February 18, 2016
SaaS Pricing Teardown: Ecommerce Platforms

Pricing is the most important aspect of your business, because it’s quite literally the center of everything that you do. Everything you do, from your sales and marketing to your support and merchandising, works to drive prospects to your purchasing page to get them to convert and come back for more after a positive experience.

Yet, even though the way you price is absolutely crucial to your success, the way your partners and vendors price (and how you choose those partners based on their pricing) is almost equally as important. This is because your partners’ pricing structures will reveal how connected they are to your success, as well as if they’re just out to nickel and dime you through pricing that ends up taxing your growth.

None could be truer when it comes to your ecommerce platform, particularly because without this software, you don’t have an online presence, nor are you able to sell to customers online. Whether you’re on Shopify, Bigcommerce, Magento, or even Demandware, you’ve formed a symbiotic relationship with these companies; a relationship you want to make sure you’re protecting your upside with at all costs.

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What we’ve found through exploring the pricing models of these different software companies is that sometimes the seemingly cheapest option isn’t always the best for you in the long run. Often times, pricing models that don’t scale with merchant size are great for small, startup ecommerce businesses, but only because mid-market and large ecommerce companies are subsidizing the costs for smaller businesses.

To understand this concept and to help you get on track with making the right choice for an ecommerce platform, let’s walk through why you should be picking an ecommerce platform that utilizes value-based pricing, before walking through a detailed pricing audit of the big four ecommerce platforms out there.

Let’s jump in.

The importance of value-based pricing to you, the customer

Before walking through our thoughts on the pricing models of Shopify, Bigcommerce, Magento, and Demandware, we need to walk through a framework of what value-based pricing entails, as well as why you should be looking out for a vendor that employs this type of pricing to ensure your own success.

Value-Based Pricing is based on mutual success

Value-based pricing entails setting up your pricing model based on the factors that drive a benefit for your customer. For an ecommerce company, this is fairly easy because you’re typically selling a physical good or widget that you’re exchanging for cash. In other words, a customer sees value in buying a new book, makes the purchase, and you exchange the book for the cash you receive from the customer. 

For software products, particularly ecommerce platforms, “value” becomes a little bit trickier. Sure, Bigcommerce, Shopify, et. al, could charge you for hosting costs, processing fees, support etc., because you’re certainly benefiting from them taking care of those aspects of you running your business. Further, that’s where they have physical costs, as well. Yet, is that really where you’re receiving value in their products?


"Picking the right platform is directly correlated to the value you get from it"

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(You Can Edit Before Tweeting)


Not really, because in actuality, the entire suite of features that different ecommerce platforms are providing have one primary goal in mind: allowing you to sell your products and grow your business. In this light, ecommerce platform providers are absolutely crucial to your business, because the value you’re receiving centers around picking the right platform that helps you grow as quickly and efficiently as possible.

As such, an ecommerce platform that’s truly employing value-based pricing is one that prices based on the value you’re receiving. Charging you for transaction fees isn’t really where you’re getting value. Charging you for feature x, y, or z isn’t really where you’re getting value. Instead, actually charging you for mutual success is what you want to be looking for overall. You should be looking for pricing models that charge based on the value you’re receiving; as the utility and value that you gain grows, pricing models that grow correspondingly will make sure the e-commerce vendor is incentivized to keep providing you more value.

Isn't this harmful to my bottom line? How is charging me for success good for me?

At first glance, value-based pricing isn’t that compelling to you, especially when it comes to you as an ecommerce company. You’re putting a lot of hard work into building your business, getting and converting customers, and fulfilling those orders, so why is it actually beneficial for you to pick a vendor that employs value-based pricing?

The answer exists in the long-term viewpoint of your growth and the partnership you’re forming with one of these platforms. Remember that the nature of ecommerce platforms being so central to your business means that this isn’t just some random app that may arguably help you or may not. These products make or break your business, and should be treated as such when making a purchasing decision.

Picking a vendor that employs value-based pricing ensures that you and that vendor are aligned on what’s in the best interest of you, the customer. We’ve all felt the pain of overpaying for something where we didn’t use 80% of the product (think about the hundreds of TV channels you get with a cable subscription). Some of us have also experienced situations where we feel like we’re underpaying for something to the point that we were worried if the company would stick around or if we could truly get the support we need.

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As a consumer, you never want to worry about something you rely on every day not being there or being the best that it can be. By not aligning incentives, some companies will not be motivated to keep your product at the high quality bar which you deserve. You truly “get what you pay for” and by picking a vendor that employs value-based pricing, you align for success and value.

