Ten years ago, Patrick founded ProfitWell, a company powering financial metrics for 20% of the subscription market, from small startups to the Fortune 50.
In this talk, Patrick shares ten years of insight on how SaaS and software pricing has changed and will delve into some of the most and least successful pricing strategies you can employ. Expect a high-density dive into the good and bad of pricing, retention and growth that will help you to grow revenue and profitability in your business.
Slides
Transcript
“I have difficulty sometimes talking to people who don’t race sailboats.”
Patrick Campbell: This is a quote from one of my favorite TV series of all time, the West Wing, and it’s by this guy named Bruno Gianelli, who’s kind of the guy that you hire when you want to be reelected president. And it comes when he’s talking to President Bartlett, and President Bartlett’s pretty pissed at him, because what Bruno did is he went and did some polling on where should President Bartlett and him his family basically have Thanksgiving dinner, like, is it better to look in the White House? Does that show strength in your doing your job? Is it better to have family values and go to his childhood home? And President Bartlett didn’t like that he brought his family basically into the whole politics of re running for office, and then a really great scene ensues.
Sometimes I have difficulty talking to people who don’t race sailboats.
I have difficulty sometimes talking to people who don’t race sailboats. When I was a teenager, I crewed Larchmont to Nassau on a 58 foot sloop called kentes, and there was a little piece of kelp that was stuck to the hull. And even though it was little, you don’t want anything stuck to the hull. So I take a boat hook on a pole and I stick it in the water, and I try to get the kelp off. When seven guys start screaming at me, right? Of course, now the pole is causing more drag than the kelp was. What you got to do is you got to drop it in and let the water lift it out in a windmill motion, drop it in and let the water take it by the kelp and lift it out, in and out, in and out, until you got it. The voters aren’t choosing a plumber, Mr. President. They are choosing a president. And if you don’t think that your family should matter, my suggestion to you is to get out of professional politics, but if you think that I am going to miss even one opportunity to pick up half a knot of boat speed, you’re absolutely out of your mind. When it cost us nothing, when we give up nothing, you’re out of your mind.
What a great scene. And I love this scene for two reasons. One, it’s an amazing example of what Aaron Sorkin can do under the influence of cocaine. And two, it is so beautifully emblematic of everything that you all in this room are trying to do. Doesn’t matter what your goals are. In your business, you’re a bootstrap business venture backed. You’re trying to, like, rule the world. You’re trying to just create a really nice lifestyle style business, which, I don’t know why this derogatory now, like, I think it’s an actual great goal for people to have, like, work less, make more money. Like, that’s amazing, right?
But what’s so beautiful about it is that no matter the type of business that you have, we’re on this spectrum, and we’re trying to get towards thriving in our goals, and we’re trying to prevent ourselves from going out of business, right? And just like a sailboat, if we’re growing and we’re pushing ourselves forward, we move towards those goals. But then there’s all these things that are dragging our business back, mainly because they’re the most inefficient things within our business of how we’re running it. But if we can figure out how to grow more and create those things that are really, really inefficient. In making them efficient, we can grow really quickly. If we can figure out how to avoid this particular scenario, we can make sure that we stay in business and we go at the pace of whatever our particular goals are.
And so I love this framework of thinking about a business, and when I think about the past, 10 years of building business, this is just one of those things – especially in a bootstrapped environment, which most of you are in – it’s really, really important to think about these two sides of how you’re actually pushing yourself forward to your goals.
We’re going to break down a couple of different things that go into both of these charts. We’re going to go through acquisition, monetization, expansion. We’ll talk a little bit about churn, a little bit about ops and finance, all kinds of fun things.
Now, I know what some of you are thinking: I’m awesome, I don’t have any drag in my business. Everything’s really, really cool. Some of you think you’re awesome and you’re not really that awesome. Savage looking at you, bud. But I love Chris. Don’t, don’t worry. I’m going to probably give him shit a couple more times, though. But the thing you got to realize is that, if you’ve been in the game long enough, you realize that the market has changed pretty dramatically. It’s gotten more and more difficult, and it’s gotten denser and denser in those days of BoS 2012 where you could kind of spin up a web page, spin up a server and have a really, really great business. Those days just aren’t here anymore.
And instead, we live in this world, to give you a little bit of data, where, over the past 10 years, the number of competitors that you’re facing, if you started a business today, are up about 16 times. Everyone and their mother has a landing page. Everyone and their mother has an actual server spun up. They’re driving traffic. There’s so much we can do, and the entry point has basically been lowered in terms of threshold to actually get going, because of all those people that are sitting in the market, and the fact that we haven’t had a new, brand new marketing channel in the past five years, all of a sudden, CAC – your customer acquisition costs – are up over 100% and you might be thinking: I have an amazing business. My TAM is huge. Everything’s great.
Well, the other side of the equation, in terms of run, a team 10 year in tech, both for contractors and full time employees, is down by about a third. And this was starting to happen before the pandemic, and all of a sudden we’re like: hey, oh my gosh, we need to keep the team. Let’s pay them more. But it’s not really moving the needle. So we’re paying 30% more, they’re sticking around 30% less, and then our market looks like this. It’s a really, really tough market we’re playing in.
And so the TLDR of what we’re going to go through today is that excellence is basically the ticket to the table. Now it’s one of those things, even if you’re trying to build a great bootstrap business that’s not trying to go public, it’s not trying to scale, it’s not trying to raise money. It’s still a different world than we once were in. So we’re going to unpack this today. We’re going to have a lot of really fun tactics, a lot of really fun data. It’s going to be awesome. Sound good? You guys fired up. You got to shave that beard, man, because you’re a little too Viking.
All right, so anyways, who the heck am I? So, as Mark just said, before, I’m Patrick Campbell. I founded a company called ProfitWell About 10 years ago. My background is in econometrics and math, which is code for having a lot of friends as a child, most of them were spreadsheets. It was a great, great childhood. I started my career. I worked in US intelligence at NSA, hunting bad guys and gals with data. Then I worked at Google, using a lot of the same models to hunt money. And then started the company ProfitWell. In ProfitWell, we’re a bootstrap business, or we’re a bootstrap business based in Boston, Argentina and Utah. We focused on basically helping subscription and SaaS companies grow and run automatically our flagship product, which some of you might have heard of, something called Profitable Metrics. We have about 35,000 different SaaS and subscription companies getting all of their financial metrics for free using that product. And then the way we made money is we studied this data and built products that essentially automated churn reduction and automated price optimization. And then earlier this year, we stopped being bootstrapped, and we got bought for a quarter billion dollars by a company named Paddle, which was kind of cool. Don’t worry, still wearing the same clothes. So that’s kind of exciting.
Paddle basically is one of these companies that were able to fuse the culture that we had around product. And I’m not really telling you this as a sales pitch. This is a terrible sales pitch, but I’m trying to give you context on where all the data comes from. And so when you see charts, when you see graphs, like, I’m not just pulling this data out of my bum, like it’s actual market data of what’s actually happening.
The importance of buyer personas
Cool. We still fired up. Now that I’ve established my ethos, let me talk about something I know the least about, but I know at least something about it, and that’s acquiring customers. It’s one of those things where I think a lot of us, especially in this room, we really, really struggle, because most of us are more technically inclined. Most of us are more like, let’s go build stuff. But it was really, really hard for us in the beginning to figure out, like, how do we get people to love us? Like, how do we get people to talk to us and come use our products? And what was really, really fascinating is it all started with something that you hear of several people talk about the past two days, which is, our buyer personas right now. The thing about buyer personas is, you all know what buyer personas are, right? It’s one of those things where we really think about our businesses, we think about: Oh, it doesn’t matter what we’re selling, but everyone in this room, no matter what industry you’re in, everything in your business is used to either drive someone to a point of conversion or to justify the product or the price, right? We all know that we’re selling to human beings. We’re selling to people now, we aggregate them into segments or personas, or whatever you want to particularly call them.
But the reason I bring this up is the first thing here, especially in our journey, but I would argue, in a journey that a lot of you are basically on, is everyone here has heard of this. Everyone here has probably read a blog post about it. You’re probably retweeting blog posts about it. When someone’s like: Hey, I’m struggling. I don’t know what’s going on. You’re like: Yeah, you should go talk to your customers, right? Like you should do some customer research, right? The problem is none of you do it, literally none of you, well, it’s not literally none of you. Only one in five of you do it, only about 20% of you actually have some sort of buyer personas, some sort of segmentation within your business.
