SaaStr Podcast #211: The Ultimate Guide To SaaS Pricing From Investors @ Benchmark, Matrix, Upfront Ventures & Operators @ Figma, Snyk and Kustomer

Welcome to Episode 211!

In Today’s Episode:

* David Skok, General Partner @ Matrix Partners: Why does David believe that all good products have at least one variable pricing axis? How can founders determine which variable they should choose for their product? What are the pros and cons?

* Chetan Puttagunta, General Partner @ Benchmark: Why does Chetan believe we have seen a strong decline in the per seat pricing model? What are the major drawbacks of it? What are we seeing replace it? What has Chetan seen work well amongst his portfolio?

* Mark Suster, General Partner @ Upfront Ventures: What were Mark’s two biggest lessons on pricing from seeing the hyper-growth of Salesforce first hand? What does Mark advise founders when it comes to price anchoring and discounting? How does Mark view the sale of professional services with this in mind?

* Amanda Kleha, Chief Customer Officer @ Figma: What were Amanda’s biggest learnings from running the Zendesk pricing playbook? What does Amanda mean when she says that successful pricing is broken up into 3 separate product features?

* Brad Birnbaum, Founder & CEO @ Kustomer: Why does Brad push back on the common suggestion of a “no man’s land in SaaS pricing”? Why is innovation in pricing actually detrimental to sales in most cases?

* Guy Podjarney, Founder & CEO @ Snyk: How does Guy think about having a large enough base to test pricing strategies? How does Guy think about the balance between freemium and paid? Does one have to come first?

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Jason Lemkin
Harry Stebbings
SaaStr
David Skok
Chetan Puttagunta
Mark Suster
Amanda Kleha
Brad Birnbaum
Guy Podjarney

Transcript

Harry Stebbings: Hello and welcome back to the official SaaStr Podcast with me, Harry Stebbings at HStebbings1996 with two Bs on Instagram. It would be awesome to see you there. Today, we’re doing something very different on the show. The other day, a founder of an angel investment of mine said, “Harry, you know, you have all these awesome shows, but if I want to learn about SaaS pricing, well honestly the content is pretty segregated and in a ton of different episodes.” I thought that’s quite a good point, actually. Why don’t we bring that together? So, today we bring you an episode that discusses the biggest lessons, experiences, and advice when it comes to SaaS pricing from founders to investors to C-suite execs on everything you need on SaaS pricing. It’s in this episode.

Harry Stebbings: So we’re going to kick off today with a legend of SaaS in the form of David Skok, General Partner at Matrix Partners discussing the relationship between negative churn and price.

David Skok: What I’ve found by doing models of different businesses and working with different companies that have achieved this negative churn is that it is transformative to a SaaS business. The top piece of advice I would give to SaaS entrepreneurs once they’ve gotten product market fit and are well on their way to understanding the sales and marketing process is that they should turn their attention to figuring out how to get negative churn. You know, how to find a way to upsell and cross-sell into their installed base. Even though they lose some customers that ultimately they’re still going to end up with more revenue from the cohort that began when they signed up that group of customers a year later than they started with at the beginning.

Harry Stebbings: What does that do to the pricing axes?

David Skok: Excellent question. Yeah, well spotted Harry because that is … The first question I get from many startups is well, wait a second, we’ve only got one product and it all costs $2,000 so how are we going to get more money out of those customers? This was actually the exact story at HubSpot. It took us a while to educate ourselves about this. We had a single product that sold at $500 a month, and there was nothing to upsell there. We couldn’t go back to the install base and get more money out of them. The first thing you realize with this is how do we sell something more to them? The answer is there’s two things you could do. You can take your current product and have variable pricing axes so that even though they’re using the same product, you’re not selling them something different.

David Skok: You’re going to get more money from them as they use it more. A good SaaS product will have at least one variable pricing axis and possibly more. A common one you’ll hear is how many seats of people are using this, but in many cases that’s not a good metric because you don’t actually add more users, but you can be still be delivering more value. In HubSpot’s case, they chose to pick the number of leads that are in the database as a good method of determining how much value the customer is getting out of the system. As you add more leads, you pay more money to them. You’ll find many different things. Dropbox, for example, uses the amount of storage that you’re using as a metric for increasing how much you pay them. I’m sure all of you are familiar with different pricing schemes out there, but the important factor there is to look at your pricing scheme and ask if you’ve got variable pricing axes.

