You Can’t Make Money Charging $1 Per Month


Photo by Images_of_Money

I recently received the following question from a reader:

[When we spoke at a recent conference] I had been thinking of a $1/month price point [for my product aimed at teachers] to make it a “no-brainer,” and you strongly advised against it, suggesting $5-7 at a minimum.  Are you concerned at all about the fact that teachers could continue using the existing work-around solution? I wonder if I provide enough value to rationalize $5-7. Maybe it would be better for me to find more ways to add value rather than lower my price point?

My Response
Trying to make money selling an app for $1/month is crazy unless your market is gigantic and you have the expertise or the funds to reach them (and even then, support will kill you).

Let’s look at some numbers:

  1. If your goal is a meager $2k per month you need 2k customers.
  2. To begin, that’s a lot of non-technical customers to support for that little money. You’ll still be working a full-time job at that point so it’ll be nights and weekends. Not cool.
  3. To get 2k customers with a 1% conversion rate you’ll need 200k unique visitors (total, not monthly). If you crank really hard on promotion and word of mouth I can imagine you’ll ramp up to 1k-2k uniques per month. Even at 4k per month you’ll be waiting a long time to hit that 200k mark.
  4. These days I’ve been advising people to go up-market and try for $30/month and $50/month price points. What can you build that people would value that much?

In your case you have a hard pricing constraint because teachers don’t have a lot of extra cash lying around to spend on software. But I don’t see any way a niche product can work with a price point of $1/month. Even at $5-7/month it’s going to be extremely difficult to build revenue beyond a few thousand dollars.

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31 comments ↓

#1 Sean Murphy on 06.27.11 at 11:15 am

It’s interesting that you brought this up, because I was just brainstorming a SAAS app I would like to build and I was thinking of charging $1/mo.

The difference for me, though, is that I wouldn’t be limited to getting only $1/mo from each customer.

My app would revolve around the idea of sharing certain ‘things’ with other people, usually employees/workmates. My idea is to charge $1/mo for each person that a customer shares with. That way customers are charged on a very linear scale based on usage.

So if it’s a small team they might pay $3/mo. If it’s a large company, they might pay $50 or $100/mo.

Would you say that it’s still a bad idea for me to charge $1/mo in my situation?

Aret Carlsen Reply:

Ten years ago the answer would have been “still a bad idea” because you would see a conversion rate in the 1% to 4% range on any occasion that the user had to enter their credit card number. 1%*1% = too little for profit.

Now that PayPal, Amazon, Google, and Apple offer easy in-app purchases (IAP), your payment structure has become an ideal flow for solo developers: charge a nominal fee for the initial app installation to cover your basic support costs and keep out the users that won’t spend *any* money, then make your real profit on supplemental IAPs.

Rob Reply:

This could potentially work, as you’re referring to a “back-end” where you sell more stuff to existing customers than just their initial purchase. If you have a back-end in place (most startups do not) you can make money with low price points.

#2 JIm Lastinger on 06.27.11 at 12:38 pm

Just think of the payment processing costs. Transaction processing for a small merchant is going to be around $0.20-$0.30/transaction. Hard to make any money at that rate.

Erik Giberti Reply:

Transaction costs can kill your profit if you are charging a dollar or two for services.

PayPal takes a nice cut off the top of the transaction too. 2.9% of the total + $0.30. On a $15 transaction, it comes up to $0.74 for US based payments and $0.89 for European sales. MicroPayments are a little easier to swallow and are definitely worth looking into if you are going to keep your transaction price small.

Rob Reply:

As someone says later in this thread: if you are charging $1/month you’d be wise to charge it on an annual basis.

#3 Michael Barrow on 06.27.11 at 1:08 pm

Amen! I finally got around writing up my thoughts on not creating bogus revenue models just the other day: http://blog.barrow.me/im-not-starting-a-company

#4 Jas Panesar on 06.27.11 at 1:15 pm

Consumer purchasing decisions are made by emotion, while Business purchasing decisions are made a lot more by logic (what will it cost/make/save me?)