And the reason that this is so problematic. Is because one: you don’t know who the heck you’re building for, you don’t know who the heck you’re selling to, you don’t know who the heck you’re setting up your pricing page for, and you just end up guessing and checking your way to success. We’re ultimately deciding, like, what’s the path of least resistance? Let’s build more stuff or write another blog post, right? And I’ve been talking about customer research now for about 10 years, and I really struggle with this, because it’s one of those things where, like, I get it, it’s so important. But why aren’t we all doing it? And I think it’s because you don’t realize the impact of what buyer personas can do inside your business.
And so I looked at about 6000 different companies, collected a bunch of data, looked at that data in the context of their growth, and what I found was that those companies that had some sort of personas inside their business didn’t even have to have data on them, but just sat down and really anecdotally put together who their customers were. They were growing 10% more than those folks who had nothing right. And then the middle, the people who went out and actually collected data, they started growing about 20% more. And then the folks who had ongoing customer research, they were growing about 30% right. Looking at the data a different way, you know your customers, your CAC, ends up being lower, ends up being 10 to 30% lower, if you understand: hey, these are the channels that we should go into. These are the people. This is where we’re going to find our people who are going to come into our business and actually give us revenue.
And then my personal favorite, NPS, which is down across the board over the past 10 years, NPS and engagement, customer satisfaction, all much, much higher. And yes, this is purely correlative data, right? But this data hasn’t changed. It’s not like this changed overnight. Every single year we look at this data, we see the exact same trend. And so let’s make it easy. Okay, I have this template. This is a template I’ve used for a long time. A lot of people have used it. I’ll make it available to you, but basically, across the top, I have different profiles. Who you’re going to sell to, you’re going to pick this for yourself. Along the rows, I have a bunch of different categories of: hey, where are we going to find them? What are our channels? What do they value? What do they not value? And what I implore you to do is take the spreadsheet. I will send it to you, and essentially, with your team, fill it out individually. First fill it out amongst yourselves. Each person is going to fill it out individually. Then come together, either as an exec team, your co founders, if you’re a solo founder, go find someone else to kind of talk about it with, and just pick something to debate. If you pick one thing to debate, I guarantee you, this is me trying to, like, get you to eat your vegetables. I guarantee you. The end of that conversation is, let’s go find out who’s right. And you’re going to find out who’s right. You’re going to go do a little customer research or a little bit of data collection.
Now, if the result of that is your business partner, the person you’re working with or for, is like: I don’t care. Let’s move on. Go find another job. Go start another company. Life is too short to work for people who don’t want to win, and winning really, really, really, is predicated on understanding your market and who you’re going after. Sound good? Cool. Dharmesh told us that we should focus on the number of laughs per minute. I’m really going for how preachy can I be per minute? That’s really what I’m going for, guys, it’s very self aware. Don’t worry.
Freemium and inbound marketing strategies
All right, let’s talk freemium and inbound media acquiring customers. There were a couple of people that at the round table I ran yesterday were asking about, like, demand generation and SDRs. And I think that it’s really, really important for everyone in the room to understand: what are you actually trying to do with not only marketing, but also demand generation? And this is something I didn’t know 10 years ago, but the basic idea is, like, you have this continuum. You have this spectrum of how leads and how opportunities basically become customers. Right at the end of everything, that person converts and becomes a customer. And probably right before that, they talk to an account executive, or maybe they go through a self serve product led growth motion. But we know the end of the spectrum here, and then before that particular place, all of a sudden you got people signing up, asking for a demo. You got folks reading your blog posts, maybe downloading an ebook. You got folks that you know are upvoting you on Product Hunt. And then you have folks who have just thought of the thing that you solve for right now, what’s really, really interesting is that demand, generation, or marketing, is basically moving this market, this river, closer and closer to that point of conversion. That’s what it’s all about.
And the way that we’ve articulated this for decades at this particular point, especially in marketing, is basically the funnel, right? Or Dharmesh Shah is trying to kill the funnel and make it into a flywheel. That’s like a very Boston tech joke. So if you got that, we’re homies. But anyways, you have your tofu, your top of the funnel, your Mofu, your middle of the funnel, and your bottom of the funnel, right? I didn’t come up with any of these terms. I’m not that clever, but basically, you have these different pieces. And when we looked at different marketing budgets, we were starting to think about our own marketing team. What we realized is, this is where all the money goes. This is where all the tools are. If you look at that MarTech landscape, it’s got like, 7000 different products on it, most of those. Products are either here or they’re more sales enablement type products way over there. And it was kind of fascinating, as in you look in the data, these are starting to diminish in effectiveness, because all of a sudden, CAC is going up so much.
So it’s getting harder and harder to bring this like proverbial world to you and inside your business. And all of a sudden everyone and their mother is trying to sell you and just not be fun in terms of selling you. And so what we started to think about is like, what if we just made that bigger, right? What if we made this middle of the funnel bigger? What would that actually look like? And what was kind of cool is one of the biggest ways to make that bigger is through freemium. And I know the pushback, especially amongst a bootstrap crowd, first: if the product’s free, then you’re the product, right? Or, my personal favorite: if the product was valuable, people would pay for it, right? I would encourage you to move beyond 2007 okay. And I would respond to you with, in this environment, in this world, even if you don’t think any of my data is correct. What better content do you have than your product? Seriously think about that, because that’s essentially what you’re doing with freemium. You’re basically saying: hey, world, hey, top of the funnel, moving towards that middle of the funnel, come into my web, my product web, start using that product, start loving that product, and eventually, you and I will have a conversation about paying us money. That’s what freemium really is.
And the biggest mistake that people make with freemium is they think about it as part of their pricing strategy, when in reality, you got to think about it as the best ebook that you actually have. It’s the most premium ebook that you have in your arsenal. And what’s beautiful about it is all of a sudden you start creating this pool. So instead of trying to get people to go from here to here as quickly as possible, we’re ok if people hang out in that middle of the funnel for a while, because all of a sudden, if you’re using our freemium product, we’ve earned the right to nurture you as a lead. And instead of some sort of artificial sales process where my sales team is basically like: Hey, are you going to sign up by the end of the month? We’ll give you 10% off. And then when you say no, we just kind of like, move on and reach back out to you for three months. All of a sudden I can go: Oh, hey, you’re in the middle of the funnel. Awesome. Stay there as long as you like. We’ll put some triggers, we’ll give you a little bit of prodding, and all of a sudden that pool will pay me dividends on top of that river that I’ve created within my funnel. And so the thing about freemium, CAC is up overall. We talked about that, but CAC for customers who convert from freemium, it’s about half, which is pretty wild. It’s going up at a much, much lower rate. Retention is going down overall in SaaS, which probably should have an existential crisis about that, which we can talk about later, but it’s much, much higher for those customers who convert from freemium, and then again, NPS. NPS is going down overall. You’re looking at 10 years, five years and a year ago, but those customers who converted from freemium, they’re holding on to that engagement because you’re not converting them on your time. They’re converting on their time. That’s what’s powerful about freemium.
So if you want to enable freemium, you got two types of freemium. You have forever free. This is like ProfitWell. Basically we have fortune 500 companies. We have startups using that product, all for free, and then we sell them other things. There’s basically an upsell for another, different product. It’s a bit more expensive, but you create a bigger pool. And then there’s the faux Free Trial style freemium, where basically you’re taking not a worse part of your product, you’re taking a smaller version or a capped part of your product, and you’re setting that particular cap like 100 visits or 100 email opens, basically, where your target customer is going to get through those 100 within 14 to 21 days. And if they don’t, and they don’t convert, they get another 100 the next month. It’s a little cheaper, little bit of a smaller pool, depending on what you’re going for.
Two questions you got to ask yourself: do you know how to convert leads into customers? And two: how good is your river? How good is your overall funnel? If you don’t know the answers to these questions, or you don’t have good answers to these questions, you shouldn’t focus on freemium. The best freemium models from a growth perspective, they basically implemented, probably about two years into a business, unless you have a top 50 growth person on your team. And if you don’t know if you have a top 50 growth person, you probably don’t.
