NOTE: THERE’S A NEWER BLOG POST ABOUT WHAT WE DECIDED. The following is interesting, but if you just want the summary of what we decided after 3 months of engaging our customers, click the link above to see it.

UPDATE 1: GREAT RESPONSE
Response has been good. Thank you! While no one enjoys a price increase, almost all communications have been positive. People are basically saying, “I know you need to run a good business and that’s important to my business, and I appreciate being part of the conversation.” Again, thanks. Please keep your thoughts coming.

UPDATE 2: MARK CUBAN
Mark Cuban is not behind this! But I asked him, and he does agree with it. We founders put in more capital than Mark did, but his contribution was very useful and he owns enough equity to be interested. He does not tell us what to do, but he does give good advice.

We just realized that, with 800 businesses depending on us, it’s time for Chargify to get profitable. And, by the way, I’m not paid anything. I’m in no big hurry, but the work I do needs to be paid (to someone, if not me). The continued (long-term) lack of pay for that work perpetuates a “false cost structure” that doesn’t represent reality.

All Mark Cuban did was agree with my statement in January, after I reviewed finances & projections, that, “It’s time we actually invest the capital we have, rather than burning it on operational losses.”  To that, he said, and only said, “Amen”.

ORIGINAL POST

It’s time to plan a pricing change for May, and we’d like our merchants to help decide the outcome.

Chargify is a team of 11 people, developing new features, working on infrastructure, training more support people, etc.

Looking at our costs and revenue, we need to raise prices a bit. It’s been 15 months since our only other price increase, and we’ve learned a lot.

Someone commented that they definitely don’t want Chargify to “go the way of the dodo bird”! That’s nearly impossible, given our history and backing. We just want to avoid a path of long-term mediocrity.

We’re aiming for June and we’d like our merchants’ input.

Recent events that crystalized our thinking

We spent December & January adding infrastructure and new people, plus making architecutural improvements.

While this was going on, our systems were slow, and merchants were not happy. They told us this story over and over:

– I have a decent business.
– It depends on Chargify.
– Make sure you have whatever you need to support me.
– If you’re not charging enough, please, just charge me more.

These merchants expressed a desire to “just pay more” if that’s what it takes. Their feedback drove us to look into many things more deeply.

What’s driving the need?

While we were working through the technology issues, we were also looking at costs versus revenue, gross margin, how we use capital, etc.

My experience and gut told me that when you feel that kind of stress, it’s almost always a sign of not charging enough.

One person asked why we can’t more accurately predict our costs in advance, and therefore avoid this kind of change. Well, we definitely try. But only with time can we really see what kind of weight 800 businesses are going to put on our organization, and then we can see how many support people we need (and what balance between Level 1 & Level 2), how many software developers, how much infrastructure, etc. The picture gets clearer over time, and that’s why we have to make adjustments.

Here are some of the costs that I’m talking about:

– One of our merchants mentioned this to me recently: our responsibility is increasing all the time. As our merchants “get serious” versus where they were 1-2 years ago, they want a different company (they need a different company, even if they don’t know it). Mistakes become intolerable. Just approaching that ideal is expensive, and in general, increased responsibility must be balanced with higher revenue/profit (if you don’t, then you’re headed for stress and problems).

– Our people are the largest expense, and they should be. They’re what you depend on today and for years to come. Our team is all in the USA, except one, who’s in Canada. Both places have high labor costs relative to other parts of the world.

– We have a Level 1 team that answers phones 24/7. They’re a large team and their expertise varies from shallow to very deep – at a minimum, they can wake up our developers if there’s a real emergency. In most cases, merchants call with questions about coupons or refunds or email settings, etc., and our Level 1 team does a great job.

– We have a Level 2 “developer-grade” person who can look at your code and help debug API calls during integration. He gets involved on the hard stuff. He’s expensive, as good software developers usually are, so we limit access to him.

– We have 4 Ruby developers who work full-time on improving our system. One member of the team spends a lot of time now on service & support (ie, a merchant needed emergency help Friday night because of something that changed in his business, and one of our developers jumped in to help him out on Friday night and Saturday afternoon). Also expensive, so we do our best to limit access when it comes to service & support.

– We have a sys admin who’s doing more and more critical low-level stuff that our Ruby developers and data center staff used to do. We passed the point where having Ruby developers and data center staff was the right answer.

– Our PCI-focused data center is expensive. They have 24/7 staff who do all the usual data center stuff, plus they take on some roles required for PCI certification. It’s more expensive than AWS, Rackspace, Engine Yard, Heroku, etc. Other options have come about for PCI, but they always shift more of the human costs to their customer (us), so we don’t escape the true costs of PCI, even if the compute resources are less expensive.

– We manage hundreds of thousands of subscriptions each month. For every 100,000 of our merchants’ paying customers, we manage another 300,000 of their non-paying users. The numbers are pretty incredible.

Where prices started and where they need to go

When we set prices in 2009, we didn’t have any history to go on. We wanted to make Chargify free for most merchants starting out, and we set prices much too low relative to the cost structure that unfolded.

