Bootstrapped Founder #30: Pricing Models That Can Break Your Business

Dear founder,

A quick word about my upcoming book, Zero to Sold: I've been making a lot of progress turning my freely available web-based guide into a fully-fledged book that will be released in paperback and as an eBook. This week, I've been working with my editor to iron out the kinks, and it will be released soon. I'll be in touch about that.

I've also released episode 34 of the Bootstrapped Founder Podcast, where I talk about the topics in this newsletter and ways for founders to stay open and fight their own bias.

But for now, let's continue to talk about pricing.

When it comes to optimizing your pricing, there are many great ideas to attract more customers or keep them retained. Two pricing models can be hazardous if not implemented carefully: freemium accounts and lifetime accounts.

The Risks of Freemium Accounts

A freemium pricing model can be great for getting people to use your product, integrating it, and eventually paying for it. It can be very dangerous to your business if it allows customers to use the product extensively without ever needing to pay for it. Setting clear limits that are easily reached when the product is used in a revenue-generating way is paramount here.

Businesses like Baremetrics almost went out of business because freemium users caused infrastructure costs to skyrocket by using the product in unlimited and unmetered ways. When Baremetrics released its freemium accounts, thousands of businesses signed up and imported their payment provider data into the Baremetrics system. The onslaught of data was so intense that they had to scramble to provision new servers to be able to handle the load. At the same time, customer support queries grew because those new users needed assistance too. Without making an additional dollar's worth of revenue, they now had to pay more for infrastructure, and their paying customers had to wait longer to get support.

If you try to attract customers using the freemium model, make it hard for them to earn money without paying you. At least that way, once a user derives meaningful value from your service, they have to start paying. You can accomplish that by turning key features into paid-only options or instituting limits that are hard to reach for an amateur but easily reached by a professional. Usually, this scales along with the value metric of a customer, like the amounts of successful purchases in an eCommerce store or the number of photos uploaded to an image upload site.

The risk for freemium to hurt you increases tenfold when you need paying customers to offset the cost incurred by your freemium users. That's why I recommend setting limits that both keep your customers from making too much money off the free tier of your service and keep your customers from overwhelming your infrastructure by using the service.

Be advised that many third-party services charge by active users. Unless your paying users can offset that cost, using the freemium model can be very prohibitive to choosing the right integrations for your service due to the very high number of non-paying customers. Particularly if you implement freemium later during the course of your business, this might cause you a lot of financial stress. Whenever you choose to use a customer-facing service, look at what will happen when your user count changes by order of magnitude.

Finally, freemium plans might cannibalize your paid plans. Every free-plan user is a user that could be on a paid plan if you didn't have a freemium option. Think about it like this: if the customer would have paid, you don't capture their revenue. If they wouldn't have paid anyway, why would you want them as a customer?

The Risks of Lifetime Accounts

Lifetime accounts are quite similar, as the danger also lies in resource consumption that, after some time, exceeds the money they paid for the product. For a customer, "lifetime" means their own lives, while for most businesses, the "lifetime" in question is that of the current iteration of the product. This can be quite confusing, usually leading to bad blood once the perceived forever-account gets migrated into a monthly plan. These accounts are great to raise initial capital for a business, but they create a lot of pain and become liabilities in the later stages of a business. Particularly when you intend to sell the business at some point, stay away from lifetime accounts.

Lifetime accounts often signal that the business is in a bad financial state. If you were confident that your subscribers would stay with you for their "lifetime," why take so comparatively little money upfront?

Lifetime accounts also attract less-than-desirable customers. The expectations you set up by offering a paid service for life can become insurmountable. With a recurring subscription fee, you can at least defend that a customer has the right to claim your assistance again and again. But what will happen when a customer who paid what in most cases is just a few hundred dollars for lifetime access to a service reaches out to you every few days, holding your attention for hours? These expectations will be hard to fulfill, even if your customers are not pathologically complicated.

With a lifetime account, be absolutely clear what "lifetime" means. Is it the lifetime of your customer? Your lifetime? The lifetime of the product in this version? All versions? Is it the lifetime of the lifetime offer? The moment your customer understands "lifetime" to mean something else than what you intend it to be, there will be a very uncomfortable conversation in your future.

It's Not Just Risks Though

Both Freemium and Lifetime accounts can work for your business. When applied consciously and with the right strategy, either can provide a benefit to a bootstrapped business — when applied temporarily.