Let’s talk about But five, six years ago, ProfitWell, again, is a bootstrap company, we did something a little crazy. The only person that supported us was actually Chris Savage, which is kind of funny. Everyone told us that we were idiots, and frankly, we kind of thought we were idiots as well. But we launched our own media network called Recur and it didn’t start as a whole media network, but we started basically building out shows, and at close we basically had eight different video and podcast series all focused on different things that we solved, all focused on different types of customers that we worked for. Now what’s kind of beautiful about this model is a lot of people have started to take this on, which is really, really interesting. But the thing about it is, you’re creating another pool, and I get that you’re sitting here and you’re. Like, hey, we publish ebooks. It’s really cute, Patrick, that’s great, like, podcasts. That’s awesome, little toys that you have there, right? But the thing that you don’t really think about is, most of inbound marketing right now, all you’re really trying to do is, you’re just trying to move people as quickly as possible from the top of the funnel to the bottom of the funnel, right? You think about that wheel, that content wheel that we always talk about, that content wheel that basically is sitting there, and it’s like: hey, how do I get people to download this thing? I’m going to score them, and based on their score, I’m going to send them sales emails, right? We’re just trying to get through that particular part of the funnel as quickly as possible. But with inbound media, what you’re doing is you’re trying to build audience. So basically, you’re trying to get a number of shows where people are coming to you every single week for that content. They’re not looking to necessarily buy, but you’re in their ears, quite literally, or they’re watching you on your screen basically every single week. And you’re creating this nice little pool.
And what you’ll see in the data, this is obviously just graphical representations of the data. Is an inbound strategy, is based on hits. So all of a sudden, I need a good ebook that goes up, and then all of a sudden it’ll trickle across across time where, you know, we’ve had an ebook on pricing for 10 years, it pays us dividends every single month, which is really, really cool. But with an audience strategy, all of a sudden we start stacking these shows on top of each other, and we start building brand, which is really, really important for that pool model. And what’s kind of cool is once you start getting multiple different shows – and I don’t recommend starting with multiple but getting there – you all of a sudden have things that are going out every single week, and certain customers or personas who are hyper interested in what you’re doing, they’re consuming content from you every single day. And then you have a couple of people who are only looking at one or two pieces of content per week, and all of a sudden, the average amount of touch that you’re doing with a particular segment starts to go up up and up. And as that happens, your pool gets bigger, and then all of a sudden your revenue gets bigger, which is really, really cool.
Now, in terms of cost, a lot of people push back. This is what got us over the edge of jumping into this, especially with resource limitations. We basically realized that the cost of a season of a show, 13 episodes, one show per week and a quarter essentially costs the same amount as an e book. We were like: Great, let’s try it. Let’s try it. Let’s try it for a quarter and see what happens. And then all of a sudden, we saw in terms of touch points per week. We started to juice those numbers, as I was kind of previously describing. Now, it’s kind of cool, if you want to do this step one, start a podcast. Just literally start a podcast and start interviewing customers or prospects. Don’t worry about how good it is. Maybe the podcast episodes will never see the light of day, but this is the easiest way to get started if you want to be a little bit more advanced.
The other path is basically just start turning blog posts into videos. And what’s really brilliant about this is your brand will increase because a lot of people don’t want to read the stuff you’re putting out, you’re getting the diehards, which is great, but we basically saw, as soon as we started putting a blog post video out each week, all of a sudden our brand just skyrocketed because people were sharing that and people were actually consuming that content in a very different way.
The last thing on this, you’re not going to go viral like Mr Beast or some YouTuber. Just to be clear, there’s a lot of business leaders who think: oh my god, we need millions of views to be successful. But the question that I would pose for you is: what if I gave you a webinar every single week that had 3000 people on it, and it was the same people every single week, being able to be essentially soft sold to every single week? You would probably love that, and that’s essentially what you’re trying to do with a podcast, especially in your space. Now, there’s some really cool stuff that you can do, and we started doing advanced stuff. I did a video where I said the word churn 100,000 times in one particular sitting that actually went like somewhat viral. We had about 750,000 views in that particular video. That’s a little bit more advanced, where you can actually get that volume out there within your customer base. But ultimately, just start by trying to build that particular audience of who you’re actually selling to cool.
Pricing journeys and value metrics
We still fired up? Awesome. I am going to decrease the number of jokes per minute. That’s my goal here. You guys want me to skip the pricing section? Yeah, I don’t have to talk about pricing. I wrote a lot of blog posts about it, so I can send you those. All right, we’re going to talk about pricing. The way I want to talk about pricing is I want to take you through the journey that most companies go through, from like their first pricing page all the way to like what a public, really well defined company does. And you don’t have to be public to do some of these things, but I want to take you through the journey, because what you’ll realize is there’s a lot of you who just kind of stop on this journey and this never evolved. So hopefully I can show you, like: Hey, you stopped here. Like you should really evolve from where you’re going. Sound good?
All right, let’s start at the beginning. Okay, you’re about to launch something. It’s 11pm your Product Hunt, it’s all ready to go. And you go: oh shit. We don’t have a pricing page. We don’t have our pricing figured out: oh my God, what do we do? Let’s google. Let’s read a blog post from the base camp guys and holy cow, let’s put together this pricing page. Okay, I don’t know how much it costs, but I read like it’s really simple. Have one tier, I think 50 or $100 And then I listened to an NPR podcast once that said you should end your prices in nines. So we’re going to make it like $49 or $99 per month, right? Because simple is better, right? I’m really annoyed when, like, I see three pricing pages on a particular pricing page, right? I don’t know what I’m building, but, like, I’ll build that thing next quarter that actually will never get built, right?
So this is where a lot of us start. A lot of us are like, all right, it’s up there. And then for a lot of you, this is it for the next five years. It’s that sad, right? Because you’re sitting there and you’re like, Okay, what’s happening now some of you, when you get feedback on this, you’ll all of a sudden have people go: Yeah, you guys are really cheap. Like, I totally would pay you more. Instead of going: interesting, I would like to take more of your money. You go: nope, keep it simple. That’s what I got to do, right? And then others are like: Hey, you’re, like, a little expensive for me, right? And you go: sorry. Like, I have to, you know, Patio 11 said to raise prices, right? Like he said, to keep the prices high, right?
Well, what others of you then do is you read a Harvard Business Review article and that Harvard Business Review article or a Forbes article. I don’t know why I’m throwing shade at Forbes right now, but I am. And all of a sudden, Forbes and Harvard Business Review go, Hey, good, better, best pricing, right? We need three tiers, because you have different segments of customers you’re selling to. You got that person who wants to pay you more. So like, let’s have an extra tier. I don’t know what the fuck is going to go into it, but like, we’ll just throw some stuff in there, and it’ll be great. And then let’s have, like, an entry level tier, where all of a sudden we can have a little bit little bit less in there, right? And, like, Don’t worry, I still want to talk to Walmart if they come in inbound and take up three quarters of my salesperson’s time. I really want to do that. So let me add this little enterprise to your contact us right now.
And this is great, right? This is awesome. This is so much better than a single tier. But then you sit there and you’re thinking, and you’re like: Okay, if there’s three segments, aren’t there 10 segments? And you’re like: Hmm, I don’t know. Like, can I put 10 pricing tiers on my page? And the answer is, no, don’t do that. But you can do what a lot of mid market and enterprise companies, do they have what are called Shadow tiers. When we look at the fastest growing subscription mobile apps, the average number of tiers the fastest growing subscription mobile apps have is over 13. Now you as a user will never see more than probably two or three of those tiers in your entire lifetime as a user. But what they do is they bring you in, they learn about you, and then, based on your behavior, they go, actually, like, here’s the tier that you should go after. It’s not on our pricing page, but here’s the actual information. It’s gonna help you with this particular feature set, right?
I’m throwing shade, like, very obviously, and I apologize if anyone’s offended, although pricing humor is very, very dark, the thing you got to think about here, this is where you should start. If you wake up and you’re like: Oh crap, we’re two weeks out from launch. I don’t have time to do any research, at least start here, right? Because what you’re going to start to realize is, it’s like, oh, that really large company I never fathomed would come in. They’re just going to self serve, sign up, and you’re like, Oh crap, that’s awesome, right? And then you’re going to have Johnny and Jane’s startup come in, and they’re gonna start using your product. They’re gonna give you a lot of really, really good feedback, but all of a sudden you’re doing a little bit better, and you’re setting yourself up for, like, just some good research, right? And maybe you do a little research, maybe you, like, read a couple of other blog posts, you collect a little bit of data, and you start to realize, okay, like, it seems this is where we should be priced, let’s put some actual special features, because we’re going to align a particular type of persona to that tier, and then we’re going to have this upper level tier that’s like, again, aligned to a particular persona, and we’re still going to keep our enterprise for, like, anyone who’s really large that comes in, right?
