Pricing Optimization and Monetization Strategies for Startups

00:01 Desi If price optimization and monetization have been on your mind recently, you’ll find this episode super useful. Patrick Campbell is the founder and CEO of ProfitWell, a software that helps subscription companies with their monetization and retention strategies. In this episode, we discuss when is the right time to start thinking about monetization, the golden rules of an outstanding pricing page, How to decide what to bundle with your main pricing and what to leave as an add-on, why design and brand have huge impact on our willingness to pay and much more. Enjoy this episode and if you want to share your feedback, drop me an email at desi@pony.studio

01:00 Desi Hey Patrick. Welcome to the Product Show!

01:03 Patrick Campbell Yeah, happy to be here.. Excited that we could finally connect.

01:07 Desi It’s a pleasure to finally have this chat with you, I’m a huge fan of what you guys are doing at Profitwell. I love how you’re using data and research, the tools you’re building, your experience and expertise to demistify monetization in the subscription economy. I think this is something the industry really needs, so tell me a little bit more about yourself. What’s your background and how did you decide that the world needs ProfitWell?

01:29 Patrick Campbell Yeah, so before, I never wanted to get into business or tech, that was never a dream of mine growing up, I actually started my career working at US intelligence for the US government. And then I worked at Google and that kind of transition happened because I was wanting to save the world and wanting to make the world a better place, so I was like oh let’s go work for the government and let’s do a bunch of fun stuff. But basically, whenever you work for the government, you realize just how bureaucratic it is and when you’re a young, ambitious kid, working for a big bureaucracy is not that interesting and so I thought oh let me go to a giant tech company, that’ll be less bureaucratic.. Sarcasm intended there. And that was very bureaucratic as well, so I just started basically you know, not through foresight, but just kind of reacting to the environment I learned that I wanted to work for myself, or I wanted to work on a small team. So I ended up jumping into the startup world and yeah, I started ProfitWell a number of years ago and we started purely in pricing. We started with a pricing software and now it kind of expanded. But the basic idea is that we help companies basically with their revenue, we accelerate their revenue and the idea really came from, I was working at a company doing the pricing and I realized you know, something that was super important. But no one really knew anything about and that was like a moment oh this is a good idea and it’s a good idea that we can kind of push forward. So yeah, that’s the rambling version of how I go here. 

03:15 Desi Just to explain it a bit more for people who are not familiar with ProfitWell, what exactly you guys are doing?. Is it a product? Is it a service? And the other interesting question is how do you collect the data and how do you use it?

03:28 Patrick Campbell Yes, we have multiple products, so our core product is something called ProfitWell Metrics, it’s used by about 24-25,000 different subscription companies. Basically you plug in your billing system, Zuora, Stripe, whatever you’re using for your billing and we give you access to all of your subscription financial metrics, so your MRR, your cohorts, we give you segmentation, we enrich your customer data with Clearbit info contacts for free and then we also give you access to benchmarks. And that’s all given away for free, because it allows us not only to study the data and implement that understanding into our product, but it also helps us obviously get leads and kind of create the requirement where we’re able to kind of show you like hey, you have this problem and this problem, you should really use this product, which happens to be one of our paid products. And so, then a lot of products are probably most relevant to talk about, one is called Retain, so it automatically reduces your churn, your cancellations, so you just plug it in and it goes to work. And then the other product is kind of relevant, it’s Price Intelligently which I think you’re referencing. That’s a software product where we collect data in the market and the way that we collect that data is basically by going to current customers or prospects, and basically answering some questions you’re asking them some question and then we filter that data through our algorithms to get what willingness to pay looks like and things like that. So yeah, it’s a little bit all over the place, but the idea is that if you’re a subscription company our goal is to make you money through our products and do that in a way you don’t have to lift a finger essentially, it just works. 

05:19 Desi Okay, so as part of my job, I work with dozens of founders, market and product managers a month and you won’t believe it how often monetization, profitability and sometimes even the business model they just haven’t thought about it. Sometimes we even have to build products for client that still don’t know how they’re going to make money. And I find this insane, people and sometimes founders, they’re brushing it under the carpet, they are leaving it for later, later is sometimes too late. Why is that? Do you think it’s been fuelled by overfunding in the startup ecosystem?. Or is there more to that?

