Capiche is a secret society for SaaS power users, building a new community of people who care about software to make the SaaS industry more transparent, together. Matthew Guay is Capiche ‘s founding editor and former senior writer at Zapier.

Free is a hard genie to put back in the bottle.

When Microsoft charged $999 for Office in 1990, little did they dream that 16 years later, their greatest competitor would be a free office suite from Google—along with dozens of small, often free apps that individually did many of the same tasks as Office.

Suddenly software was everywhere, for cheap or free. “Once something becomes abundant, we tend to ignore it,” wrote then Wired editor-in-chief Chris Anderson in his 2009 book Free . If the ancient dream of turning lead to gold became reality, we wouldn’t become infinitely richer. Gold instead would become so abundant it’d be just another metal.

Software took that to its logical extreme, first filling App Stores with thousands of apps, then with next to no marginal costs, prices crashed towards free. How do you compete with free?

Perhaps you could charge more. Far more. That’s how Sublime Text, Slack, Superhuman, Notion, Pinboard, and many other software businesses won.

Stand out by charging more

When software was scarce, any price made sense. Buying hundreds of dollars of software for your first PC, or dropping $9 on every app in the early iPhone App Store, felt like an investment in your new device. Of course you would pay. The software was not only best-in-class, it was often your only choice.

A few decades later when any App Store search returns hundreds of options, each with the same core features, it’s hard to really care. Any app would work.

“You cannot compete only on price,” wrote WP Engine founder Jason Cohen in 2010, “because then all a competitor has to do is lower their price.” It turns into a duel, where the competitor with the deepest pockets can afford to blink last and take the market. Then it’s all too easy for users to jump ship to the next new free app, and the cycle begins again.

But inside that free market, a subset of customers are eager to pay more for something better.

1. Focus on your best customers

Free is an easy marketing tactic—and a recipe to get a large user base that’s not a fit for your product. They’ll use your product, give feedback, and request changes and new features—but would they pay for them?

Charging upfront, instead, focuses your audience on those who need the product enough to pay for it. When they talk, it pays to listen—literally.

“Those which take money at the door at least get rapid feedback on how things are going,” remarked Guardian technology editor Charles Arthur after switching from the free Delicious bookmark service to the paid Pinboard. Delicious, while being shuffled through its various owners, kept changing its focus to gain a larger audience and finally turn a profit. Pinboard, by charging upfront, was instead able to relentlessly focus on features that people were willing to pay for.

Superhuman founder Rahul Vohra took that to the extreme, focusing on the 60% of users who who would be very disappointed if Superhuman went away. “With your early marketing, you may have attracted all kinds of users—especially if you’ve had press and your product is free in some way,” advises Vohra . “But many of those people won’t be well-qualified; they don’t have a real need for your product and its main benefit or use case might not be a great fit. You wouldn’t have wanted these folks as users anyway.”

Well designed email apps are not a new idea; if anything, they’ve been one of the more iconic failures of the past decade. Sparrow made email on the Mac a nicer experience, put inbox zero in reach of everyone. Mailbox made mobile email faster, and introduced innovations such as swiping messages to archive them that were soon copied by others. Yet both were acquired—Sparrow by Gmail, Mailbox by Dropbox—only to be shut down. The ideas may have lived on; the products, not so much. Neither achieved anything close to escape velocity to build a profitable business around email.

By charging upfront, Superhuman didn’t need every user to make it a financial success. It instead needed only the users who really wanted a better email app. “When you’re doing three-plus hours of email every day, it’s your job,” Vohra told the New York Times . It’s those people who were more than willing to pay for Superhuman—and in turn, it’s the feature requests from those users that would give Superhuman an increasingly better product/market fit.

“If you’re looking to get paying customers, ask for money upfront and you’ll have a lot better shot of getting them,” said Basecamp co-founder Jason Fried . Basecamp’s free users rarely converted to paid customers; “the majority of people who are on pay started on pay,” said Fried.

Free users aren’t your customers, and perhaps they will never be. By charging, even charging far more than competitors, you’ll know that when people choose your product, they really need it. It’s feedback from those users that will make your product irreplaceable.

2. Scale things that don’t scale

“Do things that don’t scale,” YC founder Paul Graham is known to advise . “You should take extraordinary measures not just to acquire users, but also to make them happy.”

When your product is free, or has a free plan used by a large percentage of your user base, many things won’t scale. Support, personal attention, and even maintaining the product itself may prove to be too expensive to scale if you’re not careful.

