Supercharge Revenue with a Value-Based Pricing Strategy
Freshsales CRM partnered with Patrick Campbell (CEO, Price Intelligently) for a webinar on “How to supercharge revenue with a value-based pricing strategy” on January 31, 2018.
Here were some of the takeaways:
- The core principles that power the best pricing pages
- A framework for continually optimizing your pricing
- Easy changes that can boost your revenue
- The most common pricing mistakes
Janani: Hi everybody! Thank you so much for joining us live on the webinar today. My name is Janani and I head marketing at Freshsales. So, for those of you who don’t know Freshsales, it’s a great, easy to use sales CRM product from Freshworks with features like AI based lead scoring, built-in phone, visual sales pipeline, and great reporting.
We help businesses of all sizes scale and optimize their sales processes. So, I’m super excited today to have Patrick Campbell here. For those of you who don’t know Patrick, Patrick is the co-founder and CEO of Price Intelligently, the industry standard software for helping companies like Autodesk, Medium, Lyft with their monetization and retention strategies.
Welcome, Patrick! Patrick is also the maker of ProfitWell. You must have heard ProfitWell. They’ve been making a lot of noise lately. A turnkey solution that powers the subscription financial metrics over 5,000 SaaS companies. Prior to Price Intelligently, Patrick was at Google and was also at Gemvara.
Patrick had recently come over to Freshworks and we had a really great workshop and we will be blown away by some of the insights. So, as a SaaS company that is really great for us. So, we’re really excited that Patrick is on board with this webinar today. Thank you so much, Patrick!
Before we begin, I also want to let you guys know that this webinar is being recorded. So, if anybody interested in listening to the webinar again, we will be providing you with a link of the recording by next week. So, yeah. Thank you, guys, and over to you Patrick.
Patrick: Yeah let’s do it. Well, thank you so much for having me. We’re going to go through a lot today. So, let’s just jump right in. Just a couple of other housekeeping items here. We’re going to be doing just kind of set expectations here is really walking through initially why pricing and your monetization is so important, not just in general but right now in the current kind of economic and market that we’re in.
We’re going to talk specifically and more tactically on how to quantify what is called your buyer personas. And if you’re not sure what those are, we’ll explain what they are in a bit but they’re crucial to a value-based pricing strategy. And then finally we’re going to you know give you a nice detailed playbook for increasing your revenue on pretty substantially using pricing.
Now to be clear though what this webinar is not, first off, unfortunately, and we’ve been searching for a long time for this. There’s unfortunately not a magic formula that can give you that requires no work at all. Pricing and in taking advantage of pricing does take a bit of work and you can do it in a very very tactical and very very targeted way to make sure that you’re doing it properly. The final piece that this webinar is not as a pitch tone.
So, there’s plenty of time outside of this webinar for us to talk about what we do and Freshsales talk about what they do, but it’s one of those things where we want to make this a nice educational experience. So, as was mentioned, webinars being recorded, all the slides, materials all that type of stuff will be sent out and we’ll have plenty of time for questions. So, with that, let’s jump in.
The big thing initially is you know who in the world are we or am I in order to talk about this? So, as was mentioned, we have a couple of different products. I won’t go too deep into anyone in particular but I will say for the past five or so years, we’ve been helping some of the best and brightest in the subscription and SaaS economy essentially with their monetization and their pricing, some of the logos are here and we’ve also a product called ProfitWell which is free subscription financial metrics that plugs right into your billing system.
I’m giving you this context obviously not to sell you, to no pitch on, but essentially to let you know that at this point in time we’ve actually seen inside more software and subscription companies than anyone else out there. We have about 25 percent of the subscription market actually using ProfitWell and that’s provided us a significant uplift when it comes to understanding what data is actually important and what data can actually teach us about how to help our pricing and ultimately how to grow our subscription in our SaaS and software businesses.
So, with that, one thing that we found particularly in the past couple of years is that growth is pretty dramatically changing and unfortunately what we think is working or what we think works to build a particular business, and this is if an independent of a subscription or a SaaS business, actually doesn’t work anymore. If we continue to build businesses in the same way that we were building businesses 5, 10 or even 3 years ago, it’s, unfortunately, going to have dire consequences on our growth.
We’re going to unpack this through some heavy data so you don’t have to take my word for it. But we’re going to unpack this and the first part of this is probably going to make us all feel a little bit bad. It’s not my intention to make you feel bad. It’s just kind of the reality of some of this data unfortunately but then the second half we’re going to build everyone back up and basically give you some of these tactics through pricing that you can use in order to basically overcome some of these things.
But to kind of dig in from a very very macroeconomic or a very high level, we’re living on another planet. When I say we’re living on another planet, I’m referring more towards the fact of if you were building a company 3, 4, 5, 10 years ago, the world was very very different. Today we have the ability to spin up software products, to spin up any product or landing pages or ads or anything to build a business in seconds and minutes rather than days or even weeks that he used to take 5, 10 or 15 years ago. What that’s caused, unfortunately, is a world where competition is now rampant. So, we actually went out and we talked to a bunch of different companies and we asked them Hey! In your first year of doing business, how many competitors did you have? What we found is that five years ago, you’re averaging probably around three different competitors and today you’re actually getting into double digits. This is what’s created you know maps that look like this. The chief martech kind of marketing technology landscape where essentially there’s a significant number of companies out there.
