

The number of clients you are hoping to have at any one time is an important factor. If you plan for a significant number, then you can charge less per customer but you will be limiting the amount of time you can afford each for troubleshooting, customer service, etc.

In contrast, if you want to have a more exclusive club and have few customers, you need to increase your prices but can afford more time per customer. This may be the best option if you have a very niche product or want to create an elite group of clients where you have very close relationships.

2. The Cost-Plus Method

This is a standard way to price services. The first step is to determine the cost of delivering the service to your market. This should include the fixed costs and the variable costs. The fixed costs should be spread out over the number of customers that you are looking to attract and manage in your subscription business.

The most common mistake to make with this method is that while you may pay someone $12 per hour, the costs are more than that. For instance, you may have rent, utilities, insurance, website, taxes, etc to consider.

3. How Much Your Competitors Are Charging

You might also want to look at how much your competitors are charging. There are various ways in which you can determine if their prices are related to yours, and we have covered this previously.

To find out their costs, have a look on their website, speak to their sales team and talk to associates who have dealt with them. This will give you an indication of how the market is reacting to pricing, especially if you have a significant amount of competition whose prices are very similar.

However, you shouldn’t base your prices on just your competitor’s price points. Your product may have a greater value or you could have different costs.

4. The Perceived Value Of Your Service To The Customer

Your customers aren’t going to pay for a service they don’t think is value for money. Therefore, you should ask your customers what they believe the value for your subscription service is. It is likely they will slightly underestimate what you could charge, but it can be a good starting point.

An alternative way of achieving this is to A/B test several price points and see which has the higher conversion rate. At the same time you should look at the customer lifespan; if you find that a higher price has a lower customer conversion rate but higher customer lifetime value – it is obviously the better choice.

Conclusion

Pricing your subscription correctly is an important factor in running your business. Charging too high or too low may cause your business to fail as you will not make enough profit to run your business effectively. Ensure you are charging the right amount to earn enough profit to live comfortably, grow your business and provide a high quality service.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

How To Assess The Prices Your Competitors Are Charging

When you are assessing your pricing levels you are going to want to make sure your business’ subscription charges are competitive against your main rivals. Many new to business consider this means that their prices have to be lower. However, this is not always the case.

Research from a number of sources has clearly identified that price is not the main reason for customers choosing a service provider or staying with them. Here are three key research findings that have backed this up:

  • The main reason for customer churn is not price. The most cited reason by customers is dissatisfaction of the customer service they have received. Accenture Global Customer Satisfaction Report 2008.
  • When compared to price or product problems, a customer is four times more likely to choose a competitor if they receive poor customer service. Bain & Company.
  • A guarantee of better customer service would encourage 55% of customers to choose the provider that charges more. Defoqto research.

Therefore, looking at their price alone is not going to give you the best idea of how much you should charge your subscribers. Instead you should look at a number of different factors to assess your competitors.

So what do you need to find out about your competitors?

Customer Perception

Linked to the statistics above, one of the first things that you need to assess is what your competitor’s customers are saying about them. There are many different websites that you can use for this, including review sites and business directories. Carefully analyse what is being said by the customers, including:

  • What did the customer say was positive about your competitor?
  • What did the customer not like about your competitor?
  • How often are reviews being left? For every one customer review, there are at least 26 customers who haven’t left a review.

Stories In The Media

You’ll also want to check what is being said in the media about your competitors. These could be positive, negative or just quoted in other articles as an expert. To keep an eye on this over the long term without having to manually search for the results periodically, set up Google Alerts for your competitor’s name.

Their Marketing And Branding

The next option that you’ve got to look at is their marketing position. Look at who they are marketing their product towards, is it large businesses or high earning individuals or is it for small firms / those with limited income? Also look at how they market their services: are they a luxury brand or an essential tool for the user?

Product Specifications

Your competitors’ products are not likely to be the same, nor are they likely to be similar to yours. Therefore you need to check off what the customer will get access to with their product in comparison to yours and others in your industry. You could also estimate how much it would cost you to provide the exact same service and calculate what their profit levels are.

If you are finding this difficult, have an employee call the competitor to get all the information. Their sales team will likely be very helpful.

Suppliers

Finally, try to find out who their suppliers are and what costs they are incurring. Those who have lower supplier costs will able to charge less for their products. See if you can get a meeting with their suppliers and arrange for a better deal – allowing you to be more competitive on price.

Conclusion

Assessing your competitors can help you to determine what prices you should be charging for your subscription business. However, despite what some business leaders believe, lower prices are not always the best price point. Instead you should look at how your competitors are performing, what their branding is and how their supply network affects their costs and then compare these to your business to help you determine your price point.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

Image courtesy of jscreationzs at FreeDigitalPhotos.net

3 Common Startup SaaS Pricing Mistakes

When you create a pricing strategy for your SaaS start-up you need to ensure it attracts customers and allows you to make a profit. Many businesses however make mistakes when they create their pricing strategy.