There is definitely more money and cash flow in building SaaS apps for SMB customers that will pay $50-$100/month without batting an eyelash. Finding a way to scale it is the challenge for me. :)

#5 Hristo Vassilev on 06.27.11 at 1:17 pm

And there is also the point of customers thinking in terms of price/quality relation.

#6 You Can't Make Money Charging $1 Per Month | Software by Rob | Vickkumar.com.au on 06.27.11 at 1:34 pm

[...] Read More: You Can't Make Money Charging $1 Per Month | Software by Rob [...]

#7 dasheee on 06.27.11 at 1:52 pm

Of course it is possible to make money charging $1/month! You can simply sell more than 1 product at this rate.

For example, many successful smartphone app developers charge $0.99 per application (not even per month!) and make a few thousand dollars per month.

John Arley Burns Reply:

“Many”? Of all the smartphone developers I know, I know of only one making more than $1k a month, and that was in some ways an early fluke on android.

Define “many”.

Rob Reply:

Indeed. If you have a massive marketplace like the app store it is possible to make money charging a pittance for your app. But there are two problems with charging 99 cents for your app:

1. Most apps in the app store make very little money for their devs. The ones that rake in even thousands per month are the extreme exception (what you do you think, maybe 5% of apps, tops?)

2. As long as the mobile market is expanding it’s possible to bring in good money, as some devs do today (though as John mentioned, most mobile devs I know do not make much). But as the sales of iPhone and Android apps dies down over the next few years is it possible that this frantic pace of people buying photo cropping apps can continue at this rate? I seriously question if it’s sustainable at the rate we’re seeing right now.

#8 TheFuzz on 06.27.11 at 2:00 pm

If your app truly delivers value to techers then a price of $1 or $5 per month will not swing the final purchase decision. (you can always discount for the first month!)

Don’t leave money on the table — take it, you deserve it!

#9 Frank on 06.27.11 at 2:14 pm

You really should stress the fact that “support will kill you”.

I have a modestly successful software product with a pretty simple value proposition and a price point of $49.95.

I severely underestimated the support aspect. I don’t regret any of my decisions, just merely pointing out that supporting your product is critically important and takes a lot of time and patience.

#10 Michael Chermside on 06.27.11 at 2:58 pm

I want to echo what dasheee said: the existence of people who make money off $1 – $5 non-recurring fees for apps on the Apple and Android app stores demonstrates that your main point is *wrong* — it IS possible to make money while charging that little.

I think that a more compelling argument for your (valid) point (that you should plan to charge more than $1/month) is an argument based on the psychological “cost” to customers.

Thousands of times as many people (or more) will sign up for something I offer for “Free” than for something I offer for one cent. They will do so even if the bandwidth it takes to download it and the electricity it costs to run it cost more than 1 cent. There is, you see, a psychological hurdle, a “cost” to making a purchase at all. The customer must overcome this hurdle PLUS the amount of money you are charging before they’re willing to buy. One of the reasons for the outstanding success of the app stores has been that they reduced (but did not eliminate) this “cost” by avoiding the need to enter payment details for each transaction.

Now I would argue that, for most customers at most income levels in western countries (US, Europe, etc), that the psychological “hurdle” for agreeing to a recurring payment is probably about the same as an extra $8-20 up front or an extra $1-2 per month. (I’m making these numbers up out of thin air. I’d LOVE to see *measurements* instead.)

Put in those terms, raising the price from $1/month to $2/month doubles your gross, while adding 1/3 to 1/2 to the customer’s “perceived” cost. That’s usually a good tradeoff.

Rob Reply:

Good points; thanks for sharing. See my reply to dashee’s comments above regarding “actually” making money in the app store at 99 cents.

#11 Reuben Swartz on 06.27.11 at 3:06 pm

Great post. For a lot of businesses, even selling for $5 or $9/month isn’t a viable business model, let alone $1.

If for some reason you want to charge about $1/month, at least charge annually. Then you won’t lose half your profit in transaction fees.