Unfortunately, all of these companies here, every single one on this particular map here, their whole goal is to basically help you grow your business. So, this doesn’t even include Dev apps or Dev products or you know even some of the other kind of functional pieces that we have within our business. So, what’s amazing about this though is that the reason so many of these companies have been able to kind of spur up and start to exist is because one technology is getting easier and easier to build. We don’t have to kind of have servers in a closet somewhere. We can just kind of basically build a business very very quickly but also sales and marketing channels were plentiful. I say, “were” very very specifically because we are living in a time where we can market and sell in so many different ways. But if you built a company 10, 15 years ago what was really interesting is that almost every single quarter, almost every single year within your business you were getting a new major marketing channel that you could take advantage of. That was really cool because when Facebook ads first came out you could basically spend very very little amounts of money and get a really really high return. Same thing with AdWords, same thing with some of the other major sales channels, but what we’ll notice saying in the past couple of years is that it’s leveling off. So, what I mean by that is if you’ll notice in the past three years, these last three bars in the graph, all of a sudden, we’re not getting a major marketing channel every single year that we’re able to utilize. We’re getting less and less, so all of a sudden, we need to use the marketing channels we have much much more effectively and that makes it a little bit painful for a business. And the fact that we’ve actually lost a lot of our power. What’s happening with all of these different people marketing?
The limits of marketing channels as well as all this technology being built and all these companies being built, we’ve lost a lot of this power in the sense that CAC (Customer Acquisition Cost) is actually increasing pretty steadily over time. We noticed that in both B2B and B2C environment, your customer acquisition costs which might have been let’s say $100 five years ago is now $150 – $170 today for that same customer and that increase is pretty substantially especially if you’re running a business at scale because obviously, you need to bring in more money than you’re actually spending so all of your margins are start to go going down in terms of what’s actually happening with your acquisition world. Now it’s fascinating is while this is happening. Because all of these different companies are coming out and all these different competitors are existing. All of a sudden, we’re also noticing that the relative value of features or the relative value of software, in general, is declining. So, 5, 10 years ago you might have been able to sell a Salesforce integration for $1,000 per month and that was in addition to the core product that you’re already selling. But today, that’s something that’s just expected. We can see this anecdote in the real live data here when we look what’s happening on this particular graph. So, essentially a product that was worth $100 five years ago is now only worth you know $30 – $40 today which is pretty extreme when you think about it but it’s also pretty intuitive if you think about it because all of a sudden, it’s easier and easier to integrate apps. It’s easier and easier to build products. It’s never going to be perfectly easy but it’s definitely one of those things where all of a sudden, we can’t differentiate on having features when it comes to boosting our value and boosting essentially the willingness to pay of customers.
In light of this, what we found is that costs are going up, prices or willingness to pay is essentially going down and unfortunately even though software is so beautiful today comparative 10-15 years ago, consumers and our customers are really really ungrateful. We looked at NPS (Net Promoter Score) scores across multiple different types of businesses and across multiple timelines here and we actually found that NPS scores on average are actually going down. So, if you don’t know what NPS is, that’s okay. It’s a measure of customer satisfaction. So, folks five years ago we’re seeing an average of about 34 in terms of their NPS score which isn’t phenomenal but it’s definitely pretty good and the scale is -100 to about 100. It’s a little confusing if you’ve never kind of come across it but you can definitely see even if you haven’t worked with NPS before that today or as of a year ago that NPS score is essentially dropped to almost 10 here.
What’s fascinating about this is if you really take a step back and look at what’s happening with software, it’s one of those things where you’re having this moment where everything is great but no one’s really happy.
If we go a little bit deeper now and a little bit you know taking this back to pricing a little bit, what we’re noticing is that what once worked it’s just no longer working in this environment. Our playbook 5, 10 even 3 years ago was to acquire acquire acquire. All we wanted to do was acquire as many customers as possible. When we asked a bunch of founders and executives what basket of their growth would they put all of their eggs as they say? Meaning if you would you put all of your resources and acquisition, all of your resources and monetization, all of your resources in retention, what we found is that on the whole, everyone said I want more logos. I want to acquire more customers. Of course, that’s pretty intuitive because obviously, you need customers to grow your business but this included startups, this included fortune 500 companies, all types of people in this data. What we’re finding when we go into the actual market data of a business is that acquisition is now table stakes. What I mean by that is if you just want to survive, meaning you just want to keep stagnant, not grow but just survive, you’re only going to focus on acquisition.
We found this by looking at data where we isolated the relative impact of acquisition, monetization and retention meaning we improved each of those levers in a business and we looked at what was the relative impact and what we found is that a 1% improvement in your acquisition meaning if you improve your lead volume by 1% or you improve your conversion rate by about 1%, four or five years ago you were seeing a 3% or just over a 3% boost in your bottom line which isn’t bad. But if we look a little bit closer to today, that’s actually diminished to just over 2%. It’s actually dropped by 1/3. And if we look a little bit deeper into that same 1% improvement for monetization which is improving ARPU (Average Revenue Per User) or your same 1% optimization on retention which is your churn rate, we’re actually seeing that the relative impact on your bottom line is much more significant. So, that same 1% improvement in your monetization comes with almost 13% boost in your revenue and that same 1% on retention comes with almost a 7% boost and that is actually accelerating when we look at closer to today versus four or five years ago. But unfortunately, if you remember the graph above, all we’re doing is we’re focusing on those particular customers that acquisition.
We’re not focusing on how much money they’re bringing us or how long those customers are actually sticking around. What’s interesting about this is when we dug a little bit deeper because we wanted to know why. Why is this happening? People who work in startups and SaaS and software and subscription businesses, they’re not dumb. We’re all intelligent at some level but why aren’t we doing it and why aren’t we realizing this growth potential? What we found is that if you were building a company 5, 10 years ago, it was actually okay to be lazy with customer development. Customer development for those of you don’t know is essentially customer research. If you ask any luminaries in Silicon Valley and you say, Hey! What’s the one thing if you could distill everything down to one piece of advice, more often than not it’s hey, you need to focus on your customer. You need to talk to your customer. You need to go to your customer. But unfortunately, what we found when we talk to a bunch of different founders and executives out there is that none of us are talking to customers. The average number of customer development conversations that we’re having every single month is actually less than 10 for most of us and these are conversations that are anon sales conversation just basically trying to figure out what makes sense in order to grow a particular company or grow or build for a particular customer.