Ok, but what does that mean in picking an ecommerce platform? 

Practically, this means that you should find an ecommerce platform that employs a value metric and doesn’t nickel and dime you on aspects of the product that are linked to your growth.

Misaligned value metrics cause mid-market and enterprise companies to subsidize costs for smaller companies

A value metric is what you’re being charged for in a transaction. In a retail environment, it’s a physical item; but in software, this could be number of page views, number of orders, amount of revenue, etc. While all value metrics aren’t created equal, finding a vendor that utilizes a value metric centered on your success is crucial, because it indicates that both your interests and the ecommerce platform’s interests are aligned to your growth.

 

You’ll notice though that most ecommerce platforms like Magento, Volusion, and Shopify don’t utilize a value metric that’s tied to your success. Instead, they either charge you for transaction fees, features, support, or servers. None of these really tie you and the platform together, and leave you paying for things that actually don’t make you money at face value. In fact, sometimes these create a disincentive for e-commerce providers. Take server or bandwidth charges. To drive customer engagement or build your brand, you may want to put a lot of care into your website experience with rich content like videos. A fee structure based on servers or bandwidth charges you for things that grow your business, while not rewarding the e-commerce vendor for what matters to you: the end sale.

A non-value aligned value metric is troubling for you as a customer, because you pay for things that aren’t really providing your core value of growth. You may have a lot of transactions compared to another type of company, so you end up paying more, even though you’re not getting more value. Similarly, if they charge you for storage, you may find that your product's images are larger file sizes or require expansive images, which causes you to pay more, even though you’re not getting more value. This setup results in an uneven relationship with your software vendor, which thereby causes you to not keep your software vendor honest in terms of helping you grow.


"Non-value aligned metrics = paying for things that don't enable growth"

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Worse yet, often times the bigger result of an unevenly aligned value metric is that you end up having mid-market and enterprise companies subsidizing the costs for smaller companies. While this is of course going to happen at a certain level, the goal of you paying an ecommerce platform provider shouldn’t be to subsidize someone else’s purchase; it should be to get your value.

Picking a vendor that employs the right value metric is crucial to ensuring you get the most value out of your ecommerce platform. Take a look through the detailed pricing research below where we break down the different platforms and make sure you’re choosing the best platform for your business.

Don't get nickel and dimed by not being charged for real value

The other negative consequence of non-value-based pricing is you end up getting nickel and dimed for features that aren’t necessarily providing value. Want to talk with a human being? Extra charge. Need more storage? Extra charge.

While there are aspects of a pricing structure for which you certainly should pay more, the baseline level of value should be enough to ensure you can unequivocally get enough out of the product without a receipt that has dozens of line items.

Before making a decision around an ecommerce platform, really evaluate what you’ll be charged for now, and into the future as you grow and expand. For any additional cost, always make sure it’s aligned with the value you’re actually receiving. Sometimes you’ll end up paying more for something that’s unique to you like wanting a dedicated account manager (and that’s ok), but you shouldn’t be in a situation where you’re paying for the fork just to eat the dinner served to you.

Pricing Teardown: Ecommerce Platforms

Bigcommerce vs. Magento vs. Shopify vs. Demandware

All of that being said, let’s go deep inside each of the main vendors to help you understand which ecommerce platform is best for you. Specifically we’ll be looking at the pricing of Bigcommerce, Shopify, Magento, and Demandware.

We’ll briefly walk through our overall methodology, an executive summary comparing the products, and then finish with detailed results and takeaways from our study.

Our Methodology 

Before digging into what we found, let’s walk through a quick overview of our methodology so you can understand how these results came to fruition. While in most of our studies, we’d want to run deep customer persona quantification studies for both price sensitivity and feature preference, the approach we’re taking here is more from the prospect perspective.

 

This allows us to see these companies and, more specifically, their pricing as a potential customer does, and thereby show you how powerful getting your pricing right or wrong can be even in the acquisition part of your business.  

For our ecommerce software platform study, we studied the marketing and lead flow of each of the companies and posed as three different types of companies. This took a bit of roleplaying on the phone with these companies as most of the information below required conversations with sales teams. We spoke with each company three different times as each persona, so 36 phone calls/signups total. Here are the personas we posed as for the ecommerce study:

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Once on the phone we acted as normal as we could while still trying to dig into a multitude of aspects of pricing, including value proposition, value metric, discounting, price point, etc. 

While our methodology is far from perfect and most certainly qualitative, the coding of this information and data provides some fascinating information into how some fairly large companies (or at least heavily venture backed companies) run their acquisition and monetization processes.

