Last week I wrote that we are changing pricing of Nozbe and today I’d like to explain the 5 rules that governed me when designing the new price list. Previously I’ve explained some of it on video but since then I think I’ve improved the system and came up with 5 principles for creating a pricing scheme that I believe to be as fair as possible. I also lay out the “gotchas” that I’ve encountered along the way. I hope this helps Nozbe customers understand where I’m coming from and fellow SaaS (Software As A Service) business owners design pricing for their customers.
- 5 Principles (or rules) of a price list for a recurring subscription when charging per user
- Gotchas - steps to implementing this pricing system
- Currencies - we offer USD, EUR, GBP and PLN
- Pricing is art and should reflect your values!
5 Principles (or rules) of a price list for a recurring subscription when charging per user
These rules may apply to any kind of pricing scheme, but they particularly are suited for businesses like mine, where you’re charging per user per month and you want to optimize for these values:
- Fairness all around
- Savings for the customer
- Good cashflow for the business
Again, these are things I optimize my business for. These are not universal truths. Some businesses optimize for maximum profit, individual negotiations or aggressive discounting. Not me. I try to focus on fairness, savings and cashflow. I don’t need o maximize shareholder value of my own business - I have the luxury that I can optimize it in accordance with my beliefs.
Let’s dive into it:
Rule 1 - Fairness of having just ONE pricing
I believe in having the same price for everyone. In my last post I mentioned how uncomfortable I felt that some of my customers were grandfathered and enjoyed their special prices for years on while others were paying more for the same product just because they came later.
That’s why with current changes to Nozbe prices we’re making a clear cut. Whatever prices you had until July 1, you can still extend your account for a few years if you want and we give you this unique opportunity because we appreciate you. However going forward, after July 1, 2023, all renewals and new orders will be calculated based on the same fair pricing for everyone. No exceptions.
This also gives us an easy answer if someone asks us how much a Nozbe account costs. It’s all the same for everyone.
In my case enforcement of this rule was even more difficult as I extended it for equalizing the prices of both of my products: Nozbe Personal and the new Nozbe. This lead to some significant changes at some price points due to my not-so-good pricing decisions from the past. Now I’ve taken this opportunity to correct most of these issues but I know it might be at a cost of alienating some of the customers.
Harmonizing the pricing between both products simplifies the choice between them. Now it doesn’t come down to price, but to personal preference of the customer. And if the “old Nozbe Personal” customers want to migrate to the new Nozbe, we’ll also copy their renewal date on a similar plan. Again, fair and square.
Rule 2 - Savings for yearly payments at 20%
Most recurring revenue businesses offer both monthly and yearly payments. Some companies offer just one or the other. Some enforce only one of these. I believe in giving the customer flexibility in choosing one or the other at any time:
- Monthly payments let the customer try your service for a while without investing significant amount of money. Typically Nozbe customers pay for a few months first and only when they’re convinced that our product is a match for them, they usually decide to commit to a yearly plan. Or they stay with monthly payments to keep ongoing costs low.
- Yearly payments are great, because they give extra cashflow for my business as a customer pre-pays for an entire year in advance. It’s also great for them as they have only one invoice (and payment) a year and in exchange they’re saving money.
However, for the yearly payments to make sense, they must be significantly discounted and my choice for this is ~20%
This way I can say that Nozbe account costs:
- $10 per month for a single user when paid monthly
- $8 per month for a single user when paid yearly.
Simple and straightforward.
As you can also notice, the guideline of fairness is present here as well as I try to avoid commas. If a business doesn’t rely on micropayments I believe people appreciate straightforward $10 instead of $9.99 - to me commas are messy and kinda sleazy. Ten bucks is ten bucks.
Rule 3 - Savings as customers’ team grows
Now this is tricky. Many SaaS businesses simply charge “per seat” as they call it. As explained above it’s $8 per user per month when paid yearly for Nozbe. Now, many businesses charge the same price for each additional user. Sometimes they charge per each and every new user the same price, other times they offer some savings when buying users in bulk. It can get very complicated.
As Nozbe is a product typically for small business owners, I think they should enjoy additional savings per user as the team grows. Additionally I believe we should have predictable prices for bigger teams.
I ended up with hybrid approach of charging per user and later per tier of users with discounts on each level that add up to 25% total. Teams of:
- 1 user - $8 per user per month when paid yearly
- 2, 3, 4, 5 users - 10% discount - $7.50 per user or less…
- 6, 7, 8, 9, 10 users - 15% discount - $7 per user or less…
- 15, 20, 25, 30 users - 20% discount - $6.40 per user or less…
- 50 users and beyond - 25% discount - $6 per user per month and that’s it.
This way a team of 2 already pays less than $8 per user per month and team of 15 saves almost 2 bucks on each user! I’ve capped the savings at 25% for the biggest teams and at minimum of $6 per user per month.