Charge upfront, however, and things that look unscalable suddenly might make a lot more sense. You can’t afford to give every free user hands-on attention forever. But if every new customer is paying from the start, perhaps you can. Superhuman, for instance, requires an hour onboarding call to help to help users get the most out of the product—something they can afford as people are paying $30/mo from the start. It puts the service in SaaS, ensures people who pay for the app get the most out of it, and creates superfans in the process.

3. Grow your business organically

When your largest competitor throws in the towel and their users flock to your app en masse, it should be cause for celebration. That is, if you’re ready—and selling an app instead of giving it away for free.

Pinboard experienced this late 2010, when Yahoo announced they were sunsetting Delicious, until then Pinboard’s greatest competitor. Overnight, traffic to Pinboard shot up 20 times, peaking at over 600 new signups per hour. That was enough to nearly take down the site—and rack up a hefty AWS bill.

“If Pinboard were not a paid service, we could not have stayed up on December 16, and I would have been forced to either seek outside funding or close signups,” wrote Pinboard founder Maciej Cegłowski. “Instead, I was immediately able to hire contractors, add hardware, and put money in the bank against further development.”

Servers cost money, as do the teams that keeps sites online. “If your free website takes off, you lose resources,” advises Cegłowski . “Your time is spent firefighting and your money all goes to the nice people at [cloud hosting site] Linode.”

When maintaining services for free users, you’re using time and resources that could otherwise have gone into your product for your real, paying customers. As the HubStaff team said after removing their free plan, “our free plan ended up losing us money and stunting our growth!”

It’s not that every business needs to make a profit from day one, that bootstrapping is the only way, and you shouldn’t raise funds to grow. Instead, no matter how your business is structured, by focusing on those willing to pay for your product, you’ll have more resources to invest in the things that make your product great—and will be able to afford growth as it comes.

4. Fight spam and abuse automatically

Ever walked through a store not feeling particularly hungry, only to pick up a few samples without thinking? It’s a strange quirk of human nature. “We take stuff because it’s there, not necessarily because we want it,” writes Anderson in Free . “Charging a price, even a very low price, can encourage much more responsible behavior.”

That’s one lesson shared by many apps who had a free plan. “Free users bring more free users. Free users eat up support. People take advantage of free accounts,” said HubStaff co-founder David Nevogt.

Free plans somehow bring out the worst in users. When MailChimp added a free plan after years of charging every user, they saw “a 354 percent increase in abuse-related issues like spamming, followed by a 245 percent increase in legal costs dealing people trying to game the system,” as MailChimp CEO Ben Chestnut relayed to GigaOm writer Liz Gannes .

Pinboard lists spam-fighting as one of the core benefits of their product being paid-only. “Thanks to the entry fee, Pinboard has remained spam-free since launch,” says Pinboard’s Cegłowski “Not having to expend resources on spam fighting means having more time to work on features, and keeps the site fast and small.”

Charging doesn’t guarantee your service won’t be abused. It does, however, make it easier to fire customers who cause trouble, and nearly guarantees your site won’t be overrun with bots creating fake accounts.

5. Give your customers security

Odds are you’ve had a favorite app disappear. One day you relied on Google Reader, Mailbox, or Sunrise, the next they were gone.

That’s why some users will be glad to pay for your app. They’re purchasing peace of mind, security that your service is here to stay. As The Guardian’s Arthur wrote , “Plumbing is dull. Plumbing is also essential. That’s why you pay money when you get it done.”

Cegłowski agrees : “A sustainable, credible business model is a big feature.” People don’t want to switch services. They like your app, and if you let them pay for it, they’re committed to its success. And you, theirs.

6. Deliver more value than you charge

“Q: What’s the easiest way to charge money for software?” asked Basecamp’s Matt Linderman . “A: Build software that helps people make (or save) money.”

$70 for a text editor sounds crazy, until you think of the value a more efficient coding environment brings to software engineers. $30 a month for an email app sounds even crazier, until you think of the multi-million dollar deals being closed in emails, where every second matters. That’s how Adobe Creative Cloud can charge over $50 a month, and Bloomberg over $20,000 a year for their terminal. If you need those tools, you really need them, and you’ll make far more money from those tools than they cost.

“When your customers find out that their needs get met if they only part with a trifling sum of money they’ll happily part with it,” says Patrick McKenzie , who regularly advises software companies and consultants to charge more. When you help people make money, they’ll happily pay. And every time they ask for a new feature, it’s something that will help them make more money—and by extension, help you sell your product to the next customer who will stand to make even more.