David Skok: Don’t worry about doing this if you’re a very, very early stage company because actually in truth, in the really early stage, you just want to keep things simple and sign up customers. This is kind of a slightly secondary thing you start to work on as you get a more mature and successful SaaS company. The second thing you could obviously do is you could add more products. You can have a pro version and you could have a enterprise version and you could charge more money for those. You have different feature breakouts. Those are different versions of the primary product, and then you could have some some add-on products which are really cross-sells to a different thing. You’re selling them a reporting module. I think ultimately when when you look at mature SaaS businesses, even though the customers may not love this, mature SaaS businesses probably have to break their products down into lots of different modules and price that way.

David Skok: The reason for this is pretty simple. You’re going to find that some customers are very comfortable and happy to pay you $2 million a year for your product and yet some other customers will only be willing to pay you $10,000 a year. How on earth do you come up with pricing that lets you sell to both of those without accidentally finding that instead of getting the $2 million from the high-end customer, you’re only getting $20,000 from them because you just didn’t come up with a good pricing scheme, which allows you to capture their willingness to pay you that high pricing differential then. I think the way to do that is to end up with segmenting of the product into different elements so you recognize that the $20,000 a year customer really doesn’t need certain features so you take them out, but you know that the $2 million customer, it’s really important to them to have global security features or things like that. You put those into the version that they want to purchase.

Harry Stebbings: Now we move to another very special member of the investing world, Chetan Puttagunta, General Partner at Benchmark on why the perceived move away from the per-seat model in SaaS pricing …

Chetan Puttagunta: Yeah, I mean I think the per-seat model is probably in the minority than the majority. Customers are wanting to buy software in a way that aligns with their business. As vendors and as companies and startups, I think it really behooves us to to move in a pricing model that aligns with how the customer perceives value. You’ve got software companies that are pricing based on the amount of data so they price per gig. You’ve got other SaaS companies that if you’re in analytics, especially the price based on events, the more events you track, that’s how pricing works here. You’ve got other infrastructure companies that price on the number of servers you run the software on or even I’ve seen folks run it at even more granular levels like price on the amount of memory that you use, for example. These are all great ways to price primarily because, one … There are a couple of things that are important, right?

Chetan Puttagunta: Number one, you want to align with how your customers perceive value, and two, you want to encourage broader usage of your product. You don’t ever want to introduce pricing and have the customer not being incentivized to use more of it because ultimately for your business … You take a step back and you’re like, obviously we would never do that, but when you’re in the weeds and you’ve said, “I’m going to just price per-seat and that’s just the way I’m going to do it,” you can miss that larger picture of does this really align with how my customer perceives value? These are discussions that are happening in board meetings today, and I think that there is a lot of companies realizing that there’s a better customer alignment if they move away from this per-seat model.

Harry Stebbings: Moving swiftly to the incredible Mark Suster at UpFront Ventures. He’s discussing his biggest takeaways and learnings from seeing the hypergrowth scaling of Salesforce and his take on pricing as a result.

Mark Suster: I’m going to give you one crazy insight and tip that was exactly reversed of what I would have expected, and I’m going to give you a second tip also. My first tip is this, when I was pricing software, I always had the mentality to price as low as you can, get as much adoption as you can, and then over time, you would find ways to add features and upsell your customers. That was always what I was taught. Salesforce had a different mentality. Their mentality was to price high and discount, and there were really two reasons for doing this. One is the psychology of buying. Most of the people who are listening to this show probably really have never been salespeople before, have never been professional purchasers before, and probably don’t understand the psychology of buying. The psychology of buying is no matter who you are, no matter how rich you are, no matter how senior you are in an organization, everyone wants to feel like they got a discount.