When I show this slide to a lot of product people they like to say, oh! What we don’t do customer development conversations but we do a lot of AB tests. We do a lot of experimentation. Unfortunately, the data suggests we don’t. Nearly half of us are running zero tests per month and this includes things like marketing tests meaning we’re not even testing subject lines which is probably the easiest thing that you can AB test in the world. What’s scary about this is that this is causing us to essentially build the wrong product.
In order to introduce this concept, if you’re introduced a little bit of a model that you probably haven’t seen before but for any MBAs on the call, it’s a classic 2×2 that you may have seen. What we’re going to look at is if you think about value and pricing for any product and this is kind of where we transition into how we actually help on pricing. If you look at any product there’s two axes upon which you can actually evaluate something. The first is what are the attributes of that particular piece of product? So, if we talk about a cup of coffee, we might think well that cup of coffee has five different attributes. It has a temperature. It has color. It has taste and its country of origin. Has a number of different things. What are the one things of those features are one of those attributes that you really really care about? And we can represent that value along this x-axis. And then more commonly, what is the willingness to pay for that cup of coffee and what can we find is the actual dollar amount that people are looking for and we can represent that on the y-axis. So, if we find a particular feature that is really really well-liked as a group and also the willingness to pay is very very high, we have what’s called a differentiable feature. So, this would be in the cup of coffee example, maybe something like the taste. You know if you want something that’s really really high tasting, you really really care about it and you’re willing to pay for it, that’s a differentiable feature.
Now if we have a feature that isn’t really cared about in the aggregate but the people who do care about it are willing to pay for it then you have an add-on. This is something when it comes to a cup of coffee like the country of origin. Or if you’re talking about software, this might be Analytics or a Salesforce Integration where the people who really really care about it are willing to pay something for it.
Now if you have a feature that everyone cares about but they’re not willing to pay for it. You have a core feature and then, in particular, my favorite quadrant which is something that no one cares about and no one’s willing to pay, we have trash land. Now what’s fascinating is we went out to I believe it was about 5,000 different companies and product leaders and we asked them to manually input where they think their last features were on this particular map. What we found is that most product people out there think this is what you’re building. They think this is how they’re building. They think this is exactly what’s going on with their product but then we went out to a million different consumers of software and different products and we asked them about willingness to pay and we also asked them the features that they care about and they don’t care about. What we actually found was that this is actually what we’re building. So, I’ll show this to you in a little bit but this is what your product team thinks they’re building and this is what your customers believe that you’re actually putting out there. This is pretty scary because we’re really really confident in what we’re building and we wouldn’t build it if we didn’t think it was valuable but a lot of us aren’t doing our homework and aren’t talking to our customers. That creates an environment where there’s really really clear winners and really really clear losers. We actually went out and we looked at growth rates from companies that were doing their customer development and those customers that weren’t doing their customer development and we found that you know essentially five-six years ago those companies that we’re doing their customer development and the lighter green here, they were growing at you know around 30% more than those companies that weren’t. But that Delta has gotten significantly higher now that we look at today. And this should really be scary.
To bring this back to kind of pricing and kind of go a little bit more tactical on the pricing side, the reason that this should be so scary is that when you think about your business, it doesn’t matter if you’re a non-profit, a for-profit, if you’re selling you know a retail product, a SaaS software product, a subscription, anything, but if you think about any products that are out there, your whole point of why you’re in business is to drive a customer to a point of conversion. So, to basically drive someone to a point where you say this is where you should buy and then to justify that product or justify that price. But if you have no idea who that customer is, if you haven’t done your customer development, if you haven’t done your customer research, then there’s no way in hell you’re going to be able to understand how you should price that particular product or how you should actually grow that particular business. Unfortunately, too many of us acquire all we can without actually thinking of that customer and unfortunately because of that data up above it just doesn’t work anymore.
So, hopefully, I haven’t made everyone feel too bad and hopefully, it’s just kind of a wake-up call here but we got to fix this. The best way to fix this is I’m going to actually walk through an example that has enough data that I can actually share. That’s something in our line of work it’s tough to find data that people are willing for us to share with others because it’s very very kind of close to their products. To kind of go back into what our history is as a company, we’ve been around for about six years now we’re about 40-45 people in Boston. We launched Price Intelligently as our first product and then about 3 years ago we actually were looking to kind of get a better lift across the market. So, we went in and we actually were talking to a company that was about to IPO that we were helping with their pricing. What we actually discovered that they were calculating their MRR or their Monthly Recurring Revenue incorrectly. For those of you who aren’t familiar with MRR, this is kind of like looking at your bank account and realizing that you’re basically getting the number wrong, reading the number incorrectly. It’s that crucial of a number. So, we got really really excited. We were like this is a product that we can build, we can basically have them plug in their billing system and instantly get access to all of the different numbers that they need and this is one that we can scale because everyone really needs it. So, we started building ProfitWell and it did not look like this. It looked pretty bad in the beginning. If I am if I’m being honest and upfront. But what ended up happening is we started getting our first 10 kinds of beta customers and we got them really excited about it and started building and started getting them buy-in. We had a couple of companies that were really big and using it, some small companies as well. And we were ready to launch. It was kind of fascinating because within a six-week period, we actually noticed that there were about 4 or 5 other competitors that kind of popped up. Some of them you might have heard of, some of them you probably haven’t but what was fascinating about kind of a launch was all of a sudden within 18 months 36 different products started claiming to do exactly what we were trying to do. This made us pretty sad because we thought this was something really really exciting. We had already put our down payments on yachts. I’m just kidding. We didn’t actually put a down payment on a yacht but we were really excited. We thought this was going to the thing and then all of a sudden, we had all these competitors. So, what we ended up doing is we went back to the drawing board and we stopped building. We stopped buying ads. We stop guessing and checking and we started doing our research. If there’s anything that you take away from this presentation, it should be for the love of God talk to your customer. They’re the only people who are going to be able to tell you what their willingness to pay. They’re the only people are going to be able to tell you what they value and they’re the only people are going to be able to give you this data so that you can then filter it as the product person or as the CEO or as whatever you are within your business and then use it properly within your business.
