Lessons Learned from SaaS Pricing Missteps

Mikael Nida
March 3, 2023

SaaS companies often offer subscription-based pricing models for their services. While these pricing models can be effective for both the company and its customers, they can also be a source of frustration and confusion if not executed properly.

Twilio, Zendesk, & Gumroad are perfect examples of companies that offer cloud-based services with priced subscription models and usage limits. These companies have faced criticism for their pricing models and pricing changes, which have caused confusion and frustration among their customers. SaaS companies may screw up their pricing models and pricing changes in various ways, such as by making sudden and unexpected changes to pricing plans, failing to offer flexible pricing options, or failing to communicate pricing changes clearly and transparently.

Companies may face challenges in designing pricing models that meet the needs of both small and large businesses, as well as finding ways to address the perceived complexity of usage-based pricing models among customers. These challenges can lead to decreased customer satisfaction and loyalty, as well as missed revenue-earning opportunities for SaaS companies.

Grandfathering Matters

One of the main ways these companies have botched up their pricing models is by making sudden and unexpected changes to their pricing plans. In 2022, Zendesk announced that they were discontinuing older Zendesk plans and introducing new ones that were more expensive. Customers were automatically enrolled in those plans without being notified. This showed that Zendesk was not interested in the concept of "Grandfathering" — a clause that lets your existing customers remain at the same price point at which they first signed up for your product, while you change your pricing plan for new customers. This change was met with backlash from customers, who felt that they were being punished for being loyal and old customers. *source*

This was a bad example set by Zendesk as the discontinuation of older plans and the automatic enrollment in more expensive plans without notification showed a lack of consideration for its existing customers. This sudden change not only resulted in higher costs for customers, but also made them feel undervalued and unappreciated. Ideally, if a customer was paying $10 per month as their subscription fees and the company changed the pricing model, you would want the previous customer to continue paying the same rate. The lack of "grandfathering," was perceived as a betrayal of trust. Customers felt that the company was prioritizing profits over their long-term relationships, leading to a loss of trust and loyalty. This isn't the first time Zendesk has done this, however. Back in 2010, Zendesk raised pricing models, which resulted in a +300% increase in monthly fees for some customers. source

Justifying Pricing Changes To Customers

Another way these companies have folded their pricing models is by failing to offer flexible pricing options that cater to the needs of different types of customers. In 2022, Gumroad, an e-commerce platform that allows creators to sell digital products directly to their audience, raised its pricing without warning, causing an uproar among its user base. The company increased its transaction fee from a tiered pricing model based on revenue milestones to a 10% flat fee on all transactions. The changes came as a surprise to many Gumroad users, who had built their businesses around the platform's previous pricing model. The sudden increase in fees meant that some creators were facing significant increases in their costs, which could eat into their profits and make it more difficult to sustain their businesses. source

Many Gumroad users took to social media and other platforms to express their frustration with the pricing changes, with some threatening to leave the platform altogether. Some creators also complained that they had not received any warning or explanation from Gumroad about the changes, which made it difficult for them to plan for the future. The incident highlighted the importance of clear communication and transparency when making changes to pricing models. It also underscored the need for companies to be mindful of their customer's needs and to consider the impact of pricing changes on their businesses. By failing to offer flexible pricing options, these companies are missing out on revenue-earning opportunities from larger businesses that may be hesitant to use their services due to the perceived complexity of usage-based pricing models.


Billing Failures

Furthermore, companies have ruined their pricing models by failing to communicate pricing changes effectively to their customers. For example, in 2019, Twilio announced that it had made an error in its full-year earnings forecast. The company revised its revenue projections downwards, causing its stock price to plummet and leading to concerns about the company's financial health. The company attributed the error to a miscalculation in its pricing model, which resulted in lower-than-expected revenue. The news of the revision came as a shock to investors, who had been bullish on Twilio's prospects. In response to the news, Twilio CEO Jeff Lawson acknowledged the error and apologized to shareholders. He emphasized the company's commitment to transparency and stated that it would take steps to ensure that such errors did not occur in the future. The incident highlighted the importance of accurate financial forecasting and the risks of relying too heavily on one revenue stream. It also underscored the need for companies to communicate clearly and proactively with shareholders and investors to maintain their trust and confidence. source

How can companies avoid these outcomes?

As a result, larger businesses may be more likely to choose pricing models that offer more predictability and stability, even if they come with higher costs. This can complicate the pricing models for companies like Twilio and Zendesk even more, which initially relied on usage-based pricing models to generate revenue at the startup and mid-market levels.

We built Lotus from the ground up with flexibility at the forefront. When software companies change their pricing, they need concrete systems and processes to have smooth transitions, manage grandfathered customers, and organize all of their plans.

Lotus built a solution for this in our plan versions, adding the ability to version pricing the same way you version code in git. Versioning mitigates the risk that you change an existing customer's plans while changing pricing for new customers. Stay tuned for another post where we go into depth about how exactly to version plans and manage custom contracts in Lotus.

To learn more, self-host our pricing and billing engine for free here.


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