CEO Insights is a new Airbrake blog series featuring articles by founders and executives who’ve managed first-hand the ins and outs of operating tech companies. In this inaugural post, Treb Ryan, the CEO of Airbrake– formerly the co-Founder of OpSource (acquired by Dimension Data, now NTT)– shares his ideas about “flattening functionality” tiers to make your recurring revenue product or service more appealing to customers in order to drive usage growth.
The idea: “Flattening functionality” tiers to align price with value
Historically, software vendors approached pricing and packaging by charging for individual features, bundling core pieces of functionality at plan levels, or by putting restrictions on usage to encourage users to upgrade to larger plans.
Conversely, vendors of true cloud-based services have an opportunity to use pricing and packaging to focus on the core value of their solution. For example, at Airbrake our pricing is based on how many errors we receive from our customers’ apps. Ideally, that means we should make it as easy as possible and more beneficial for users to collect more errors. This is why every Airbrake paid plan is now fully feature enabled. In other words, we’ve “flattened our functionality” to a single all-inclusive tier for all paid plans. As a result, our base plan prices are only tied to the core value Airbrake delivers – the number of errors we receive from an app.
That said, many companies in the error monitoring and APM space are still trying to use product features to force users to upgrade in order to access specific features, which may or may not have anything to do with errors, and everything to do with making the customer pay more.
Recently, I noted that the following pricing approaches are being widely used by cloud software companies, which led me to wonder why customers are still willing to pay more to get less.
Restrict plans based on the number of users
Restricting the number of users who access a product or service is the most common way cloud software providers try to drive upgrades and revenue growth. This might be one of the dumbest holdovers from old license-based pricing schemes for two reasons.
- If there are more users of your system, it usually means that the customer will use more of your software, not less. Restricting users can restrict the broader adoption of your solution and, ultimately, slow revenue growth.
- Most organizations these days use a common password system like 1Password to share access and give multiple users access to a single account login. This means customers won’t upgrade just to include more users and your solution is less secure because there is no individual user accountability.
Wait, there’s a third, even sillier reason to restrict users and discourage customers
Among error monitoring service providers, many still require customers to buy an “enterprise” level plan before enabling single sign-on. This strategy not only makes it more difficult for the customer to use a solution, but it can have a negative impact on user adoption and long-term growth. Again, if our core value metric as a cloud service provider is usage of the solution, allowing everyone in an organization to sign-on securely only improves that result.
The bottom line? Limiting the number of users to force upgrades doesn’t work. Customers will simply find another way to use your product without upgrading and usage of your solution will be inhibited.
Limiting access to 3rd party integrations is a relatively new method I’ve noticed vendors using to “encourage” customers to upgrade. So in the case of error monitoring, this means customers can use the core product but they can’t integrate with other important developer tools like Slack or Github. Again, this is a misguided strategy for the cloud software provider.
It seems that some vendors hope to frustrate a customer into upgrading to get access the full functionality of a product.
When is frustrating your customers ever a good idea? It’s certainly an illogical move for a cloud software provider.
Integrations are easier than ever using cloud services and they increase customer stickiness. Why wouldn’t you want your customer and all their tools to be more deeply integrated into your product? Once fully integrated, they’re less likely to churn.
While frustration or need may encourage some customers to upgrade for 3rd party integrations, there’s a good chance many customers will look elsewhere for a product that does meet their integration needs without paying a hefty price tag.
Charge a premium for bursting
Charging a premium for bursting or usage spikes is a practice that goes back to the old telecom days. It made sense “way back when” because there was a finite communications capacity a company could sell and any unused capacity was expensive to maintain. Therefore, the goal was to penalize customers for not committing up front to a certain level of usage in order to balance the expense associated with maintaining excess capacity. Once again, this doesn’t make sense for cloud solutions for a number of reasons.
- Software, by rule, has much higher margins (meaning a lower infrastructure cost) than telecoms.
- Elastic cloud computing systems mean vendors don’t have to sit on unused capacity until it’s needed.
- Most importantly, by charging customers elevated overage fees, cloud software providers are in fact de-incentivizing their customers and encouraging them to find ways to use less of their product.
Really, there’s no reason to charge a premium for bursting. It’s a self-destructive technique that can drive customers away and limit usage. Instead, why not make bursting cheaper and reward customers who use more of your product?
To put it simply, “nickel and diming” customers to upgrade in order to access solution features accomplishes just two things:
- It frustrates customers who will find workarounds and limit their use of your solution.
- It discourages usage of a cloud solution and makes it harder for customers – and software vendors – to grow and achieve long-term success.
Flattening all available features into a single-tier places emphasizes on the core value your solution offers. This makes it easier for customers to use your solution, increases usage, and improves the long-term growth of your business.