So how do we do that?
Well, it’s a lot to kind of explain in the rest of the time that we have today but it’s something that we can definitely… We have an eBook that we wrote. It’s about 150 pages. It’s really well chaptered out so it goes through this entire process. But what we’ll do is we’ll kind of go through the high-level and some of the tactical pieces that you can take away today in order to kind of get you started. Your process overall is essentially what you’re seeing on this one slide. What we’re going to do is we’re going to set up an experimental design. An experimental design, it’s just a fancy way of saying hey we’re going to go out and we’re going to ask some people some questions in a very very kind of formatted and formulate way, we’re going to take that data and run it through some basic statistical models, you don’t have to be a mathematician to do any of this. A lot of this you could do in Excel. It’s basic math. You can make the math much more complicated if you want to but it’s one of those things where you can keep it straightforward. We’re going to quantify those buyer personas. We’re going to figure out who those buyers are and then we’re going to basically use that data to kind of inform our pricing strategy. The tools that we’re going to use and we’re going to double click into this even further, one is called relative preference analysis. So, in the coffee example, that’s figuring out do they care about you know the temperature? Do they care about the taste? Do they care about the smell? What do they care about? And then the other is the price sensitivity analysis which is the actual willingness to pay data which is ironically the easiest data actually collect. The way that we’re going to collect this data is actually through surveys.
I know what you’re thinking. Surveys? I hate surveys! And you’re probably right. You probably do hate surveys. But the reason most of us hate surveys and the reason that surveys seem to be an ineffective tool is that to be very very frank with you, we are terrible as is industry and just as practitioners at sending surveys. We like to send 45 questions surveys via email to someone where the first question is what’s your email? And my response is always you just sent me this via email and you should basically not waste my time asking me what my email address is. Those 45 questions are typically way too long. They require way too much of our users. What we really want to do is we want to make sure that any survey that we’re sending that’s non-compensated. It needs to be less than 4 minutes long. In addition to that, any survey should really get down to about 30 to 60 seconds if you want to continually send these surveys out. So that’s a max of 5 questions. When you get these down to 5 questions, you can actually send these out almost every you know single 6 weeks. It makes it really really effective to get that data right in time. But in order to only ask five questions, we need to make sure that we’re asking the right type of questions in order to help these particular users.
The two tactics that we really want to use is that relative preference as well as the price sensitivity. Both of these are fairly straightforward. But there’s some other things that I can share within that eBook that’ll help you kind of with some of the other data points that you might be curious about. So, the first tactic we’re going to walk through is this relative preference analysis which is really answering what do people value? Now the traditional way we do this is we go out and we show someone a feature or we show someone value proposition or something and then we ask them hey can you rank this? How important is this on a scale of one to ten? The problem with that type of ranking, unfortunately, is everyone is basically going to say 10, 10, 10, 10, 10. They might not actually say 10 but your averages are all going to be very very similar because if you’re not forcing someone to make a decision, their response is well everything is important. So, what we’re going to do is we’re actually just going to change the way that we ask this particular question. Instead of asking someone to take one feature and basically say rank it on a 1 to 10 scale, we’re going to show them 5 features or 3 features or 4 features or a set of features and we’re going to say out of this list, what is the most important and what is the least important. What happens with this particular analysis is all of a sudden you get results that look like this. Well, I not only have this rank order where I can see the ranking of these particular features but I also have magnitude. So, I can essentially see how important this feature is compared to this feature or this feature up at the top compared to this other feature. That allows us to start making decisions around. We might be looking at a product roadmap for instance or we might be looking at the packaging of our product and find out none of these features are really that much more important than the others and that’s going to influence Hey! We’re going to make sure that we include all the features because we don’t really have something that’s differentiable.
When you start to break this data down on a demographic basis, you start to find these really interesting differences between different respondents. It’s really easy to do this when you collect data on how big they are or what tools they’re using or whatever thing that you want to basically segment this data along. If you make some assumptions about who your buyers are, meaning you might say, hey! This buyer is anyone who’s making more than five million dollars a year or this buyer is someone who you know has three children or lives in Kansas or lives wherever, you can start to basically see and break down who these buyers are and what they care about. For us, with our particular buyer personas when we were first starting we essentially had a start-up person and then we also were going after someone who was not quite the traditional mid-market but was a little bit bigger, was basically making between you know one and you know ten million dollars per year. Just with this one question, kind of basically segmented along these two different personas, we all of sudden started to see, okay! If we’re going to go after startup Steve, he or she is really going to care about price? They’re really going to care about design which is not something we were good at that time and if we go after Meredith here. He or she is going to really care about accuracy and depth. And with that one question, we are now able to on a quantitative basis understand where value was for these particular buyers. When we added willingness to pay to it, we actually were able to start to figure out how much willingness to pay was for different features as well as for the product overall. When you’re measuring willingness to pay, it’s actually quite easy. It really comes down to just basically not being timid in the sense of actually asking your user about their willingness to pay. Now what you don’t want to do is go to someone and say, hey! How much are you willing to pay for this. The reason you don’t is because the human being human beings are Minds. We don’t think about value as a single point. We think about value on a spectrum. So, we know for instance that the water glass that might be on our desk right now is worth less than the computer that we might be watching this on. I know it’s kind of a dramatic example but because we’ve purchased water and because we’ve purchased a computer in the past, we essentially know where that value is relative to the other types of products that we might have purchased that anchoring that happens. So, we can take advantage of this psychological phenomenon by asking questions in ranges. So, if I’m trying to price something, I’m going to ask my customer about full different questions. I’m going to say at what monthly price does ProfitWell become way too expensive that you’d never consider purchasing it? At what point is it starting to get expensive but you’d still consider purchasing it? At what point is it a really good deal? And finally, at what point is it too cheap that you question the quality of it. You can do this for any type of product. It doesn’t have to be a monthly or a subscription product.
