Implementation Fees and Unit Economics
This episode might reference ProfitWell and ProfitWell Recur, which following the acquisition by Paddle is now Paddle Studios. Some information may be out of date.
Originally published: June 18th, 2018
Ah, one of the great debates in SaaS: implementation fees. For the uninitiated, implementation fees are essentially an extra fee for training, setup, or actual technical implementation that you pay in addition to what you’re paying for the product. Although mainly seen in B2B, there are quite a few B2C companies that deploy this tactic.
On this episode of the ProfitWell Report, Cem Hurturk, Co-Founder of Sendloop - asks us "How do implementation fees affect unit economics?" To answer his question, we looked at just under one thousand companies and over half a million subscription customers. Here’s what we found.
But first, if you like this kind of content and want to learn more, subscribe to get in the know when we release new episodes.
Improve CAC recovery and retention with implementation fees
To get right to the point, implementation fees dramatically improve customer acquisition cost or CAC recovery and actually improve retention rates across different ARPU customers considerably.
From a CAC recovery standpoint those companies utilizing an implementation fee of some sort are seeing 30-40% lower CAC recovery timelines than their non-implementation fee counterparts.
This is intuitive, because no matter what your implementation fee looks like, the basic math will tell you that this revenue will clear some of the cost of acquiring that customer.
Further though, retention is an important consideration when looking at an implementation fee, because most of the time in SaaS and the world of subscriptions you’re not using the fee to cover the cost of setup, you’re using it to cover the cost of some sort of training, which is used to get your customer using the product, seeing the value, etc.
Companies with implementation fees are typically seeing roughly 10 to 20% better net retention across different ARPUs than their non-implementation fee cousins.
This data bucks the notion that friction is bad for business. In reality, a little bit of friction not only helps CAC recovery, but your retention as users are pushed to see the value in what they’re buying.
Lower conversion rates - The case against implementation fees
Critics of implementation fees point to the conversion implications and they aren’t completely wrong. When comparing the two models, low ARPU buyers did convert at a lower rate as their higher ARPU counterparts when faced with an implementation fee, but considering those customers with the fee were retained longer, there’s an argument to be made that the numbers net out still for the better in the long run.
Ultimately, your job as a leader in the recurring revenue economy is to understand your customer to the point that you can utilize all of the tools at your disposal to serve them well and align your unit economics. Implementation and setup fees of some sort, although a bit controversial, may be an effective way for you to start counterintuitively slow down the conversion process for nice, long term gains.
Want to learn more? Check out our recent episode on Average Revenue Churn Rate Benchmarks and subscribe to the show to get new episodes.
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You've got the questions,
and we have the data.
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This is the ProfitWell Report.
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Chem asks, how do implementation
fees affect unit economics?
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Ah, the old
implementation fee debate.
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This is a great question, Chem,
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especially because people seem
to be very strongly opinionated
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on implementation fees.
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So to answer your question,
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we looked at just under
one thousand companies and over
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half a million
subscription customers.
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Here's what we found.
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For the uninitiated,
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implementation fees are essentially
an extra fee for training, setup,
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or actual technical
implementation that you pay in
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addition to what you're
paying for the product.
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Although mainly seen in b to b,
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there are quite a few b to c
companies that deploy this tactic.
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To get right to the point,
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implementation fees
dramatically improve CAC
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recovery rates and actually
improve retention rates across
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different ARPU customers
quite considerably.
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From a CAC recovery standpoint,
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those companies utilizing an
implementation fee of some sort
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are seeing thirty to
forty percent lower CAC recovery
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timelines than their non
implementation fee counterparts.
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This should feel intuitive
because no matter what your
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implementation fee looks like,
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the basic math will tell
you that this revenue will clear
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some of the cost of
acquiring that customer.
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Further though, retention is an
important consideration when looking at
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an implementation fee.
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Because most of the time in SaaS
in the world of subscriptions,
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you're not using the fee
to cover the cost of setup.
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You're using it to cover the
cost of some sort of training
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which is used to get your
customer using the product,
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seeing the value, etcetera.
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Companies with implementation
fees are typically seeing
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roughly ten to twenty percent
better net retention across
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different ARPUs than their non
implementation fee cousins.
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The data bucks the notion that
friction is bad for business.
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In reality, a little bit of friction
not only helps CAC recovery,
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but your retention as users are
pushed to see the value in what
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they're buying.
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Critics of implementation
fees point to the conversion
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implications and they
aren't completely wrong.
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When comparing the two models,
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low ARPU buyers did convert at
a lower rate as their higher
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ARPU counterparts when
faced with this type of fee.
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But considering those customers
with the fee were retained longer,
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there's an argument to be made that
the numbers net out in the long run.
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Ultimately, your job as a leader in
the recurring revenue economy is to
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understand your customer to the
point that you can utilize all
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of the tools at your disposal
to serve them well and align
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your unit economics properly.
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Slow down the conversion process
for nice long term gains.
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Well, that's all for now.
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If you have a question,
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shoot me an email or video to
p c at profit well dot com.
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Let's also thank Champ from
SendLoop for sparking this
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research by clicking the link below
to give him a nice little shout out.
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We'll see you next week.
