Why Cheap Customers Cost More

pricing-example

I was listening to Patrick McKenzie’s podcast (with Amy Hoy as a guest), and they touched on something that I had heard before: when you offer multiple plans for a service, the cheapest plan’s customers tends to require the most support.

Now at first this seems counter-intuitive. You’d expect the opposite: that the people who pay the most feel more entitled to support, and thus ask for more of it.

So if the cheapest customers truly require the most support, why is that? At first, I intuitively assumed it was a matter of character: like people who pinch hotel slippers and airline blankets, they simply wanted to extract the most value out of any situation. In other words, it’s not so much that they need more support, they just abuse it because it’s free.

The Better Explanation

But then I looked at my own example: when I do contact support, it’s not because I enjoy it. It’s because I don’t have a choice. So I gave this matter more thought , and decided there’s a better explanation.

I think cheap plans disproportionately attract a special category of users: dummies.

Now being a dummy is not the same thing as being dumb. Being a dummy simply mean that you’re not well-versed in a particular domain, and you might benefit from reading a “* for dummies” book. In this way every single one of us is a dummy at some things.

So let’s assume I’m not well-versed in cars. I don’t know the first thing about pistons, gearboxes, propellers, or drive shafts (can you tell I’m not pretending?). When it comes time to choose a car, what’s the only rational factor that will drive (heh) my decision?

That’s right, price.

And since I’m a dummy, when my car breaks down (or just runs out of gas…) I won’t have a clue what happened and will be incapable of fixing the problem myself.

On the other hand, savvy customers consider many other factors besides price (otherwise, there wouldn’t be much of a market for BMWs). And being savvy, these people are more likely to be able to troubleshoot their own problems.

So it’s not that cheap people require more support. It’s that people who require more support are more likely to make their decision based on price alone.

So once you’ve understood this, what can you do?

Educate Your Customers

Intercom inserts *dummy* data to help you understand how it works

Well, first of all you can try and educate your customers. Adding tooltips, wizards, help, and a FAQ will probably greatly reduce the amount of support requests you need. After all, according to the 80/20 rule, the same 20% of issues probably cause 80% of requests.

Drive Dummies Away

Amazon's pricing tables. Software Engineer degree not included.

Another possibility is to drive dummies away. In other words, make your service attractive to savvy customers who (like everybody else) are also looking for a bargain without attracting dummies in the process.

You can do that through “child-proofing”: for example, Amazon’s EC2 hosting offering is one of the cheapest around, but the amount of technical knowledge required to use it ensures that no dummy will inadvertently sign up.

Embrace Dummies

Lastly, you can embrace the dummies. This is a strategy used by Internet providers everywhere: advertise cheap prices to get that grandma demographic, but then make money on support and installation.

This strategy gets a bad rap because  a lot of the companies who use it provide bad, expensive support. But there’s no reason why you can’t offer great expensive support.

Conclusion

No matter which strategy you choose, remember to consider the impact pricing will have on your customer base and your support costs. For example, a good strategy might be to start off with high prices, and then only lower them once you’re ready to scale your support infrastructure.

In any case, remember that people simply respond to incentives, and that there’s a very valid reason why your cheapest customers are asking the most questions!

Hey there fellow Hacker News readers from Japan (all 3 of you!). I’ll be at the Hacker News Tokyo meetup this Friday, hope to see you there!

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