You’re cooking along. You maybe have, like, a salvage offer tier for people are trying to churn. You have this other enterprise tier. The next thing, and this is the thing that everyone should focus on in the room is what’s called a value metric. A value metric is how you charge. So this particular tier, you get 500 widgets, or what sits or whatever we’re selling with these fake pricing tiers. Here that tier, you get 1000 and then up there you start to get to incremental pricing. Now, value metrics are so beautiful because they bake growth into how you charge. All of a sudden you have that enterprise company that comes in that wants 1000 seats. You’re not charging them the same as the Johnny or Jane startup that only has one seat, right? And what’s really, really beautiful about this is that that growth is very, very apparent.
The yellow here, you’re looking at value metric based pricing companies and basically their year over year growth. The green here, whatever the color. This is goldenrod. I’m not really sure we switched to yellow. Like, that’s the brand colors at paddle. I’m not a huge fan, but, like, I’m there, right? I’m going all in on it, OK? So just like, I haven’t really accustomed to this.And the growth is coming from the fact that your churn tends to be much, much lower. And the reason the churn is lower is because when Johnny or Jane startup is paying for three seats, they don’t have this resentment because you’re forcing them to pay for 10 or you’re forcing them to use a bunch of features that they’re not using, right? So downgrades will go up, but your churn will go down, and they’ll take a downgrade over churn every any other day.
The other thing that’s really brilliant about this is, all of a sudden you have expansion revenue that’s baked into how you make money again. So instead of having a situation where you’re like, hey, lead, can you please, like, upgrade to this feature, like, this feature, you could really, really use this feature. I know you’re already paying this, but this is the feature that you really, really need. Instead, you have a conversation that’s like, hey, congratulations. You guys are using 30 C sales. That’s amazing. You guys must have grown. I’m just going to bump you up to the 30 C tier, but let me know if you have any issues, right? It’s a very, very different sales process, and that exact copy is basically what Wistia has used for quite some time, and it works really, really well.
How do you set your value metric? First thing you’re going to do think of what is the perfect measure of value for your business? Doesn’t matter if you can measure it. Doesn’t matter if your customer agrees with it. Think of the perfect measure of value for a company like HubSpot. It’s money you make through their marketing software. Now if you can measure that, which HubSpot probably could, and you can get your customer to agree to the measurement, that’s the value metric you should use. We do this with retain we charge you based on how much churn we recover for you. We can measure it. We can get you to agree to the measurement. It’s a perfect value metric, but only about 10% of companies can do that. HubSpot can’t even do that because I wrote the blog post. So how much of that 100 grand is mean, how much of the 100 grand is HubSpot? It’s really hard to tell, right?
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So the next step is, what are the proxies for that perfect value metric, things like number of contacts, for HubSpot, number of users, number of visits, all of these different things. And then you’re going to go collect some data, you’re going to go do a little research, and you’re going to come up with one, maybe two value metrics. What’s the one thing that scales with our customers using our product? That’s the thing that you’re basically going to set up, and you should revisit the levels that you give out, but your value metric probably isn’t going to change dramatically over the lifetime of your company.
Next up, maybe we shouldn’t sell all of our features in every single tier, right? Maybe we should use add ons. Add ons are one of the most underutilized aspects of B2B SaaS pricing, and they’re one of the easiest things for you to implement. And the reason is that you have built a lot of stuff right over the history of your company, but some of those features aren’t really used by a lot of people. You all of a sudden have these features that are used by less than 40% of the people in that tier, or less than 40% of your customer base in general. And instead of just kind of continuing to keep that value within those tiers, we can break those particular add ons out and we can sell them to the entire customer base, right? And these are normally not fully featured products. These are like individual features.
My personal favorite is priority support. Every single company in here can sell priority support. I know that breaks your heart. Nick I’m so sorry, but I’m not really that sorry about it, but doesn’t mean it’s bad support if they’re not on priority support. But in doing a lot of pricing research, we found that about 20% of just software buyers, they essentially are willing to pay for their phone call or their email being answered before everyone else, and you can have great support even if they’re not paying for priority support, but everyone can do that, in particular customers with at least one add on typically have about 20 to 50% higher lifetime value. It’s not only because they’re paying you more, but they tend to stick around from a retention perspective as well.
Last bit here, if you’re selling internationally, 20% of your customer base is outside of your home region. You should do what’s called price localization. So here, you’re not only cosmetically updating the actual currency symbol of what you’re selling, but you’re also having different relative prices in different regions. And the reason for this is that, basically, people are willing to pay different things in different regions based on the density of products, the competition subset the value that they get.
And they give you a little data here. This is about a million and a half data points in this graph you’re looking at: what is the relative willingness to pay, controlling for VAT controlling for exchange rates – it needs to be updated as of this week or last week. This should be clear, but it’s one of those things you’re looking at, what is the privilege to pay relative to the United States. Nordics on par are willing to pay about 30% more. Southeast Asia willing to pay about 40% less. It does vary depending on the product that you have. Some consumer products, the swings can be hundreds of percent in one direction, not in the other direction, obviously, unless they’re going to pay you to use the product. That was a math joke, if anyone picked up on that.
Anyways, OK, let’s round this out. Customers will never like to see any of these changes. Who here has raised their prices in the past 18 months? That’s not enough. I was going to say I was really impressed by the room, and then the hands didn’t jump up as much as they needed to. One of the biggest barriers to actually raising prices is people just don’t know how to do it. They don’t know how to actually communicate to people. So I’m going to show you some copy, but please, for the love of God, don’t copy this, because you’re going to ruin it for everybody. OK, use the framework. Use the template a bit. But whenever you’re making changes to anything that we just talked about, or the hardest one you can think of, which is actually raising your prices, there’s a nice little process and a nice little messaging that you can actually use for this.
So the first step this is where Nick and I have had an argument basically for 10 years. I am not a fan of legacying your customers into their existing plans. I think it’s a really, really cute idea throwing you some shade in the early days of your business, but eventually, unless it aligns with your values. It’s a really, really poor business decision, because you start to get this TAM that you’re really penetrating, and then all of a sudden you’re like: Oh my God, I don’t have enough logos. I have to charge people more. And you’re like: Well, let me build another product, which is already really, really hard to get the first product right, let alone the second product. And so I’m not a fan of keeping customers on their existing pricing.
Do your research. We’re not gonna be able to go deep in how to do your research, which is a little bit of a tease, but I’m a tease. That’s how it works. The biggest thing come on, that was good. That was a good one. Anyways, you want to do your research and do an impact analysis. The problem is, that you never did any research on your price to begin with. So all of a sudden you’re going to do a little research and be like, they’re willing to pay 10x what we’re charging now the data must be wrong. And it’s like: no, you just like, basically anchored your entire customer base to a price you pulled out of your bum. And all of a sudden it’s like, the data is actually right, but if people have more than a 50% increase, they need a little bit more personalized you know, they may need a phone call. Use your best judgment, but the biggest thing to kind of keep in mind here is that if it’s more than 100% you got to stack it across multiple years. You can’t just rip the band aid off unless you kind of want to. But it’s really, really hard to raise your prices over 50% let alone over 100%
But I have seen people 10 times their prices, and not only increase their revenue, but also increase their conversion rate, because they were so down in the market, people didn’t trust the price. We were talking yesterday about this. But in addition to that, they also weren’t in the right part of the market, where people were like: Yes, this is the solution. I want messaging is key.
Here’s how I recommend doing any pricing change. This is going to be specific to a price increase. First thing I’m going to do is I’m going to remind the customer of the value that I’ve provided over the past x months, whatever it is, we’ve made you this much money. We’ve gotten you this many contacts. We’ve done this many widgets or what sits for your particular business. We added that feature a few months ago, and we have this feature that we added in the past year that you use every single day. I’m pulling in actual database information that shows them that they’re actually using the product and they’re actually getting a lot of value from it.
I’m then going to say in the context of them, for us to make the product for them and their team, we need to raise our prices. That’s always a shock, even if they’re your favorite customer, or even you’re their favorite vendor. So what all of a sudden I want to do is, because you’ve been so loyal with us, though, because you’re not like all those disloyal people who have never paid for this product, we’re going to raise prices on all of them today. But for you, because you’re so special and so loyal to us, we’re going to give you the next six months at your existing price, which is worth this much we’re giving you this particular gift. I’m obviously hamming it up a little bit for effect. If you have any questions, let us know.
