# The SaaS Pricing Fundamentals I Used To Become a Millionaire

Channel: Rob Walling
Video: https://www.youtube.com/watch?v=wjYPak5EUik
Duration: 48 min
Language: English
Words: 9866
Transcript page: https://viewrankai.com/tools/youtube-transcript/wjYPak5EUik

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[0:00] in this video you're going to learn about the fundamentals of sas pricing video replays a talk that i gave back in 2021 at microcomp europe in croatia and i dig into how to think about sas pricing why you should be constantly looking to raise your pricing how to do that as well as some other mental frameworks around subscription pricing talk about net negative churn all kinds of things it's it's 45 minutes including q a and it codifies a lot of my thinking around sas pricing is something that i had been meaning to put together into a single place like a talk for a couple years and microcomp europe gave me that

[0:35] opportunity speaking of microconf europe tickets for our 2022 event are now on sale microcomp europe is in malta this year and there are some tickets remaining although they are going quick and it is a reduced capacity event i'm looking forward to getting back in a room with so many bootstrapped and mostly bootstrapped ambitious sas founders i hope you're able to join us you can head to microconf.com europe if you're interested in picking up a ticket and finding out more about our speakers and with that let's dive into this talk on the fundamentals of sas pricing i actually debated about what to talk about here and what i realized is the

[1:16] thing that i've been thinking about the most over the past thinking about and advising the most there's been a bunch of topics and i wrote them all down while i was on the first plane to portland like four weeks ago and i had this big list of things and it's like that was like a three-hour talk right it was just all these topics what i realized is they all rotated tangentially at least around pricing and so that's what today's talks about so i'm calling it a brief primer on pricing on sas pricing itself so i say it's brief because how much can you cover in in 35 or 40 minutes right i i

[1:50] there's a couple bullets that i'll run through it is obviously not an exhaustive list but i feel like this is almost i almost called this a founder's guide to sas pricing because you don't have to have a phd in pricing you don't um need to necessarily understand everything to the infinite depths of all the equations it's what i've learned as a founder and now an advisor in very i would say practical terms so any talk i give i try to keep it there's obviously some theory involved but there's a lot of just practice and patterns and practicality that i want to drop today the talk title that i gave xander was razer

[2:29] prices and other obvious startup advice we of course could not have a microcomp without someone not saying you know someone's saying raise your prices he asked me in slack when i sent this to him he said are you sure i'll go with that but i feel like you're punking me that that's the title so either of those work um what we're going to be covering today in four i can't remember if i have three or four sections to be honest we're going to talk about expansion revenue really about pricing structure tiers some thoughts on that and how to build in expansion revenue we're going to be

[2:58] talking about rpc not ltv you often hear our poo average revenue per user but it's always bothered me because as pierre said this morning users are not customers you can have a thousand users not paying you anything so i've always said arpc average revenue per customer it's the same thing but rpc not ltv i'm going to talk about why rpc is so important the impact of raising your prices of course um first order effect which everyone knows the second order effect that i don't think most people think about right so i'm not here to tell you obvious things i'm going to say raise your prices that's the obvious thing but

[3:34] then i'm going to say why and then i'm going to say second order why and then i'm going to actually talk in depth i've raised prices i was trying to think i think 5 i think five different times i raised prices on assassin it might be six then i've seen it done really well uh i've been involved intimately reviewing things about sas pricing increases total maybe 15 to 20 times um with different founders that i've advised or invested in or whatever so i have enough experience it's not an end of a thousand but it's in probably an end of uh you know more than most people do and i've seen it done really

[4:10] well and then i've seen me leave a company and have it done catastrophically so some of you some of you get that joke so uh always start with my why this is this is a microcomp tradition of this is all business advice this is great we want to build incredible companies this is why i build companies is for the freedom to do what i want the purpose because building companies is so much fun and my relationships and i think some of you have seen these two little kids here when they were running around you know three four years old right and yeah i have some folks in there so i mean they

[4:43] were coming to microgrunt back when it was in prague and barcelona they're 15 and 11 now one's in high school um so things change but you know this is this is this is why i'm here so with that let's dive into expansion revenue okay so we have we have we have it so good with sas there's so many things the cost of goods sold is so low uh distribution is infinite you build it once you sell it over and over and recurring revenue we don't talk enough about this in every other business if you're not in sas if you talk to someone who runs a restaurant