Slack uses the power of Freemium to get people to join free self-organizing communities, only to later have the same people carry the paid version into their day jobs. Zapier offers a "Free Forever" plan that similarly converts free users into customers once they require more advanced solutions to their integration problems. Both companies treat their free users as valuable customers, because they know that conversion rates are high, and a single user can turn into a lead catalyst for the 50.000-employee organization they work for.

Some businesses that desperately needed cash up-front sold a few lifetime accounts to their earliest customers, and that gave them the funds they needed to jumpstart a business that can survive long enough for recurring revenue to establish recurring revenue. But lifetime accounts are just that: a temporary cash injection that, after a while, might turn into a drain on your resources.

Whatever you do, revisit your choice every few months. Keep your eyes on the Customer Acquisition Cost and the Lifetime Value of your users and how it changes when you implement these kinds of accounts. Once those metrics show a tendency towards negative revenue, be prepared to phase out those offers.

Generally, adding one more customer to your software service won't cost you much. The marginal cost of SaaS businesses is near zero in many cases. If this is true for your business, you can definitely experiment with these pricing models. Just make sure you don't wipe out potential recurring revenue streams indefinitely by giving customers subscription options that give them a lot of value without compensating your business for providing it.

Both freemium and lifetime accounts can attract the kinds of customers that you might not want to serve. When in doubt, stick with monthly and yearly subscriptions after an extensive trial phase. That way, you'll see if customers are with your business because you provide them enough value continuously. Because if you're not, they will cancel. And when it comes to making sure you provide the best product, that is a clear indicator that you need to work on it still.

You can find this article on the blog, and I talk about it on The Bootstrapped Founder podcast as well.

Links I Found Interesting

Stetson Blake wrote about how he wrote a SaaS product because the internet made me believe it'd make him rich. So far, it didn't, but his work on EarlyBrd taught him valuable lessons—lessons that you won't learn until you actually build a business. It is that more than anything else that stands out for so many first time founders: building a business is really hard, but without ever attempting to do it, reading up on business will only get you so far. Of course, the Hacker News backseat entrepreneur crowd was quick to point out a few flaws, so if you're interested in some "collective wisdom," risk reading the comments.

While I assume that most bootstrappers will never have to create a pitch deck, delving into the presentations that led to the funding of businesses like Intercom, Moz, and Buffer is just too interesting to miss. The scope of ideas and the quality of thought that went into making them presentable will give you a few ideas on how you can be more clear with your own messaging, to customers, partners, and, who knows, maybe also investors.

A few weeks ago, I shared a link to the psychological concepts that permeate design. This week, I want to share tools for better thinking. If 'Abstraction laddering,' 'Second-order thinking,' and the 'Iceberg Model' sound interesting to you, then enjoy this collection of tools and frameworks that will improve your decision-making and problem-solving skills.

James Ivings, the co-founder of the LeaveMeAlone app, wrote an insightful article on the functionality of the Gmail unsubscribe button, highlighting the complexity of regulations, implementations, and technical quirks. If you're running a newsletter or even intend to have an email list—which you should–then this post will give you some actionable insights to reach compliance quickly and easily.

Bootstrapping Successes

Anne-Laure Le Cunff's wonderful Maker Mind newsletter and the Ness Labs project has reached $10.000 in revenue so far. She has built a great community around her intersectional work between creativity, productivity, and how our brains function. I love the newsletter, and I joined her community as soon as she opened it up. I can highly recommend it, and I wish her much more growth.

Sometimes, what sounds like a wonderful opportunity to you might look like a risk to someone else. Brett Williams shared an amazing milestone this week: his side project just hit $13.000, and he's still not quitting his full-time job. This is the reality of any founder: you just don't know if it will continue to work out. It's a dangerous undertaking. The comments in this thread are interesting in two ways: some are hopelessly naive and overly optimistic, while others show having experienced these doubts themselves. This milestone shows that at no point during the early days of founding a business, there is no perceived security. I remember feeling this same fear even at $55.000 MRR. It never leaves.

Mike from RegiRank got his first paying customer, on a project that he had neglected and had accumulated many freemium users. I have the feeling that he'll double down on the business now. The lesson here? Sometimes, it takes a while to get things going.

Thank you for reading this week's edition of The Bootstrapped Founder. If you like what I wrote about, please forward the newsletter to anyone you think would enjoy it too.

If you want to help me share my thoughts and ideas with the world, please share this episode of the newsletter on Twitter or wherever you like, or reach out on Twitter at @arvidkahl.

See you next week!

Warm Regards from Berlin,

Arvid