You can do this for a feature individually. You can also not ask all of these questions. If you’re having a one-on-one conversation with someone on the phone or something like that, it’s a little awkward to ask all four of these questions but you can ask something like you know what point is it way too expensive that you won’t return my next call? Or at what point is it a really good deal that you sign the contract today? That still gives you some data even if you’re trying to sell into the enterprise. But what’s fascinating is if you do ask all of these questions you get output that looks like this. So, each of those questions corresponds to one of these lines and what point is it way too expensive, getting expensive a good deal and too cheap. You also get what’s called an elasticity curve out of this data which is essentially a measure of if I change my price what’s going to be the relative drop or gain essentially in my number of customers. And instantly with this one type of question, we can start to look into okay what is the willingness to pay for this particular segment? And we can start to break that down across different segments. So, what you’re seeing here is essentially the willingness to pay for a SaaS metrics product across different sized companies. What you’ll notice is on the low end, essentially folks that are willing to pay about 50 bucks a month. And on the high end, we’re seeing folks essentially looking to pay somewhere between kind of 225 and 300 dollars per month.
If you’ve seen enough of this data, you’ll start to think through and see that this actually isn’t that great of data mainly because what’s happening is you don’t really have this nice 20x lift between your smallest customer and your largest customer. When you’re a SaaS or subscription company, expansion revenue is extremely important so you want to make sure that those other companies are able to grow from a small amount to a large amount but here you don’t really have that opportunity assuming that these are going to be our smallest and our largest customers. That’s why looking at this kind of elasticity data is so important because it allows you to kind of figure out where on this particular curve does it make sense to price those particular segments. And then ultimately when you’re looking at those segments against each other, you can start to see where the biggest opportunities are.
So, for ProfitWell we kind of saw this 50 bucks a month and 200 of bucks a month phenomenon and unfortunately, we made some basic assumptions about what our lifetime value would be? What our customer acquisition costs would be? We started to realize that this was going to be a very very tough business because essentially, we were not making any money on our startup customers. We were basically losing a ton of money with our middle price or our larger customers. So, fortunately,we collected some other data and we realized that you know the willingness to pay for something like a retention solution actually had this nice kind of 10 to 20 X lift that I was talking about in the previous slide which started to kind of get our wheels turning around. Okay. So, people aren’t really willing to pay for metrics but they’re willing to pay for this retention solution. We can make some choices and make some decisions around. Do we just shut down the analytics product or do we use that as kind of a freemium offer? And that’s kind of what we chose to do. I can get into freemium when we get into the Q&A here.
But when you’re bringing this all together, this is essentially where you start to earn your paycheck. What I mean by that is it’s extremely important that you use this data in a nice filtered way along with all of your other data that you have. Whether there’s qualitative, quantitative, where you want to go as a market, where you want to go as a team, because that’s going to really really guide what you end up putting on this particular pricing page. So, what I mean by that is you know if all of a sudden you find out that no one cares about a Salesforce integration, then you either need to not have it or if it’s a really important retention feature you should include it across all of your particular customers. Now if you find out that premium support is something that’s really really valued by a certain subset of users, you might either include that in a particular tier or more often than not actually included as an add-on. But this is where the science becomes a little bit of an art because depending on what you can build and depending on who you can acquire, it’s something where it’s really really important to essentially start to translate that data in a very very targeted way into your actual pricing page.
One enormous thing to keep in mind that we didn’t go through too much today is that this is a process. What I mean by that is pricing is never something that can just be one and done. The things that you should focus on at different stages in your business are going to be a bit different but it’s something that every single quarter, every single six months, you should be reevaluating parts of your pricing and making changes. Now that doesn’t mean that you’re changing and raising the actual number on the page every single six months but the packaging within your product should be changing. The value metric that you’re providing meaning how you charge should be changing. But you want to understand those customers and those target customers really really well to make sure that you’re understanding where the value comes from and ultimately taking that value in the right direction.
So that’s why we recommend if you’ve never done this type of research, make sure you start small. Start by asking one feature value question that we showed you and then the four pricing questions. Something that’s really really easy to do. It’s five questions. If you don’t have current customers to ask or prospects to ask, there are some products out there that you can very very cheaply get survey respondents.
Like ask your target market but there’s no excuse to not getting this data. Just takes a little bit of work to get it. And to give you context that analysis that we did and I didn’t have time to show you everything but it was it was a little bit more comprehensive than what you’re seeing, it only took us 12 hours total. It only costs us about $2,100. That was because we needed to pay people to take the surveys because we didn’t have enough people in our base to basically answer and ask these particular questions. But what’s really fascinating about this is that 12 hours and $2,100, we estimated actually saved us about 18 months of time. The reason for that is because we noticed that both of our competitors our main competitors. They ended up actually kind of following us a bit into the free territory and also, we noticed that one of our competitors who are very transparent with their revenue, actually ended up we found that their ARPU, as well as their lifetime value at the time, basically looked exactly like the data that we had pulled. So, it’s one of those things where we didn’t waste eighteen months basically trying to force the product on the market. We essentially went after growth and went after kind of targeting this hub-and-spoke model with the other products that we had. That was a lot a lot of money essentially that we took off the table because we ensured that we weren’t kind of chasing the wrong value model.