[5:16] who runs a um a services business who runs a one-time sale of anything brick and mortar recurring revenue everybody wants it and there's a reason because recurring revenue is the business cheat code right it there's a reason that there's a kajillion books written on this topic many of them not very good that one's really good by the way if you decide we already have if you're already sass you don't need to read that book but the whole point of that book is in a non-recurring business here's how to get recurring revenue once you have recurring revenue your sales multiple increases your enterprise value increases the stability of your business

[5:50] increases if you hit a recession so much about it and we get that for free as sas founders since we're super greedy we can't stop there what is the sas cheat code that's expansion revenue so what's expansion revenue that's the opportunity for a customer to pay you more money as they get more value from your product it's basically having pricing tiers that allow them that allow them to usually auto upgrade sometimes have to manually but usually they just auto upgrade through the tiers they pay you more money why is that's the first story effect second order effect why is that important because that eventually gets you to net

[6:23] negative churn which is something most apps never see but once you've seen that negative churn and you've looked at your business and said wait a minute we had a really rough month because december sucks every year usually for companies i started it was right around tax time in the us april may one of those months sucked december sucked every year we added you know zero net customers but our business grew four and a half percent last month how is that well it's net negative churn and if you're actually actively putting things on you know new customers and there's net negative churn this is what the biggest

[6:54] business and fastest growing sas businesses in the world are able to achieve it's not trivial but it's something that we should at least strive for if possible it's not possible with every sas business if i were to ever start a sas company again i would have you know we all have our list of things right i'll never send email for my app again because it's such a pain in the ass i will never um i will never not i will start a business that has some type of virality in it right and i will start a business that has some type of uh of expansion revenue

[7:24] so let's talk about expansion revenue and then i'll look at a couple examples the idea oh the funny thing is there's two slides here that fonts are all different it's because i pulled them we have a tiny seed playbook that we do the first seven weeks eight weeks of tiny seed and we have one on pricing and one on funnels and it's like everything you know all the intimate like secret top secret details and so i pulled a couple slides from that here because we have one on on pricing so the idea with expansion revenue is that you want to charge more but you want to charge more

[7:54] only to the right customer segments right so the example i often use is squad cast is a tiny c batch two company they are studio quality podcast recording so i go into chrome log into squadcast i send out a link because i'm gonna interview john knox so i send him the email and then he and i both go in and suddenly studio quality it's a double ender it records locally on both sides that's great podcast recording they have you can imagine they could have a pricing tier i've actually seen competitors do this um i could just say all right cool it's worth 20 bucks a month and there we go we don't really

[8:29] have tiers right the problem is you get or you could say it's 50 bucks a month 100 bucks a month you pick a single price point problem is you have flight fishing podcasts you have a dungeons and dragons podcast you have hobbyists who are like kind of balking at nine bucks 14 a month you're really that's a lot of money you have business podcasts like startups for the rest of us um you know any other podcast we might listen to and for us 50 bucks 100 bucks a month it's it's nothing right that's that's a good price point and then you might have a company i'm

[8:57] using a made up example but you have gimlet media you have npr you have espn uh podcast network iheartradio these big podcast networks that have different needs and startups the rest of us and should pay a hell of a lot more like thousands of dollars a month two three four five thousand a month probably so the the concept here is in this particular instance right is what features or usage patterns differentiate these customer types such that not only when they sign up you can auto put them in the bucket that they should be but in other instances actually upgrade over time even if they start at a lower you

[9:35] know a lower price point and so there's really there's two common ways to do it and a third that's a bit less common and more complex it's the only ways that i've seen to do this with monthly pricing week i'm not going to cover so we do the state of independent sas report and we ask what your pricing is and it's like 85 or 90 of us in the general independent sas community are monthly or annual and then there's like three percent pay as you go four percent um what's the other one metered and then there's all these different ones so i'm not unfortunately able to cover those but i'll cover the

