A couple of weeks ago I first saw Know Your Company, the new product by the 37signals crew. Since this sounded right up our alley at WooThemes, we've gotten a demo. We'll be signing up and have high hopes for the value that it'll bring.
The thing that intrigued me most about the product was that it veered away from "traditional" recurring, monthly pricing in favour of a $100 fee per employee once-off. Yep, you read that right: you pay $100 (per employee / seat) only once and you get to use the product for as long as you want or need.
At Woo, we're a team of 31 now, so a $3100 once-off investment (into anything) isn't something we just shrug off. 37signals explains that this pricing is designed to get your buy-in i.e. if you pay that kind of money for anything, you're bound to actually use it.
What has intrigued me most about this though is the fact that the pricing model is swimming upstream. So much of what we know about selling anything digital has a core goal of generating recurring revenue (something I'm chasing with PublicBeta too).
In fact that probably compromises 99% of all SaaS business models. What's more interesting is that 37Signals was one of the pioneers in shaping the SaaS business model.
When I chatted to Ryan Hoover about this, he said:
"The 'Once-off Startups' model is the antithesis of the growing freemium trend where the product is given away for free in hopes that a small percentage of users will pay and an even smaller minority will drive the bulk of the revenue."
So why step away from a successful recipe now?
My friend Ryan coined the phrase E-mail-First Startups a couple of months ago. Beyond it being a totally fascinating post, it almost heralded the age where we'll probably see various sub-breeds of different types of (online / tech) startups with various, new business models.
Know Your Company got me thinking about the Once-off Startup and the possible characteristics of this sub-breed:
You charge only once and you do so immediately. This sounds like a similar business model to buying mobile apps shrink-wrapped software or any kind of license.
Due to it being a once-off cost, the pricing is premium and front-loaded to allow you to earn an appropriate ROI over the lifetime of the customer (CLTV).
Front-loading the cost makes a lot of sense if you sense that customer engagement might wane over time. By charging $100 per seat once-off for example, Know Your Company is charging for 10 - 20 months in advance (depending what the monthly fee would've been). Capturing the full CLTV upfront has many advantages though in terms of cash flow and the reduction of risk (engagement waning).
Since there is no trial period or interactive demo, it'll probably require a human-being to demo and sell the product to prospective customers. My gut feel would be that a product that requires a $3000 investment upfront, would require more hand-holding (something with a trial period or interactive demo can't do).
To increase CLTV, you would need to charge for future upgrades or add-ons.
Ongoing updates and the addition of new features can't be used as an incentive for existing customers to stay on board or upgrade to a higher plan (this would need to be sold to existing customers as "upgrades" or add-ons). So future development work can only be funded with new customer acquisition. You're always a slave to growth.
Revenues received needs to be invested in a way that builds a longer-term runway. Cash-flow may be a concern otherwise, as new cash will only come in along with new customers.
The ongoing costs related to providing support / customer service needs to be considered and planned. In your traditional SaaS environment, these would simply be covered as a percentage of your monthly recurring revenue.
As such, you would probably need to figure out a way in which support demands taper off quite quickly and that the support requirement (from customers) is mostly front-loaded too (so that it matches the revenue and cash inflow).
The purpose of the product should probably have a longer-term application which justifies the bigger up-front payment. (In this regard, it's almost like buying a house where the biggest expense is essentially on day one, but the amount of rent you save on in the long-term justifies the decision to buy property.)
This may be an efficient model to customer-fund the development of a new product. I'm however unsure how a brand new startup would fare in this regard compared to someone like 37signals, who already have loads of brand equity and an existing, loyal customer base.
Those are a few of the characteristics "Once-off Startups" might have, if they were to become more popular within the SaaS and startup ecosystems. Whilst it's most certainly not a new business model, it isn't one that we - as a startup ecosystem - have explored in great detail.
That's not what it's about for me though; I'm just fascinated to see someone try something new.
Hopefully that inspires a few other entrepreneurs and hackers to conceptualise the next wave of SaaS-related business models.
PS. I'm currently building an online learning community for entrepreneurs and hackers, where you'll be able to discuss topics, ideas and concepts like this in detail. Join me!
(Thanks to my friends Poornima, Ryan, Jason, Jesse, Nate, Brittany & Stefano for helping me write this.)