Bill Gates stated that “a platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.” That should be the goal of your product as well. You win when your customers succeed, when they achieve their goals and make more money thanks to your product.

The paradox of paying

“The way to compete with free is to move past the abundance to find the adjacent scarcity,” wrote Anderson in Free .

So Pinboard charged for bookmarking that promised to never lose any site you saved, when Delicious and browser bookmarks were free. Sublime Text charged $70 for a faster text editors, when its alternatives were free open source mainstays. Slack made chat fun, then charged over three times more than HipChat. Zoom came into a market that Google quickly dominated with Hangouts, and people were excited to pay for calls that consistently worked better. Box raised prices over time and didn’t keep up with Dropbox and Office 365’s storage levels, focusing instead on business needs. Stratechery, The Information, and others fought free blogs and business newspapers with paid tech reporting. Notion and Quip got teams paying for notes, even when Google Docs is free, Dropbox Paper or Box Notes come with their file sync app, and OneNote comes with Microsoft Office. Superhuman one-upped everyone by charging $30 a month for a faster way to use your free Gmail account.

And they all won, building a premium market from people who wanted a better product. Charging more than the competition set them apart, let them do more, grow faster, and establish a beachhead where conventional wisdom said there was no more room for growth. They didn’t just get customers, they earned superfans who sang their praises to anyone who would listen.

“Paid products carry more value,” said the HubStaff team after noticing how few of their free customers upgraded to paid pla ns. People value what they pay for.

In the same way we’re willing to pay more for artisan drinks and handcrafted products, we’ll pay for software that helps us do more, better. You get what you pay for , claims the adage, and businesses are willing to pay, even as the software inflation rate goes up . When they pay, you can afford to build better products and invest more time into each customer. That makes your product a better fit for customers, earns additional customer loyalty, and suddenly you’ll have a better growth flywheel than trying to convert a few percent of your free users to paid.

Why your SaaS success is all about ‘Net Dollar Retention’

If you’ve ever taken a marketing 101 course, you’ve learned that keeping a customer is much more profitable than acquiring new customers. It’s an old piece of wisdom but still valid today.

Unfortunately, many SaaS companies forget about it and concentrate their efforts on generating new leads. The costs of acquiring new customers get very high, really quick. And if you’re unable to bind your user to your product, it is completely useless.

Most people judge the performance of a SaaS-company on its MRR while judging a company on its NDR might give much more valuable insight.

Why? Well, it’s not uncommon that a company’s MRR increases while their NDR deteriorates. In other words, the company is bleeding money.

One could argue that NDR is much more than a number; it quantifies how your clients value or love your product and how much of an impact you’re making on their lives… I’d say Customer lifetime value (LTV) is one of the most critical metrics for SaaS companies.

With that in mind, upgrades or downgrades and churns must be considered while judging a company’s performance.

What is Net Dollar Retention?

NDR is a metric expressed as a percentage. It illustrates the (change in the) amount of revenue from the current users a company can retain compared to another period with taking downgrades, upgrades, and churn into account.

NDR, or Net Dollar Retention , is not as well known as MRR, but a very valuable (if not more valuable) metric. Especially for SaaS–entrepreneurs. Why is NDR so important? Well, first and foremost for me is the fact that it’s very much possible to grow your MRR while losing money.

This scenario occurs when your marketing department is on fire. The acquisition of new users creates a revenue stream that exceeds the net reduction in revenue from your existing user base.

Let’s say your company starts this month with €100,000 in MRR. It books €50,000 in new subscriptions, zero in expansion revenue, suffers €20,000 in downgrades, and €5,000 in churn.

In this example, your MRR rose by a whopping 50%. And yes, you should bring out the champagne for that. But, your NDR is only at 75%. You lost 25% of MRR from your current userbase. Also, what was your marketing budget? How much did you spend to acquire these new users? Money is leaking from your business…

To understand Net Dollar Retention, you must consider expansion (by marketing), downgrades (of packages), and most of all churn, and their effect on monthly recurring revenue (MRR).

Let’s dig a bit deeper into what this means before we address the essentials of NDR.

Increases in MRR

MRR can increase via two broad mechanisms:

Through newly onboarded customers

Through an increase in usage or upgrades within your existing customer base

Simply put, MRR increases when your existing customers start spending more on your product. By upgrading a standard subscription to a premium subscription, for example. Or when your marketing department does a bang-up job.

