Pricing and Monetization Strategy Lessons from 18,377 SaaS Companies

Patrick Campbell, Founder & CEO @ ProfitWell

Startup Grad School Stage
Ascent Conference 2020

[00:00:03] What’s up, everybody, Patrick here from Profitwell, and we are going to be getting down and dirty into pricing today, which you might not think is that interesting of a topic. But I’m going to convince you that it is interesting just for personal background. My background’s in econometrics and math, started my career working in U.S. intelligence and worked at Google, basically doing fun things with data to either hunt bad guys and gals when I was working at NSA or hunting money, essentially when I was at Google and then about eight years ago started a company called Profar. Well, what we do in a second, but we’ve been basically working on different areas of revenue operations and one of those is monetization and pricing. And so if I share my screen here, just so you can get rid of my ugly mug here and start seeing these beautiful slides, what we’re going to be doing today and we only have twenty five minutes to do it, so it’s going to be a little bit of a nice, fast and furious. But don’t worry, you’re going to get the slides recording all that kind of fun stuff from the conference organizers. But we’re going to be focusing in on how can we give you a framework for understanding and optimizing your monetization.

[00:01:09] And the reason I want to set this up this way is that a lot of you think that you’re optimization of your monetization involves the actual price point. And what we’re going to learn in a second is that monetization, especially in the world of P2P, SAS, which most of you are a part of, is very, very different and much, much deeper than just that particular number on the page, especially given the constraints that we’re seeing in the market. So with that, let’s jump in. So already explained who I am. I’ll give me just a modicum of credibility. But on top of that, what we do a profile well, as I mentioned is we have a bunch of revenue operations, products for subscription businesses. Our core product is something called profitable metrics where you can plug in your billing system or Curley’s or a straight Braintree charge or five charge whenever you’re using and basically get free access to all of your subscription financial metrics, LTV churn cohort’s. We enrich all the data, a whole bunch of things, and we give it away for free, which we can talk about freemium in a bit. And then we make money through a couple of different products that optimize retention, pricing and some other pieces. But the reason I’m giving you this context is because that was the best sales pitch ever. It was actually terrible. But right now we have about twenty thousand different subscription and SaaS companies using Profar. Well, and so we’re sitting on so much data and we’ve been able to study so much data to understand what’s working in the market, what’s not working in the market. And ultimately, we can pass that on to you in the form of content. And that’s where a lot of the data that you’re about to see is actually coming from. So if we could jump into pricing here, let’s set the stage of what we’re talking about with monetization already hinted that it’s much more than that number on the page. Let’s go a little bit deeper here. And what I really want you to question is, is what are you trying to do with pricing? And if we go to the 30000 foot view, you as a business and it doesn’t matter who you serve as a matter what type of business you are, retail products, product, et cetera, you have treated and created some sort of value. And because we don’t trade goats for wheat anymore, we have a modern economy, if you will. You were then saying that this amount of value that you’ve created is worth this much. And the mental model I want you to use for the highest level, essentially, of what you’re trying to do with monetization is that you’re pricing in your monetization is essentially the exchange rate on the value that you’re creating. Now, if I go a little bit deeper into this framework, when I start to realize is that everything that you’re doing from your sales, you’re marketing your customer success, your product team, your finance team, your ops team, everything you’re doing is used to drive someone to a point of conversion or to justify the product or justify the price that you’re offering them. And when you start to think about it in this manner, you start to realize that there are a lot of levers that you can pull to actually influence that exchange rate that comes to your pricing strategy. You can adjust who you sell to. So essentially structuring it in a manner that you can actually go up market, down market change the vertical that you’re focused on. Of course, you can change the product up of the most underutilized pieces of monetization from B2B. SAS is not enough of you are using add on strategies and then of course you can influence the price. Not only that’s going to influence your conversion rate, but it’s also going to change the perception. Are you a premium product in the market? Are you a discount product in the market and so on and so forth. Now going a little bit deeper here. The one big number or the numbers that I want you to focus on when you’re thinking about are you doing monetization properly or not, is your revenue per customer. You might measure this from ARPA, you might measure it as AKB, average revenue per account. There’s a whole host of ways to measure this. But really what you want is to make sure that your revenue per customer for that first 30 days of a cohort is constantly going up, meaning you’re acquiring customers have better monetization rate. And then also over time, those customers, their revenue is basically increasing. I used to expansion you just getting better, your pricing, raising prices, et cetera. Now, there’s a lot of things that you can do to influence this number. And ultimately, your monetization is not an exhaustive list, but just to get your mind working a little bit. You obviously can adjust your value metric, we’re going to talk about that a little bit, you can increase your prices, you got the add on strategy already mentioned and there’s hard things or things that weren’t as hard back in the day but are