Like many entrepreneurs, the guys behind the online-billing start-up Chargify often fantasized about generating buzz on some of the tech world's most popular websites. One day in early October, about a year after the company's launch, they got their wish.
"I'm sure you'll be laughing all the way to the bank, but not with my money," a Chargify customer posted on the online tech forum Hacker News. "Today you've turned around and told all of us that we don't matter to you," groused another. Another was more direct: "Wow. What a kick in the nuts."
That morning, Chargify, which makes a Web-based system that small companies use to manage billing, had announced that it was changing its pricing model. Specifically, it was eliminating the free service it had offered to entice customers to sign up. The idea behind the so-called freemium model was that free users would in time upgrade to a version that cost $49 to $2,500 a month. The problem: After 12 months in business, less than 1 percent of clients were paying a dime.
Chargify's co-founders Siamak Taghaddos and David Hauser knew that no one would appreciate the change. But the pushback proved more powerful than anyone had anticipated. In addition to negative comments on Hacker News and the blog TechCrunch, the Needham, Massachusetts-based company was flooded with angry e-mails. Whether or not the pricing change was a good idea, it was clear the company had bombed the communication.
Taghaddos and Hauser launched Chargify in September 2009. It was the first in-house incubated business for Grasshopper Group, which makes a suite of products for small-business owners, including the phone system Grasshopper. The billing-software marketplace is a crowded one, and Chargify sought to stand out partially by its approach to pricing. Users with 50 or fewer customers could use Chargify for free; as these companies grew and acquired more customers, they would graduate to a premium option. What's more, unlike some of its rivals, the company does not collect a fee for each transaction or ask for a percentage of total billings.
Before launching, it seemed like a perfectly sound idea. Given Taghaddos and Hauser's experience with Grasshopper, they figured that 15 percent of Chargify's nonpaying customers would grow into paying ones within three months to six months of signing up, which would provide enough revenue to build a sustainable business.
But six months after Chargify's launch, it was clear that the model wasn't working. "We were attracting way too many hobbyists -- who were, with a few exceptions, just never going to be successful," Hauser says.
The company's executive team agreed that to lure faster-growing businesses as customers, it needed a new price structure that would weed out the hobbyists. The team agreed to eliminate the free option and raise the price for companies with up to 500 customers from $49 a month to $99 a month. The price was justified, the company believed, because Chargify was adding new features, such as round-the-clock phone support and credit card security compliance services. It was a gutsy move -- Chargify would now have the highest entry-level price in the market.
On the morning of October 11, Chargify sent its 2,500 customers an e-mail announcing the change. "We are grateful for all the support we have received from merchants like you over the past year," it said, "and we are excited about the future of Chargify." The message went on to outline the new features and included a link to the site's new pricing page. The e-mail also explained that free customers would have 45 days to begin paying or find another provider.
At Grasshopper Group headquarters, the mood that morning was rather relaxed. After all, says Hauser, "we changed pricing with Grasshopper many times, both up and down, and never had any significant pushback."
Then someone posted a link to the announcement on Hacker News. Others took to Twitter and the Comments section on Chargify's blog to rip the price hike, the lack of advance notice, and the absence of a grandfathering clause. One commenter wrote, "...we were suckered into thinking that the free startup account would be around until we outgrew it." Hauser; Chargify's CEO, Lance Walley; and others went into damage-control mode, jumping online to address complaints and mollify angry customers. Says Jeremy Butler, Grasshopper Group's director of marketing: "We needed to do some triaging pretty damn quick."
As all this was happening, Taghaddos was out of the loop, as he was visiting family in Los Angeles. That afternoon, he pulled out his BlackBerry and scrolled through Chargify's Twitter feed. He was stunned. He dashed off an e-mail to Hauser. "Why are we apologizing for the pricing change?" Hauser's reply: "Front page of HackerNews, 112 comments, e-mails, and massive response on Twitter. People are ok paying (well the good ones) [but] they did not like the huge jump."
Taghaddos fired off a respon