You can find numerous articles describing how to attract more visitors, convert them into customers, and then cross- and up-sell them to different membership tiers or add-ons. However, one item that is not described often on popular SaaS strategy blogs is another aspect of revenue generation: how to make money with success penalties and user lock-in—perhaps because it is not very customer friendly. It is a strategy worth exploring since the biggest SaaS vendor, Salesforce.com, seems to be successful with their success penalty strategy. There are five simple steps for success with success penalties:
Step 1: Pick something that hits a limit only when the customer is hooked.
When implementing a success penalty strategy, picking the limit over which you will charge the extra fee is the most important step. Make sure it is something prospects don’t consider and don’t compare to vendors. For example, if your normal pricing is per seat and membership tiers differentiate in seat pricing and functionality, apply the success penalty to the amount of data storage and charge per GB.
Now that you’ve chosen your limit to charge the success penalty on, make sure that limit is not discovered too quickly. You want your customers to make a complete switch to your app. You want them to have people trained, use it in their daily work, and have their organisation running it for at least a year before they hit this limit. If your customers discover the limit early, they will switch to a competitor. The longer they run your app, the more they do with it, and the more you have them locked in. No IT manager wants to retrain 30 employees to use a different app or procedure—they would rather pay your penalty fee.
One way to accelerate this and make it a success penalty rather than a regular fee that customers discover is to promote behaviour that makes customers hit the success penalty limit earlier. At Salesforce for example, training, how-to, and best practice, promote that every email, call, activity, and marketing campaign is logged in the system. They are right: a CRM should have all the information in one place, the central marketing and sales hub. Nobody is going to doubt that; however, never explain that every email, every call, and every other record is slowly approaching the limit you have chosen.
BONUS: Don’t scale the limit with tiers or extra seats!
You can make it even better: don’t scale the limit. Keep the same limit if the organisation is using 5 seats or 25 seats. This fits perfectly in our strategy: the more seats, the more the organisation is locked in your app and the quicker they will hit the limit. Is it logical to charge per seat but keep the limit organisation wide? No. That is the beauty of the success penalty.
Step 2: Don’t communicate the limit on your website.
Never put the limit explicitly on your website or in the membership tier comparison tables. That only makes prospects think about the limit during vendor comparison. Keep your tiers crisp and clear. Act like there is no limit at all, just extra functionality.
BONUS: Hide the limit in a PDF document!
If you never mention a limit, how can you use it later to justify the success penalty? You have to mention the limit somewhere, but don’t do it where people will see it easily. Put the limit in a PDF document where few people will read it.
For those few that download the PDF and actually read it, make sure the limit is written in small font and mentioned only at the bottom of the last page.
Step 3: Let customers overrun the limit more then 400% before starting the sell.
It is important to have a customer locked-in before notifying them of the limit and charging the success penalty. Why do it immediately after they hit their limit? That would give the opportunity to scale back, remove items, and move on—way too risky. Make sure they overrun their limit by at least 400% before notifying the customer. They are really locked in at this point and you can charge 400% more than you would when notifying them directly.
Step 4: Charge absurd amounts for something that is normally cheap.
We call this a success penalty because customers are successfully using your app and hitting a limit caused by their success (tracking more in a CRM is a success: the more you track, the more you have to pay next to the regular seat pricing). To make it a double penalty, charge absurd amounts for something that is normally cheap.
Everyone knows that the price of a gigabyte of data storage is nearly nothing in 2014. But when implementing a success penalty strategy, charge like it is 1989! Why go through all this effort when you are only asking for cents? You can charge thousands!
Step 5: Don’t offer the customers tools to fix the overrun limit.
The final step, but the most important: don’t offer tools to fix the overrun limit. If the customer can delete a few records to be below the limit, everything is lost. Refer to step 3: only notify the customer when 400% over the limit and make it almost impossible to get below that limit with the tools in your app.
Organisations will hit the data storage limit around 1,000,000 records in the system (roughly 16 months of email and calls at an organisation that purchased 25 seats. Remember, the limit does not scale with the seats!). Cleaning up a million records, when the tools provided only work in batches of 250, is going to be a rough job.
Of course, nice guys will develop a tool to let customers do this easier and quicker. However, make sure API access is only available in the upper tiers of your pricing plan so if you lose the success penalty revenue, you still win since the customer had to upgrade for access to the API tool to be below the limit.
BONUS: Offer a paid service to fix the penalty limit!
There will always be non-tech savvy users that upgrade to a higher plan and think they are safe. But they still need a tech-focused tool with API access to avoid the success penalty. If they can’t figure out how to do that, offer premium support, charged per seat per year (recurring revenue!) to do it for them—you are the good guy.
That’s it: a five-step revenue booster straight out of the playbook from a successful and innovative SaaS company.
Salesforce.com is a great tool. This blog post is not meant as a negative commentary on Salesforce, only as a post to highlight a success penalty best practice.