actually breathing really hard now, things like changing your customer proportion and going up market. It’s harder to do that today than it was 10, 15 years ago. Feature differentiation used to be the thin name of the game, but that’s also harder to do is we’re going to talk about in a second. But the big thing here is that ultimately this revenue per customer is the game that most of you aren’t playing. And it’s because the average amount of time it takes someone to update their pricing and not just raise their price or change the number, but to do anything related to their pricing is about three years. And it turns into these giant projects that all of a sudden just aren’t that useful once you’re done with them. And then still, Joe, in accounting or Sallyanne sales, still going to hold it up from actually being implemented. And so we’re going to talk about how we can actually unblock these particular pieces and take advantage of monetizations power. Now, why is this so important right now? And this is where I scare you. I’m already a scary person. I’m just going to increase the scariness even further. But the really the big thing that this comes down to is that we as businesses, particularly in the world of and subscriptions, we’ve lost a lot of our power. And what I mean by that is if any of you have been in the game for a while, back in the early 2000s, the 90s, even the late to late twenty twenty two thousand twenty tens, if you will, we were building businesses where the biggest technological barriers in these early days was actually the building of the technology. We had server racks, we had colocation. We didn’t have all these DEVE tools. And also we were living in an environment where, as those costs came down with the birth of the cloud, we all of a sudden were running into a situation where these new marketing channels were opening up almost every single quarter. So all of a sudden, we had Penny Google AdWords, we had remarketing all of these different things up until about twenty, fifteen or all of a sudden that gravy train started to slow at the last major marketing channel, opening up being Snapchat and Tip-Top may be useful, but probably not for B2B for a while. And so as a result of this market shift, we now have more competitors than ever, and customer acquisition cost is up about 70 percent, both in B2B and indice, meaning that customer that costs you one hundred dollars six, seven years ago there now cost you somewhere around one hundred seventy dollars also because there’s so much stuff out there and we got really, really good at shipping code. Product value has actually gone down about 60 to 80 percent, meaning that Salesforce integration that used to be able to sell us a thousand dollars a month. Add on to your core product. It’s lost about 70 to 80 percent of its value. And to kind of kick you in the face the last bit here, our customers are so ungrateful. I mean, they’re not ungrateful on an individual basis, but we’ve seen NPS score as a measure of customer satisfaction, basically go down almost 60 to 70 percent. And I don’t think anyone’s going to stand up and say that products were worse five, six years ago than they are today. It’s just that software has lost its magic, used to be able to put a database with a login screen and you can make a million dollars. Now, if it doesn’t have good design, good support, and you throw in the kitchen sink, people aren’t really, really that excited about it. Obviously gross generalizations, but hopefully you get the point. And because of this and because of all this competition, we got really, really bad at basically determining value. We used to be told and we still are told by the luminaries of Silicon Valley, like if they had to boil down all of their advice to one thing, it’s, hey, you should focus on the customer. And then we love to respond with things like, well, Steve Jobs and talk to his customers like I shouldn’t either. Right. In this kind of denies the fact that Apple spends in the top five in market research every single year, but also the fact that we’re in a very, very different market than Steve Jobs market, although those markets still do exist, but most of us are in them. And the result of this is a lot of us are building the wrong product and I’m going to kill two birds with one stone here, because I’m not only going to support this point with some data, but I’m going to also introduce a model for thinking about your packaging and your positioning. And it’s a nice little classic, two by two. And if we talk about any particular product, it doesn’t matter if it’s a cup of coffee and a price piece of software, anything in between. You have two main axes of value. The first access to value is the relative value of attributes or the features or the positioning of that product. So for a cup of coffee, it could be taste the country of origin, the temperature, a whole host of things. The second axis of value is the actual willingness to pay. So if I have any product and I go out into a market that I’m trying to target or a segment that I’m trying to acquire more of, what I can do is using some methodologies that we’ve developed. Those that are open source is a bunch of ways to get this data. I can figure out for that cup of coffee that when push comes to shove compared to the other features, the most important feature is something like taste. I can then find out that relative to the other features, people are pretty indifferent about temperature and country of origin is the least important relative to the other features. It doesn’t mean that no one cares about it, but in this particular segment it’s the least valued compared to the others. If I throw it into a different segment or I ask for a. Instead of features, maybe country of origin ends up being the most important, but at least in our generic example here, it is the least. Now, when I cross-reference that with the willingness to pay data, I can find out that those who care about taxes, they’re number one, they’re willing to pay about 30 percent more. Those who care about temperature, there’s very few of you, but your willingness to pay is about 20 percent less. And then the hipsters in the audience here who basically care about country of origin as they’re number one, they’re willing to pay about 40 percent