Mark Suster: They want to feel like they weren’t being fleeced. If I go to buy a car and a car costs $40,000, and if I end up purchasing it for $38,000, I feel better, as long as I feel like I didn’t do something stupid. If I later found out that everyone else bought it for $34,000, of course I’ll feel stupid, and people hate when they go in to buy something for $40,000 and by the time they leave, they’ve paid $48,000. Salesforce’s strategy, as far as I could tell, was keep your price high and discount, and that helps customers, through a negotiation process, feel like they’re getting, these are my words, a pound of flesh. I always tell people everybody wants to get a pound of flesh and if you go to Both Sides of the Table, and you Google pound of flesh, I’ve written a lot about this before in terms of add and negotiate.

Mark Suster: Number two is it’s impossible to increase price. Once you lock in a price, customers hate paying more than that because they perceive that as the value. If you charge $59 a user a month, try ever raising that to $79 a user a month, and you’ll see, you know, mass protests in your community. The beautiful thing about pricing high, let’s say $150 a user a month, and then offering discounts is over time, it’s easier to reduce the amount of discount that you apply to a sale and therefore in a way you’re increasing price without people perceiving it and everyone buying still feels like they got great value. I wish we lived in a world where I could just say, price x is what everybody pays. It doesn’t work well with human psychology.

Mark Suster: The second message I want to leave people with here, Harry, is everybody assumes that Salesforce.com didn’t care about professional services because they don’t have a big professional services business, and frankly that’s just not true. In the earliest days, Salesforce had a philosophy and that philosophy was customer success. You could only build a great company if you had customer success because the number one rule of scaling sales is referenceability. If you go and you sell a bunch of software and you expect clients to implement it fully and get value out of it themselves, without your help, you’re fooling yourselves. In the early days of building a software company, you really need to put professional services against it.

Mark Suster: Most VCs will tell you not to. Most VCs are wrong. What putting professional services means, number one, it means that you are more likely to have customer success and therefore referenceability and therefore future scalability. Number two, it’s much easier to sell new product to existing customers than selling to totally new customers. If you have professional services, you have people on the ground who can help you land and expand.

Mark Suster: Number three, it’s a great profitable, scalable, early-day revenue source for you. You’re not going to be at 80% gross margin. You’re going to be at 35 to 50% margin but that can be meaningful cash for your business, and it’s something that customers are willing to pay for in the early days, whether it’s custom code, whether it’s integration work, whether it’s strategy, whether it’s training. Now, here’s the thing. Over time as you scale, you just can’t become reliant upon that revenue. It can’t become crack cocaine.

Mark Suster: What happened to Salesforce is they had a reasonably big professional services organization until after they went public. After they went public, Wall Street started holding their feet to the fire over gross margin and pointing out that this business wasn’t profitable enough. What they did is, it’s not like they abandoned it, they spun it out, and then they funded a whole ecosystem of professional services businesses with their cash to help drive customer success for Salesforce clients. I should stop there or I may take the entire interview with no questions. Let me stop.

Harry Stebbings: Now, we’re going to hand over to Amanda Kleha, Chief Customer Officer at Figma, discussing some of the biggest lessons she learned from largely running the pricing playbook at Zendesk.

Amanda Kleha: Absolutely. I learned a ton about pricing. Most of the decisions in the early days, for better or for worse, were by gut instinct. In 2010, we made a pricing decision that helped inform a lot of subsequent pricing decisions for awhile. What we learned was that customers don’t like pricing changes forced on them but they are willing to entertain new prices if you give them a choice. For many years, we decided that the price you bought into was the price that stayed with you until you upgraded your plan or added more products, and as a result we changed our product strategy to consider things like add-ons rather than force customers into a new price for more functionality on their existing plan.

Amanda Kleha: At some point, we ended up hiring Simon-Kucher, a consultancy, to help consult on a proper pricing research project. And they told, or taught me a lot of things about pricing, in particular leaders, fillers, and killers. Do you know what those are?

Harry Stebbings: I don’t, no. Leaders, fillers, and killers, tell me.

