Products with Tentacles

February 8, 2013

37signals is a polarizing company. Because they do things differently, often contrary to what the ‘textbooks’ say you should do, they have ended up building a legion of fan-boys and plenty of haters.

Recently they launched two new products, Breeze and Basecamp Personal. There’s nothing really surprising about these two products. Both were born from their redevelopment of Basecamp, and both scratch a small itch across a rather large market. What was surprising is that both these products came with a Pay-Once pricing model, something rarely done in the SaaS (software-as-a-service) space.

This pricing model seemed to confuse a number of people, and Jason Fried’s blog post on How to Price Something didn’t provide much insight into this.

So, F%&k CLTV right?

CLTV is the net present value of the recurring profit streams of a given customer less the acquisition cost.

Any graduate of SaaS school  knows that the SaaS model of recurring subscriptions will result in a higher Customer Life Time Value (CLTV) compared to a single up-front license fee – so long as you’ve priced it right, you can keep you acquisition/retention costs in check, and you can keep a customer happy long enough.

Breeze by 37Signals was priced at $10 one-time fee. So why would they do this? Surely they could make more money charging $2/mo, or even $10/yr. But what if the point of Breeze was to prospect for new accounts?

A Product With Tentacles

Breeze and Basecamp personal have one very important thing in common: They both involve keeping many people in the loop about a topic. This act of keeping many people in the loop means that the reach of the product goes far beyond the account holder.

Take Breeze for example, this is a simple email distribution list manager for lists up to 50 people. The numbers below are just for example purposes.

  • Lets say that 37signals has acquired 5000 sign ups for Breeze.
  • Each of those 5000 lists contains on average 25 people.
  • So because of my product’s tentacles, I have 125,000 people exposed to my product. Each email sent gets a footer saying Powered by Basecamp Breeze and includes a link to their product website. From here a visitor can explore all their products.
  • Let’s say that 0.25% of those email recipients sign up for Basecamp with an average monthly subscription value of $25. That’s another $93,000 annually if they can keep those customers.  And the cycle continues on and on because each member of those mailing lists and basecamp projects can find value and sign up themselves and keep funneling customers back to 37Signals.

So was their $10 pay-one pricing good? Yes. It can be treated like a loss leader to get people in the door to offer additional products. I’m using ‘loss leader’ as a concept. I don’t actually think they would lose money on Breeze. Because their R&D and commercialization costs were likely pretty low for Breeze, it’s likely that $10 per lifetime account is very profitable, and if that $10 product has tentacles like Breeze does, the product can do sales prospecting  for you and increase subscriptions across the board.

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