more than the mental model here, is that if I find a feature or a value proper piece of functionality, that among a group is high value relative to the other features and those who care about it as they’re no one are willing to pay more. That’s a differentiable feature. If I find something that’s low value relative to the other features but high willingness to pay for the group that cares about it. That’s an atom core features that are highly valued, but people aren’t willing to pay for them. And then my personal favorite is trash. Now you can use this even if you don’t collect the data as a good way to kind of think through your features and think through some packaging experiments. But originally, the reason I was presenting this was mainly because I wanted to support that point that were really, really bad at understanding value, which Daryn also supports why you should do something like this and actually collect some data. But what we ended up doing is we went to about thirteen hundred product leaders and we made sure that they understood this. We asked them those gnarly set questions like which of these is not in terms of these four quadrants? And we actually asked them for the last new features to just plot where they think they are on these four boxes. And this is what they said for just under five thousand features. Now, it’s really fascinating about this is we then went out to about one point two million different customers and user profiles, price intelligently software actually collected data on where the value was within these four boxes. And this is what their customer said. So we think we’re building things that are actually highly valuable and pushing things forward. But in reality, we’re building things that are very, very differentiated. And this is a very common thing that’s happened because in the early 2000s and 2010s, there just wasn’t as much stuff out there. So the roadmaps became really, really obvious. But now we’re getting good at building code and building features and all of a sudden we have to be a lot more choosy with what we’re building because we need to pick what’s actually driving value. And you’re still going to have to build core. You’re still going to have to build trash because it’s very relative. Obviously, a fleet management app, if you don’t have a mobile, mobile, mobile product, all of a sudden they’re going to put that in trash because it’s just so commodity’s within those products. But it is one of those things that we are getting more and more disconnected with our customers. And we probably always have been, but it matters more than ever. And so now that it made you feel terrible and you probably have already exited the Xoom, let’s jump into how do we actually fix this now? I’m not going to be able to go to do this is haliday of monetization and pricing. But I’m going to try to balance this with trying to help you focus on some really, really big pieces. But then also give me some really tactical pieces in case you want to do something substantial or you want to do some quick things to actually help. The first really, really big thing in terms of phase one here with your pricing. And it doesn’t matter if you’re Jonny Jean startup or your big old enterprise company is the first thing you have to get into place is your value metric. Some folks call this a pricing metric, but it’s basically how you charge. So this is Entercom. I’m sure all of you are familiar with Entercom. They charge based on the number of people that go through the messaging product. So the number of end users that go through it, one of their competitors, Dreft, they charge based on a per user basis, very traditional kind of sales enablement. And the reason I wanted to show this is, one, they’re using different value metrics, but they’re both kind of focused on similar markets or similar solutions, I should say. But they are focused on different personas. Dreft has gone after more of the revenue organization sales and a little bit of marketing, whereas Entercom has gone after sales, marketing, product support and a whole gambit. So they need a little bit more of a generalized value metric. Now, why are value metrics so important? Well, it harkens back to your econ professor or teacher in college or high school that basically talked to you about the demand curve and making sure the different points on the demand curve at different prices in order to get as much revenue as possible with a value metric, you can seemingly get infinite different points upon that line. And we see this in the growth. Those individuals were utilizing value metrics. Their growth is typically almost double of those who are using pure feature differentiation. So you’re kind of seeing the extremes in the options that people have with pricing. Now, what’s really interesting is that the reason that this is taking place is that one churn is amazingly good. What you’re looking at here is gross revenue churn on a monthly basis and essentially on the far right here, you’re looking at the value metric pricing models and the far left. You’re looking at future differentiated pricing models and basically those with value metrics are essentially half. And the reason this is taking place is you’re more apt to get downgrades, but you’re not necessarily going to get churn unless someone’s going on a business or. Just straight up, really don’t want to use your product anymore, and I’ll take downgrades, overturn any day of the week. Now, the other piece of this is expansion. Revenue was built directly into how you make money. And so when we look at the same categories here, we can see those we’re using value metrics essentially are at double the expansion revenue as those who are using feature differentiation because it’s not a sales commitment. It’s basically like, hey, you’re using more or you’re getting more value from the product. We’re just going to upgrade you. And they can choose to then use less or they can choose to accept that because they’re getting value in the actual product. Now, we’re not going to be able to go deep into, like, how to put your value metric together. But I have a lot of resources if you want to email me on how to do that. But if you get everything else wrong, but you get your value metric right, you tend to be OK when it comes to pricing.