Some other quick things before we kind of open it up for Q&A. I would recommend doing this quarterly, this type of research. Because what you’ll end up finding is that this type of information really helps not only your pricing but also helps your product team, your marketing team, your sales team, everyone within your business. You should be making changes even if you’re big, even if you’re small every six to nine months. Again, as I mentioned it’s not necessarily you know raising your prices but you should be making some sort of a change because that’s the only way you’re going to kind of take advantage of the power of pricing. One semi controversial point, you shouldn’t grandfather your pricing.
What I mean by that is grandfathering is essentially when you’re about to raise your prices saying to your existing user base that you’re not going to raise their prices and only raising prices on new customers. The reason for this is that more often than not, we don’t live in particular customer bases where we have enough customers to sustain our growth. Meaning we can acquire enough net new customers. We need to eventually raise customers on the rest of our base. There are plenty of exceptions here but most people they just think grandfathering is the thing to do because it feels good. It does feel good and is great for some businesses but it’s really really bad for a lot of other niche businesses or businesses they’re only serving a particular B2B environment.
The second to last piece is that make sure you’re using a value metric. We didn’t have time to go too deep into it today but a value metric is what you charge for. So, it might be per user, might be per hundred visits, might be per dollar saved, anything like that.
You really want to use one of those as the center of your pricing model because it allows you to bake in expansion revenue into your growth meaning there’s going to be customers that go from using only a little bit of your product to using a lot of it, you want to make sure you capture some of that value.
The final piece here is that freemium, it’s not a pricing model, it’s an acquisition model. So more of us need to start thinking of freemium as kind of a premium eBook rather than you know thinking of it as the savior of our pricing. Freemium should be used when you’re looking to kind of gain leads and nurture leads, it shouldn’t be used to kind of you know hide problems with your pricing.
But overall, just keep in mind growth is changing. You know what works or what once worked, just doesn’t really work anymore. It’s something that if you continue to do what you’re doing, unfortunately, we’re going to end up running into some dire straits particularly when it comes to happening actual growth. As a next step, we’ve gotten very very good at identifying problems and opportunities when it comes to pricing. So if you go to profitwell.com/profitwell-audit, you’ll actually be able to sign up for a free pricing audit where we’ll actually walk through and based on kind of a half hour conversation we’ll be able to give you some advice, we’ll be able to point you in the right direction and we can also give you benchmarks if you’re able to sign up for ProfitWell where you can actually see like where your biggest pricing problems are. So, it might be with expansion revenue, it might be with your annual contracts, those types of things. But since we’re sitting on so much data, we’ve been able to see so many trends and just identify really good patterns. So, feel free to go to profitwell.com/profitwell-audit and you guys can sign up for a free audit.
With that, I think we are now into the questions and I’m sure there’s plenty of different questions here in order to make sure that we can help you with any niche type of things that you want to talk about.
Janani: Thank you for that Patrick. Just a call out to all the folks of the webinar to start sending your questions. There are a bunch of them already but if you guys have any questions now would be a good time to sort of type them out and Patrick will be able to take them one by one.
So, Patrick, I think one of the first questions is although the three pillars that you spoke about, acquisition, monetization and retention, that was a great slide! Do you want to just talk a little about, I remember the workshop as well you were speaking about percentages increased in each of those pillars and how that sort of effects the bottom line, so do you want to talk a little about monetization and how it affects the bottom line?
Patrick: Yeah. Definitely! Sorry, my headphones decided to just stop working. So, I believe I got your question or if I could clarify its how does monetization impact the bottom line, is that your question?
Janani: Right. You were talking about percentage increases in each of those pillars. So maybe a little bit of explanation on that slide would be interesting!
Patrick: Yeah. Absolutely! So, let me walk back to it just so I can understand or talk through the actual data. So, what you’re seeing here or very shortly when I pull up this data in a second is that when you think about your business, the three main pillars, especially a subscription business are the customers that you can acquire, how much you’re going to charge those customers and then how long those customers are going to stick around. So, when we look at you know actually kind of isolating the impact of these different pieces, we can actually see as I kind of it was explaining previously that monetization has you know 2 to 4X the impact depending on the other levers that you’re looking at over the others out there. The reason for this and just kind of explain it intuitive fashion is that if you acquire 100 customers at a dollar versus acquiring 100 customers at $2, the impact on your business is extraordinary but your impact on acquisition might not be as extraordinary. Meaning you haven’t really improved your acquisition at all in that particular scenario but you’ve improved your pricing and it had much much bigger gain than increasing the number of customers that you might have out there. So, we have some other data that I can share kind of afterward here around. The impact essentially of growth as well where those companies that have pricing functions and actually are continually updating their pricing in some way are actually outpacing you know those folks who haven’t changed their pricing at all by a scale of or a factor sometimes of 2 and definitely more than 30% growth compared to the others.
Janani: Thanks for that Patrick. So, I think I’m just going to jump onto the next question which is on freemium. So, the question is about there are pros and cons to the freemium preach. I think the questions about somebody who’s done this really well. Like for example, Dropbox has done a really great job on freemium. So, this is from an early stage startup. Any pointers on how they can you know sort of look at freemium and anything that you would like them to sort of warn them or the pitfalls of premium and how they can go about pricing?