Then my personal favorite is this. PS, if this materially impacts your business or your life, let me know, and we’ll work this out. It’s for two types of people. For people who are actually hurt, you can have a really good brand opportunity to basically say: Hey, don’t worry about it. We’ll come back to you in a year. Or it’s for people like everyone in this room. If I show you that we’ve provided that much value, and you look at that, you’re going to go, I don’t want to pay more for stuff, but they’re right. They are valuable, and you’re not going to cause a sin, or you’re going to contact them and say, I don’t believe you. This is bad. We hate the product. All that kind of fun stuff. Focus on them, not on you. Thing to keep in mind about pricing, it’s not super complicated.
It’s like everything else inside your business. It’s uncomfortable and important, and that’s why you avoid doing anything with it. But it’s one of those things that when you center in on it, you can do a lot.
Churn and retention strategies
Cool. We still fired up. Great. I have more punches in the face. Ok? For you, for me, I’m not really sure, but we’ll see. All right, let’s talk about churn. I have an argument with most product people, Nick, these types of people, they say things like this. I’m not saying Nick has said this, but they’ll say: hey, when it comes to retention, when it comes to churn, if it was valuable enough, they would stick around, right? Who hurt? Who here has heard something to this effect when talking about churn or retention, right? Not enough people read Hacker News very clearly. It’s a cesspool. Don’t worry about it. I get it. Yeah, the problem with this particular statement, and the problem with how we look at retention inside a business, is that it’s not very binary. It’s a lot more like a spectrum. Right on a spectrum of retention, we have our advocates. These are people who love you, GT crowd reviews. They buy everything that you put out. The other end of the spectrum, you have people who hate you, like literally hate you. They write really bad reviews. They tell people that they should never buy your product, and in the middle, you have this point of cancelation, right? Most of the things that we talk about when it comes to retention, most of the talks you see on retention, they basically focus on these ends, right? How do we make the value of the product? How do we get the jobs to be done? And that’s really, really important. That’s why you need a really, really great product leader. The problem is that we found in the data that 40% of the time that someone hits a cancel button, it has nothing to do with you, absolutely nothing to do with you.
Now, if the product was valuable enough, theoretically, they would stick around. But there’s this whole chasm in between the strategic retention that we call tactical retention, where all these things that can give you a nudge in one direction or the other, to go from wanting to cancel to not canceling, or to go from kind of being on the edge to being basically an advocate or someone who really likes the product.
Now we require some effort here to go through these couple of things. One, optimize your term length. Basic idea, it’s really easy for everyone to understand those customers who are in our longer term plans, quarterlies, semi annuals, annuals and above, they typically have about two to 800% higher lifetime value than those who are on monthly plans. Very easy to understand, right? The problem is, the only time we ask these folks to get on annual plan, unless we’re forcing the annual plan, is when they sign up, which is kind of like using the old metaphor of like, Hey, we’re on our first date. Do you want to get married? Right? It’s not great. Works for some people, I guess. But anyways, the issue is, is you want to be going to these customers, especially in SaaS, from two to 10 months of being a customer and essentially asking them, hey, you’re awesome. We’re awesome. Why don’t I give you one month or two months free? And we found those whole numbers work better than percentages, and make it a really clean experience where they can just reply to the email or just double click in and not go to your billing Settings page, which is probably the worst design page on your website. It’s OK. It’s everyone’s worst design page. You want to make it really, really smooth for them to basically upgrade. And it increases that retention pretty considerably, as we just talked about.
Another big thing for the tactical retention zone is cancelation flows, very controversial in the product community. Basic idea is, when someone hits that cancel button, what actually happens? Right? We have some parts of the community that believe the minute someone breathes on a cancel button, they basically should be canceled. And other people are like, make them call us on certain days and send certified letters. Right? Both answers are completely wrong, right? Don’t make them call that’s more wrong. Let’s just say that’s more wrong. What we found it actually kills your reactivation rate. So yes, you might solve some little bit of a churn, but your reactivation rate will basically tank. But what’s kind of interesting is what we found in looking at a bunch of different cancelations is that you have about 18 to 30 seconds before people get aggravated when they hit a cancelation button. And what we found is that you want to obviously ask, Why are you leaving? Right? It’s really, really powerful to obviously learn why they’re leaving, not only because it helps your product team, but it also helps you kind of learn, what can you do to basically keep this customer but the most overlooked question is, what did you like about the product? And this is a really important question, because what ends up doing is it taps into what’s called the nostalgia effect, where you have this person who’s on a freight train to basically cancel your product, and all of a sudden you can look at them and be like: hey, was anything good, right? And it causes them so that when I look at this particular data, I can then set them up in terms of: Hey, you said this and this. Why don’t I give you a free month? Why don’t I give you $10 off, or you said that your project ended, but you’ll be back. Why don’t I put you on a maintenance plan where I can basically save all of your data and you can pick up right where you left off when you come back, or pausing plans freemium tiers, and it’s also okay to like, let people leave if they say you just don’t have the features that they need. Favorite thing to do is: hey, we’ll keep you abreast of whatever product updates we have. Just let us know, and we’ll keep emailing you about those. But it’s one of those things that if you implement cancelation flows, what we’ve typically seen is that you can actually reduce your cancelations by about 10 to 25% and when you’re thinking about the math, a 10 to 25% reduction in your cancelations is pretty huge for not doing that much work to implement something like that.
There’s the data just in case you didn’t believe me. Cool. How are we feeling?
I’m really relaxed right now. I don’t know if that’s good or bad. I don’t know. I sold a company, so maybe that’s what it is. I guess so, checking your payment failures, like, I don’t need you to like me. Like previous years, I’d be like, please love me. And now I’m like: whatever. I don’t know. No, I’m just kidding.
Last one here, check your payment failures. It’s the single largest bucket of lost customers. If you’re obviously not taking credit cards, it’s not going to be the single largest bucket if you lose 100 customers. About 20 to 40 of them are because of payment failures. It’s terrible. Payments are a weird, Arcane space that I am now in and learning just how weird and arcane it is. They’re mechanical devices that are subject to failure. It’s one of those things to really think about. Most companies can double their recovery rates. It’s that bad because you don’t really focus on it. Because you’re like, we’re going to build new features. There’s no other retention besides features, right? There’s a bunch of stuff we can get into on payment failures. I’ll leave that for the Q and A I wrote a book on this. I’m a fantastic party guest. I write books about credit cards, so I can pass that along as well.
Operations, finance, and people
All right, we’re going to do a very small detour on operations and finance. First one, hire a finance person, even if they’re a fractional person, one of the biggest things that held us back, we weren’t investing quickly enough, and we wanted to be like a nice, big company. And basically what ended up happening is we were like, oh shit, we should have spent that money a quarter ago, right? So make sure you hire a finance person, and then the other thing, taxes will creep up on you. The IRS comes for you, like, for a lot of reasons. I can’t wait for a comment from this guy over here, but the thing you got to think about is sales tax. It’s not something you can just, like, avoid at this point, especially if you’re selling into Europe, they will come for you eventually. I was talking to a founder friend who’s been growing and everything’s great. They raise money. They’re kind of on that particular path. He texted me. He’s like: I have a $4 million tax bill that I had no idea existed. It can kill your business. He’s going to do okay, but it’s one of those things that like just make sure the operations and finance are taken care of.
All right. Last point, who here has a team member on their team, at least one. There we go. You count as one so everyone? No, I’m just kidding. This was told to me the first year in business, and I thought this was the biggest crock of crap ever that people are everything just shows you where I was emotionally 10 years ago. But the thing to think about is, people are everything right? It’s one of those things that, like, the people you hire, especially as you’re scaling your business, they’re building the thing that’s building the thing right, like they’re the ones that are basically putting everything out there. But what’s really fascinating is, I’ve been going deeper into this, because I think one of the big reasons we weren’t like a billion dollar exit is because we started to get people right, like three years ago. But if we had gotten it right maybe six years ago, maybe the outcome would have been a little bit different. And I started looking to some data. Fun fact, the average tenure of a manager inside a tech company is only about 18 months. Director on up. It’s about two years, right? So you’re sitting there and you’re like: Yeah, people are everything. People are really important. But the people who actually defend your culture, they’re not really there that long in order to actually defend your culture, right?