The wrong pricing strategy doesn’t just affect how much profit you make per customer; it can also affect your conversion rate and how your potential customers view your brand. In this article we will look at the most common brand pricing mistakes that SaaS start-ups make and how you can avoid them to ensure your brand is performing better than its competition.

1. Pricing Your Products Too Low

There is a misconception that the lowest price will always be best and most desirable for customers. Many customers view extremely low prices as indicating there maybe something wrong with the product or the customer service. Alternatively, they may question the legitimacy of the business. Either of these can significantly lower your conversion rate.

Another problem is that having prices too low can be dangerous for your business operations. Only the very best businesses can hope to sustainably charge significantly low prices for a prolonged period of time. These companies often have large amounts of stored capital to support their operations and a strong public image to entice customers to their brand.

Therefore, don’t consider copying some of the major discount brands like Costco and Walmart but instead price at a level that is acceptable for your business. Consider the acquisition cost, the cost to deliver the service and a reasonable profit margin.

You could also look at your competitors and see what they are offering and for what price. You might even find that if you can prove your small business’ authority, you could charge the same amount or more and still attract a significant proportion of the target market.

2. Too Many Pricing Plans

There is often the temptation by new businesses to offer a pick and mix or a large variety of pricing plans to entice customers. This seldom works. Customers like to have options, but too many can confuse them. A confused customer will leave your website and it is unlikely you will see them again.

Instead create a pricing structure that has between 2 and 4 options. Each pricing plan should have slightly more than the previous plan. This gives your visitors an easier choice and clear definitions of what each price grants them access to.

If you have several products available you could consider more pricing plans, but it would be best to separate them so they are on different pages and there are clear boundaries on what each product is.

3. Not Using the Right Pricing Point

One of the biggest mistakes that new businesses make is not using pricing theory. This states that if your product’s price ends with a 9 it will achieve better sales than those that end with another number, even if the price ending with 9 is more expensive.

The only time when this is not the case is when you are comparing an original price ending in 9 with a sale price that shows the original price. This is true even when the sale price is higher than that of the price ending with 9.

Conclusion

Selling online involves providing the right price that can convince your customers to purchase one of your products. When starting your SaaS business, you need to ensure that you are not making some of the most fundamental pricing mistakes that will turn your customers away or limit your profits. By studying the above common mistakes and implementing the advice you could create a successful pricing strategy that will perform well for your business.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

Image courtesy of cuteimage at FreeDigitalPhotos.net

Should You Increase The Price For Existing Customers?

At some point, your subscription business is likely to have to increase prices. Whether you apply these higher prices to your existing customers, in addition to new customers, can be a difficult decision for you and your management team. Some businesses (like Amazon Prime) do change the subscription charges for their existing customers. Others, do not unless the customer is coming up to a renewable period.

Whether you increase the charges for your current subscribers is a decision that is very specific to your business. There are several different factors that can impact your decision, here are three of them:

1. Why Are You Increasing The Price?

The first consideration should always be to identify why you are increasing your subscription prices. If it is because you are finding demand extremely high and you would like to increase your revenue, then there is no necessary reason why you need to increase prices for your existing customers. That isn’t to say that you shouldn’t – just you should have another rationale.

On the other hand, if you are increasing prices because the costs to deliver your service have risen, you might need to. You first need to look at your profit margin on providing your service. In your cost analysis, include the customer acquisition cost as well as the expense to maintain and deliver your service.

If the profit margin is too small you’ll need to increase your subscription prices.

2. Have You Added New Features / Changed Package Deals

Sometimes you have to increase prices because you have made changes to your packages. If you’ve added new features to existing packages, and you’ll be offering those same features to your existing customers, you should increase the price for your current customers. Otherwise new customers might be upset that your current customers are getting the same deal for less money.

Therefore, you need to consider either raising the price or keeping them the same for new and old customers the same.

If you’ve changed the package deals so that they are completely new, rather than attached a new feature to current packages, then you have a different scenario. You could keep your current subscribers on their old pricing plans while moving new customers to the new pricing plan. Then as renewals come up or customers want to upgrade / downgrade their plans, you can move them onto the new pricing structure.

3. How Will Your Customers React

Another consideration is whether your customers will abandon your product if you raise the price. This might be the case if you have done several price increases in recent months or you have made promises not to increase the price.

However, there is limited evidence to suggest that rising prices will force long term customers to find alternatives. In fact, many long term customers often retain their membership because they know the benefits and value of the service you provide.

You should also be careful as to whether new customers will be annoyed that old customers are getting the same deal but with lower prices. If they found out, perhaps because they were referred by a friend, they might abandon their subscription.

Conclusion

When you need to increase the price of your subscription service you need to think very carefully as to whether you need to raise the charge for your current customers. There are some factors to consider such as why are you increasing the price, what is your profit margin and how will they react. The answer to these questions will tell you if increasing the price is right for your business.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net