This week one of our service providers, Chargify, went through a major business model change that shocked their customers and caused quite a stir on the Twitter, TechCrunch and Hacker News. To their credit, they were out engaging early and often trying to quickly make modifications to their new plans to appease their angry customers.
Yesterday Lance Walley, their CEO, posted about why they had to change their prices. Essentially, they had priced themselves into a corner. They worked primarily on a freemium pricing model but with a premium sales and support process. The two don't mix well.
Their original pricing made it very easy for businesses to "try out" their service. Any business could use Chargify to manage up to 50 subscription users for free. After that there were various price plans based on the number of users you had.
We already had a billing system in place before switching to Chargify but Chargify had a lot of features that were really nice, saved us a bunch of time and mode our lives easier. After starting out with the service we eventually became paying customers.
The problem for Chargify was that they experienced all of the costs associated with our account when we were free customers.
Chargify isn't simply a service you turn on and it starts working. Especially if you are going to use their API (which is the approach we took). Working with API's, no matter how good they are, takes time for customers and creates a lot of questions. Organizations that offer API's often have to spend a lot of time answering those questions.
In our early days I had questions about the product and how it worked that were quickly answered by phone, email and Twitter. And I eventually became a paying customer. But according to what Chargify is saying, there were many, many customers that never converted from free accounts to paying accounts, simply because they weren't growing fast enough.
Once again, most of Chargify's support costs were incurred while accounts were free (now that we are a paying account I rarely contact support at all). If your support costs are high for free accounts and very few of those accounts become paid accounts then your business will run into trouble very quickly which is exactly what happened to Chargify.
Matching Your Sales/Support Plan With Your Pricing Model
Chargify's support has always been fantastic, but it was the wrong sales/support model for the pricing model they had implemented. If you are going to offer a freemium service then the sales and support process needs to be largely self service.
Chargify had a pricing model that required self-service but a setup process that required a lot of one-on-one interaction. The two don't mix. If set up is going to require a lot of one-on-one time then you need to do one of the following:
- Charge for setup
- Require a minimum paid contract after setup
- Retain the customer for a long enough time and at a low enough ongoing support cost that they are profitable
I am not a fan of the freemium model, especially for new B2B businesses. We tried it in the early days and things have gone much better since we went away from it. But if you are going to have a free or low cost solution you need to make sure that you have resources in place to effectively scale your business.
Good Documentation Eases Support Costs
One of those resources is good documentation. I really believe that better documentation could have really helped Chargify out. They recently launched a new documentation site. This is much better than what they previously had but it still isn't there. The lack of a search feature is a major omission which just serves to increase their support costs. In addition, support resources are now spread out across a knowledge base, software documentation, forums, an FAQ and API documentation. In the end it is easier to contact support than to find an answer to your question.
We have had many businesses come to us who were in the same situation. We had one customer come to us who was just about to shut their business down because of high setup costs. They started using ScreenSteps Live and support requests instantly dropped. We regularly hear the same story from other customers. Having good documentation that is updated regularly helps them scale their business.
Now, not just any documentation will do. Our customers are following a simple methodology for creating documentation that decreases their support load and improves their business. If you have the methodology in place then things work great. If all you do is create documentation and pray that it works then you won't get very good results.
Changing Prices and Grandfathering Existing Customers
One of the major causes of backlash for Chargify was their refusal to grandfather existing customers as they rolled out new plans. It is fairly typical for SaaS based products to grandfather existing users when they roll out new pricing plans (Grandfathering is the process whereby existing users are able to keep their current pricing regardless of new pricing for new users). Zendesk learned this the hard way several months ago and eventually ended up grandfathering customers. I am assuming that Chargify is doing this because the cost of supporting existing customers is higher than the profit gained by those customers.
You can't grandfather customers if existing customers are causing you to lose money. Don't put yourself in this position.
The lack of grandfathering really ticked a lot of people off. As a customer it really felt like a breach of trust to have pricing changes sprung on us with such little notice. But obviously, it was a move Chargify felt they needed to do quickly.
This is another area where better docs could really help them since the majority of the costs associated with existing customers are support related.
Let's be clear. The Chargify guys are much smarter and accomplished than I am and have created some incredible businesses (Grasshopper, Engine Yard, etc.). As far as marketing, product development, and PR they really know what they are doing and we can (and have) learned a lot from their examples and blog posts. But I believe that if they would have focussed on their support and documentation costs from the beginning then they would have been in a better position to raise prices for new customers while keeping existing customers happy. They could have made sure that at least their existing paid customers were profitable customers.
The One Thing We Have Done Right
We have done a lot of things wrong in our business but we have always focussed on having great documentation. We see this as being a key factor in allowing our business to grow. We develop and support three significant products, ScreenSteps Desktop, ScreenSteps Live, ScreenSteps Workgroup, and plan on launching a new service, ScreenSteps.me, fairly soon. There are only two of us but we always answer the phone and respond to support tickets quickly.
But we don't get that many calls. And we don't receive that many support requests. Our customers are doing some really amazing things with our products and integrating with a wide variety of services. But because the docs are good and are in a simple, centralized location our customers' questions are answered *before* they have to contact us.
This gives us a lot of flexibility as we go forward. We have a subscription service, ScreenSteps Live, that is really affordable for our customers. At some point we will probably increase prices for the service. But because our support costs for existing customers are so low we will easily be able to grandfather existing accounts, allowing them the option to keep their existing pricing and plans, only upgrading to higher priced plans if they want to. We have already done this once in our history and received zero push back from our customers. They viewed the new pricing as optional as opposed to obligatory. We were able to make it optional because of low support and infrastructure costs.
Could that change? Yes. If our infrastructure costs dramatically increased then we could be in a position that we would have to increase prices for existing customers. But infrastructure costs seem to be going down instead of up so I don't really see that happening.
Will we be sticking with Chargify? Yes. They have a great product and great service. And the new pricing isn't really that big a deal for us. The way the pricing increase was handled left a bit of a sour taste in our mouth and changed what was unbridled enthusiasm to something a little less glowing.
I should probably be careful in what I say. We haven't experienced the kind of growth and press attention that I am sure Chargify has. And maybe things would be different if we did. But I do know that the money our customers pay us is more than what they cost us in support. That gives us a lot of options as we grow our company.
If you would like to read an excellent summary of what of what Chargify learned from this experience you can find it here.