[10:09] monthly annual because most people are that so expansion revenue first way you can do it to to allow people to upgrade from one to the next is to have a value metric right most people in this room probably know that what is a value metric if you are an email service provider like mailchimp or like drip then it's the number of subscribers or contacts you have the more subscribers or contacts you have probably the more value you're getting from the software if you are using crm software like close.com salesforce pipedrive then it's seats right the more sales people you have the more users you have it's just user based

[10:45] so it's great if you can come up with a value metric to me this is the number one way to do it it is the best way um overall one note quick to tangent i have a few quick tips in this thing and i'll say this one here the only way the only time that you can do seat based pricing is if two users from the same company log in and they see different things so imagine two users both using mailchimp same company same organization they don't see anything different you really really really should not do seed based pricing because they can just share a login

[11:22] if two users log into pipedrive they have things assigned to them it looks different two users log into help scout that's support software tickets assigned to me you got to pass them back that makes natural sense so that's that's one rule but anyways value metrics yay that's that's what we want to do some places some uh let's say industries or or verticals that you're in they just aren't super conducive to value metrics so the second one in my opinion is uh feature gating which is where you say all right so we can't think of a number that you use more of so we're just going to say if

[11:55] you need this salesforce integration or the zapier integration then you're on a higher plan if you need streaming to you direct streaming to youtube or whatever we do feature gating and then the third one that originally wasn't on my list but i realized it's actually relatively common although it's more common with larger companies sort of further along is both it's where you have a value metric and then you also have feature gating and the examples there's a few ways to do this elegantly and well i would really discourage you in the early days from doing both um the examples that i've seen most common when i think of it in search for it is like

[12:29] if you go to mailchimp site they do it if you go to zapier they do it salesforce intercom there's one other that i thought of and if there's one thing all those have in common and it's that they're all valued at a billion dollars or more and they didn't start with that pricing and especially if you're i would say if you're sub a million arr you should i would i would sacrifice some revenue some mrr in order to be simple in their early days to get to get customers because you'll see the pricing pages later as we thumb through a couple of them and it's pretty pretty complicated

[13:03] so um here's a couple pricing pages just to give you examples so this is aweber and they of course are email service provider they compete with mailchimp and activecampaign and such and they actually are using um they're using it against their competitor right they're they're saying no funny stuff everyone gets everything with aweber because if you go to mailchimp you don't everyone doesn't get everything because depending on which tier you are then you have subscribers so they are kind of doing the jiu jitsu move i don't know if it's working or not but i think it is clever because mailchimp is a 900 pound gorilla right so their value metric is

[13:34] subscribers the more subscribers you have the more revenue you pay them this is makes it pretty easy to build an esp because the pricing model is you know as all decided this is a small page this is the pricing page from castos yay podcast hosting now something that unfortunately in the podcast hosting space is a bunch of the early podcast hosts decided that they were going to allow unlimited podcasts and unlimited episodes this is before cast i mean we

[14:04] were talking like 2008 9 10. so a lot of the companies in the space are forced encouraged to do that to do unlimited unlimited there are some that are not doing it and i actually believe craig just talked about on a podcast i'm pretty sure it was a public podcast that that they're looking at adjusting their pricing and so there are ways out of this but really castos is a you know is a successful um company that's doing quite a bit of revenue and they have done it without a value metric to date and of course they're just feature gating right so they're feature getting this video

[14:38] republishing to youtube a headliner audiogram integration advanced analytics and they had to figure out you know what the interesting thing is actually so i have three podcasts on castos i have two it's tiny there's a tiny c podcast tinyctails microconf podcast and startups the rest of us tinyseedtails and microcomp were on the 190 plan because they didn't need extra stuff and then starts the rest of us which is actually a larger podcast it's more complicated we need more stuff for it we're in the 490 tier um so in this in this case it works so that's feature gating and then here's an elegant way to do both this is the way i

[15:10] discourage you from doing both unless you really really know what you're doing but this is an interesting way this is rails auto scale which is an add-on for heroku and what he found out the value metric here is the dinos right these are just servers vps's i believe so like one to three dinos one to nine one to 29 that scales you up and down between that many um and so that really is a value metric but then what he found is the feature gate is that standard dynos are slower less ram whatever they are and then less memory and then performance dynos are quite a bit more

