Nothing in life is unlimited including life itself, and most people know that. Then why do we buy into “unlimited” and sometimes even pay extra for it?
I mean you can see it in so many industries: cellphone providers, restaurants, web hosting companies, resorts, etc.
At one point or another, you’ve probably wondered should I implement unlimited in my business? Is unlimited really sustainable or should I charge annual fee?
I too had these same questions at one point, and my mentors helped me understand when unlimited makes sense and when it doesn’t. Anybody who gives you an absolute answer: “unlimited is awesome” or “unlimited is not sustainable” doesn’t see the full picture.
We need to understand how people make decisions to fully understand the true power of unlimited.
Why is “unlimited” so attractive for consumers?
As humans we don’t enjoy making decisions that requires justification. Why? Because we have to calculate the opportunity cost and that adds guilt because we have to rationalize our purchase each time we make a payment.
Now because we have unlimited wants and a perception of unlimited needs, when we see an ultimate offer that gives us everything, it makes the decision really easy.
According to Dan Ariely, professor of Psychology & Behavioral Economics, it takes the focus away from the pain of paying and put our attention on the enjoyment of an experience.
So essentially, we experience less pain of paying when the form of payment is distanced from the pure representation of money.
For example: when you go to an all-inclusive resort, they give you a wrist-band which acts as your mode of payment. Except you don’t feel bad for ordering late-night room service because it’s “theoretically free”, but it really isn’t. You simply pre-paid for it earlier.
What’s even more important is that you don’t even think about the 999 other amenities that was also included in the price that you didn’t use.
This brings me to my next point on why marketers love unlimited.
Why “unlimited” is so attractive for marketers?
The big three reasons why marketers love unlimited is:
- Unlimited is Easy to Sell
- Unlimited increases demand
- When done right, unlimited can significantly increase profits.
People overpay for just the idea of having unlimited. We’re conditioned to want more and always get the biggest package.
Restaurants and convenient stores are a prime example. Soft-drinks at restaurants are conveniently priced 2 – 4 times higher than the retail price of a can. It’s extremely profitable because it’s purchased in bulk. Second it’s full of ice. Lastly, not everyone drinks 4 glasses of soda at a meal.
So when does unlimited make sense for your business?
Unlimited in Your Business?
The decision whether you should add unlimited in your business needs some serious thought. Because if you’re not ready, then it can have negative impact.
End of 1996, AOL changed their pricing model. Instead of charging by hour: $19.95 for 20 hours and then $2.95 per additional hour, they decided to do unlimited for the same $19.95.
In theory just like the soft drinks at restaurants, there will be a few people who will use more but the rest will not. That wasn’t the case. When people saw they can get unlimited, the demand increased dramatically (quadrupled), and they weren’t prepared for that.
You want to learn from the unlimited soup and salad model. You should add unlimited on items that not only have high profit margins but are easy to scale while being attractive for the type of customer you want.
Shared web hosting industry does this very well. Let’s use Hostgator as an example.
Notice how all 3 of their shared hosting plans overly abuse the word Unlimited. Not to mention they also use other psychological triggers like FREE, 20% OFF, and showing the lower price “starting at”.
An argument can be made that the only real difference between those plans are the name. But for their targeted demographic (small business owner), this is perfect because it makes the decision really easy. This is also very lucrative because most small sites won’t use up the resources.
But if you go to their dedicated servers page, then you see that there is no such thing as unlimited because it is catering to a different audience.
The key here is to know your audience and offer unlimited on areas that are highly profitable and easy to scale.
Since a good portion of my business is in the WordPress industry, there’s always a debate of annual recurring revenue vs. one-time unlimited.
Recurring Revenue vs. One-time Unlimited
While most would pick recurring revenue as an obvious choice, I want to present the other side of the coin. In my experience, when done right one-time unlimited can be far more profitable than annual recurring revenue.
How is that possible? Well recurring revenue relies heavily on your attrition or churn rate. How many customers are actually renewing your software license at the end of the year?
Since we know that it’s cheaper to keep an existing customer vs. getting new ones, often companies resort to giving high renewal discounts (25% – 75%). Smart companies have marketing automation so they start with 25% renewal discount and go as far as 75% based on the events.
Let’s say that you have 3 annual price plans varying in features with your highest package costing $199. With a 50% renewal discount, in 3 years you will make $398.
The problem here is that you’re expecting the customer to actually stay full 3 years. On every renewal, the customer has to go through the pain of paying to justify theie purchase and that’s where you see a drop. Also you see users switching to different sometimes cheaper products.
Using one-time unlimited, you could charge that money upfront. Let’s say you charge $349 for the Ultimate package. Giving the attrition rate, it may make more sense for you to do this specially if all they’re paying for is updates.
When a user sees few options next to each other where all say 1 year of updates except one says Lifetime, a good number of them will instantly purchase the unlimited package.
For one of our WordPress plugins, we saw that we had a huge drop off rate in renewals. Why? because our older version worked fine, so the users couldn’t justify paying the renewal price.
We simply added a new package that was 2.5 times the price of our highest package where the only real difference was lifetime updates. When considering the renewal discounts essentially we charged the user upfront for 4 years.
Considering that the average life of a user was 1.4 years, we significantly increased our profit margins. Not to mention that the support requests got lower and lower with the age of the customer. The queries raised by our long-time users pointed out real issues rather than being a user error support request that you get from new customers.
For all of my developer friends, I’d highly recommend that you make calculated business decisions rather than taking the words of one expert or another.