In the past pricing attempts I’ve gone with savings too low for bigger teams and this opened doors for additional unnecessary negotiations. Now it’s clear, fair and square.
Rule 4 - More tiers for smaller teams
Again, in alignment with our mission of helping small business owners get their personal and business life organized, I’ve decided to add more tiers for the smaller tiers. As noted above, between 1-10 users the pricing changes after adding each user. Small teams usually don’t grow too quickly so they should pay for the exact number of employees they have.
Only starting up from 10 users I decided to add tiers every 5 users. Typically at this level the number of employees starts changing more frequently so we didn’t want the customers to think about switching plans all too much on one hand, and secure them a predictable monthly cost on the other.
Rule 5 - Pay-less switching between plans
This is not price-list specific but more of an implementation detail but I believe it’s very important. As the customers grow with Nozbe they should be able to switch between plans as easily as possible. We shouldn’t ask them for too many separate payments or task them with making complicated decisions.
Many businesses approach this differently. Some invoice the customer for the new plan upfront (and we used to do that), others pro-rate new user cost and add the difference to a monthly invoice or they just bill monthly for more users regardless of the customers’ payment preference.
We’ve introduced “Pay-less” switch system.
It’s quite simple. Let’s say you have a team of 5 people and you choose Nozbe plan for 5 users. Great, you pay the monthly or yearly fee for that and you’re done. Now, after some time a new employee joins your team. You simply add them to your account and you don’t pay anything right then.
What we do, is automatically switch you to the 6-user plan and re-calculate your outstanding balance based on that and change your renewal date. If you add a user, the renewal date for the new plan comes closer, if you remove user and switch to a lower plan, your renewal date is being moved further in the future.
We just update your renewal date and only then you’re being charged for the new plan.
This system makes adding or removing users from Nozbe not only completely hassle-free, but it also gives teams flexibility to expand (or shrink) quickly if they need to.
Gotchas - steps to implementing this pricing system
All these rules are pretty straightforward and fair, but especially implementing the rule 3 - saving as customers’ team grows - is tricky to implement. It gets even more complicated if you’re like me and you don’t want to deal with commas. Here’s what I went through to arrive at the new Nozbe pricing:
Step 1. Automatically calculate the prices based on the savings
In the spreadsheet I put $10 and $8 per user per month and in each new row I calculated the increment of an additional user MINUS the discount of the growing team as mentioned above. Then I it rounded up without commas.
This was very automatic and it went pretty smoothly.
Step 2. Manually adjust for fairness based on per user cost and tier change
Now comes the tricky part. After all the automatic calculations are done, it’s time to manually adjust for fairness. As customers are expecting two things:
- Price per user should go down as you move a tier up
- Price difference between tiers should be the same or lower as you move tier up.
This is manual labor - I added columns for “price per user per month” and “price tier change” to monitor these parameters. Things I had to correct manually:
- price per user per month at 6 users was 8.50 and at 7 users was 8.57 (and it mustn’t be bigger!)
- price difference between tier 1 and 2 was $8 while between 2 and 3 was $9 (and it mustn’t be more!)
To make sure I adjusted the prices correctly while still adhering to rule 2 - savings of ~20% for yearly plans - I had to add a third column that monitored this parameter.
Here’s a screenshot from my spreadsheet:
As you can see, it was lots of work to make sure I adhere to all my rules, give customers a discount and make sure the prices looked right, avoided commas and were as fair as can be:
Please note that the additional tiers for plans 1-10 will be added to the price lists after July 1.
Currencies - we offer USD, EUR, GBP and PLN
One last choice is the currency choice. For new new pricing we’ve chosen USD (American Dollar) as the main international currency as it’s understood all over the world.
For European countries we went with EUR (Euro), even if the country is not in European Union (like Norway or Switzerland) as Euro is understood universally in Europe and is the de-facto standard. Two notable exemptions are GBP (British Pounds) for our British customers and PLN (Polish Złoty) for my compatriots in Poland - as our company is based there.
In all these currencies we’ve set up definitive pricing so that we (and NOT our customers) take the currency exchange risk. This way if you’re based in the USA, you’ll pay the same amount of dollars every month, if you’re in Germany, you’ll pay the same amount of Euros and if you’re in the UK you’ll pay the same amount of Pounds Sterling. As our customer you shouldn’t be receiving different bills depending on the currency exchange rates. In the future we want to offer our pricing in even more currencies.
Pricing is art and should reflect your values!
In my last article I explained why we were raising prices and how we were communicating the change and today I’m following up with how exactly I went about making sure the prices reflected our value of fairness while giving our customers savings and optimizing our business for good cashflow.
That’s why I believe writing down these rules and putting these assumptions in place is critical in designing pricing. This communicates what you believe in and lets the customer know you’re together in business for the long haul.