Careful! This Simple Pricing Experiment Cost Us $2,000 in Revenue

This is the most expensive blog post I ever posted — it cost our plugin company over $2,000, and I’m not kidding nor exaggerating.

Since our plugin is a “Service-ware” (software as a service, wrapped into a WordPress plugin), we always followed SaaS markets standards and offered a monthly plan, in addition to an annual plan. A few months ago, I decided to challenge our plugin’s pricing and try the “WordPress way” by removing the monthly subscription. Keeping only the annual and lifetime billing cycles.

The reasoning behind that call was that it should probably increase the customer’s lifetime value, and will generate more immediate revenues. In our case, instead of generating $8.99, we’ll get $95.88 upfront for every new customer.

We ran this pricing experiment for one week and saw a drastic fall in new customers. “Drastic” is an understatement — we lost 54% in our customer acquisition rate. Even though we have never seen such a huge fluctuation in customer acquisition, one week is too short of a period for any conclusions. We, therefore, decided to give it at least another week.

We ran an experiment trying to increase customer lifetime value & revenue. We failed miserably.Tweet

The second week was even worse! We observed a 61% drop in new customers compared to our new customers acquisition rate when we had the monthly plan. As much as I’m a big fan of a/b testing and giving it enough time to run, clearly, there was a negative effect in removing the monthly plan and I decided to get the monthly plan back.

After this test, I set to analyze the numbers, and the results were shocking. If you think about it, it should make sense that the number of new customers would go down, since it’s easier to send your hand to your wallet for $9 than for $96. But what doesn’t make sense at a first glance is that the total revenues went down.

I found out that the number of new customers that subscribe to our annual plan was lower by 47% (10 vs. 19) than what we usually get when we have the monthly billing cycle in place.

with a monthly billing cycle in place
with a monthly billing cycle in place

With a monthly billing cycle in place

Without a monthly billing cycle set
Without a monthly billing cycle set

Without a monthly billing cycle set

The bottom line here is that we generated less revenues from new customers in those two weeks than in any other two weeks in 2015.

Moreover, as a recurring revenues business, what matters at the end of the day is the LTV, churn rate, and customer acquisition rate. It doesn’t matter if the customer pays $9 this month or $95 right away. What matters is the LTV.

Yes, there’s a tiny-tiny chance that this change would slightly increase our lifetime value. But I’m not willing to continue this trial for a year. Two weeks were more than enough :) Also, I doubt that the LTV will be doubled to recover the 50% decrease of new customers.

Trying to understand that phenomenon, I looked back on our pricing page and realized that without the monthly plan there’s no discount for the annual plan. And looking at our lifetime plans, the cheapest one is $150.

Pricing with no monthly plan
Pricing with no monthly plan

No monthly plan

With monthly plan
With monthly plan

With monthly plan

Then, I thought about Dan Ariely`s book discussing the decoy pricing concept, and it all started to make sense…

When talking about the decoy pricing model, also called the ‘asymmetric dominance effect’ — there are two offers:

  1. The first offer is priced low.
  2. The second offer is priced much higher and promises to include more.

Remember that our aim here is to attract the customer towards the higher-priced offer, in order to increase revenue. To help with that aim — simply introduce the decoy, offer #3, priced even higher than the 2nd offer, but with very similar features and value.

This decoy offer will drive the customer to seriously examine the option of going with offer #2 (the more expensive original offer, which now looks more inviting, and relatively cheaper).

With the more expensive decoy, a customer will look differently at your original high-priced offer.Tweet

It’s practically impossible to evaluate an annual plan vs. a lifetime plan since your potential customer can’t predict how long they will be using your plugin. On the other hand, it’s way easier to evaluate monthly vs. annual. If monthly > annual / 12, and the user plans to use the plugin for at least a year, it’s an easy call to make: the annual deal seems much more attractive.

Exactly how to create a prosperous WordPress plugin business in the subscription economy.

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The answer is — It depends. Just a few weeks ago, I had some great discussions about monthly payments with a bunch of plugin business owners at PressNomics. One of them was Joe Guilmette from WP All Import. After talking with Joe, I realized that in order to decide whether the monthly billing cycle is for you or not, you need to ask yourself if your plugin provides continuous value, or is it a one-time thing.

Let me give you an example: if your plugin is an exit intent pop-up, every day that the plugin is active it continues to generate value for the site owner by capturing more leads. On the other hand, if your plugin is a migration plugin from Drupal to WordPress, then it’s a one-time thing. After the migration is done, the publisher doesn’t need the plugin anymore. Therefore, I would not try monthly pricing for a personal license in a migration plugin.