[15:45] expensive so he quickly figured out that he could differentiate there and if they had three or four types of dinos of course he would have different pricing for him so that's like a kind of elegant way to do it um it's not terrible this in my opinion this is mailchimp and look they sold for 12 billion dollars three weeks ago so it's not like they're doing anything wrong but you know what go back to their pricing in 2007 it didn't look like this right it used to be one plan purely subscribers and it wasn't until they got way in and had kajillion data points that they that they started doing

[16:17] this kind of stuff this is not the full pricing page the down here where you see it says marketing crm and then contacts audiences and it goes down i mean there's a huge list it's quite complex and it's this is pretty rough for me um even if i were a new user i mean geez i built an esp and like when i try to read this and figure out what i would need i don't know like it's this is daunting to someone who's like in the industry so again i discourage that in the early days zapier same thing even if you do it well it's there's still a lot there all right

[16:50] so that's both that's expansion revenue second piece average revenue per customer not ltv rpc not ltv um this one's an interesting one so of course we all pay attention to lifetime value right and lifetime value is an easy equation it's your average revenue per customer divided by your churn that's the easiest one there's a bunch you can go online and find more complicated ones that's the simple one and so obviously we want to pay attention to there's like six metrics that are like the most important in sas right that was almost another talk i wrote i have them all written out but churn is one of them ltv is another the

[17:28] issue is i'm going to show you two examples and point out why ltv is good but it's a it's a longer term thing in the near term as bootstrappers mostly bootstrappers we need to be thinking about our c average per customer more than ltv so 50 a month average revenue five percent churn so i take 50 i divide it by .05 in my good handy calculator and of course we get a thousand dollars so that's my lifetime value of a customer and so i used to think i remember in you know 2008 2009 as i was just starting to get in to recurring stuff and i i said wow it's a thousand bucks

[18:06] so that means if i could you know run ads and get a customer for 700 and most of the there's really low server costs and it was just me working on this app i could make like 300 bucks right so i should just do that a bunch of times here's the problem average revenue for customer overturn let's say it's still at 50 a month but let's say i'm really good and i'm really sticky and i have a one percent churn so now my lifetime value is five grand that's great i have increased it it seems like a lot of money so now can i spend four grand and make a grand

[18:41] in theory assuming no costs obviously the problem is you will get that 5 000 over 8.33 years and that's the kicker is that lifetime value can be deceiving especially if your churn is very low so that's where average revenue per customer has is a shorter term thing and as bootstrappers we have to since we don't have a million five million in cash we have to think a little shorter term in venture capital the rule of thumb is that you should spend no more than 12 months of uh of it's called the acv right the annual contract value you should spend more than 12 months of revenue from a

[19:23] customer to acquire them that's a loose rule with bootstrappers the loose rule is three to six months six is i think i got to seven at one point we had a bunch of money in the bank so money in the bank becomes a bigger constraint arpu is more important than ltv because you can't think out three four five years right if your lifetime is that long because you don't have the cash for it so that's where we're talking about okay i can increase my ltv just by driving turndown but that's why i'm raising prices is so important is that the only way to raise my average over customer usually is to

[19:56] have expansion revenue or to raise my prices so that's why those two pieces are part of the talk so the first order effect of all this is average revenue per customer should go up and we understand it's more important than lifetime value for the most part what's the second order effect of this this is a piece that i don't know is talked about enough and i don't know it may not have occurred to some folks in this room why does average driven per customer going up matter and it's because of this slide this is every market b2b sas marketing approach i think it's everyone that i

[20:30] know of and i pulled these out of traction the book by gabriel weinberg this is from our tiny seed playbook this is from just it's just from all my stuff um i'm like working on a book and i have a list and i pull it out and put it here it's not that many actually i'm sure there's some others but uh you know there's some broad ones offline ads like what does that actually mean well it's like billboards and and radio ads or whatever not that many of us would do that here's the thing if your average over or if your average revenue per customer or your annual contract value let's say

[21:02] you know is is let's say you get 500 over the course of a year you can only do three or three maybe four of these you just can't afford the others so your business is severely limited in terms of growth if you want to build a two three hundred thousand dollar business great you're all set that's a great thing i've had some of those they're amazing if you do want to be more ambitious and get into the seven figure away figure you ha you have to have a larger uh acv than that you have to have a higher average revenue per customer if you have a lifetime i keep saying