Patrick: Yeah. Absolutely. It kind of goes off of what I was saying that you know remember freemium is an acquisition model, it’s not a revenue model. So, with that in mind, it’s one of those things where I think… Dropbox obviously did really really well but I don’t like talking about Dropbox or like Apple or something like that because you know they had a lot of things going for them right. There’s a lot of lessons there. But there’s a couple of other companies that I would point out.
One of them is Wistia, so it’s video hosting and analytics. It’s a SaaS company out of Boston here as well and they’re I think are a really really good example of free… And HubSpot is also another example I think that did really really well with this and a little bit of a different way but what you’ll notice is that both of these companies, they were around for a little while longer than before they actually launched their free plan. That’s something that’s really really important where they understood their unit economics, they understood why someone wanted to upgrade, they understood why someone bought before they opened up the top of the funnel. So, free should be used to basically open up the top of the funnel. The other reason that you might use free is if you have someone who has very very high leverage growth opportunities within your market.
So, if you have like a very very good person on growth and I don’t mean like someone who’s okay or good, I mean someone who’s amazing and you know top 1% of growth people out there, then you might want to go free right away because you can you know do a land grab even though you might be waiting to basically get that data or get that understanding. To go a little bit deeper here, there are two types of free. One free is called a faux free trial and that’s basically a product where you give away let’s say 100 visits per month but your target customer will use all 100 of those visits within 14 to 21 days and have to convert essentially to a paid plan to get more visits or whatever you know limit that you’re putting on the product. The other is something that’s kind of free forever which is like ProfitWell where you can get constant value out of ProfitWell but what ends up happening is you can pay for other products even though you can use the product free forever and you know basically not pay for it at all.
Janani: That’s a great answer and I think this was really helpful. The next questions from somebody called Sanjay, the question is I created a new product in the past in a new market and I had some early mover advantage, what should I do if the old price becomes extremely high now due to saturated markets? If I lower the price, would that not affect the brand value?
Patrick: Could you repeat that one more time? I think I heard all of it but I was taking some notes. So, I want to make sure I have it all.
Janani: Sure. So, the question is from Sanjay. The question says, I created a new product in the past in a new market and I had some early mover advantage. What should I do now if that old price becomes extremely high due to saturated markets? If I lower the price, would that not affect brand value?
Patrick: Yeah. That’s a great question. If you have kind of a saturated market, the first thing is to understand that a lot of the markets we think are saturated but they’re really not as much. I say that because keep in mind, you live your competitors. Right. Ike, you’re not necessarily but you live your markets. You know who your competitors are. You know kind of what’s happening and so the first thing I would say is being really honest with yourself if you’re truly are in a saturated market, meaning your customers keep bringing up your competitors and that they’re cheaper than you and these different things. That’s what I would keep in mind first.
So, in our market, because we’re loud enough and our competitors are loud enough, there’s still people who have probably never heard of us that have heard of our competitors but there’s enough of them, there’s not market saturation, but it’s enough to take into account your competitors. Now, I would say that overall, given that, when you’re looking at a competitor market that’s actually oversaturated, you have two options. One, you can join them, meaning you can basically start to cost cut and basically start to lower your price and you can kind of take it to the extreme.
Let’s say, you know the market because you have this early mover advantage. So, you can build or segment certain features and then based on those features undercut the market by giving away more for the same price or more for cheaper. That typically is a tough market to be in, if it’s truly oversaturated. The other option is actually ironically raise your price and what I mean by that is actually raising your price so that, one, you go to a different customer style because in your market even if it’s let’s say the CRM market which you know Freshsales definitely has some experience in and it’s one of those markets that’s super tough. You know Freshsales is pretty competitive but what they’ve done is they’ve actually created a really good brand around the product. So, you can start to upmarket your brand and even actually raise the price on your actual product with that brand and you know might be the hey! We’re the Premium X, whatever you actually are. So, if you want to use this product, that’s fine. It’s cheaper but it doesn’t have the premium X or the premium Y or these different things. Honestly, that’s something that we did with retain.
Our pricing model, we do have some other competitors that are you know lifestyle businesses and those lifestyle businesses they’ve essentially decided they don’t need a ton of ARPU, they don’t need a ton of money to survive. So, we went more premium. We’re a managed service where you know we have our own algorithms, all this other fun stuff whereas our competitors are you know basically chasing the bottom of the market which you know we’re totally fine with. So, long story short, I would go premium or I would go and join them and there are some different things you’ll have to do depending on you know the choice that’s made. It’s a great question though.
Janani: I think I like the next questions as well. It’s from Laurel. So, Laurel asks any advice on taking out the trash besides customer service and other more informal customer intel. It’s gone on to explain we struggle with saying no when asked to build feature X and laser focus on highest value features identifying what is high value related to all the noise coming in. Do you want me to read that again? I think it’s a pretty long question.
Patrick: No. I think I got it. Yeah, that’s a great question I think you got to learn to say no. It sucks. I’m a people-pleaser. I want everyone to be happy. I want every customer who has an objection or complains about something I want to fix it immediately but I think that you need to get comfortable. It’s not necessarily saying no. I think it’s saying, hey! That’s going to come. It might be awhile and here’s why or hey we’re more than willing to pre-prioritize this but we’re going to have to charge you more or something like that. That’s a good way to kind of change from no to under what circumstances will we do this. Because I’m sure if you have a product person who is building a lot of trash you know unfortunately and you tell them, Hey! Like we should build this or this or this because so-and-so is going to pay us for it. That starts guiding them and also clarifying with the users that they’re actually valuing it. You can do this in a couple of ways.
