You could have phenomenal product marketing and you can have phenomenal structure around your pricing and it might make a whole lot of sense to you financially. But if you have a persona that’s coming to your page and all of a sudden he or she just doesn’t understand it, that’s a lost opportunity.
Patrick Campbell is THE guy when it comes to SaaS Pricing and Monetisation. As CEO of Price Intelligently and Profitwell Patrick looks at pricing as a science and using software and data, helps SaaS companies such as Atlassian and Wistia align product to price and the right customer.
We’ve not talked about pricing before on The SaaS Revolution show podcast, so I invited Patrick to be a guest on the show to help you and me better understand why SaaS Monetisation really matters. You can listen to the full podcast episode below and read the transcript or subscribe via iTunes and never miss an episode.
Alex Theuma: Patrick, before we get into this, your the CEO of two companies! Isn’t that a little greedy?
Patrick Campbell: It’s funny as actually technically it’s one company, but it’s two products. But I think referring to it as two companies is definitely you get the feeling because what we’ve been able to do is basically over the past 3 ½ years, we’ve been building for the same type of customer. Under one offering. The Price Intelligently side where it’s a software that helps folks with their pricing, has really been funding the business. And then Profitwell, which is a new product we launched about a year ago, is kind of our future in terms of getting more scalability.
I don’t think it’s quite greedy necessarily but it’s definitely something where we’ve been kind of building for the same customer and we’ll see what happens in the future. We’ll have these parallel paths until we merge them or decide what to do next.
AT: Okay. Good stuff. Well, let’s get a little bit of an intro into Price Intelligently and Profitwell as well if you don’t mind.
PC: Yeah, absolutely. Price Intelligently we’re a software company that combines not only our software but also some services to help folks basically build out their pricing. So we’ve done, built out monetization paths and models for companies like Atlassian, New Relic, Big Commerce, all the way down to some of the big up-and-coming growth companies like Wistia or Litmus. That’s kind of our focus there is, long story short, we build pricing models.
Then on the Profitwell side it’s essentially financial metrics for your billing system for subscription businesses. So you plug it right into your billing system whether at Zuora, Stripe, Braintree or even user API, and then once we get all that data you get free access to your MRR, your churn, your cohort and all that kind of fun stuff. that’s kind of the unabridged rambly version of both companies essentially.
AT: Today, and we’ve not done it before, we’re going to talk about pricing and B2B SaaS pricing to be specific. I’ve had founders ask me about pricing at meetups. It seems to be a problem. And also on the SaaS Founders Club Slack channel. But I’m not the guy. I’m by no means an expert. Pricing is too difficult and complicated for me.
But you’re the guy, right? You’re the guy on pricing.
PC: Yeah. That’s what they tell me. I don’t know. I love talking about this and it’s something where we probably think about SaaS monetization more than anyone else out there. That’s our little bread and butter.
AT: As it seems to be a problem with many founders that I’ve spoken to, is pricing the most difficult thing for a founder to create?
PC: I think it is, mainly because it comes down to understanding your customer personas and I think a lot of founders and companies, although they claim to know their user personas or can sometimes give some answers to, “Hey, who are your buyers,” most of the time they don’t. They haven’t done their homework in-depth enough to truly understand their true buyer personas or quantifying their buyer personas as we say. As a result then if you don’t know your buyer then you don’t know how to price that buyer.
I would say that’s why it’s so difficult and I’d say the other aspect is because it’s so central to your business. Everything is either driving someone to that pricing page or justifying the price on that page a lot of times there’s some analysis paralysis that comes in that makes it even more difficult.
There’s a lot of stuff that’s difficult for a founder but I would say this is definitely one of the most difficult ones.
AT: A link there to Lincoln Murphy as he talks about one of the first things is creating this ideal customer profile. So understanding the customer persona, one of the first steps there in getting the pricing right?
PC: Yeah, absolutely. I think there’s a little bit of misnomer and Lincoln talks about this a little bit in some of the content that he writes. But it’s not just about a pretty avatar and a cute name like Marketing Mary or Sales Steven, it’s about actually getting down to the nitty-gritty unit economics as well as collecting market research around these folks because you almost can get a false positive where, oh, I have like yeah, we sell to Marketing Mary. It gives you a little bit of a false sense of accomplishment when in reality you need to understand which aspects of Marketing Mary, what company size, what’s her role, what she does every day, what she cares about, her willingness to pay, all that kind of fun stuff.
