A product leader turned entrepreneur, John Kotowski has been in the tech industry for over two decades. Working for different companies throughout his career, he saw that SaaS companies still had a long way to go when it came to monetization:
"Product teams have become increasingly better at creating value for customers but they are still really bad at monetization, the process of deriving revenue from their products. They usually leave it up to sales and marketing — and it's usually an afterthought."
John learned a lot about monetization when he served as the head of product at Format because not only was he responsible for building the product, but he also had to figure out how to grow revenue.
When Format was sold in November 2021, John decided to go off on his own and establish Buyerson, Inc. where they help SaaS companies with product monetization.
Pricing-related issues experienced by SaaS companies
Revenue has three components: acquisition, retention, and monetization. Any issues related to these components are what SaaS companies go to Buyerson, Inc. for. These can be:
- Struggles in growing the average revenue per account (ARPA) or average revenue per unit (ARPU)
- Seeing little expansion revenue (there's an increase in customers but the average revenue stays the same)
- Struggles in understanding how pricing increases or anything related to pricing will increase or affect their revenue
To help their clients, Buyerson's approach is to focus on customer research to help with their pricing problems:
"That's when we usually come in and do consultations on a sprint basis. Our focus is really on customer research: understanding the customers, developing their buyer personas, and understanding their feature preferences. We then work with product teams to implement changes based on those findings."
Factors that result in pricing issues
Lack of customer insights
The lack of expertise in customer research and the lack of time to devote to doing it properly result in the lack of customer insights:
"Pricing and packaging is a big component of it but, ultimately, it's the whole customer journey. One of the big challenges is there's not enough research or expertise about customers."
Lack of ownership
"Pricing and packaging are those things that tend to be neglected and there's no clear answer on who actually owns it."
Difficulty in running pricing experiments
Jane adds that because SaaS companies are pretty tight on resources, this makes it hard to run pricing experiments too:
"The implementation of new pricing or pricing changes is not always as easy as changing plans in Stripe. It sometimes means implementing a completely new onboarding flow, a rework of the UI that's related to billing — which can be intense on the resources."
The research process at Buyerson, Inc.
John's consultancy is focused on developing the client's buyer personas. This helps them understand the quantifiable attributes for segmentation. Eventually, they use segmentation to identify the pain points per segment:
"For example, Figma has a lot of customers. Some of them are free, some of them are paid but they do have different tiers. And one of the attributes they could be using is how big is the design team. So if it says 'solo', that's one buyer persona. If it's a designer working on a team of five, that's another one."
Here's a rundown of their research process:
- Interview internal stakeholders and get their perspective on segmentation
- Interview customers to understand pain points and what they value about the product
- Develop buyer personas
- Ask customers about pricing-related questions
When asking those pricing-related questions, how do you make sure that customers' answers are closer to the truth (eg. willingness to pay for the product)?
You won't be able to get a perfect answer, but you can get it once you start charging clients and see if they actually pay the price for your product.
Another way is to use studies and surveys like the Van Westendorp Pricing Model that asks four questions:
- At what price would you consider the product cheap enough to question its quality?
- At what price do you think this product is starting to be a bargain?
- At what price point do you think this product seems expensive?
- At what price point do you think this product will become too expensive?
You then plot the answers on a graph which gives you an approximation of the average price point that you should be going after. It's also good if you look at the prices offered by your competitors:
"If you have a poorly differentiated product, chances are somebody may be trying out different sets of products, not only yours. If you raise prices too much, they may leave and go to a competitor if your product is not differentiated or sticky. So it's a combination of research experience, competitive analysis, and going with your gut feeling."
Experimenting with pricing changes
It's normal to feel a little anxious about increasing prices because it might have a negative impact on your revenue or reputation. John's team uses data in their format to determine if it's okay to raise your prices:
"When you change pricing, you want to make sure you're aligning the value that you're offering to these customers. Look for signals in your research or take a look at something like your NPS survey.
If you see that customers are not complaining about pricing, or they're saying, 'This is really good value for the money.' Or if you look at your exit surveys from customers that churn, and if you don't see anybody complaining about pricing, that's another good signal that there's an opportunity to raise prices."
How do you experiment with pricing changes? One way is to implement them only to new customers and grandfather the prices for existing customers:
"You can give these existing customers a year or even more before moving them to the new pricing. You can always roll back these pricing changes."
Another way to do it is to give customers smart discounts:
"You can also apply what I call 'smart discounts' where you give them some amount off at first and then the full price kicks in."
