Starting any business is hard. There’s no perfect playbook laying out all the right turns to take and potholes to avoid. Unfortunately, we’re all prone to make mistakes. But those mistakes are often what lead to the most important, eye-opening lessons on how to get things right in business.
One of the best ways to sidestep later trouble is to learn from leaders who have already experienced it. In his 2022 BoS USA talk, Dharmesh Shah, co-founder of HubSpot, lays out some of the biggest mistakes he’s made (and lessons he’s learnt) as a founder. Here are some of the main takeaways from his presentation.
Table of Contents
For a full version of this talk, including a video recording and transcript, click here.
Partnering with big companies can be great. Until it isn’t.
Shah tells the story of when he was a young software engineer working for a major company – many years before he co-founded HubSpot. A year into working there, he approached the company leadership with an idea for an application that would solve a number of the business’s internal data transfer issues.
Long story short, Shah left the company and built the application, and later entered into a partnership with them, where they agreed to split the revenue from the application’s sales. The big problem, however, was that there was no contract in place, and there were no standards or rules set for how the business would sell it.
‘It was this kind of handshake agreement,’ Shah recalls.
Eventually, the company stopped selling the software to customers altogether and simply added it as part of its product package – free of charge. ‘Over time, they’re like, “Oh, we started giving the software away, we’re not really charging for it. So we don’t really owe you anything,”’ he says.
In retelling this story, he relates this experience to learning about sales. ‘[My co-founder and I] talked about it like, “Okay, we’ve got a business to run here.” The big lesson is that if you ever find yourself in this situation, almost invariably, this is how those partnerships go. When they’re going well, they’re going just fine. Until they don’t go fine.’
Shah and his co-founder ultimately ended up selling their company because they weren’t positioned well enough to grow profitably in the long run. Despite the outcome, Shah admits that sometimes partnering with other companies works. But before you do, make sure the partnership is fair and that you have everything in writing.
The lesson: A handshake does not always a fair deal make.
Solve for the customer – even if it means being a little unfocused.
Time has told us that ‘fortune favours the focused’. And generally speaking, this is particularly true for businesses. To find success, you have to identify your ideal customers’ pain points and create a solution for them. That focus, especially in the early days of your business, is probably narrowly focused and offers only a few solutions.
But that’s not what happened at HubSpot. Shah and his HubSpot co-founder, Brian Halligan, asked themselves, ‘What are we doing?’ And the answer turned into a long list.
‘We’ve had this [notion] since year one of HubSpot, which is “solve for the customer,”’ he says. ‘[We asked ourselves], “what are we doing?’ Well, we’re going to build a content management system and search tools, and a blogging application, landing pages, social media – we’re going to do all the things.
‘In talking to customers, the issue they had was that, yes, there were great products in each of those categories. But that’s not what they needed. They didn’t need a better content management system or better social media planner,’ he explains.
In short, HubSpot might have looked unfocused on the surface by offering so many different products, but their focus was on their customers’ needs – a singular platform that allowed them to run the bulk of their online business and marketing.
Luckily for them, taking this direction was no mistake. But it was a major lesson nonetheless.
It’s easier to get pricing and packaging wrong than it is to get it right.
No matter the size of your company, you’re going to spend a lot of time talking about how to package and price your offerings.
In his talk, Shah explains how he and Halligan got their first pricing model wrong.
‘We wanted to start getting customers to see if there was evidence of a market, so we started charging early. And we got together and were like, “Okay, we need a price. How much do you think we should charge?” “I don’t know. How much do you think we should charge?” “I don’t know. How much do you think we should charge?” “How about $250 a month?” “Done.” That was our price. And that was the entirety of the conversation – I’m not paraphrasing! That is what it was.’
‘You may notice the absence of a – not $250 per server, per user, per something, per gigabyte of storage, per million words of content – nothing. It was, by God, $250 a month, not a penny more, not a penny less. That was the price. We had massive customers come through and buy HubSpot. And we didn’t charge them more than $250 because that was our price.
‘Boy, was that dumb. That was just so, so stupid. There’s no other word for it that I can use,’ he recalls.
‘Don’t do this!’ he says.
Getting Pricing ‘Right’
There are two pricing extremes: setting the price point too high that it’s not sellable from your website (‘People are not going to whip out their credit cards and pay X dollars a month,’ Shah says) or setting the price point too low (‘You can’t afford to have salespeople sell the thing because you’re not making enough money for that price,’ he adds).
Being caught between these is what Shah calls the ‘no man’s land’ of pricing. ‘You’re kind of caught in that trap, which is exactly where HubSpot was with our $250-a-month price,’ he says.
Instead of agonising over a single price point, Shah stresses that your pricing model is as important as the actual price of your product.
Ask yourself these questions:
How do you charge for your product? Do you charge per user, per gigabyte of storage, or some other quantifiable option? And how does your product scale as your number of users grows and as the company grows?
‘There has to be some variable access to your pricing in order to get to what economists might call “price discrimination” in a positive way that says, oh, customers who are getting more value will pay more, and customers who are getting less value will pay less.” And you can kind of try to fill in this supply-demand curve.’
Know whether you’re selling a tool or a transformation.
Shah says that when it comes to pricing, you have to ‘pick your poison’. A lower average price means you’ll likely have a simple, shorter sales cycle, and you can probably expect to sell more directly from your website. (But you also run the risk of pricing so low you can’t afford a sales team at all, so there’s a hard-to-find ‘sweet spot’ on the lower end of the pricing spectrum.)
The other option, then, is to price higher. ‘If you’re going to have a higher price tag, you’re going to have a longer sales cycle,’ he says.
Part of this conundrum, though, has more to do with whether you’re selling a tool or selling a transformation.