And so this has got me thinking a lot about things around culture, and there’s a couple of things that we really, really learned. There’s a lot of things we got wrong, but a couple of things we learned, which was, first off, a lot of us were really scared of people. There’s this concept of founder fear that I’ve been talking about lately, and with founder fear, you work to get it really, really small in your head, but it’s still there, especially if you’re a first time founder around. If I make this decision, if I put the stake in the ground, I’m going to lose that person that took three months to hire, right? Or if I don’t do this thing, the investors aren’t going to come into the next round. Like it’s something that really, really shapes you in a reactive way.
And second time founders, they get really, really good at avoiding all of these founder fears. But I think the thing to kind of think about is like, you need to define who you are for, and, more importantly, who you are not for when it comes to your particular culture. I didn’t realize this until too late. It’s just one of those things where we were always like, Okay, if they don’t agree with one of our values, we can change them. We can, like, bring them over to our side. We can, like, take away 30 years of development of their life in six months and teach them that this is the right way. Right and it wasn’t in an arrogant way. It was a very much in a we just think this is world is better when you think this way, right?
And one of those things, just to give you a little bit of example, was this whole concept of giving the most charitable interpretation. And the basic idea of the most charitable interpretation is, let’s say Chris and I have a disagreement, which often does happen. What Chris can hear is something along the lines of: okay, Patrick just kind of aggravated me a little bit. But I don’t think he meant to aggravate me. Like, I’m gonna give him the most charitable interpretation, and, like, move on, right? And if Chris can’t do that, he’s gonna talk directly to me in a positive way. He’s gonna be like, Hey, man. Like, I don’t know if you realize this, but when you, like, say that thing, or you wear that shirt, it really offends me. Normally, it’s not wearing a shirt, but like, you get the picture, or it can be a negative interaction. Or if we’re working together, you can go to a manager, go to HR towards the end, right? And then we trust people to be adults. And basically, like, if you have a god forbid thing, like, obviously use your judgment, or if you’re in doubt, go to HR. Right? Now, this is something we really, really believe. We found it really important.
The problem was, as I said before, for so many years, we were trying to just like, teach people this, rather than just hiring people that really believed us, internalized it and went across with what our culture was actually looking for. And so we got to the point where, if it’s hard for someone, what we would tell them in the interview process is just like, hey, we’re not better than you. You’re not better than you. You’re not better than us. It’s just this is how we handle situations, like we’re not going to be a great place for you. And that was the hardest thing to do, because we were like, Oh, we’re not going to be able to hire anybody if we do this right? And the minute we started doing this, the minute we started firing people who just weren’t on the same wavelength, all of a sudden everything got better. Like everything emotionally was better. Everything from a growth perspective, was better, because all of a sudden we had people aligned in the real aligned in the really important things, and then we had diversity on everything else. That was a really, really great time to have in the lead up to the actual acquisition.
Chaos and alignment
All right. Last point, I promise. Last point, we’re going to talk about chaos, right? So one of the most annoying things for the past 10 years was there was a good three year stint in profit wells history where every other all hands, someone would ask, What even is the vision? And me as a first time founder, I would sit there and go, I have explained these three sentences so many freaking times I said it last meeting, what do they not get? Right? Do they not get and the issue was, I had a very, very poor view of what alignment was within an organization. And the thing that I realized as we scaled to about 100 people, is alignment is everything, because we have this view as founders, because it’s in our heads. We thought of the thing, we’ve explained it a couple of times. So we have this vision that, like, we’re gonna go on our mission. Everything’s gonna be up into the right. It’s gonna be amazing. We’re gonna hire some people. They’re gonna be just really aligned with us, and then we’re gonna hire more people, and everyone’s just gonna get it right, because I thought it, therefore they could think it. And we’re gonna hire a couple people that just, like, don’t fit, but we’re gonna, like, bring them back to basically going forward, or we’ll let that person go, because they just don’t get it right?
This isn’t reality, though. This is what reality looks like, right? You have the product team thinking they’re building for that customer. You got the sales team going and acquiring that customer. You have your buddy who really is aligned to you, but it’s just not enough people, so all of a sudden your mission just looks really, bad, right? And what’s interesting is that it’s hard to move people generally in the same direction, but the framework that we came up with was pretty simple, pretty straightforward, and it really started with just defining what the mission was. And this was the hardest part. What are we for? What are we doing? Because it meant that we had to give up a bunch of different things. And we looked at, we exist to grow subscription revenue automatically. That was our mission. And then we tied it to what is called a mission metric, which is basically, if there’s one metric that goes up and it encompasses so many different things, that means we’re progressing on our mission, then what we did is, is, what are the things that are going to help us win for us, it was this concept of do it for you. You will not see a WYSIWYG editor in any profitable product, because we do it for you, we productize it, or we have a human being do it for you, and we’re going to be the most helpful brand in SaaS. That was a huge guiding principle for us.
And then what happened is, every department leader can put together. What is their strategy? Where are they going to go? How are they going to win in the context of this particular mission? And then they can define, basically, what is the process, what is the metrics that they have? And then, most importantly, what we call tempo, which is basically what is the expectation of how often they’re going to ship, whatever the thing that they’re in particular going to ship. And when you have these three structures basically sitting as one. What we found, which is really, really brilliant, is that you had from basically leader level all the way down to entry level employee at least as much alignment was needed to understand where we were going and how they were contributing to the mission. But you also had expectations setting with every leader, because all of a sudden it was like, Well, you guys said you were going to do this and you’re not doing it. What’s going on? How can I help? What are you blocked by? Right? This was really, really helpful, because it brought us together and allowed us to be really, really unified in what we were going after. I’m a big believer now that alignment is how really high performing teams become a high performing company. Because obviously, culture is important. People are really, really important. All right, how we feeling? Everyone get some value. Did I put you to sleep? That’s kind of my goal. I was doing a really sultry version of this. Don’t know what I meant by that. That got weird. Sorry. All right,
Wrapping this up, grow and run. Okay, you got a lot of things that push you forward, a lot of things that hold you back, be a lot more efficient at those things that hold you back. Be a lot better at those things that help you grow. You gotta cuddle with the chaos. Okay, this stuff’s hard. None of this stuff’s linear. I talked about in a very linear manner, because that’s how humans communicate best. But it’s not linear. There’s a lot of this stuff that’s gonna be screwed up. There’s a lot of fires you’re gonna let burn, but the. Big thing is make sure you keep going.
That’s what I love about communities like this. I was a scholarship in 2012 Dharmesh Shah sponsored me to basically come to this conference, which is great. Been coming back a long time like these are the types of communities that you really, really want to dig into. And it’s one of those things where, like, just make sure you ask questions, all the stuff everyone’s struggling with and some of us have figured it out. Some of us think we’ve figured it out, but it’s really important to keep going and cuddle with that chaos. If you have questions, patticus on Twitter, **@pa*****.com if you message me on LinkedIn, you’re dead to me. Okay, it’s a cesspool. I don’t check my LinkedIn messages. I apologize. I should. I shouldn’t be that mean to LinkedIn, but it’s not mean to you. It’s mean to LinkedIn because it’s terrible. So anyways, but find me at the email address, find me on Twitter, and I’m happy to answer any questions.
Q&A
Mark Littlewood: Imagine how much wiser you’d be with a bigger beard, right?
Patrick Campbell: Almost brought a scissors up to cut that thing, actually.
Mark Littlewood: Santiago, you go first. Yep.
Audience member: Thank you very much. So, regarding choosing the item of value, I don’t remember the name you used for choosing the pricing. I worked for a startup, and we were offering basically a database. So one logical way to do it is by storage, yep, but then I don’t know, the company got acquired now a larger corporation. One of the problems is how the price is structured, because now they’re paying their people, paying customers, paying 1000s and 1000s of dollar, dollars on a very cheap commodity right now, that’s average. So how that’s one aspect of it. The other one is, let me remember…
Patrick Campbell: How about I answer the first one about when you have a commodity in the market. Profit Metrics, it didn’t start off free. We were like: oh my god, we were helping this company with their pricing. All of a sudden, they were calculating MRR incorrectly, and they were about to IPO. And we were like, we’re geniuses. We can do basic math. We’re going to have a billion dollar company. We’re going to buy Ferraris on building a subscription analytics product, right? Like that was our vision. And then we realized, Oh, crap, graphs are commodities, basically, right? And the reason I give you that background is because when you have a commoditized product, you have a couple options, right? They’re not. None of them are great. One, you just go down to the commodity, and then you have to sell additional products, additional SKUs, to basically boost that LTV over time. You can make the choice to go to the direct bottom of the market and basically give it away for free, but then you need some way to basically make money and boost that basically margin based on a loss leader. And then third option is trying to go premium, right and in commodity, commoditized products, if you’re trying to go premium, it’s incredible. It’s incredibly difficult, like, almost to the point that, like, it’s not worth it. And in our example, it would be like, going up market. This is why most analytics products start off with, like, we’re gonna democratize this metric across the world, and then they’re like, nope, Fortune 2000 that’s who we’re selling to. That’s basically how it works. And so, yeah, it’s really hard, and sometimes the best option is to move to another market. Yeah, verticals sometimes help with that as well.