An example of the first would be a user upgrading from a €10 basic subscription to a €50 premium subscription. In this case, the expansion revenue would be €40 or the net increase resulting from the upgrade.

Decreases in MRR

Life can be hard, especially when you’re a SaaS–entrepreneur. Sometimes you lose clients, this decreases your MRR. This can happen in two ways:

Through downgrades in usage within your existing customer base

Through churn, where customers cease to do business you

Downgrades are any decrease in revenue caused by downgrading in use, which is basically the opposite of our previous example.

A downgrade would be a user moving from a €50 basic premium subscription to a €10 basic subscription. The downgrade in revenue, in this case, would be €40, which is the net decrease resulting from the downgrade.

Churn

I’d define churn as a disaster . Or, more mildly put, as losing users.

An example of churn is a user leaving the platform from a €50 subscription. The churn would be €50, the net loss resulting from the user leaving your platform.

But with that out of the way, let’s get to the meat of this article.

Calculating Net Dollar Retention

NDR accounts for the changes in MRR caused by expansion, upgrades, downgrade, and churn within an existing customer base.

It is expressed as a percentage and calculated using the following equation.

For example, a company starts the month with €10,000 in recurring revenue. Over the month, it added €2,500 in expansion revenue, has €1,000 in downgrades and another €500 in churn.

The company now has €11,000 in MRR and due to an NDR of 110%

Making use of NDR

A Net Dollar Retention below 100% means churn and downgrades were bigger than the growth you realized with your existing customers. You are losing users, or they’re spending less on your product. The role that your product plays in their life is not significant enough. They can do without you. Or, with less of you. Both are a little painful.

It’s like being dumped.

If this analogy seems a little far fetched, but I tend to disagree. People don’t leave something that they really love. Or, in this case, a product they really love. Maybe, just maybe, you’re not loveable enough, and it is time to invest in the relationship.

How to improve the NDR?

If your NDR is bad, don’t worry. I’ve worked with many SaaS companies along with my team and we’ve seen it’s more than possible to beat churn and turn your negative NDR into a positive one.

Of course, there are plenty of ways to turn NDR around, but the one I have the most experience with is through human-centered design. A human connection built straight into your application will make your users fall in love and make sure they’ll stay with you as long as possible.

Design helps you get your product from liked to loved. What does this mean? Well, your marketing efforts are more fruitful, your clients more positive, and VC’s are banging on your door. Making sure your users never leave you anymore, invest in the upgraded design of your SaaS product.

So calculate your NDR and find the best way to get it to where you want it to be.

3 neck-stretching routines you can easily do at your desk

It’s time for your morning coffee break, and you find yourself stretching your stiff neck almost by routine — but let’s face it: you’re probably doing it wrong.

Working from home or not having the right work setup in the office can wreak havoc on your physical health, causing a lot of stiffness and pain.

With this in mind, here are three easy neck stretches that I’ve found helpful — just do them at your desk and they’ll leave you feeling better in no time.

A quick routine covering all bases

This 8-minute video (c’mon, you’ve got 8 minutes to spare) will give you plenty of stretches to work with.

The first three neck stretches will target your upper traps, your levator scap, and your anterior scalene muscles — which can get super tight when you’re working at a computer or gaming for long periods of time.

Dr Jo will also walk you through chin tucks, which will work the muscles around your neck but also rest them if you’re suffering the effects of bad posture.

You will need a towel to perform some spine stretches, but don’t worry, it’s nothing too strenuous.

A yoga routine

Next up is Judi Bar , who brings you short but sweet yoga moves designed to relieve tension and open up your chest.

Don’t be scared of trying this, the poses are really simple, and you won’t need any props aside from your desk chair.

You can expect to roll your neck, circle your shoulders, lean, and stretch. And it feels so good!

A super duper quick ‘Deskercise’ routine

Now, if you’re pressed for time and you literally need to stretch on the job , then this ‘deskercise’ routine is for you.

You’ll stretch your neck and shoulders and will be feeling better in no time.

This is one of my firm favorites because it allows you to do simple exercises without too much down time.

Now, it really goes without saying but remember that none of these videos contain medical advice nor are they treatment plans. They are intended for general education and for demonstration purposes only. Please don’t use them to self-diagnose or self-treat any health , medical, or physical condition.

I know it can be a pain to get around to booking doctor’s appointments, but don’t use these exercises as a way to avoid seeing a doctor or to replace any advice they’ve given you. Make sure to consult your healthcare professional before doing any of the exercises demonstrated in the videos.