After running our SaaS, Snipcart, for two years, it was pricing that disrupted our small team’s harmony. It was pricing that triggered our first real argument.
Our product manager had just come up with the suggestion to add a minimal fee to our percentage-based commission. And our lead engineer and I drastically opposed the idea.
“Forget it, Georges, we’re not doing it,” I told him bluntly.
“Trust me, guys, I’ve been thinking this through all weekend. I’ve done the math, and it makes more sense than you think,” he answered, composed as always.
I wasn’t trusting him, at all. Our primary marketing promise had always been “if you don’t sell, we don’t get paid”. I thought altering this would cause a storm of complaints, hurt our brand, and harm our business.
But I was wrong. Dead wrong. And today, I’m going to show you why.
I’ll be diving in to the pricing change we made at Snipcart a while back. I’ll share metrics, results, and, more importantly, the lessons we learned from the experience.
Ready? Let’s do it.
First, a tiny bit of context
When we launched our developer-first e-commerce solution in 2013, we priced it using our guts alone. We were all coming from a servicing background and had next to no experience with SaaS products. So we settled on a simple formula we thought would ease users in: 2% of monthly sales.
Bold and clear on our first site, we wrote:
Many enjoyed this risk-free approach. Many hated it. But we ran with it for two years anyway.
As the user base and revenue kept growing, so did our business data. We now had significant numbers we could crunch, and relevant feedback we could use.
Our product manager decided it was time to take a step back to analyze this data. So he did.
To get a better understanding of our business, he dove into a pool of metrics. And he emerged with fresh, actionable insights.
Why we decided to change our pricing
Going through our numbers and customer data, we realized how asymmetric our support efforts were. Let me explain.
We uncovered that 80% of our revenues came from 20% of our customers. Which meant, in a commission only pricing model, that 80% of our customers were paying $0 to use the platform while contacting support frequently.
The reduced barrier to entry (% vs. flat $) attracted customers who weren’t necessarily committed to building a serious e-commerce business. In many cases, it even attracted users who weren’t comfortable using a developer-first product. Because for them, the worst that could happen was a bit of time lost, without any impact on their wallet.
And for a while, we were fine with this. We tried our best to help with their e-commerce integration, sometimes going as far as writing code for their own site.
But after seeing how low our average CLV was, and how our constant support efforts were impeding product development, we had to change something. We were, after all, providing the best developer-to-developer support we could for a quality product that brought value to both developers and merchants.
To put it more candidly: we couldn’t afford to spend hours of support for users who brought in next to zero revenues. We were—and still are—running a bootstrapped business. Our ROI has to be on point if we want to survive in our highly competitive space.
So, after agreeing to our product manager’s proposition, we launched a simple pricing experiment:
We set the minimum fee for our 2% to $10.
Why $10? Based on the data we analyzed, we saw that 80% of our customers sold less than $500 a month (2% of $500 = $10). This gave us a benchmark to use in order for this pricing change to have any significant impact on the business.
We added the info to our pricing page, and made it crystal clear in the user dashboard.
For any customer selling over than $500/month, this had zero impact.
But for all the other ones? This meant $10 out of their wallet, each month. $10 they might have never intended to spend upon signing up.
So once we stopped arguing and decided to just do it, we had to handle the next step: breaking the news to all our existing users.
Handling the announcement and the backlash
I wish I could tell you it was a smooth transition. But it wasn’t.
We thought we had played our cards right. Three months before the new pricing went live, we sent numerous announcements and reminders via our newsletter. We also added a prominent notification in the merchant dashboard. We updated our pricing page & FAQ. During that period, only a few scary emails repeatedly found their way into our inboxes. Stuff like:
I’m sorry guys, but I think this is a great mistake on your part. Your percentage-based pricing is one of the only reason my clients agreed to go with Snipcart. I strongly advise you reconsider this decision. Otherwise, I’ll have to stop using your service for my current and future clients.
These emails brought in a good dose of self-doubt and worry, especially for our lead engineer and I. But we kept moving forward with our decision. Eventually, we reached the critical point: billing day for the new pricing.
And that, my friends, is when the emails started. Boy, were we swamped.
Even with our customizable Gorgias answer templates, we were stuck in email and support threads for days. It was then that we noticed that the subtle difference between a “minimal fee” and an “additional fixed fee” was harder to explain than we had thought. Way harder.
Again, we were scared. But our product manager kept re-assuring us. Because, as cold as it may sound, he knew what we were risking with this move: users who weren’t willing to pay $10 a month for their e-commerce solution provider. We weren’t losing customers; we were losing users who didn’t generate revenue, but drained our support and infrastructure resources.
It took us a whole lot of time to get through this communication blitz. Because we committed ourselves to provide in-depth explanations to any customer who reached out, regardless of his/her Snipcart usage. Why? Because our retro-fitted decision had more than an impact on numbers: it also broke a promise we had made in the past. Hence, we made a few one-off exceptions here and there when it made sense.
We put forward the importance of optimizing our small team’s efforts, and we tried to handle this with honesty and transparency.
After the storm, the shiny metrics and dollar signs
After all of this negative feedback we received, I was worried our sign-up rate—our whole growth, to be honest—would take a strong blow. But it didn’t.
Why? Because Snipcart’s conversion cycle is often long-winded: developers who find our solution aren’t always “bleeding neck” customers looking for immediate e-commerce integration. Many times, they’ll play with Snipcart in free test mode, and discuss at length with other parties involved in the project (clients, colleagues, bosses, etc) before going live.
Our key observations:
- We did notice a slight drop in post sign-up activation rate, i.e. entering our Live API key and start selling for real. A decrease of about 2-3%, to be exact.
- We lost a grand total of zero paying customers. Like I’ve said earlier, this change didn’t affect them at all.
- We lost almost half our user base (around 2,000 accounts at the time), all non-paying customers and a few zombie stores. This brought a great pressure-relief on our support.
- In the following months, we tripled our revenues. This allowed us to hire a new developer, accelerate product development velocity, and keep offering stellar customer support.
A few months later, we got back together in the meeting room. Our product manager pulled up the following revenue growth graph on our monitor:
“All right, Georges. There: you were right,” I said.
He smiled from ear to ear.
Takeaways with SaaS pricing and flexibility
I believe the beauty of a SaaS business resides in its ultimate flexibility: driven by both humans and data, shaped by experiments, it can react to stressors, bounce back, adapt, evolve, and, ultimately, grow.
And this little pricing experiment we ran gave our SaaS a much-needed stretch of growth. Any SaaS building a profitable business (and not just striving for product adoption) should seriously look into this kind of strategy.
Plus, it also gave us a few key lessons I want to end this post with:
- Customers, no matter how vocal and convincing, should never dictate your pricing. In the end, it’s your call.
- Growth doesn’t always have to translate into “hacks”, inbound techniques, or paid acquisition. Pricing can play a crucial role here, and you have 100% control over it.
- Pricing is malleable, but trust isn’t. So make sure you do your maths and know how to communicate effectively with customers before making a decision.
We’ve been running and growing with this new pricing for almost a year now. Things are looking good, and I’m super glad we decided to trust our product manager with this call. But still, I believe there are other pricing models that may help sustain our growth even better.
We’ll have to rewind the experiment loop and start again, sooner than later.
This post first appeared on Baremetrics.