Case Study: How to Raise Prices
Like many entrepreneurs, the guys behind the online-billing start-up Chargify often fantasized about generating buzz on some of the tech world's most popular websites. One day in early October, about a year after the company's launch, they got their wish.
"I'm sure you'll be laughing all the way to the bank, but not with my money," a Chargify customer posted on the online tech forum Hacker News. "Today you've turned around and told all of us that we don't matter to you," groused another. Another was more direct: "Wow. What a kick in the nuts."
That morning, Chargify, which makes a Web-based system that small companies use to manage billing, had announced that it was changing its pricing model. Specifically, it was eliminating the free service it had offered to entice customers to sign up. The idea behind the so-called freemium model was that free users would in time upgrade to a version that cost $49 to $2,500 a month. The problem: After 12 months in business, less than 1 percent of clients were paying a dime.
Chargify's co-founders Siamak Taghaddos and David Hauser knew that no one would appreciate the change. But the pushback proved more powerful than anyone had anticipated. In addition to negative comments on Hacker News and the blog TechCrunch, the Needham, Massachusetts-based company was flooded with angry e-mails. Whether or not the pricing change was a good idea, it was clear the company had bombed the communication.
Taghaddos and Hauser launched Chargify in September 2009. It was the first in-house incubated business for Grasshopper Group, which makes a suite of products for small-business owners, including the phone system Grasshopper. The billing-software marketplace is a crowded one, and Chargify sought to stand out partially by its approach to pricing. Users with 50 or fewer customers could use Chargify for free; as these companies grew and acquired more customers, they would graduate to a premium option. What's more, unlike some of its rivals, the company does not collect a fee for each transaction or ask for a percentage of total billings.
Before launching, it seemed like a perfectly sound idea. Given Taghaddos and Hauser's experience with Grasshopper, they figured that 15 percent of Chargify's nonpaying customers would grow into paying ones within three months to six months of signing up, which would provide enough revenue to build a sustainable business.
But six months after Chargify's launch, it was clear that the model wasn't working. "We were attracting way too many hobbyists -- who were, with a few exceptions, just never going to be successful," Hauser says.
The company's executive team agreed that to lure faster-growing businesses as customers, it needed a new price structure that would weed out the hobbyists. The team agreed to eliminate the free option and raise the price for companies with up to 500 customers from $49 a month to $99 a month. The price was justified, the company believed, because Chargify was adding new features, such as round-the-clock phone support and credit card security compliance services. It was a gutsy move -- Chargify would now have the highest entry-level price in the market.
On the morning of October 11, Chargify sent its 2,500 customers an e-mail announcing the change. "We are grateful for all the support we have received from merchants like you over the past year," it said, "and we are excited about the future of Chargify." The message went on to outline the new features and included a link to the site's new pricing page. The e-mail also explained that free customers would have 45 days to begin paying or find another provider.
At Grasshopper Group headquarters, the mood that morning was rather relaxed. After all, says Hauser, "we changed pricing with Grasshopper many times, both up and down, and never had any significant pushback."
Then someone posted a link to the announcement on Hacker News. Others took to Twitter and the Comments section on Chargify's blog to rip the price hike, the lack of advance notice, and the absence of a grandfathering clause. One commenter wrote, "...we were suckered into thinking that the free startup account would be around until we outgrew it." Hauser; Chargify's CEO, Lance Walley; and others went into damage-control mode, jumping online to address complaints and mollify angry customers. Says Jeremy Butler, Grasshopper Group's director of marketing: "We needed to do some triaging pretty damn quick."
As all this was happening, Taghaddos was out of the loop, as he was visiting family in Los Angeles. That afternoon, he pulled out his BlackBerry and scrolled through Chargify's Twitter feed. He was stunned. He dashed off an e-mail to Hauser. "Why are we apologizing for the pricing change?" Hauser's reply: "Front page of HackerNews, 112 comments, e-mails, and massive response on Twitter. People are ok paying (well the good ones) [but] they did not like the huge jump."