Results: Highly differentiated market with very different pricing structures

Executive summary

Overall, each ecommerce software platform commands impressive usage numbers with either really big retail names (Demandware) or tens of thousands of businesses using their platform (Shopify, Magento and Bigcommerce). While each had their pros and cons, before we dig in, here’s some interesting facts and a top level summary of each company from a pricing perspective:

  • Demandware and Bigcommerce were the only companies that tied price to value by tying pricing to performance through a value metric (% of Gross Merchant Value for Demandware and by order volume for Bigcommerce)

  • Magento and Demandware had extremely long sales cycles

  • Shopify was exceptionally quick to discount

  • Bigcommerce offers the best value and the superior commerce platform for mid-market businesses

Ecommerce_Platform_Chart_1.pngTight persona alignment for Shopify/Bigcommerce/Demandware; Magento, a mess

What was most fascinating about the companies above is the key differentiations in target market. While Shopify and Demandware clearly defined their market as either the smallest or largest retailers, Bigcommerce and Magento are a bit more malleable, serving the mid-market, as well as smaller or larger retailers. Demandware wouldn't even take our call when we wrote to them and called in as the $250k company persona and one of the Shopify sales reps admitted we may be a bit too big for their platform when I called in as the $20M persona. While that's a scary thing to think about--turning away potential customers--this focus is extremely important in the long term growth of a company, because it allows them to replicate their sales, support, product, etc. all for the SME types of customers.

Bigcommerce’s plan was geared for both established businesses and those intent on growth. For the latter, arguably represented by the $250k persona, the Pro plan was a good fit, with enterprise-grade features at a $199.95/month price point. That price entitled that persona to 2,000 orders on a trailing 12-month basis, with an incremental charge of $80/month for every 1,000 orders above that. For the established businesses represented by the larger personas, it was a similar structure--a monthly fee that entitled the merchant to a set number of orders in a 12-month window, with adjustments for sets of orders used above that.

Magento’s problems are probably too far gone. We had the most trouble getting ahold of a human being through their marketing site and sales funnels. When we could, the sale was a bit all over the place, to the point that we weren’t entirely sure for most of the sales cycle what was being sold, or how we were being charged. Unfortunately, this is the cost of growth, as Magento grew rapidly through their open source model, but these scaling issues shouldn't be a factor when it comes to trying to interact with customers like you.

Highly differentiated prices for seemingly similar products

From a pricing perspective, although each platform provides seemingly similar functionality, the actual price points charged were extremely different. Shopify was almost double Bigcommerce for similarly featured products. While some on this is on Bigcommerce to price better, we actually think this is a phenomenon where Shopify isn't necessarily the best fit for the larger customers, so they're potentially using price as a key screening tactic to make the onboarding and service of a larger customer worthwhile. Then again, it's more likely that Bigcommerce just needs to raise their prices.  

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*More on the methodology of how we received these quotes in the next section

**They were very upfront about higher service costs

***They went hard at the Shopify Plus plan first and then went down to the $179/m plan

Magento and Demandware were of supreme interest because they’re a bit away in terms of functionality when compared with Bigcommerce and Shopify. Magento doesn’t offer much out of the box, where most functionality needs to be unlocked by hiring an engineering and design team to put your store together. Even so, their prices were absolutely premium in the market, likely on the back of their reputation and vast customization capabilities that many customers want when they reach a certain level of revenue where they’re able to afford Magento.

Demandware, on the other hand, was the enterprise leader with absolute enterprise pricing. What’s fascinating about Demandware is that they tied their performance (revenue) to your performance (gross merchant value). While this symbiotic relationship may seem taxing to the customer, everything out of Demandware’s marketing and sales surrounded the concept of “shared success.” To put it a little more elegantly, Demandware will only succeed when they help you, the customer, succeed. Although the sticker shock was a bit of a heart attack compared to Bigcommerce, Magento and Shopify, their features and services set was clearly the most extensive out of the bunch, which presumably justifies the increased cost.

Big Pricing Takeaways: Value metrics, discounts, and sales cycles 

As we’ve explained extensively, a value metric is how you charge, whether it’s on number of users, orders, etc. Pricing along a value metric is so important because it ensures you tie your value directly to the value of your customer. The implication of pricing along a value metric is that when your customer grows, you grow, and thereby get rewarded through mutual growth.