You can make the price very very high if it’s something that you don’t think you should be building in general. So, basically like, Hey! We shouldn’t be building this at all but if they’re going to pay us for it, we will. Because that means there’s a market for it. Or you can do, it’s one of my favorite little tests, if it’s something that is small and it’s just annoying on your roadmap but you’re going to get to it eventually, you might say okay, we’ll build this for an extra 10 dollars per month and 10 dollars seems so small but it’s just testing them do they really need this feature are they just kind of complaining about something.
So, those are a couple of tactics you can use. I would say the other thing that you really need to do is find a product person who has a framework to think about what they build. Too many product people, they build kind of in chaos and they kind of build in a very reactionary manner where essentially what they’re doing is they’re like, oh yeah! I read this one support ticket so we need to build this. Right? You need to find someone who has a framework where they look at, okay! Yep, we have that one support ticket. I feel like that’s a really important thing. Let me go do a couple more conversations and validate this and then if we get enough validation we’ll build it. I think too many of us we shoot from the hip as they say and I think that’s costing us a lot of time and a lot of money because we end up building too many things. We don’t we don’t kind of force our customers as well as our product teams to kind of validate or confirm that we should be building that.
Janani: Thanks for that Patrick. We do have time for a couple of more questions. So, can I just jump on to the next one?
Patrick: Yeah. Keep them coming.
Janani: Okay. So, the next one’s from Ross Ravels. He asked I see the ProfitWell works with payment providers that accept online payments. What do you recommend for a smaller company serving the enterprise market that has to build via traditional email invoices? Is there a product that could help manage invoices and provide better analytics to inform pricing?
Patrick: Yeah. It’s a great question. So, we did write a pretty long post where we reviewed I think it was 21 different billing and subscription management systems. Based on what you said, I mean my particular favorite if you’re just starting out and even if you’re bigger actually, I really like Chargebee. And the reason I like Chargebee is because it’s super affordable and it also has like mostly everything you need or it gives integrations to mostly everything you need. You know when you get bigger or much bigger you might need to go to Ozora or you know some of those folks and you might be tempted to just use Stripe or Braintree, if you’re small enough. The problem is that while Stripe and Braintree are great, you have to build those things. You have to build on top of them whereas Chargebee works really well out of the box for both credit card charges as well as invoicing. That’s what I would essentially kind of do on that front. Of course, there’s a bunch of other options so I can make sure that they send over the link afterward.
Janani: The next question is from Vince Sharma. I think I’m sure this is a question that you get often Patrick. So, he says for a start-up that’s pioneering a solution, how would you structure your pricing tiers since the target users don’t really know the benefits or the value of the solution?
Patrick: Say that one more time. Just want to make sure I follow that.
Janani: Right. For a startup that is pioneering a solution, how would you structure your pricing tiers since the target users don’t really know the benefits or the value of the solution? So, I think something completely new in the market and he wants to know how can you go about pricing it?
Patrick: Yeah. Totally! This is a great question because you still have to do your homework. A lot of people are like well I’m doing something new, I don’t need to you know do my homework and in actuality, that’s like the most important time to do your homework because there are products that you will try to build. It’s so far out there that people just aren’t willing to change in order to use that product or they’re not going to value the product at a high enough rate for you to essentially stay in business. So, my recommendation is to do your homework, maybe they will actually see the value out of the gate or if they’re not seeing the value but it’s close enough that you can just get them in the product, I would optimize around some sort of a free trial or some sort of kind of free plan if possible in order to get them using the product then realize, oh wait! We definitely should be paying for this. You know here’s X amount of dollars to do XYZ essentially.
Janani: Thanks for that. I think we have time for one last question Patrick before we sort of wind it up. So, the next question is from Sarvana Kumar. He asks you, how do you get users to survey if you are entering a new market. You mentioned asking your target market. Will it be effective?
Patrick: Yeah. That’s a great question. So, we typically recommend when you’re doing this more formally, there’s typically three different groups that you’re going to want to ask. It’s going to be your current customers, your prospects and then people who have never heard of you. If you’re really really early and you don’t have customers or don’t have a lot of prospects, there are countless ways that you can find these people to ask. You can go to Facebook groups. You can go to Google Groups. You can go to meetups. You can run ads. You can go to ask your target market. You can go to all of these different places to actually find users. So, I wouldn’t use that as a reason you know to hold you up. Now you might not get enough respondents. You might only get 12 or 24 you know not enough to get 100 or 200, but you know the limits of your data then. So, what I mean by that is if you only get 12 or 15 responses, it’s all qualitative. You know you don’t have anything that’s going to be statistically significant but you’ve at least collected some data that you can some decisions on. But I would recommend as for target market going to any of the different sources that you can find people on. If you think about it, if you can’t find these people to have survey questions to, it might be something where you might not have enough of a market or you might not be able to acquire these customers in as efficient of enough way in order to basically build that business.
Janani: Thank you so much for that Patrick. I think with that question, we will wrap up the webinar. As promised, all of you will get a recording of the webinar by next week. If you have any questions. The deck had Patrick’s details. You can also reach us at email@example.com anything that you want to add there Patrick?
Patrick: No. If you have any other questions feel free to ping me a firstname.lastname@example.org. In order to find me if you got a Price Intelligently or ProfitWell but we’ll share some resources with the Freshsales team so that they can send stuff out and yeah, we’ll rock from there.
Janani: Absolutely! I’d also like to let you guys know that we’re hosting another webinar on Feb 13th. It’s by Aaron Ross, the author of Predictable Revenue so we look forward to seeing all of you there again. Like I said, we will be sharing a recording of this webinar so feel free to share it, share with your teams and we’d be happy to take any questions and forward them to Patrick as well. See you guys. Thank you once again. Have a great day. We look forward to seeing you soon.
Patrick: Awesome. Thanks, everyone!
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