[00:15:50] Now, the other big thing here in terms of foundation is determining your market and more specifically the segments that you’re targeting. Now, this is a little bit of a broad point. You’ve all heard a buyer personas, but remember, you’re driving people to a point of conversion and justifying the product or the price. So if you have no idea who the heck these people are, it’s really, really hard to set up an efficient pricing model, let alone an efficient flywheel within your business. Now, you’ve got to go beyond what Granpa, HubSpot and Grandma have been talking about for a decade now. And you actually have to quantify or get deeper into what is the actual unit economics of these segments, what’s the willingness to pay? What channels are they coming from? What’s their NPS? Because then you have to make proper decisions when we started coming out with our free product. Basically, this is what we thought our personas looked like. And even when we just did this exercise, these quantified buyer personas acted as a constitution internally so we could essentially debate different features or different directions based on who we were targeting. Now, what’s interesting about this is that you then want to take it a step further and actually quantify these folks by doing customer development, not only because that’s going to help you validate what pricing that you should put in the market, but also it’s going to help validate your business, because what we found out is that this is actually what our personas look like when we collected some data. And as you can see, we didn’t really have a business. And this is what led us to either kill the product, go up market or go freemium. And we eventually chose the freemium path. I guarantee you there is a segment or a persona or something that you are targeting right now that’s on some vision document or it’s in a founder’s head somewhere that is terrible for your business. It’s just the very nature of us being humans. We want things and we want to will them into existence, especially as operators and entrepreneurs. But it’s one of those things that you have to validate them out. And I’ve the story of companies that have been priced intelligent customers are still are priced intelligently customers who basically spent 30 million, 50 million, one hundred million dollars acquiring the wrong type of customer because they didn’t do some basic unit economics analysis. So it’s really, really crucial determine those segments.

[00:17:54] Now, picking up the pace a little bit here, only got a few minutes left. I want to give you some really big tactical pieces in the area of covid in the context of Cauvin, I’m sure it’s been mentioned a thousand times over the past two days here. But the big thing here is that the recovery is going to be fragmented. And so price localization is one of those things that is really, really successful for businesses right now and also successful outside of a global pandemic. Some of the best companies we saw right after covid started heading into the Western world was basically they started targeting places like Sweden. They started targeting places that had lockdown’s they got ready to basically have a more fragmented approach to their growth because they knew the recovery was going to be very, very fragmented. And that’s basically what happen now outside of covid. This is obviously a really important point is to make sure your pricing is different in different regions. What you’re looking at here is on the far left. This is a controls. There’s no localization. And you’re looking at our growth for those folks. I’ve got to go back here for those folks who are basically doing cosmetic localization. These are the folks who just the currency symbol is updated. And then here these folks are doing region based localization, meaning the price is different in different regions.