Audience member: The other one component of it is how not to deter the customer using the product. So, for example, going into the storage team because they came back mainly the ones in the lower part of the market go. I just want to back up everything. I’m going to manage that on a whatever Dropbox, and then use your product, which has some really interesting features to play with the data, but I’m just going to store that got it, by the way. So how can you not deter your customers to, let’s say, share a seat, or, in this case, back up the data and use something.
Patrick Campbell: Yeah, I think if you’re seeing that behavior, it’s a sign of like, it’s a sign of what I just talked about. Like, if you see people sharing seats and getting the exact same value, it means your value metric shouldn’t be seats. Seats is, like, a very archaic value metric, like, basically, where seats came from is we used to sell perpetual software, and then we were like, oh, there’s this cloud thing. How should we price it? And we were like, Hmm, we did seats. Let’s do seats again. But SaaS and billing has gotten to a point where it’s actually, like, we can do so many different things in how we charge. That’s the first thing that I would look at. But if it’s still commoditized and they’re like, working around things, it’s one of those things where you can offer, like, all in plans that, like, just kind of skip to the end of that particular, like, back and forth, but you got to do some product and market work, and it might mean that you have to just commoditize out. I don’t know enough about your business to, like, make a call, but that’s how I would look at it. Thank you. Thanks, man.
Mark Littlewood: Next question, sorry, you’ve got a light behind you so I can’t see your face.
Audience member: Hey, Eugene. Thanks a lot for the presentation.
Mark Littlewood: Oh, of course it is!
Audience member: Slightly side tracking a little bit, not the main topic. But you’ve mentioned that as you send that email about price increase, you actually mentioned that, Oh, you guys are using all these cool features. So are you actually, I mean, you’re super data driven, obviously. Are you disclosing to the customers that you’re actually looking at what they use and how do they take it? Because we are kind of thinking of like, how far can we push it? Can we tell them: hey, you haven’t been using this? Maybe you should try or like, can we be open about it? What’s your experience around that? Or do they feel like we are spying on them?
Patrick Campbell: Yeah, interesting. I did work for the NSA, so that’s, that’s an interesting that was my first job out of school. Great. I think, I think the thing so there is a line, and it’s kind of like, how the Supreme Court defined in the US, this is not, there’s a lot of international folks. I’m not gonna use this reference. Because it shaded really quickly. But now I have to, no, I’m just kidding. But the basic idea is, like, there is a line, and it’s hard to, like, define, you kind of know it when you see it. And so I think that, like, we send an engagement email that’s like, if engagement drops, meaning, like, daily active usage in an account just drops. We send an email that’s like, hey, we haven’t seen you in a while, right? I think that’s fine. I think it’s like, Hey, I saw you use that feature at 12:02pm on Thursday. Like, obviously, that’s a little too far. But I think that using usage data in terms of engagement, like, it doesn’t always have to be usage data. It’s like: Hey, you have this many seats. Hey, you’re using this, that type of thing. But I think when done elegantly or, like, even a little haphazardly, it kind of shows that you’re, like, connecting with that user, and you’re getting into the mind space of, like, oh yeah, we do have a lot of users in this app, right? And so it’s the best I can do, unfortunately, with that answer. But I’m happy to look at any email copy or anything like that, if it’s if it’s useful.
Audience member: I was wondering about founder fear.
Patrick Campbell: I think that founder fear, like, prevents you from pushing sometimes, like we’re all kind of wired as founders a little bit differently, like some of us are, like, a lot more insecure, like a lot of us are really insecure. And then there’s like, a very small including myself, just be super clear. And then there’s like, a really, like, small group of people who are, like the bulls, and they’re just, like, tearing through the walls, right? That type of a thing. And so I think if you’re not that, and you know, if you’re that, I think it’s okay to push a little bit,
Mark Littlewood: You missed yesterday because you booked a flight the day late, which is the kind of thing I do.Okay a question.
Audience member: Hi, Patrick, thanks. I’d like to squeeze in two quick questions, if I can. First is: if we looked at moving from a seat base to a value metric, and it would create chaos in that, you know, the correlation between seats and metrics is not are in value is not there. So people, our legacy customers, would be paying vastly different prices. So the question is, well, do you just leave those behind on the old seat pricing and then move on with your new customers. And then the second question is, you know, periodically improving pricing on drinking that kool aid, but how do you manage the risk that you change your customer persona, you drift off market far? Yeah. Then, you know, unintentionally, then suddenly your pricing, your messaging, is that a whack on your website?
Patrick Campbell: That’s a really good question for some of the last question’s really good for the other speakers, or a number of the other speakers on positioning and marketing and those types of things. But I think that my like, quick take on the last one is like, one of the biggest mistakes people make, I would argue, in business, but in pricing in particular. And the reason I love pricing so much is like, it’s the center of what you’re doing, right? Like you’ve created this value. And because we don’t act in markets where we’re trading like goat for wheat, like we sell things, like you’re saying this value is worth this much, right? And that’s like, a very beautiful thing, if you think about it, the reason I bring that up is like, you can’t be everything to all people like you can, right? And so if you’re going upmarket, and the entire marches upmarket, you’re probably having a product that, like, can only be sold at market. And then you can do some like startup plans and these types of things. Like HubSpot actually did really well with this, because they basically said, at some point, if you’re not our I think it was like, mid market Mary or something like that. If you’re this owner, Ollie, which is a smaller business, we have a lot of content for you, but, like, we’re not going to price for you, right? And then eventually they added the freemium products for that particular group. So I think it’s if you’re drifting. There’s a lot of things you can do from a messaging perspective, but you also have to question, like, are we a product that scales from small to low? Large, like some dev products do that, or are we a product that, like, we’re just choosing a new market, we’ll do some backstop things to protect our flank for the early stage on your value metric question, there are some markets where per user pricing is ingrained. You can’t sell a CRM, or it’s really difficult to sell a CRM that isn’t seat based, and that’s okay, right? Like, if you have a market that’s truly ingrained like that, or a customer base, it’s okay to keep them on legacy, right? And this is kind of the problem with not changing your prices for years is like, you’ve just so ingrained that customer base, rather than, like, keeping them up with the time and keeping them up on that value exchange of like, Hey, we’ve improved the value, therefore we’re expecting more, more like, monetization from you, essentially. So I think that’s the thing to kind of think about. And worst case, you can just keep them alone. Best case, there’s ways that you can kind of bring them along, where you’re like, This is a new product. It’s so much better than the old one. It includes a lot of the old one, but it’s got all these new features. And then they upgrade. This is how a lot of people do the perpetual to SaaS transition. Is like, they either just say, no more perpetual licenses, like, we’ll support them until they’re done, or they say, like, this price on perpetual is going to keep going up, and then for SaaS, like, it’s going to be cheaper and cheaper relative to the perpetual that type of thing. So there’s some things you can do, and I’m happy to
Mark Littlewood: Talk about cool. I wasn’t being mean to James. He’s missed a day of networking so everybody knows who he is, and everybody’s gonna be able to go up to him, Oh, we’re all friends here. Yeah, rip each other. Gonna go up to him and tell him what he missed yesterday, and start to fill him in, and you’ll meet more people. Ben.
Audience member: We have a lot of interest top of funnel, and we’ve just started looking at freemium to support the middle of the funnel piece that you just described. One of the things that we think art is a necessity for you to make a decision to move forward, is you see your own data in the system of oil. Probably similar situation. Two problems with that. One: getting clearance, because we sell the big enterprise, getting the authority to or the authorization to allow that data to come in. And then a lot of times it’s bad data to begin with, and they’ll say, Well, let us work our way through the data, and then it stalls. So I love freemium, but talk a little bit about when freemium needs customer data. How do you work through that?