‘If you sell a tool in a known category – it solves a known problem that customers know they have – you can put it up on the website [and sell it]. It might even be somewhat expensive, but people understand it.
‘If you’re selling a transformation, by the way – saying, “The way you did X is all wrong, and you need to rethink how you do sales, how you do marketing, how you do finance, how you do auditing” – if you’re trying to change the religion of the company, and the way they approach something, or the religion of that role, that has to be sold.
‘You’re not going to convince someone with a really well-written website, great videos, or great customer testimonials alone. Odds are you’re going to need some carbon-based life form to communicate the motivation for that transformation,’ Shah explains.
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The moral of the story: If you’re fixing a known problem for your customers that they’re aware they have, you can likely sell your tool at a lower price point from your website with a small, lean sales team. Transformative products likely have higher price points, take longer to nurture, and will require more from your salespeople.
Beware of the ‘grandfathered-in’ pricing structure.
Shah told the story of how he and his co-founder first decided on their $250-a-month price in the early days of HubSpot. Over time, as the growing company restructured its pricing, it adopted a ‘forever’ opportunity for existing customers.
‘One of the mistakes we made is that we said, “Hey, customers, if you’ve already bought HubSpot, whatever the price was at the time you bought, we’re going to lock that in.” We didn’t qualify it. We raise prices at least once a year, and all existing customers continue to pay [at their original price point]. And our rationalisation, which I think is noble and right, is we’re rewarding those early customers with that locked-in price because they believed in us early. And that’s great.
‘What’s not great is the fact that now you’ve got this kind of baggage of a bunch of customers sitting around with this old price, and your team is going to have to track that forever. And it’s okay to kind of credit those customers, but for, five? Seven? Ten years? At least put some date on it. That way, you have a date that you can say, “Oh, we can kind of clean house with that set of customers, and we can move on with our lives,” says Shah.
If you have a setup or have made promises like this now, there’s nothing to be ashamed of, gentle founder! It’s great that you’re providing a benefit to your early customers and adopters by giving them a ‘fixed price’.
But if this is you, Shah recommends putting a time limit on it. Let your customers know you’re grateful and perhaps offer them a continued discount that doesn’t break your team’s spirit, and don’t feel guilty about doing what’s best for your business in the long run.
Don’t fall prisoner to your packages.
‘Packaging is this really weird thing,’ explains Shah.
Deciding how to package your products and where to place features in your pricing tiers are often fiercely debated. ‘Everyone’s got an opinion, everyone’s got a side,’ says Shah.
‘Someone might argue, “Well, if we give those features away, we’ll never sell enterprise [tier] because we’re putting them in the pro tier. So what incentive do customers have to buy the enterprise version?” Or, “If we took this feature and put it in the free version, what incentive do people have to actually pay us money at all?”’
Shah makes an excellent point: It’s all too easy to fall victim to your company’s internal pricing wars and, in the process, get your pricing wrong.
Shah goes on to explain how HubSpot has learnt to structure its own pricing tiers: Any new functionality the company adds first goes into the enterprise tier at the top of its pricing model. This allows HubSpot to test the new product’s functionality and adjust where needed. Over time, after the novelty of that added function wears off a bit, HubSpot pulls it down and offers it as an added bonus in its lower pricing tiers – eventually, all the way down to the free option.
‘The reason that works so well,’ explains Shah, ‘is that you’re basically subsidising the cost of your lower tiers with those enterprise sales so you can see the benefit. And then you protect yourself from disruption from below because that product is getting better and better every year. That’s hard for new market entrants to really compete with.
‘So as you start pulling out features, I know it’s subtle, but it’s one of the hard-won lessons. Don’t be locked into your packaging. When Moses came down, there was no 11th commandment that said, “Thy packaging shall stay exactly as it is; it is etched in stone.” No, change it.’
Rethink your customers’ lifetime value.
‘As it turns out, people leave companies, but they often don’t leave products and platforms,’ Shah jokes.
Often, online businesses – particularly SaaS companies – think of their customer LTV as very linear and black and white: They know what their cancellation rate is, they have a solid average price their customers collectively pay, and based on that information, they can calculate the lifetime value of a customer.
Shah pointed out how embracing this view of calculating LTV falls short. ‘The thing we get wrong is that we assume the lifetime of that customer – and the value they bring – is based on the lifetime they’re a customer at the company they’re working at right now. Suzy might be working in Company X now, but she goes to Company Y. You might think of it as a churn because maybe she was kind of the primary sponsor, but she will likely take your product with her,’ Shah says.
The second thing he says software companies often get wrong is long-term calculations of average revenue.
When you make your calculations to estimate your average revenue within 1-3 years, your numbers will likely be somewhat accurate. But those numbers are based on what your customers are paying now.
‘If you had done that calculation for HubSpot 10 years ago, 15 years ago, you would have gotten it completely wrong. And we did!’ exclaims Shah.
As you add products, shift your pricing tiers, and increase prices over time, these things obviously affect your average revenue. ‘I will bet you money, the average revenue per customer does not look the same 5 years from now as it does today. And that’s the number we’re using to figure out how much to invest in growth and things like that.’
Shah suggests looking back at your LTV to customer acquisition cost (CAC) ratios and raising your lifetime value. Knowing the numbers and making sure you’re calculating them correctly will help you better rationalise the investments you make in growth.
Making mistakes is where the best business lessons are learnt.
If you’ve spent any time marketing on the internet, you’ve heard of HubSpot and likely have used some of their tools or content as a guide. They’re a trusted resource for all things surrounding growing a business.
The most important takeaway from Shah’s talk may be this: Don’t be afraid to make mistakes, but look for the lessons in each error you make. Because there’s always a lesson to be learnt. And on the other side of it, your company will come out stronger and better positioned to continue growing and scaling.