06:06 Patrick Campbell I think we’re lazy. We’re not lazy in the sense of, we obviously work hard, but we like to go towards the path of least resistance. And when you think about building your business, the path of least resistance in your mind is to get the dopamine of getting new customers. So let me run a new ad campaign, a new content campaign, let me do x,y,z, that’s the path of least resistance, that’s what we want to go after. The issue is that oftentimes, thinking through what is the best way to retain our customers, to monetize customers, that not only has resistance in the fact that it’s harder, I don’t think it’s difficult, but it does take more effort I should say. But also it’s something that you don’t really learn about, like there’s so much data and content out there about how to get your customers, how to do this, how to run this ad campaign and those type of things. But in reality, it’s one of those things where you’re sitting there and you’re all of a sudden like let me go run that new ad campaign because I don’t know what I’m doing here and I think it’s going to be too hard. So I think it’s just a mindset and I think what’s interesting is that the past couple of years the market’s gotten harder and harder where you go to be good at acquiring customers just to survive, let alone thrive and the result of that is you just kind of see it in the market that we’re living in a world where you’re kind of forced to take care of these things and forced to look at them. So yeah, I think it’s just the path of least resistance problem we all of a sudden think very differently when it comes to solving these problems when in reality you just need to think the same way you think about everything else in your business.

08:03 Desi When do you think it’s the right time for a SAAS company to start thinking about monetization and subsequently for profitability?

08:12 Patrick Campbell It’s not necessarily about profitability, but it does have a piece of that. I think profitability kind of depends on your type of business, so if you’re heavily venture backed and you’re kind on that treadmill, obviously you can change it up when you think about profitability, when it makes sense, if you’re bootstrapped business or a customer funded business you have to think about profitability early on I think the thing with monetiazation is you want to be thinking about it from the get go, from the early stages of your business, because if you think about what you’re doing with monetization, you’ve created some sort of value as a company and because we don’t trade in economies, most of us at least, you have to assign a currency value to that particular product that you’ve created. And so it’s the very essence of what you’re doing and so it’s less about when and it’s more about what is the order to which you should do things, because should you worry about your exact specific price point in the early days?. Probably not. You just kind of need to know am I a 100 EURO or 1000 EURO product and these types of things. But should you worry about your value metric, like how you charge? Absolutely. That’s like the number one thing to figure out in the early days. Am I per user, per 100 visits, per 1000.. That’s the important question. So it’s a constant thing, it’s just you don’t have to worry about all of it all the time and that’s the misconception that comes with pricing, like this is the only area probably, I’m sure there might be something else, but it’s one of the only areas in your business where you apply an all or nothing mindset to, which is kind of crazy. Like you don’t say oh my gosh, our product needs to be perfect before we ship it. Or our marketing campaign needs to be perfect or we can’t ship it. Like it’s just because we get so insensitive about pricing is because it’s at the intersection of uncomfortable and important and whenever you have something at that intersection, you get scared, right? So I think it’s more of you should be constantly doing something you know, because something is better than nothing. in this case, the order what you do it is more of the important part if that makes sense.

10:25 Desi Yeah, totally. I like that you mentioned pricing per user, for other interviews that I’ve watched of you, you definitely don’t like this strategy. And I completely agree with you and I usually don’t advise our clients, unless it’s absolutely necessary. And it’s some sort of a value metric, you shouldn’t price per user. Explain why you don’t like this strategy and what are exceptions of companies that should price per user.

10:56 Patrick Campbell Yeah, it’s less that I’m against pricing per user, it’s more I’m against just copying and pasting what other people have done with price per user. And the reason for it is if you think about it, I don’t the ages of people listening and watching if you were building products in the 90s or the early 2000s, you lived in an environment where you sold perpetual licenses, you sold software that wasn’t on a subscription base and when we got to the cloud, and so when things were on a subscription basis, all of a sudden we entered this world and we’re like How should we charge? Well, what’s the closest thing to licenses? I guess we could charge on a per user basis, right? And then everyone just kept doing per user pricing for a long time. And so the issue isn’t that that’s bad, it’s just for a lot of businesses, it’s not the ideal way to charge and the way that you can tell is if you just do a simple thought exercise and just think about like if you and I shared the same log in, let’s say we have different work we need to do like you need to look at marketing stuff,. I need to look at sales stuff. And we share the same login inside the product and we are able to get everything we wanted and everything we needed to do done, you probably shouldn’t be using per user pricing. And a lot of people respond by oh just make it hard for them to share logins. And it’s like whenever you’re doing that, you’re using the wrong metric. Like you just start using the wrong one and so the better thing to do is think about what is the actual value that you’re providing for your products. And think about it, what is the perfect value? And it’s typically we save money, we gain money all these types of things and in consumer products it might be like joy or fun. You can’t really measure those things, but at least that’s like your perfect value. Then if you can charge on it and your customer agrees with the charge. So out retain product for churn recovery we can measure how much churn we recover, we can get the customer to agree to it and we can basically, you know, set a price. But for most of us, we won’t have that luxury so you want to take a step back and think what are the proxies for that perfect metric? So if I’m Hubspot, the perfect metric is amount of money gained through using Hubspot software, but they can’t really charge based on that, because it’s hard to get the customer to agree to what they think the measurement is. So they take a step back and look at all the proxies – per contacts, per pageview, per page features and these types of things and then they kind of figure out what makes the most sense but for most of us per user is actually the wrong type of metric. Now to flip the original idea, to close this out, if I log into your login screen and I can’t get my work done because it’s so customized to you, it’s your leads and information and I can’t access my information, then you could use per user, but if I don’t have that, then I probably shouldn’t using per user.