Yeah, absolutely something to start with and that’s where Lincoln has a good spearhead into something to do to make sure you’re building that engine of growth.
AT: You researched the three pillars of growth which are acquisition, monetization, and retention. And through that research you found that 1% growth in each of those pillars that the largest increase in the bottom line of a SaaS business was through monetization. Why was that?
PC: Yeah, that’s a great question. I think there’s two ways to look at it. The most basic way is intuitively this makes sense because imagine you have 100 customers all paying $1. If you add 5 more customers you’re going to have $105 a month, but if you double your price to $2 all of a sudden you’ve gone from $100 to $200 a month. It’s not always the easiest to do but just very intuitively that makes sense.
But taking a step back from a strategic standpoint, I think the data shook out to be that way mainly because what you look at from kind of a Customer Acquisition Cost perspective as well as from an acquisition frame of reference is that a lot of times it’s not about acquiring those new customers. It’s really about how you retain them, which is still better than the acquisition side of things, but also how you make money off of them.
Most of us, you kind of alluded to previously, aren’t that great at monetizing our customers. We’re just all worried about trying to acquire them when in reality that might be the reason that your business goes down because you’re acquiring too many customers at such a poor cost.
AT: Why are SaaS companies continuing to miss out on huge percentages of revenue because of these issues in pricing?
PC: There’s a lot of reasons, I think. I think it’s a lot of time just not dedicating enough time to pricing. It’s something where we talk to companies all the time and we ask, “Oh, when was the last time you looked at your pricing?” And they say, “Oh, you know, 5 years ago.”
Oh, my God. Your product has changed drastically and you’ve improved it so much but you haven’t improved the very exchange rate on the value you’re creating, which is your price. I think it really comes down to that lack of priority and focus.
And people think it’s a hell of a lot harder than it really is. It’s not difficult to implement some sort of a pricing process. It’s something that’s very, very similar to the regular customer development process, it’s just we didn’t get taught pricing in school or not a lot of people teach it even in their blog post and educational factors so that people think it’s this big black box they can’t approach.
I would say those are really the two foundational causes. I think the other reason too is that we get so sucked into acquiring more customers that we become what we like to call these CAC fiends, these Customer Acquisition Cost fiends that it’s all about logos. But a lot of times if you don’t have a lot of funding behind you, which is 99.9% of us, and I’m talking not like hundreds of millions of dollars, eventually you’re going to have to monetize and get your unit economics in check. It’s just a little bit harder that’s why it’s not the path of least resistance.
AT: What are some other bad examples of SaaS pricing that you’ve seen because you’ve been exposed to a lot of this? What are the terrible mistakes that people make and perhaps without naming names?
PCl: Oh, yeah.
AT: Or you can name names, actually. I don’t really care.
PC: Yeah, we could. I might get in trouble but I would say just kind of categorically look through. From a customer perspective, I think the biggest things are whenever you go to a pricing page where you’re left thinking, wait a minute, what are they selling me? How much is it? Like any confusion is definitely a huge mistake. That’s probably the hardest one to figure out because you could have phenomenal product marketing and you can have phenomenal structure around your pricing and it might make a whole lot of sense to you financially. But if you have a persona that’s coming to your page and all of a sudden he or she just doesn’t understand it, that’s a lost opportunity. So I would say there’s a lot of cosmetic things to fix.
I think other big mistakes that a lot of people make from kind of a business perspective are too simplistic of pricing, kind of opposite of the fact where it’s only one tier for instance. If you only have one tier that means that you’re basically averaging that willingness to pay when I guarantee you there’s some people willing to pay much, much more even for simpler things to implement like priority support or maybe API access. It’s probably a good swath of people willing to pay less as well that you’re missing out on. That’s another huge mistake that we see for a lot of pricing that’s out there in SaaS because people try to get too simplistic.
I think other than that, the buyer persona is probably the bedrock problem. A lot of people, we walk into companies, even companies that are about to IPO and we ask, “Hey, who are your buyer personas?” A lot of times they’re “Oh, they’re developers.” It’s one of those things where you ask, “What kind of developers?| And they can’t even go any deeper than that. It’s a good sign that they grew the way they grew based on just really heavy customer acquisition costs.