#12 Jas Panesar on 06.27.11 at 3:11 pm

@Michael, I don’t think you’re contradicting Rob at all. He did mention that it’s very tough to make money at $1/sale when it’s a one time sale, or monthly unless you have access to a huge marketplace like Apple or Android. Even then, you have to fight through the noise to get your app out there.

It might just be me, but for SaaS (and not mobile apps) $1 is very, very little. Value based pricing (tied to how much time/salary/money you save someone) is a much more financially sustainable way to price things.

#13 Drew on 06.27.11 at 5:01 pm

I doubt Marco Armet is making a fortune from his $1 / month subscription pricing for Instapaper.com but his service and business model are worth taking a look at.

He seems to make substantially more money from selling his iphone app.

http://www.marco.org/2011/04/28/removed-instapaper-free

#14 Setting Low Prices : Dragons in the Algorithm on 06.27.11 at 9:31 pm

[...] the range of $2.00 all the way down to cents (and sometimes less). I was inspired to write this by an article by Rob Walling in which he advised someone not to charge $1/month for a service–almost [...]

#15 ErikB on 06.28.11 at 12:29 am

agreed. People should think differently about their work. If you do and sell software by yourself you should also be able to value your work accordingly. If a marked can’t afford prices with 2 or more digits per sale, then the market is probably not worth to develop for.

I also considered doing some software for teachers, before. My mother is one of these customers. And even she adviced not to help this group, because software requirements are actually quite high (highly educated group of people has high standards) but the prices possible to pay are not that high.

#16 Anonymous on 06.28.11 at 1:38 am

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#17 Ghillie Suit Clothing on 06.28.11 at 2:26 am

I think there was an article about this in Wired a few months ago. Many people forget to factor in support costs. It’s better to charge $100/mo and get 100x less customers because you’ll need 100x less support time.

#18 Alex T on 06.28.11 at 11:56 am

Come on, guys, if you plan sell product for $1 per month then it should be simple iOS game or so, because even not popular game on iPhone will charge you more, after you will download it (i mean in app purchase )
I’m ready pay $1 per month for game which I will use once, two per month but for app which i will use for my business… no, because i think your app is crap app, sorry…

#19 Alex T on 06.28.11 at 12:10 pm

its one of perfect examples, of this: http://stoicjesterstudios.com/2011/06/iphone-app-marketing-mistakes/

#20 Melanie on 07.01.11 at 8:10 am

At a low price like $1.00 conversion rates are higher than 1%. This is suggested by user buying behaviour in mobile apps. The biggest resistance would result from the time commitment required of paying and the fees.

At Willet (http://www.getwillet.com) we are working to eliminate those two problems. We have come up with a “tab model” which allows aggregates small payments, so that we can charge lower fees. The tab model also has the benefit of allowing users to use the app immediately, deferring the time commitment of entering credit card information to the time when they reach $3 and then automatically charging the credit card after it has been entered.

Rob Walling Reply:

>>At a low price like $1.00 conversion rates are higher than 1%. This is suggested by user buying behaviour in mobile apps.

Does anyone know the conversion rate on mobile apps aside from Apple? I’ve never seen numbers on this since they’re locked up in iTunes.

Also, a $.99 mobile app is quite a bit different than a $1 per month SaaS application. It’s not just the money in this case – people are willing to try a mobile app and dump it if it doesn’t work. But signing for a monthly service requires a commitment to sticking with it. It’s a different mindset and would thus have a lower conversion rate than a one-time mobile app payment.

#21 Mxx on 07.01.11 at 1:35 pm

So what do you think about product/service such as LastPass.com? They charge $12/year(effectively $1/month) and they appear to be pretty successful.

Rob Walling Reply:

LastPass gets 200k-500k unique visitors per month according to http://siteanalytics.compete.com/lastpass.com/. If you can pull that off you can make money with a $12/year fee.

#22 King Manu on 07.04.11 at 10:48 am

hahaha… funny one. 1$ price.. pff..