[21:34] lifetime if you have an annual contract value of say 5 000 you can do half maybe 60 and when you get up to 25 000 or 50 thousand that's enterprise right you can do pretty much everything on that slide so it's it's not just making more profit it is um the ability to try and execute more marketing approaches let's talk about the impact of raising prices now we're going to talk about the impact of it we're going to talk about a first order and a second order effect quickly and then we're going to go to the end which is how to raise prices like get in a little

[22:10] as much as i can with you know 15 minutes left but get into some nitty-gritty all right so the impact of raising prices i tweeted this out a few weeks ago pricing is one of the biggest levers we have is sas founders there's a reason so many microgrunt docs talk about raising prices it is one of the very few things you can do by just going and changing a number on a pricing page and a number in a stripe call right it's scary what i find is that the the technical ability to change things is not that hard it's usually the emotional oh my god i'm going to

[22:37] completely crush my business right or i'm going to take it too far because you know all your numbers at x pricing and the moment you change them everything goes haywire right so there's a big emotional fear and that's something that we i help like both the tiny sea founders and founders i advise and stuff is getting them over the emotional hurdle and to think about it often as more of an experiment than anything so here are a couple graphs from a couple tiny seeds ago i use i use tiny seed companies because i have access to their revenue right so i'm going to keep them anonymous

[23:07] but this is when they started tiny seed and that's the month we did our pricing playbook and our pricing playbook is some of what i've had in here but a lot of it is like most of you are underpriced or mispriced your value metrics off you know you should switch from feature gating to value metric blah blah blah so that company that company that company there's a there's a bunch more um the interesting thing i mean you can you can see a big spike up right now that's from other things too the founders got some funding from us they you know maybe moved to full time or

[23:40] whatever excuse me but each of these absolutely changed prices and said that it had a major fundamental impact on their graph um and i actually said there's a green line there where i extended it out and if they hadn't you know if they have been the same slide and in theory they hadn't uh changed pricing they would have been just over 10k and in fact by march of the next year from may to march they were at almost 20k so it's a substantial number right if you're able to do this i often get the question i'll head off of the past like but you know should i just raise it

[24:11] i can't raise them to infinity right it's like you can't right at a certain point you do get too high for where your market is and where your product is but you you can get there but most people don't is what i'll say so the first order effect is raising prices helps grow mrr more here's a second order effect that thing that i don't think enough people think about when we talk about this so again this is tweets that i did nine months ago or maybe even more so for more than a decade this is my thing i've been harping on right i've been saying lower paying customers churn

[24:44] faster here's another data point this one from a tiny c company who remain a user permission they'll remain anonymous so we're going to look at some data this is one company but this is the it is the exact pattern i see over and over and over across companies all right so let's remember this segment a pays 30 bucks a month segment b pays at least 100 so 100 and up so segment a low paying segment b higher enormous difference between uh in net churn and ltv segment a low paying net revenue turn of 11 segment b which is 80 of their revenue yay but more 100 and more right

[25:22] literally negative 4 net negative churn i already talked about how powerful that is trying to grow a company i'm reading my own tweet here with 11 net negative churn versus -4 is not in the same ballpark that single metric can be the difference between 250k arr and a million irr or more in in the audience if you have never segmented your churn by how much they're paying you by pricing tier or by however you know however you do it it is fun it is crazy to see the value that you are actually getting and and the um just the long-term you know um long-term value that you're getting

[26:01] from the your usually it's your higher paying customers so that's our second order effect right i told you i was going to tell you something maybe a little obvious then hopefully something you haven't heard and then i'm just going to walk through one example from chinese batch one this is when we realized we really uh that we had to really harp on pricing it's a company called gather visual spec management for interior design teams and architects and when they first came to us they were doing a high-touch sale in essence it was a one or two demo close so zoom calls right one or two demo close

[26:30] and their lowest price was 29 dollars a month so that's an that's a in unfeasible business that business it just can't work you can't hire sales people and compensate them at that so we encourage them raise the pricing and i believe this was they raised 39 and 79 because again it's hard to they said we're going to leave people behind they actually didn't have a bunch of great features for larger companies so they were still building them so they moved slowly and then they realized they moved to 39 there was no difference then they moved to 99 there was no difference in terms of people not