I would say those are the three biggest things that we see. And a lot of times those things can be fixed fairly easily just with a little bit of work that has huge payoffs.
AT: What are some great examples? Name a customer, or it doesn’t have to be a customer. Name a SaaS company that has got the pricing right so that the listeners can refer to their website, look at their pricing and say, “Oh, yeah. This is right.”
PC: Absolutely. I think a really good example is actually a company called Wistia. So they do video hosting and analytics for marketing companies and they also just have really, really good product marketing educational content if you’re doing video and marketing. But what’s really fascinating about their pricing is that they have this thing called the Value Metric. And the Value Metric is a really important piece of your pricing and it’s essentially what you’re charging for.
So a really simple example is if you look at a CRM system like Salesforce, they charge per user for instance. And as you add more users, your cost goes up. With Wistia, they’re charging based on kind of a combination. I know they’re going to be changing this in a little bit, but a combination of bandwidth as well as the number of videos. What’s really cool about that is a guarantee is that you’re not charging someone like the Disney Channel the same amount as you’re charging Johnny or Jane Startup because of that differentiated value. That really, really helps them make profitability and revenue expansion into their product by making sure that they have that Value Metric.
Some other really good examples I think if you look at any of the companies, and Salesforce is included in this, but like Atlassian or HubSpot, these companies that have reached a point where they have the ability to cross-sell a lot of different products. Meaning if you go after a similar type of customer persona, all of a sudden you can sell them one product, for instance like the HubSpot marketing suite, and then start to sell them the sales tools or other products on top of that because you’re either a tangential buyer to that original buyer or it’s the same person. I think that differentiation and that product suite really, really helps them be successful.
I think even in a B2C side there are a lot of really good companies doing some really fascinating things even with simple pricing. One that’s kind of, it’s still a B2B but they’ve taken a lot of B2C practices is like Slack, for instance. Everyone likes to talk about how successful Slack is and one of the big reasons that I would argue is that their pricing model is set up so elegantly where they have a free plan that brings you in and you can technically use that forever with your entire team. But as soon as you upgrade, it’s not like $10 a month to them, it’s a minimum of probably around $150 to them all of a sudden per month because you’re upgrading an entire team to a not-so-cheap point.
Those are a couple of examples that I would kind of look at as you’re considering your own pricing. And even just taking a little bit of each of those can really help you grow.
AT: I read in one of your blog posts recently where you talked about good product and good product marketing doesn’t necessarily mean that you have good pricing. This was a little case study call out of Intercom. And apologies, Intercom, I’ve got a lot of friends there, but there’s some valid points here. Are you happy to go through a summary of what you meant by that?
PC: Yeah, definitely. I think I lost a lot of friends there with that post.
But I think what we meant, and it’s a good point to clarify as well, is if you look at Intercom’s pricing, and they wrote a really good rebuttal to what we wrote as well which was good to see, they have made some decisions that make perfect sense from their financial perspective and from their monetization perspective. So for instance, if you look at their product, they have four different products right now or four different entry points. Each of those four points have two different versions like a basic and a pro. And then there’s this element of users, for instance, that if you’re on pro feedback you also are priced on your number of users.
What’s interesting, and this is kind of what they said in their rebuttal, was they have done all these tests that make sense from growth from their pricing perspective but from an outsider’s perspective, which we were speaking on on our front, it can be really confusing. Because if you go to a page that has four different options and then each of those four options have two options and then those two options also have this user element that can get confusing. And if you look at the other people who have talked about Intercom’s pricing that’s what they normally harp on is that confusion factor.
This brings up a really, really good point though because there are some things that you’re going to do or you should be doing with your pricing that, regardless of certain personas’ feedback, you should still be doing. That was what popped up after we wrote that article was a lot of the people who were maybe complaining about their pricing just weren’t the right customer for them. And that’s something that’s really, really important because a lot of times the biggest choice that you’re going to have to make, and I think Intercom does this really well especially with their product background, is who should they be going after and who should be their target customer. Everyone else just it’s not that they don’t necessarily matter but they don’t matter right now, if that makes sense.