Amanda Kleha: Yeah. Leader features are the main reason you would buy a package. If you’re going to go buy a happy meal at Burger King, you’re going to buy it for the burger. The burger is the leader feature. Fillers are the nice additional things that you want as well, so the fries and the drink. Then killers are the features that actually devalue your bundle. Most people don’t want killers, and so they feel like they’re paying for something that they won’t use and therefore shouldn’t have to pay for. If you had added, say, a cup of coffee to a value meal, that would be a killer because most people don’t want a coffee as well. Some people might, but most people don’t. We really tried to teach the whole company about these learnings because we thought it was a valuable framework for everyone, from product to sales, to understand.

Harry Stebbings: Penultimate opinion on pricing now, and I’m delighted to hear from Brad Birnbaum, Founder and CEO at Kustomer.

Brad Birnbaum: Pricing is a really difficult thing, right? It’s something that we wrestled with in the earliest days of Kustomer. We wanted to be innovative. We thought innovative pricing would be very important to us. We quickly learned as we started talking to customers that they didn’t want innovative pricing. They wanted repeatable, consistent pricing that mapped to the budget they already had in place. Now, as we are growing mid market and above, we’re mostly replacing existing solutions, whether it be Zendesk or Salesforce. They already had a budget in place. They just said, “Hey, we have x amount allocated for a solution. Your solution is better. It’s robust. It does work, but this is the budget that we have.” They wanted a pricing model that frankly mapped to the way they’re accustomed to doing business and was highly predictable. While we wanted to think about doing a consumption model here at Kustomer, because we thought that was innovative, we realized our customers didn’t want a consumption model and frankly, what we have today is a pretty standard model.

Brad Birnbaum: We have several pricing tiers of different depths of functionality, and then people pay for it monthly on an annual basis. It’s a pretty standard model that users are familiar with or our customers familiar. Frankly, for us, pricing has not been a challenge for us. If anything, we’re getting better at driving our ASP up quarter over quarter. The last three quarters, it has gone up significantly each and every quarter. We’re doing that by adding more and more capabilities into our highest level tiers. In this case, for us, it’s Ultimate, and frankly we’ve started to roll out additional capabilities. We’ve rolled out our telephony solution that our customers have had an incredibly high take rate on. We rolled it out last quarter and about 50% of our [inaudible 00:17:28] customers who have adopted it already. We’re seeing customers are appreciating the more value were able to ride and frankly are willing to pay for it.

Harry Stebbings: Can I ask, in terms of the mid market segment that you kind of really honed in on and do so well at, how do you think about the often cited terminology of no man’s land in SaaS pricing? Is that something you’d strongly disagree with having lived through this and scaled through this today?

Brad Birnbaum: Yeah, so look, regarding no man’s land, I actually think that 10K in ACV is where we see our growth business. We have two parts. We have our enterprise business and our growth business. The growth business is for deals that are closer to 10K in ACV, right? We want it to … We’re seeing lots of inbound interest from customers who don’t need the hundreds and hundreds of agents who really appreciate what our solution offers them, and they see the value in it, and we don’t want to turn them away. We also see that many of them start on the 5 to 10 to 15 seat size, but quickly expanded and grown. We’ve had really amazing success on that so we don’t want to turn them away. Actually, we’ve seen a lot of success in the 10K in ACV range around our growth deals and the expansion has followed that up. For us it’s not no man’s land. It’s been a great place to play. Our ACV is definitely higher than that, but it’s been a great place for us to play, acquire newer customers, and watch them expand with us.

Harry Stebbings: Finally, I’m very excited to welcome Guy Podjarney, Founder and CEO of Snyk, discussing what really is a significant enough customer base and then how to really think about kind of monetization and pricing alongside that.

Guy Podjarney: I don’t know if every industry is the same on those elements. I think for starters, you have to say that a good base is a sufficiently large user base that really loves your product and that gives you feedback to continuously do it better. You know as a starting point, it needs to be a group of people that you can make loyal and that helps you improve, and that as you expand, they will be your anchor. You might still be mediocre in some other environments and still be learning, but this core base would stay stable and would be more valuable. Now, at some point, at the beginning, it has to be about product feedback and it has to be around … At the end of day, we’re in startup land so I run metrics that help you raise the next round and sort of have those relevant audiences. At some point, those metrics have to include revenue.