Taghaddos fired off a response. "Rare are companies who tell it like it is however and not give in," he wrote. "We should just be careful and not come across as weak."
Still, after talking to dozens of customers and responding to more than 100 complaints, Hauser felt strongly that the company had to do something. It had been a big mistake, he thought, not to offer a lower-priced plan for current customers. Walley agreed. "Our customers built their business plans around our pricing and didn't think it would change," he says. "There was a feeling of betrayal." But Butler, the marketing director, and chief operating officer Don Schiavone were reluctant to reverse course so quickly. "I wanted to see it settle for a week or two," Butler says.
The Decision For Hauser, waiting wasn't an option. He wanted to act immediately. He decided to offer current Chargify customers with up to 100 customers a new, $39-per-month option, with all the features of the $99 plan. Early in the afternoon, Walley announced the new option on the company's blog. TechCrunch responded with an article titled "Subscription Billing System Chargify Missteps as It Switches From Freemium to Premium," inciting another wave of criticism.
The next morning, Taghaddos decided he had had enough. He logged on to Twitter and began to write: "Moving away from freemium gets rid of freeloaders & bad customers, so you can provide better products & support to good ones." His choice of words didn't sit well with some customers. "Just saw the statement calling freemium users the freeloaders/bad customers," tweeted a customer. "Pretty gutsy and flat out rude." Taghaddos replied in an effort to clear things up. "Misunderstood," he wrote. "Freemium models attract both good/loyal customers + bad ones. Moving away helps you focus on the good."
Hauser has known Taghaddos for eight years and was not surprised by his blunt comments. Still, Hauser and Walley redoubled their efforts to accommodate customers who wanted more time before the new prices took effect. Hauser also wrote a post on his blog titled "How to Break the Trust of Your Customers in Just One Day." Many readers commended Hauser for taking responsibility for the uproar, though several were miffed by some of his other comments, including "Free customers go out of business or never launch" and "Free customers have the time to complain."
Indeed, that was the final straw for Jeff Epstein, owner of a referral software provider called zferral.com. Epstein had been using Chargify for three months and had invested quite a bit of time into integrating the software into his own systems. Hauser and Epstein had a lengthy e-mail exchange, but in late November, Epstein jumped ship. "I really do respect that he took the time to chat with me," Epstein says. "But I just can't trust them anymore."
Chargify also introduced a $39-a-month option for users with 10 or fewer customers. It is guaranteeing all customers 12 months at the rate they signed up for. In the month following the October announcement, 35 customers left Chargify, compared with just 15 for the entire year leading up to the change. But the company also added 225 paying customers over the same period, up from 25 in the previous year. "We did hurt our image a little bit," says Butler. "But the plan is already doing what we wanted it to: bringing in more revenue."
The Experts Weigh In
Think Before You Speak
In social media, if there's an opportunity for something to be interpreted negatively, it will be. You really have to be careful with your words; that means writing things and not hitting Send. We always tell our clients to put themselves in the position of the people they're talking to and try to communicate with that perspective in mind. Chargify's big challenge now is convincing customers that it won't continue to change pricing policies whenever it gets "data" that say the company could be making more money with a different model.
CEO, Maslansky Luntz + Partners
New York City
It's Going to Cost Them
We compete with Chargify and have spent three years working in this market. The owners of these small companies -- even if they are free customers -- see themselves as having made a significant investment in time, resources, and energy to integrate with your product. If you grandfather a bunch of the early evangelists, it makes them feel special -- and more inclined to talk up your service. Chargify didn't do that, and I think it's going to cost the company more in bad will than it would in money if Chargify had supported those free customers for a few more months or a year.
Raleigh, North Carolina
Time to Move On
Chargify's new pricing was fine, though everything around its introduction was obviously done the wrong way. It was smart of Hauser to admit on his blog post that Chargify had screwed up; it showed his human side. Ultimately, the company did what it needed to do to try to appease customers and move on. That's smart; if you continue to try to defend your position too strongly against people who think you wronged them, it only shows you're not paying attention.
Managing Director, Sixteen Ventures