That’s why I think their decision and what we were harping on was more, hey, this is confusing if the general person comes to your site. They frankly were just kind of like, well, that’s okay because we know that this works from our perspective financially, which was interesting to see the back and forth a little bit of that as well.
AT: Okay. Interesting. I missed the rebuttal there but I’m going to have a look at that after this podcast call and see what they said there. I imagine good product or great product and great product marketing with great pricing then that will be something, right?
PC: I guess I didn’t really answer your question, did I? I just kind of talked about the situation.
I guess just to speak to it, just to give an answer to it, it got out of line and I’m always going to harp on the buyer persona. I’ll be a broken record with it because I think it’s that important.
But for them, some of their product marketing, their product, isn’t necessarily targeting. It’s more of that halo type content that brings in a lot of different types of people. Like Buffer is really good at it as well where all of a sudden you bring in not just people who are your target customers but all kinds of other folks. There can sometimes be a little bit of a disconnect between the people coming in with the product marketing and your actual buyer and that’s where you get a little bit of friction that can kind of offset that perfect alignment. That’s to speak to your actual question there.
AT: Now, I know you’ve spoken about three ways to better monetization before. What are they for people that don’t know how and heard you talk about it or read your content around that?
PC: I think there’s a lot of ways, there’s a lot of entry points but I think, and I’ve harped on a couple of them, the buyer persona that’s the first thing. Making sure that you understand those buyers. Now I’m starting to annoy myself by how many times I’ve said it.
The other thing I alluded to was that Value Metric. So really making sure that your pricing isn’t flat. What I mean by that is you can still have feature differentiation but somehow have some sort of scalable metric. It could be visits, users, although users isn’t always the best one. It’s actually more commonly not the best one unless you’re building a sales or kind of a helpdesk product.
It could be API calls, it could be just another of things that allows you to basically get that information through the door and make sure you bake scalability into your pricing.
And then a third one is basically it’s really simple. It’s just making sure that there’s some sort of a cadence to evaluating your pricing. We recommend, no matter your size, having some sort of a pricing committee. It could be made up of just the two founders or it could be made up for a larger organization having a member from each of the main organizations of marketing, sales, finance, product and just making sure that they meet, they collect some data each quarter.
It’s no one’s fulltime job but they just really look into different problems with the pricing because it’s not something where all of a sudden you’re going to get this huge gains by just doing one thing. It’s going to be a series of different iterative implementations that really, really help make a cohesive monetization strategy. One month you might be changing your discounting promotion strategies, the next month you might be adjusting the levels of your value metric. And all of those things add up to really, really huge gains with growth in mind.
AT: You mentioned it’s no one’s full time job there. But have you seen a Head of Pricing before or do you envisage that in the future there will be a Head of Pricing or is that not going to happen and would that put you out of business?
PC: That’s why we’re building Profitwell, right?
I think that pricing used to be handled by the marketing team. It used to fall under what they called the 4Ps. But now what ended up happening is the rise of product organizations especially in software. Product is a lot closer to the customer typically because that’s just the nature of building a good product. It started to fall a little bit under product but that kind of transition made it kind of fall under no one’s purview.
The problem is that in a really large organization you can afford to have someone on pricing because you should, because there’s someone who should at least for 60-70% of their job be focused on running tests, looking at data, putting into implementation different pieces of feedback and things like that. But normally if you’re not someone who has multiple different products or a large customer base, it doesn’t necessarily make sense to have someone running that full time. The reason for that too is that pricing is so kind of cross-functional that even though sales or marketing or product might be kind of the main point of contact around pricing, you’re going to need input from finance, you’re going to need input from all those different pieces and so, long story short, until it becomes a huge issue or opportunity to the point where one person needs to coordinate everything, you probably don’t need someone who’s the Head of Pricing but you should have someone who’s assigned to be the main point of contact because he or she is going to be the one who is collecting the data, running those meetings, proposing the different implementations based on feedback and just making sure kind of the trains run on time, as they say, in terms of your pricing.
So yeah, you don’t need someone full time but definitely have someone as that main point of contact or that facilitator.
AT: What are Patrick Campbell’s pricing hints and tips? I’m not going to allow “buyer persona” because that’s my hint and tip for everyone listening so you have to think of something different there.
PC: If you record how many times I’ve said that a minute, I think it’s all I’ve said.