Tactics for increasing your growth through monetization
But can you still use monetization for growth despite the current global economic situation?
"In the current economic situation where there's a lot of inflation, a lot of companies are trying to figure out how to grow. Despite all this inflation, monetization is one of those levers that's usually untapped because there's a lack of ownership around monetization."
So how exactly do you leverage monetization for growth?
1. Raising prices
Even if you don't do a full-blown pricing study, you can still raise prices by looking for signals that indicate that your products are underpriced:
"Look through your NPS comments and your cancellation surveys. If your churn rate is pretty low (under 1% per month), that's another signal that there's room to raise prices, especially if you have a sticky product where the switching cost is pretty high."
When doing this, it's best to align the prices with value and your buyer personas:
"Figure out who your customers are and how to split them into buyer personas that describe their attributes and their feature preferences."
And then start modeling it to see the sweet spot of the price increase:
"If by increasing prices, the net effect is better than the loss in conversions and churn rate (because those will inadvertently go up). That's where the sweet spot is."
But when you do raise prices, make sure you communicate and reinforce the value to your customers to justify the increased prices. As an example, Netflix softens the blow of the price increase by sending emails to users, showing them the new shows and movies that they can stream on the platform.
2. Adjusting your plans
SaaS companies usually do "good-better-best" plans that go along with different feature inclusions. To determine these, you have to identify which features customers are willing to pay extra for.
When John was still at Format, they had three plans which were: basic ($6), pro ($12), and unlimited ($25). Because there were so few customers on the unlimited plan, they decided to scrap it and replace it with a new one:
"The difference between pro and unlimited was $13. It was more than the price of pro, which was $12, and there wasn't enough value for somebody to go to that plan. What we ended up doing is scrapping that plan and introducing a middle plan called pro plus. At the end of the day, we ended up shifting new customers to the middle plan, which is priced at $18 versus $25."
By introducing this new plan, they raised their ARPU by 25% overnight.
3. Applying smart discounts
Giving discounts can be a slippery slope:
"You see a lot more conversions from customers and once they get the discount, they often ask for the same price."
To avoid this, John suggests giving out smart discounts where you incentivize a user to sign up at a lower price point. For example, QuickBooks promotes the first three months at 50% off, lowering the entry barrier from $22 to $11 a month.
"It's sticky enough that when the full price kicks in, they're getting the full revenue. So they're getting the original price ($22) for the entry plan. But because they lowered it to $11 with 50% off for the first three months, they increased their conversion rate because the sticker shock isn't as big as the original price."
Ownership of pricing and monetization
Who should be in charge of the pricing and monetization? John believes this should be the product teams because they know the product better than anyone else:
"The product teams are the ones who are creating value through the product. So when they build products, they need to deliver value to the end users. Monetization is all about deriving revenue from that value so they're in the best position to understand the customers and the value that they're delivering."
But in reality, what happens is product teams are more focused on building features. Pricing and monetization becomes an afterthought and are passed on to either the marketing or sales teams.
"I've been at companies where pricing was left up to sales where salespeople were making up their own pricing. That's probably the worst thing you can do because they're not incentivized to maximize pricing. They're incentivized to close deals.
I've also been at companies where marketing has been in charge of it but they don't really understand the product or the customers enough. They can put together really nice pricing pages but it's not necessarily based on research."
Because the product teams are at such an advantage, John believes that this should be incorporated into the roadmap planning and the product strategy process.
"Before building something, you should really determine several things: how is this going to be monetized? Are we going to release this feature for everybody? Is this going into the premium plan to acquire more customers? Or is it going to be only available to our enterprise users? And here's the revenue we expect from building this feature."
Credit card upfront vs no credit card required
When it comes to credit cards, you have to balance between getting more users into the product versus getting their credit card information because you are introducing friction in the signup:
"If there's a free trial, no credit card required — that's the least amount of friction — so you'll get the most trials or free users that way. If you ask for a credit card upfront and you say that they can cancel at any time during the 14-day free trial, you're introducing a friction point where there can be drop off."
If you want to test which one is better, you can do an A/B test for different cohorts:
"Unlike raising prices, you can experiment with different cohorts to see if you ask for a credit card versus don't, how they convert at the end of the 14 days."
Ultimately, this will depend on how quickly you can get users to the "aha moment" during the trial period.