14:01 Desi That makes total sense. Let’s talk a bit more about Freemium versus a Free version. And why do you advise all products to lead with a Fremium version?

14:14 Patrick Campbell Yeah, I think the future is freemium, because the best content you have is your product. It’s the best content that you have. And it’s getting harder and harder to acquire customers and cost of acquisition is just going up and up and up. And so the result of that is you’re looking into an environment where it makes the most sense to basically have something that can nurture those users not on an artificial time horizon, so what I mean by that is – if you think about a sales process, so no freemium and even a free trial basically you’re kind of pushing that user to sign up, without really much experience with your products and you’re pushing them on your timeline. And what we’re finding in the markets is that things are moving closer and closer to the timeline of the user, like when does the user, when does it make sense for them to convert? And because of that, the result is that you want to make sure that you’re nurturing that user and you’re seeing the value of that user or that user is seeing the value in your product and when it’s ready for them to convert, they convert. And so, just to give you some numbers: Customer acquisition cost for customers who convert from freemium versus those who convert from traditional channels is typically about 30-40% less. Your retention of those customers who convert to paying customers from Freemium versus those who converted from a sales process is typically 20% more on an absolute basis. And NPS for those users is typically triple those that are converting from a regular sales process. And so if you look at what’s happening in the markets, as the markets become denser and denser because we haven’t had a new marketing channel since 2015, you’re just seeing math play out in the market. And so I think that the one thing though to keep in mind, I used to be very against Freemium for what it’s worth, so it provides a bit more credibility and not just like you know, a zealot without considering the other side, but the big thing to keep in mind is it’s very much a scalpel, it’s not a sledgehammer. This is where I think a lot of people get this wrong, where they start with freemium and I actually think most businesses shouldn’t start with freemium at all. I think they should implement freemium basically 1-2, maybe 3 years into their business when they learned who their customer is, how to convert that customer from free to paid and so on and so forth. So I think that’s the right way to think about it essentially.

16:59 Desi Right. Product-led growth is the way, isn’t it? I watched a video where you say Brand and Design drive higher willingness to pay. Can you elaborate on that and what was the process behind the research and how did you reach the conclusion that design has such a huge impact on our buyer’s decisions? I think that your study found out that if you have an affinity for the design of a brand, your willingness to pay could increase with up to 25%. That’s huge, isn’t it?. Yeah. So what was your process there?

17:27 Patrick Campbell Totally. So the thing you have to keep in mind is that this is not design from the perspective of “oh we would all agree this is a really great design, let’s put this in a gallery.” It’s not from that, because design is from the customer’s perception, is a bit I don’t think subjective is a right word, but design has to do with like does the person think it’s good design? So what we did is basically we measured in that study we took a bunch of people and we asked some questions to score their affinity for a particular product’s design. And if you’re someone who is a truck driver and your app is just designed properly, but it’s not pretty, but it’s just really easy for you to use, you might have high affinity for the design of that product versus low affinity if it’s so clunky and hard to use. So it’s a little bit more than the measure of UX, but there is an element of UI perception that goes into it, but with this we measure that affinity and then we measure willingness to pay. Basically we found people who had a low affinity for design basically their willingness to pay was about 15-20% less than people who had high affinity for design, their willingness to pay was about 15-20% more, so there’s a 40% swing to the extremes, which is pretty dramatic if you think about it and the point of that study was to show that basically what’s happening is that you’re living in an environment where 5-6 years ago, the data didn’t look like it, it was flat and now you’re looking in an environment where you know, because there aren’t as many differentiators, because there’s so much stuff out there, things like your brand and your design are starting to become more and more important versus what it looked like previously. So yeah, it’s just some extra information to hopefully help folks take this stuff a little more seriously within their businesses.