But so here’s a couple of things. One, there’s one part where, and this is kind of a preface, is hints and tips are only going to get you so far. Every time I talk about pricing I always get questions about, “Oh, should you end your prices in 9’s or 5’s or 0’s?” It’s one of those things where the answer is, “It depends,” but the real answer is, “Hey, that’s like a last 5% optimization. You know it doesn’t matter if you end in 9’s or 0’s if the rest of the homework hasn’t been done.”
So do your homework, as I’ve alluded to already. But what I would then do is there’s still some basically really good hints and tips around just data that we’ve seen. For instance if you have a product or one of your tiers that’s between $100 and $200, we’ve seen just unequivocally in hundreds of thousands of data points at this point that your price should be at $100 or $99, $150 or $149 or $199 to $200. Or your tier should be split like that.
And the reason is because in just thousands of responses around price elasticity, what we found is that if your price is $130 really it could be $150. There’s no real difference in the mind of a buyer. And similarly if it’s at $175 there’s not a huge difference between $175 and $200. So once you do some price testing and collect some data, just make a choice between those three different pillars mainly because that’s kind of where you’re going to be priced at.
Similarly there’s below $50. From $0 to $25 it’s a little bit of a crap shoot so it’s highly dependent on your customer, meaning it could be $10, $15, $20, $25 just depending on the type of person you’re selling to.
But once you get over $25 and into the $30 range, you might as well be $50 because they’re similarly not a huge difference between $30 and $50 for a lot of those folks. And then between $50 and $100 it’s very similar to below $25 where it’s a little bit of a crap shoot. But those are some really tight hints and tips that I can give you from the perspective of just looking at thousands of data points.
Then I guess one of the last things that I would say is just a reminder about the value metric and implementing a pricing process because you’ll just soon discover, holy cow, our discount rate is so high just because now someone’s dedicated to thinking about this and you could start to make those little changes to really bring forth some really good growth.
AT: Awesome. Great hints and tips there. I’ve certainly learnt a few things from that. And I’m going to add a hint and tip which is understand the customer persona or your buyer persona. I think from that for the founders that are listening, there’s certainly a lot to take away there and learn and do your homework and work on that pricing. And if you got serious problems then call Patrick as he’s the guy on pricing.
I know that you’re coming to Europe this year. There’s rumours of a pricing workshop in April in London and you’re also speaking in September in Dublin at SaaStock. So what can you tell us more about both of those?
PC: Absolutely. So we should be doing a workshop in April 20th or 21st in London. What’s cool about that program is we’re actually going to be walking through with the details of actually how to set up this value-based pricing process. And so it’s going to be a nice, live, interactive way to learn how we build the best pricing models out there so that you can take that back into your business and implement that process and also implement a lot of different little tips and tricks that we’ll have.
And I think what’s in addition to that, we’re offering up a number of opportunities for basically one-on-one evaluations as well as workshopping so that I can actually go through your testing plan, go through your process, basically evaluate where you are and give you some really, really pointed advice so it’s not just some general kind of conversation but can actually help you in the context of your business. That’s what we’ll be doing with the workshop.
In terms of SaaStock, we’re pretty pumped to be kind of making this entry point into Europe as we are this year, and being able to really bring some really sexy SaaS stats, as you will. We have access to and we’ve seen inside thousands of SaaS companies at this point and so there’s some really, really good benchmarks that we can start to bring so that you can make sure that you’re focusing on the right type of data as well as focusing on monetization a little bit better. Long story short we’re pumped.
I’m actually in Estonia right now speaking at a conference and so we’re all about Europe this year, which is pretty exciting mainly as we continue to grow the team and make the leap across the pond, as they say.
AT: I guess regarding the workshop people will hear about that via your newsletter on Price Intelligently? You can hear about that first, I guess. Well SaaStock obviously, the SaaStock.com you’ll see Patrick is one of the 20 speakers announced already. I’m super pumped about that as well.
And great names of conferences these days with SaaStock and SaaSFest, right?
PC: Yeah, absolutely. We’ll take care of the East Coast and the U.S. and you guys can take care of obviously all of Europe.
Patrick will be speaking at SaaStock 2016. Europe’s Premier SaaS Conference. Early bird tickets available now