Patrick Campbell: So the second one, the way we handle it. So we started building on stripe. Stripe has an intense number of permutations of how you can implement and use stripe, right? So the answer for us was, we are going to handle 1300 edge cases, and we’re going to attack every single one. Because our thing was data accuracy, right? We noticed in the market the rest of the free story was: Oh, we’re going to sell this thing and buy Ferraris or something, I don’t know. And then all of a sudden it was like: Oh crap, there’s 30 different competitors, because everyone was building on stripe, and they all had a lot of these pretty graphs, but we found out they’re really inaccurate. So Johnny and Jane startups didn’t really care about the accuracy. So they were like: Yeah, let’s post this company and this company on Hacker News. Everything’s amazing, right? And then all the people who, like, were gonna pay money were basically like: No, this isn’t accurate. And so we took 18 months and basically built the most accurate metrics, which is kind of like the worst Sisyphean task, because people don’t really appreciate it. They only notice when it’s wrong, right? And so the answer to that question is, is, like, find a place where you can, like, have that accuracy. Maybe it’s a preview of, like, a state or something. I don’t know the exact data source for you. I understand your business, but I don’t know exact data sources.
Or what we ended up doing is we had, we called it like white glove service. And basically what we would do is, is they would ingest their data, especially for like, like, ironically, like, recurrently charged some of these other billing systems, the data was more accurate for stripe. For a long time, we’d have white glove service, and then we had a QA script that basically looked at and it was like, Okay, if the QA script passes at like, 99% or something like that, we’ll like, just send the email. But if it’s below a certain threshold, like a product person has to actually look at it, and then sends an email and like: hey, let’s get on a phone. And then they get on the phone, and they’re like: hey, and even free customers, right? Hey, just so you know, like, the data is not accurate because you’re doing x with your data and y with your data, therefore, like, here’s kind of what it looks like. Here’s a demo. But we would need to like fix this, and we already have it on the roadmap, and it just took a commitment to like data accuracy, because whenever we were building features, whenever we were building features, whenever we were doing stuff, if the data wasn’t accurate, we just drop everything and, like, fix it, which was really, really hard.
The first part of your question around, like, permission, I think that, like, it’s sad, but I think the permissioning, like, is a lot easier than you would think. Like we were really worried. We’re like, we need all these logos on our website and, like, trust and all this other stuff. And it just kind of turned into, like, you just have people, like, sign up, and you just made it very clear that they could delete their data. And even when we would publish like graphs and stuff like this, we’d be like, very clear, like, we are not allowed to look at anyone’s account. We can aggregate the data, that type of a thing. But I think ultimately, like, it’s just like getting customers and users all of a sudden people are like, Oh. You use this like, as well. And then anytime they would have those questions, we had a very, very clear like, privacy policy and stuff like that, especially when you’re going after mid market enterprise. And then one of the biggest things was getting them on there so we could sell them stuff, right? And so what we would do is, if they were really upmarket, and they were like, you know, we didn’t have sock at the time, or any of the other, like, you know, compliance stuff. What we would do is we would do, like, a manual way of doing it. We’d be like: hey, just send us a spreadsheet. Go into your account, download here, cut as much as you’re willing to, like, give us, and you can delete these things. That’s normally what people are most concerned about. And then we’ll do the calculations, and we’ll talk to you about it. So there’s just ways around it. You just have to think through the problem. Yeah,
Mark Littlewood: Great. Final stage question for the day. Carl,
Audience member: So mine is just a follow up on this. We sold software to banks, large commercial banks, nice and so, and even small ones. But one of the things that helped us tremendously also helps with that problem. It also helps with moving people along, is we give money back. Guarantee, yep, and it’s actually kind of the the bizarro freemium kind of thing, yep. What happens is, uh, we never had anybody actually use it, yep, but it moved the contracting, it moved the process along, because it de risked it to everybody, yeah. And ultimately, if they you believe you can bring their data in, yep, but they can’t give you your data as part of a trial, or anything like that, just because, yeah, regulatory matters. Totally give them a money back guarantee and say, you know, and it just kills so much stuff, and it moves the thing forward, you risk it to the buyer.
Patrick Campbell: Yeah, same thing as, like, 60 day outs, stuff like that. Like, just give them outs. Do you have a question? All I want is your question. If you have one. I know you’ve seen it already, but I just, I’m always, I’m always excited for your question.
Audience member: Patrick, I have about 200 billion questions for you.
Audience member: Okay, nice. It was over 200 so, like, I’m just putting it out. But it’s actually with that in mind, I wanted to bring the conversation back to the freemium and the job of freemium, okay? I heard you on John Warlow’s podcast, and you were talking about how some you were looking at who would value the free customers right on the metrics product, versus just those from the cash flow. And I was thinking about the job right of the free part of the product, what you’ve been calling Freeman so far, which was originally a term like describing trials or a stage in the revenue process, but it’s actually about building an asset, and whether you could turn our attention for just a minute at the end of this conference, From the question of like building the revenue line right to enhancing the balance sheet and the equity value of your company as a result of those initiatives you took that increased your access to data that you had, that nobody else had reputation in the market, much like we’re doing right now in relationships.
Patrick Campbell: Yeah, it’s a great question, and it kind of goes back to the talk that we had previously here around an acquisition. So it actually it was weird with equity, like, equity value of the company. And the reason I say weird is because, like, when we weren’t going to sell, we didn’t want to sell, like, that wasn’t the intention. We were going to raise money for the first time, because we were having a lot of, like, $10,000 arguments, like, we have these five initiatives, they all should be funded. But we just are scared. You know, there’s a lot of fear, right? And so what ended up happening is we went to advice, and then Christian, the CEO of paddle, was like: Well, if we bought you right? And then we kind of went off to the races. We talked to like, 12 different people. And the reason to give you that context is that we didn’t talk to PE specifically, because we had this whole vision of, like, one, it’s like, I know our product team would be pissed if we went to PE, and PE was like, we’re gonna mine this data and sell it and all that kind of stuff. And that’s not the like contract we made with our customers, even if we legally could.
And then the other thing was we wanted to keep going, like, we wanted to keep going on this particular problem. And so the reason I bring that up is because PE, and it’s not, not everyone’s equal, but like PE, basically it’s like, this type of revenue, this multiple, this type of revenue, this multiple, and there’s, like, typically, a pretty tight range, like, based on what they’re doing, and not always right. But for strategics, all of a sudden, the media arm was a huge moat, especially for, in this case, a British company that didn’t have a lot of US presence, and then the freemium model was also because we have, like, we have 1000s of potential leads, essentially, that are, like, using our product every single day, right? And so when it came to us, was very similar to the story that was told earlier, which was like, what’s the number that gets done? Right? Like, that’s how it kind of became, because the first drafts of offers, and we were lucky enough to get four Lois, or, like, we’re gonna send it. But then we were like: Don’t send it if we have an obligation to tell lawyer, like, you know, that type of a thing. But what ended up happening is, like, we had this, like, service ish revenue, like, they were like, like, the multiple was there.
Then we had, like, our pure SaaS revenue, and then there was, like, this plug that was just made up for, like, the freemium side and stuff like that. And we just looked at it, and we’re like, yeah, if that’s it, we’re not doing anything right. And then we kind of, like went back and forth, pitting people against each other, all that kind of fun stuff. And then, actually, the voicemail is public. We filmed a documentary on this. I should have said that if you go to we sign tomorrow.com we did a whole documentary on the deal with paddle, and then the voicemails in it, where I was just like, this is the deal, that this is the number that gets it done. And then, even then, like, we didn’t do this in a rude way or a non partnery way, but we, we like the number went up from from where that voicemail was just given some dynamics. So yeah, I think that gave us the ability to, like, really defend that number, because it allowed us to kind of see that there was this, there was this really valuable thing that wasn’t in the spreadsheet that we were not willing to give up for less than the number that Got it done. Thank you. Thanks.
Mark Littlewood: Patrick, thank you.
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Patrick Campbell
Founder & CEO, ProfitWell
Patrick founded ProfitWell in 2012 to help subscription companies with monetization and retention strategies. ProfitWell provides free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.
ProfitWell was bootstrapped until purchased by Paddle in May 2022 in a $200 million deal and now serves as CMO of the combined business.
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