19:22 Desi Yeah. And also the industry has matured and the user has become more sophisticated, more demanding so it totally makes sense for people to be more serious when it comes to product design and usability for sure. So I’m a huge fan of Pricing Page Teardown, I don’t know if this is a podcast or just a video series, but I think everyone working on the digital products should watch it. So tell me what are the golden rules of an outstanding pricing page?

19:55 Patrick Campbell Yeah, it’s a good question. So I think that there’s two conversations, there’s the visual and user experience side of this and then there’s the like more pricing element, because I think the design of the page in an of itself, with the actual pixels of the page, the hallmarks are people are able to understand where they fit in, meaning like which tier they should belong to or how much the product is going to be for them, they should be able to understand that within you know, a good 5-10 seconds. And so when I go to a pricing page and I have to look at it and study it for a bunch of time to just understand what I’m looking at, that’s really problematic. Some products, they get away with this by having a really good sales team so Salesforce’s pricing page is very complicated, it’s got an ungodly number of features, it has a PDF you can download that has a map legend, to understand the pricing page. And you know, they can get away with that because no one really buys Salesforce touchlessly or many people do, but they probably end up talking to somebody at some point. So yeah, it’s just one of those things that you want to funnel that user to the right place and then things like social proof, things like this makes, those types of things. are really important. Now more important than that is the value metric that we talked about but also making sure that you are basically getting those users in and then you have a way for them to grow. Because I think a lot of people think about pricing is the single move game, where it’s like all right, they’re not a customer, they converted and that’s the end, right? When in actuality the beauty of the subscription model is the relationship with the customers is baked into how you make money so the result of that is that you want your relationship to grow over time based on the value provided, based on the user’s happiness or satisfaction. So the result is that you essentially want that person paying more over time so the best pricing pages, they get that user in, but then they don’t stop beyond the actual page. So those are some things that are hopefully helpful.

22:14 Desi Do you have like an example of the top of your mind that you think is doing an amazing job?

22:24 Patrick Campbell So I think there’s 2, and you and I mentioned this before we stated recording, I think there’s 2 for very different reasons. So one is Basecamp and the reason I like to talk about that and I’m just bringing it up on the screen here so sorry I’m not looking at the camera. Basically their whole idea is simplify, right? So this is not a pricing page that is going to maximize revenue by any means. They have one tier, it’s $99 per month, and basically they include everything in that tier. So it’s very simple, I don’t have to make any decisions, it’s just do I want Basecamp or not? And they defend that value with here’s all the teams that signed up last week, here’s all the features and then they have basically a bunch of other social proof things to kind of compare them to a competitor, answering questions, talk about how many people are on Basecamp, these types of things and then another kind of example that looks a bit more like maximizing revenue is a company of Hubspot, where if you go to their pricing page, there’s a bunch of little things here that they do really, really well like for one, they kind of have Starter,. Professional and Enterprise, right? If I’m looking at this, they could do a bit better by maybe adding a little blurb of like best for businesses just starting out with Hubspot, but the names kind of imply that, which is great and then all of a sudden, you’re looking at a situation where I can kind of funnel myself into the right plan and then they have a bunch of different little features like oh if you pay upfront, you will end up saving money and hey, there’s these bundles that you can buy and they do really well with having a fairly complicated pricing page, but doing it in a manner that you know, isn’t completely overwhelming. Some people would come here and be overwhelmed, don’t get me wrong, but they do a really good job by like easing people into basically the product if that makes sense. 

24:22 Desi Let’s say I have a SAAS product for reviews collection I have 3 pricing plans, mainly based on the number of collected reviews. But I also have a number of other cool features that I want my customers to try, that not everybody uses or needs. How do I decide what I bundle in the main pricing plan and what I leave as an add-on?

24:45 Patrick Campbell That’s a good question. I think the shortest answer to that question is the start is of that tier, of that group of people you’re selling to will 40% or more of them use the feature? It’s a heuristic. It’s not exactly going to be 40%, it depends on your business a little bit, but that’s a really good first test. And if you determine 40% or more of people are going to use this feature, or get retention value out of it, you should include the feature in that bundle. Now, if all of a sudden you think I think only 40% or less of people are going to use this, the next thing I would do is do a little bit of research in determining what’s the willingness to pay that people have for that feature separately Meaning in addition to your core product and paying for that in addition Then that basically you know, gets you into a position where you can actually have some really good insight around you know, having those add-ons, cause add-ons are kind of one of the most under-utilised aspects of SAAS pricing, besides the value metric and the reason they’re so under-utilised is because our instinct is just like just dump features into the plans. Which is not a terrible instinct, it just all of a sudden you get features and functionality that people just aren’t using. If you’re not using it, you’re wasting it in that tier when you could sell it to the entire userbase rather than just selling people into that core product. So that’s kind of heuristic, you basically want to find features that not everyone cares about but the people who care about are willing to pay more, that’s kind of the mental model for add-ons and if you should bundle those features.