So, in late 2010, we increased prices. A price tier that had been $0 moved to $39, another that had been $49 moved to $99, etc.

Now that we have another 15 months of history and we can see more clearly how our cost structure grows with merchants, it’s time to make a change.

We need to increase fees 30-40%. While this is a noticeable percentage, it’s a much smaller increase than our 2010 price change. We’re zeroing in on the proper cost/price/profit balance as we develop with our merchants.

Here are some examples of the change you can expect.

Your individual increase will vary because we’re going to spread the cost over different things, some of which you’ll use and some of which you won’t.

$39—> $59
$59—> No Change (you’re on a new plan that was bumped up from $39)
$99—> $129 to $139, perhaps $149 in some cases
$349—> $449 to $499
$999—> $1,299 to $1,499

The ranges above give you an idea of what to budget for, no matter how the details get worked out.

To do this, we’re thinking about fees like these:
– Charging more for subscriptions (paying and/or non-paying subscriptions).
– Adding some new premium services (like accounting integration).
– Adding an “extra site” fee after your first 2 sites. We haven’t decided yet if we’ll count test sites & live sites, or only live sites. Most merchants have 1 test + 1 live site.

How to structure the changes

Here are 3 paths we’re considering for May:

Path #1
– Current price plans stay in place, but they go up a bit, like $39 to $59, $99 to $129, etc. (note that today’s $59 plans are already there; they used to be $39).
– New fee of 1-3 cents per month for each of your non-paying users. Non-paying users are subscriptions that are active but non-paying, such as someone on a free trial or a free product. Someone who has been cancelled does not count.
– New fee of roughly $20 per month for each site you manage after your first 2 sites.

Path #2
Current price plans go away.
– New fee of 1-3 cents per month for each of your non-paying users.
– New fee of 10 cents to $1 per month for each of your paying customers.
– New fee of roughly $20 per month for each site you manage after your first 2 sites.
– New base “packages” for support levels, included premium add-ons like accounting integration, SLA, etc.

Path #3
Current price plans go away.
– New fee of 10-30 cents per month for each of your paying customers and your non-paying users.
– New fee of roughly $20 per month for each site you manage after your first 2 sites.
– New base “packages” for support levels, included premium add-ons like accounting integration, SLA, etc.

Path #1 keeps our “legacy” price plans but adds some granularity with the incremental fee for your non-paying users. Some people like this because it doesn’t change things much.

Paths #2 and #3 remove our legacy price plans and go for a completely granular ramp in prices as you grow your business. #2 maintains different costs for your paying customers versus your non-paying users, where #3 flattens things down to a single fee for all of your customers/users, which is kind of elegant (I’m pretty sure Amazon Web Services would do this).

Notes:
– We’re giving wide ranges on per-subscription fees, because paying & non-paying subscription fees will affect one another, and because there will probably be quantity breaks.
– There’s a wide range in our merchants’ ratio of paying-to-non-paying users. Many merchants have no non-paying users. Many have a ratio of 1:5 or 1:10. Some are 1:30 or 1:100. Those ratios will help us determine how to set fees. The less we collect for non-paying users, the more we need to collect for your paying customers.

Can’t we just wait it out?

If the solution was just a matter of generating more revenue with more merchants, we’d wait, but that’s a dangerous route. In almost every business I’ve been part of, once you have a decent number of customers, adding more customers with incorrect pricing just makes the problem worse.

And throwing capital at it doesn’t fix a basic pricing error, either – it just covers it up. Again, if we thought the pricing was right and we just needed to grow a little more, we’d wait. We have capital and access to more if we ever need it, but this issue is more basic than that. We’re not charging enough, whether we have 800 merchants or 2,000.

The good thing is that this pricing change is a lot smaller, as a percentage, than our 2010 change. We’re definitely zeroing in on the right cost and price relationship as we build the business and our customer base.

No grandfathering

We’re not going to grandfather our current pricing, but we’re giving 2 months for merchants to adjust, plan, and give feedback to help us determine the exact outcome.

You may wonder why we don’t grandfather our current pricing.

It’s because we’re in a market where growth is relatively slow. We’re a service aimed at a specific segment of small/medium businesses. It’s not a fast-growing consumer market.

So it will take time to double or triple our customer base, and during that time, we can either run a business that’s a bit too tight, or we can adjust prices to provide a better service and to more fairly distribute costs.

I know a few readers will ask, “How do I know Chargify won’t raise prices again & again?”

For starters, it’s neither enjoyable nor easy.

Our aim is to keep growing the business and adjust occasionally, until we reach a point when no further adjustment is necessary. Someday, I want to lower prices.

Comments or Need Help?

Our goal is to provide a great company that supports our merchants today and for many years to come.

Tuning our pricing is a critical part of maintaining that goal.

As with our 2010 price increase, if these changes will put extreme pressure on your business, let us know. We may be able to stretch your transition over a few extra months.

You can always reach our support team at 800-401-2414 or by submitting a written ticket at http://help.chargify.com

And I’m available directly at 415-244-0349 (cell) or lwalley@chargify.com

Thanks.

—- Lance Walley, co-founder/CEO