[00:19:05] So with cosmetic localization, even just updating the currency symbol, because people like buying in the currency that they trust, you can actually boost your overall revenue per customer. Now, if you then go a step further and have a different effective price in different regions, you can gain a little bit more. And what we’re doing is we’re taking advantage of the fact that everyone buys a little bit differently. Everyone has different willingness to pay. All markets are different in terms of density of competitors. And this graph here, what you’re looking at is about one point five million different data points. That’s basically pointing out that if you were going to price something in the Western Europe or the Nordics, it should probably be about 20 to 30 percent higher price than in the United States. Now, this controls for that. It controls for exchange rates. But the one thing that I’ll say is that this does differ pretty dramatically depending on the industry. So you want to do some homework, but if you want to kind of shoot from the hip, you can use this data to kind of set up your pricing initially, localize your pricing. It’s a pretty big thing now. Boring, but probably one of the most important points of this entire presentation, and that is establishing a pricing committee. I have seen time and time again the distance between basically implementing and optimizing pricing and basically not doing anything. This is the difference now. A committee, you should be working on a quarterly basis, meaning you should adjust something about your pricing every quarter again, not raise your price every quarter, change the number, but something about your monetization. We recommend a quarterly sprint process. The committee meets in the first week, basically a marketing manager or product manager for 20 percent of his or her job goes off, does the research, comes back committee debates maybe to come back again makes the decision. And based on the gravity of the change, basically implements those changes. Now, who should be on the committee? Product, sales, marketing and corporate finance? If you are a customer success or product marketing, a separate parts of the organization, they should be involved to companies like HubSpot and like a United Nations set up, which is a whole host of different people within that room. But the important point is that the decision maker and to have a decision maker should probably be in product or marketing sales are normally not perfectly aligned to making changes. Corporate finance really good and excel engineering, but not necessarily good at the inputs. Basically, whoever is closer to the customer and customer research, sometimes that ends up being caught dead. When you get a large enough finance organization, they should be the main decision maker and decision makers and deadlines are the biggest things when it comes to pricing changes. Make a decision, put it out there. You can always hedge your risks. You can always hedge with more data. But the biggest thing is that you get some momentum. So this is why I recommend starting small with something like localization or even changing up your discounting strategy rather than jumping into big things if you have a highly political organization or one that you think is going to be problematic now. Rapid fire here. A couple of big things. I got data to back all of this up, but I’m not going to necessarily share the data with you here just for the sake of time. But if you want to just ask me, design support brand, they now all correlate with higher willingness to pay. They didn’t ten years ago. But now and even in B2B, these things, people who have a higher affinity for these three things, meaning you have a higher quality design, support a brand in their eyes, they’re willing to pay much more. Another big thing, your value props, your positioning. You ought to be evaluating these, even if it’s just the leaders emails like every quarter, if not every month, people are shifting really quickly and it does influence both willingness to pay and retention. And then another big thing, just because this has come up quite a bit, especially in B2B environments, your customer success is not there to help. It’s there to help with expansion revenue. It only has a very, very small correlation with lower churn, the existence of customer success. But it heavily influences expansion revenue, meaning those who have customer success. Typically, there’s much, much more expansion revenue versus those who don’t have customer success. And so just make sure that your return is being sold by product support, these types of things, rather than focusing in on customer success being that Band-Aid, because they should be there as a revenue generating part of your organization. All right. A lot of information, not a lot of time. So that’s always a nice relationship there. But I hope you all got some value. I know we don’t have time or we’re not doing Q&A here, but I am super, super accessible. Just email me a patrica profile dot com. We wrote a book on this. We wrote a book on freemium, a bunch of different stuff that we’re happy to send you. And then we publish a lot of this data. And so if you have a pricing question, if you have something that you want to kind of start your journey on, don’t be afraid to email us. We basically are here to kind of help you both evangelize and also educate you on the world of pricing. If you have a question on something, we probably written something on it. And then my sales team would be really mad at me if I didn’t tell you that we also do free pricing audits. You could just email me for these, basically because we’re sitting on so much data when we’re able to do is essentially compare you to a profile of different types of companies from a data perspective. So you can actually see where your churn is relative to other companies where you are. Puiu, revenue per customer growth is relative to other companies and we do this. Don’t be afraid. If you’re a Johnny or Jane, start up and you’re worried about getting a sales pitch. We do do this as a first step in the sales process in order to evaluate if we can even help you. But it is one of those things where we have a certain percentage of these that we do. There’s plenty of them for people we know are probably never going to pay us just because we know the car is going to come back to us eventually. And so feel free to have me have a Patrica profile. Dot, I’m more than happy to get you some of that benchmarking data. But with that, for once in my life, I am actually early on a time I was trying to get perfectly to twenty five minutes, but I hope you all have a good rest of the conference, good rest of the week and ultimately a good rest of the year. It’s been a fun, bumpy one. But just remember, this kind of stuff matters. Your retention matters. Everything matters now. And if there’s one consolation, covid and twenty twenty have made us all be better disciplined operators. And so I’m on this journey with you as well. So be well and let me know if I can help.

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