26:28 Desi Right. And I have a couple more questions before I let you go, Patrick.

26:33 Patrick Campbell Let’s do it.

26:34 Desi Can you tell me the best tactics you’ve seen for switching to an annual plan? Other than obviously a lower price and a better deal.

26:45 Patrick Campbell Yeah, there’s a lot we could talk about that so let me try to summarize it in a good way. So first – why an annual plan? or six monthly plan or quarterly plan – they retain at a much higher rate. Meaning people who are on an annual plan, their retention is much better than people who are on a monthly plan. And so, you typically want to get those folks on those annual plan, quickly, but the problem is we as practitioners, we end up only asking them when they sign up. So they sign up, they never used your product presumably and you’re asking them to make a 12 month commitment. It’s a little bit much, right?. You should still ask at the signup, there’s plenty of people who actually want to get the annual plan. Depending on your price point, but then what I want to do is just 2 months into the relationship, you want to 2nd month up to the 10th months, I want you to periodically go out to them and offer them kind of a reward basically for “hey you’ve been so great, everything is awesome. Let’s get you on this annual plan and we’ll give you a discount for basically getting on the annual plan. For being such a great customer. Now the way that you use that discount is really important, things like percentages off, like 10-15% off, those are actually less effective than if you said 2 months off or 1 month off or $100 off. So you want to use physical amounts versus percentages and then ultimately what that allows you to do is just to push things forward in a way that properly gets that person on the annual plan. There’s kind of if you’re a low price product, $10- $20 a month, you actually should have a really good proportion, 40-50% of your customers on an annual plan. And then if you’re a little higher price, it kind of dips down, you should have it to 20% and then it kind of goes back up, because ultimately, when you start selling larger products, you end up forcing people into an annual plan, so hopefully that’s helpful and just try to think about how to get folks on those annuals.

28:41 Desi And before I let you go, Patrick, tell me what are the most common mistakes that companies are usually making when it comes to their monetization strategy? What are your clients struggling with before they contact you?

28:54 Patrick Campbell Yeah, I think honestly there’s some interesting things that are pricing related, but more often than not, they are not taking it seriously at all, like it’s not that they don’t know what’s important, it’s just that they haven’t done anything. So I recommend to people just hey, put a calendar invite for once every 2-3 months. Maybe you snooze it every so often but hey, you should implement some sort of a change or some sort of experiment with their pricing. And people think it’s just a number, like that’s just a small part, interestingly enough, of pricing and packaging. It has to do with all these other things that influence your revenue per customer. And so normally what I say is don’t worry about Like doing things complicated, just get a momentum. So taking it seriously and the other thing is that comes down to decision makers. Which is kind of the other part of this, it’s not really a sexy concept, but it’s like you’re going to paralyse yourself with analysis, mainly because you haven’t done this before and it’s uncomfortable, but you have to treat it like everything else in your business that you haven’t done, but you’re still uncomfortable and you thought through it, you figured something out. So, I think that’s like the big thing, just making sure that you’re pushing things forward and then ultimately, you’re getting into a position where you’re actually making changes. Some of the other big mistakes, I kind of mentioned this already, only thinking that the price point is the most important thing and not worrying about everything else. I think some people, they have too many politics within an organization, it’s really hard to make any changes, because everyone scared and no one wants to talk about it. And then I think there’s little more practical things value metrics, you should be pricing these value metric, you should be pricing with add-ons, these types of things are also like two really, really big growth levers. The rest of it is important, but you know, there’s a little bit more to struggle that comes with those just internally. 

30:47 Desi So we go back to the point don’t be lazy. Be proactive when it comes to pricing. 

30:53 Patrick Campbell That’s exactly right.

30:55 Desi Thank you very much for your time. And for sharing your wisdom with us.. Where can people find you on the Internet?

31:01 Patrick Campbell Just Patrick Campbell, you can find me on LinkedIn, Twitter, that’s where I do most of my postings or you can just send me an email at patrick@profitwell.com (mailto:patrick@profitwell.com). Sometimes it takes a little while for me to get back to everybody, but I tend to get back to everybody you know, with questions and things. And you can go to our blog, we have a ton of content on pricing, retention, benchmarks and these types of things. So I’m more than happy to help.