Having said that, I would try monthly pricing for an agency/freelancer/developer level plan since those are doing migrations all the time.

When I say people, I mean the buyers — site owners, freelancers & agencies. I’m NOT talking about what the plugin developers presume their buyers are thinking :) Since I knew this post was coming for a while, when I met “website builders” at WordCamp Miami and PressNomics, I asked them a very simple question: “Would you prefer paying for a plugin $120 a year or $10 a month?”

The initial reaction to my question was an immediate distrust: “where’s the catch?”, but after I clarified there’s no catch, all four gave the same answer — “If those are my options, then I would prefer to go with the $10 / month option.” As a mathematician, I know that four samples are far from proving anything. Hence, I posted a short poll on the Advanced WordPress Facebook Group to crowd-source the data:

Advanced WordPress Poll About Monthly Payments
Advanced WordPress Poll About Monthly Payments

Over 120 people participated in the poll, and it received more than 40 comments. I’ll let the results do the talking: 7 out of 10 people prefer the monthly billing cycle.

7 out of 10 people prefer to pay monthly for WordPress plugins (out of 185 voters).Tweet

67.5% prefer to pay monthly.
23.7% prefer to pay annually.
8.6% don’t care.

The most common opinion of why monthly is preferred was that it gives the ability to test the waters, both from the product side, as well as the support provided to it.

Another interesting data point is that 40% of the comments (16 to be exact) highlighted the fact that they would only go for an annual plan if there’s a discount in place.

Some people thought that I’m asking for feedback on how to sell my plugin, and therefore provided their insights from the plugin developer’s point of view. Also, after analyzing the voters who chose the annual billing cycle over the monthly, ~20% of them were plugin developers, and I have a good feeling that some of them, subconsciously, voted as plugin business owners.

Here’s an example of a comment I received by James Tryon from WP Valet:

People will pay and leave after the first month.

James is absolutely right, and that’s exactly the next point I’m about to make.

If you decide to try the monthly billing cycle — make sure you block the premium features after license expiration.

You may think that it’s not the “WordPress way”. The fact that only a few developers provide a monthly plan does not mean it’s wrong. It may be wrong for your particular plugin, but it would be wrong not to give it a try.

In fact, the WordPress ecosystem is still immature from a business perspective, and the “WordPress way” is constantly changing. If you look 8 years back, no one had even thought about monetization. Back then, selling a plugin was a crime. If we look only 2 years back, very few “brave” plugin developers had the courage to do automatic renewals, and now it’s becoming the trend. The market is maturing, and there’s a very good reason why everywhere else outside of the WordPress ecosystem the common model is monthly subscriptions.

From our own experience, we NEVER received any complaint about blocking premium features on license expiration.

We have NEVER received any complaint about blocking premium features on license expiration.Tweet

You could claim that we are a service and not a product, but for the common WordPress user — we are just another WordPress plugin.

While I can’t guarantee that your users won’t complain about that — once you offer a monthly plan, it’s reasonable that you will want to protect your business and block the features right away if a user stops paying.

If you are using Freemius, there’s a one-click switch on the plans page to set that mode:

Block features on plan expiry
Block features on plan expiry

If you are using EDD you can purchase the Software Licensing Extension, and based on Josh Pollock’s words, you can hack it and make it work that way.

If you only monetize with support, without any premium features, you should calculate your cost of a complicated ticket, and price the monthly plan with a healthy buffer on top of that cost.

When monetizing with support, the user will usually upgrade because of an issue he/she may be having with the product.

I already covered the enormous benefits of running monthly payments, the main one is the ability to build a sustainable and predictable business. Now, based on our experiment, offering both monthly and annual can push your plugin business to the next level by increasing your bottom line. Following the results of the poll, it’s clear that the majority of people prefer to pay on a monthly basis.

Compiling all this data altogether, it looks like selling WordPress plugins with monthly and annual billing cycles is a win-win for everyone.

Selling WordPress plugins with monthly and annual billing cycles is a win-win for everyone.Tweet

If you are still not convinced or ready to test the monthly plan, I would test adding an artificial discount. Something like: “Usually $150, today $100”. I noticed that ‘Banana Republic’ does it all the time and it seems to be working well for them, adding the “urgency” as another psychological element to the purchase decision.

I’m obviously not advising against such experiments and tests. On the contrary! I encourage you to constantly be performing creative tests (with pricing experiments, among other things), and see how you can make for a better product/experience/offering for your customers.

If you just follow market benchmarks and won’t take risks to challenge your business, your progress’ cap will always be the market pace.

Do you have an idea for an interesting pricing experiment? Have you made any creative A/B testing with your WordPress products? Do tell us about those in the comments area below.

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