Guy Podjarney: I believe that when you offer an offering like ours that is freemium, revenue is like a second order metric. Your first metric is about usage. It’s about adoption. It’s about just getting people and the virality, maybe, element of it, user acquisition around getting people onto the platform. Then, they’re on the freemium platform. You’ve evolved your product faster thanks to the fact that many people are using it, assuming you listened to them, and you build it out, kind of then using that base to start learning how do you convert them to monetization. What it means is that money would come later, you know, revenue would come later, but when it comes, it will be multiplied, right? It will grow faster. When I talk about when to expand, you have to somehow factor, first and foremost, feedback to the product and usage and then you have to think about what are the metrics that would successfully get you to the next milestone.

Guy Podjarney: I was fortunate that Ed and Eliot did Boldstart and also with the support of [inaudible 00:20:28], and they were very supportive for us. They understood, and Ed volunteered even at various points of time to say, “Don’t distract yourself right now with revenue. We both know that’s not the focus. Make sure that you get that user base, that you get that adoption.” Whatever those metrics are, you need to ensure that you have them for the next round, if your investors are bought in, and that you don’t prematurely focus on revenue if that’s not the right one.

Harry Stebbings: Yeah, absolutely. We’ve [inaudible 00:20:51] on the adoption and usage there, and I do want to … I have one final question on the product itself. We touched on the MVP earlier also. In terms of feature prioritization, how do you think about feature prioritization decisions today and that versus maybe technical debt and all the other intricacies that one has to think about when thinking about feature upgrade, feature prioritization, so to speak?

Guy Podjarney: It’s really tough. Feature prioritization is really tough. Like in startups at first, you’re trying to get one thing that catches, but then once you have that [inaudible 00:21:17], then people ask you for everything. There are a million good ideas and choosing the right one is really, really hard. One thing that I would say is just users. Maybe I will say within features, there are three classes of features, right? There are features that get you into a POC around evaluation. There’s features that get you to win a POC or evaluation. There’s features that help the customer be successful after they’ve purchased.

Guy Podjarney: Different aspects of the product are more important. You want customers to be successful. You can’t just delay that last category to the very end. It depends on what your problem is at a given time to prioritize your capabilities. At the very beginning, you need to get in, you need to be evaluated, to be inspected, whether it’s in a bake off or if it’s just online attention.

Guy Podjarney: You want to build the capabilities even if they’re very narrow, very shallow to get into an evaluation and have something compelling to offer. Then, a second set of features is around delivering on that. You actually need to successfully … Once they’ve used the product, they want to continue using it so you have to deliver on it. Oftentimes, there’s a core-like secret sauce that has to be there that they need to get hooked onto in that environment, and then they need enough in the surround sound to be able to get through the POC. Then once they purchase, they’re going to start rolling it out. They’re going to start using it on an ongoing basis. It’s going to be a whole set of other capabilities that you need to build, and if you totally neglect to those, then the customers are not going to stay customers for a very long, especially problematic also in the land and expand environment.

Guy Podjarney: At different phases of your life, you know, especially in the early days in startups, you have to maybe evolve from focusing more on the former to focusing more on the latter. For us today, pretty much every feature we build has a set of customers that have asked for it. Then, we work with them and we build a very, very tightly right alongside with them. That helps us ensure that what we build is the right thing. That’s definitely how we prioritize features. We ensure there’s always a set of features, and we contain the amounts that are more about the future. They’re more about the vision. They’re more experimental. Even then, we work with customers, but we might be the ones volunteering the idea versus asks from the customer side.

Harry Stebbings: Well, there we have it. What a pricing extravaganza! I’d love to hear your thoughts and feedback on the episode today. Do let me know. You can find me on Instagram at HStabbings1996 with two Bs. It really would be great to hear your feedback to drive really our product roadmap going forward with the show. I do want to say a huge thank you to all the guests today that participated. If you’d like to see more from us also behind the scenes, you can follow us on twitter at Saastr. It’d be great to see there also. As always, I cannot thank you enough for tuning in and I call him wait to bring you another exceptional episode next week.

 

Published on February 15, 2019

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