"If you are doing a free trial, you want to make sure you're using it properly. By properly, I mean use that period to demonstrate value and help them develop habits where they start using your product. So by the time you do ask for that credit card or you charge them, they feel convinced it's worth paying for."
You also have to consider the length of the commitment, because this will determine churn:
"Are you doing monthly billing or are you asking for a yearly payment upfront? With monthly billing, the churn is much higher. With yearly, the churn rate is lower because the user only has one chance per year to cancel the subscription. You can artificially push people towards annual plans if you provide steep enough discounts."
Another consideration would be the frequency of product usage:
"What is their natural frequency? Do they use it every day? Do they use it every week? Is it just oneoff or once a year kind of thing?"
Quality of trials
In our own experiment at Userlist, we observed an increase in the quality of trials when we asked for a credit card upfront. John says this has something to do with the level of commitment:
"If you need somebody to do a lot of work upfront, asking for a credit card sort of increases that commitment. Even though I can cancel before you charge my credit card, I feel more committed."
It's also good to look at the quality of trials that are coming in because you have to consider the cost of support:
"If you're getting a lot of trials that are of poor quality because you didn't ask for a credit card upfront, then you're spreading your support team a lot thinner or have to hire more. If you ask for a credit card upfront, there will be fewer but higher quality trials and your support team can be a little bit more effective in that case."
Tiered vs usage-based pricing
SaaS companies usually go for either tiered or usage-based pricing. But how do you know which one is best for your business?
The first step is to identify a proxy value metric that can be used to represent the value of your product. Examples of this are the number of seats, number of gigabytes, or minutes for video.
"If that ties to the value that the product is delivering, that usually gives you the most revenue."
For example, let's compare Amazon and Salesforce, who both use the usage-based pricing strategy.
Amazon users get varying amounts on their monthly bills because it depends on factors like the number of virtual machines that they used, how many gigabytes were used, etc. On the other hand, Salesforce charges you depending on the number of seats you paid for.
The difference between the two cases? The Amazon services are treated as a utility that is based on consumption (like a telephone bill), whereas Salesforce isn't a utility product.
But Salesforce leverages this seat-based pricing by negotiating with customers upfront:
"What they typically do is they'll negotiate with you upfront and they'll say, 'Hey, do you know how many seats do you think you'll need this year?' And if you tell them 30, they'll give you a discounted price upfront for the 30 seats. Every extra seat will be about $50 or you can buy just 10 seats upfront, but then every extra seat will be $100."
In terms of bill shock, this will depend on the product:
"In the case of Amazon, people are used to this consumption model where every month, your bill will be a little bit different because it's like a telephone bill: the more you use, the more you pay.
With other companies like Salesforce that are not considered to be a utility, there's this price shock. You can apply tactics like Salesforce where you ask upfront or you do discounts. You can also try another tactic where once you hit a certain threshold, there's a trigger in the product where users actively have to get another seat."
Consider billing frequency and systems
"If you sell annual plans, you have to keep in mind that the price increase will take about a year or two to fully take effect. Because if somebody signed up last month and you're raising prices this month, they won't see the price increase until 11 months from now."
Invest in good reporting
This will help you identify which users have undergone the price increases and which haven't:
"The monthly ones are typically easier because you'll get through them in about a month. But the annual ones are tricky."
On the operational side, you also need to decide if you are raising prices for everybody or are grandfathering prices for old customers. Because you might have customers that are sleepers — users that are paying for the product but are not actively logging in or using it:
"In the case of Format, which is a website builder, there's a chance that they still share their website, but there's a lack of insight about usage.
Chances are, if you increase prices for that segment, it might be an opportunity for them to churn, which is something you want to avoid doing. So it might be a good idea to leave them on grandfather pricing until you have a chance to activate them or increase their usage."
However, this might present logistical problems because you will end up with customers on new versus old pricing. But despite the challenge, a good reporting system will definitely help.
The crucial role of customer success teams
Customer success teams play a crucial role in pricing-related issues too because they have to deal with the brunt of the customers' frustrations, which is why you have to equip them:
"The best practice is to really work with them early on in the process and equip them with playbooks. Give them sort of canned responses and tools to deal with some of those frustrated customers that could be in the form of discounts."
Do consider product monetization as an ongoing practice.
"Markets change and competition changes your product and customers. So it's really important to reassess pricing, packaging, and the way you sell your products on an ongoing basis."
Don't be afraid to raise prices.
"It is very time consuming and somewhat scary, but it can have a super positive impact on your recurring revenue and it has compounding impact as well."
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