In our study, we found that both Shopify and Magento are primarily feature differentiated, which hinders their growth as a company, but more importantly has the potential to skew their connection to the success of customers into the long term. This isn’t to say either company has bad support or a bad product but the advantage Demandware and Bigcommerce has is that they’re constantly trying to up the amount of orders and revenue going through their system for each of their customers resulting in mutually shared success.


"Pricing along a value metric is important; it ensures you tie your value directly to the customer."

mrr-calculation

(You Can Edit Before Tweeting)


For instance, there isn’t much benefit to Shopify or Magento to help a company grow from 1,000 orders to 1,100 orders because they’re not guaranteed an additional cut of those orders. Sure, there’s some advantage as the customer may see extra value in the platform and not churn out. Yet, for Bigcommerce or Demandware, if they increase every one of their customers’ order count by 100, that’s a significant amount of money for them and their customer, overall. This relationship sets up a win-win with mutually aligned incentives.

To read more about the benefits of a value metric to your bottom line, check out our post on finding your own value metric here.

Be careful with how quick they are to discount. Shopify loved them. 

The second we showed any hesitation over the quoted price on the phone, Shopify’s reps quickly offered up different ways that the price could be discounted. While this could be a way to incent smaller businesses who may seek out discounts on everything they purchase, we don’t think this is a great strategy to have blanketed so brashly.

Discounts in SaaS lower your lifetime value by an average of 30% across the board, which is a lot of cash in the long term, especially when your customers aren’t giving you too much money in the first place (small businesses). While lifetime value is obviously important, we typically see a bigger problem when seeing discounts so aggressively out of the gate in the form of a sales team that isn’t controlled enough in aggregate to make sure profitability is top of mind.

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Of course, we’re only seeing into a snippet of Shopify through this exercise, but in the hundreds of SaaS companies we speak with, Shopify looked more like some of the other companies we know with LTV/CAC problems than not. That being said, the ironic part is every sales person we spoke with was aligned to almost the same sentences around value propositions, brand, sales script, etc., almost as if we were chatting with the same rep each time (which we weren’t). This is a saving grace, because we think this means that their discounting is more of a targeted tactic than something that’s out of control.

The lesson here though is to make sure you’re being extremely careful with your discounting strategy. Discounts should be discreet and have a timeline. In this manner, you’ll be able to use them as a tool, instead of a path of least resistance for not knowing your customer well enough to sell on value. To learn a bit more about discounting check out our post here

Sales Cycles Can Kill Deals - Magento and Demandware

One of the most telling non-pricing phenomenons we found in this study was the length of the sales cycle for both Magento and Demandware. While a long sales cycle can be a good tool to weed out poor leads that aren’t ready for the expansiveness of your solution, they’re more often than not a sign of a poor sales structure.

Getting on the phone or even getting an email response from Magento when I was asking to be sold took weeks. Not days or hours. Weeks. I was so frustrated with the sales process that I wanted to chat with a manager and complain, even though I had no interest in actually using the product down the road.

Demandware on the other hand was extremely interesting, because they used their long sales cycle as an actual way to push back on leads that weren’t ready for the big time. Judging by their customer lists, they likely are more driven by outbound than inbound interest, so for inbound leads forcing them to wait a bit likely saves them an extreme amount of time and customer acquisition cost as poor leads weed themselves out of the process. They need to be careful with this though, because each inbound lead still needs to be scored to make sure it’s not a whale hiding amongst the minnows.

In the hustle and bustle of building a business we sometimes forget how important bedside manner is when nurturing leads. People like to receive quick responses and courteous service. Just keep this in mind when evaluating your sales cycle and the length it takes to close a deal.

Make sure you're picking the right platform for your size 

Overall, you absolutely need to do your  homework to ensure you’re picking the right platform for your business. From our findings, we’ve determined that aligning your size to the right platform is much more important than trying to pick the right set of features, mainly because the way these companies are charging is more crucial to your success than feature set.

In that vein, if we were making the decision, we’d align smaller retailers with Shopify, since the upfront ownership is extremely inexpensive and is subsidized by larger merchants on their platform. Their feature set and pricing model breaks down as you grow though, which is why we’d move our recommendation to Bigcommerce if you’re a mid-market sized company. They’re most closely aligned with those looking to grow as quickly as possible, and in the right manner. Of course, if you’re some of the biggest of the big retailers, then Demandware should be your choice if you aren’t going to build your own custom solution.

All that being said, keep in mind that pricing is absolutely crucial to not only your company, but also the companies and software vendors you choose to partner with to help you grow. After all, you’re focused on your own value, so make sure whomever you choose to do business with is aligned with your value, as well.

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CEO and Co-Founder
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