[27:04] converting or people not sticking around there's no increased churn or whatever so suddenly they're realizing where is the ceiling right how high can this go because you go to an architecture firm of five 10 20 people and you think about if they're going to run a huge chunk of their workflow on it do they care is 30 and 130 or 99 isn't that kind of like it's trivial it's a rounding error to your business right when we last left uh gather i think this is what they have today they redesigned

[27:29] their pricing page but 165 and 290. and they they did this i don't know six or eight months ago and you know folks who have access to their revenue graph know that that it just keeps going they have they're at their fastest growth rate ever um because two things number one they raise prices and number two they are now getting customers who churn less that second order effect all right so now a couple tips these are almost like like asterisks some of these have been questions because i gave parts of this talk at the locals and people would ask a question so now i'm going to

[27:58] give you a tip that maybe you're thinking in the audience um this is one that we did back in the drip days and i think i might have done it with hit tail too you there's a there's a hack around directly raising prices is that you can decrease the value of a specific plan so meaning today if you get 3 000 subscribers for 49 i can just switch it tomorrow to where you get 2500 right you just down to kind of move it down i we did this because i really liked our price points with drip 49.99 149 it just made sense it didn't want to go 59

[28:33] 109 150 you know it just it becomes awkward um so you can drop the value metric right the other way is doesn't raise all your pricing but it's to drop your lowest pricing plan that's another way to raise your average our new customers pretty that one's super easy to do because you go and you hide a div or whatever and then you just watch it for a week as you bite your fingernails and then you just watch usually there not be a difference there are cases where that doesn't work where your mailchimp and you do want everyone to come in right you want early adopters to err

[29:04] people are just getting started to come in and then upgrade with you over time so you don't want to remove a low pricing plan but but it is one way last section here and i think i'm going to zip through the end of it and you'll have a bitly url that you can refer to some specific text but i'm going to talk about raising prices and the reason i am is because it always bothers me to hear someone tell me to do something and not tell me how to do it so i wanted to get something practical this is going to get like deep in the

[29:27] kind of a mental framework i have around raising prices again having done it well not so well having seen it done well not so well so i think we have three pieces here so the first thing is uh and i'll dive into each of these in a minute but um is to think about whether it's an experiment experimental raising price or a certainty i put a certainty in quotes because nothing's a certainty in startups right but it's like do i think do i want to be able to roll this back real fast or am i pretty certain that i'm going with this no matter what second thing is think about

[29:56] grandfathering when to do it how long to do it that kind of stuff third thing is how to message it well there again i've seen it done very well and that's the example i'll run through at the end so we'll start with experiment versus certainty um this is a lot around your founder got there were times when i raised prices where i knew that i didn't care if it hurt our funnel in the short term that i knew we had to do it and we were going to raise prices and i was not going to roll it back like would have gone really far sideways for me to roll it

[30:28] back so i noticed the first question i'm going to get is how do you know if it's experimental certainty and it's usually a gut feel if you don't know that's probably an experiment i felt very confident about a few things so but here's the thing so if it's an experiment then you treat it like one you make it so it is a two-minute roll back right you literally change the five things they're all in one get label thing is that we call the label and you you're able to to roll it back very quickly and you watch it every day painstakingly and you see there's going to be feedback but more

[31:00] more importantly it's like what are the results right how many people are coming through what's your trial to paid what was your trial to pay the last week blah blah blah every day and then you give it a couple weeks maybe a month it's a poor you know we used to call it a poor man split test right um in a perfect world you would split test this split testing pricing very very difficult i have literally seen one company ever do this i'm sure someone else one sas company and i don't what i don't mean is getting on sales calls in the early days customer development and saying oh yeah

[31:30] it's 100 bucks 120 130 that's not what i'm talking about i'm talking about literally like on a website i have a decent amount of traffic and i'm going to split test it the only one i know who's done it is zapier and what they did if you ever want to try this i've never done this is that you would sign up and i don't think they they must not have had pricing published on their public page it was just sign up for zapier and when you once you got inside they forked you and it was only inside the app once you were logged in and that

[31:54] was a way for people not to see it on the public site right so split testing's very difficult i wish it wasn't so instead i would again put it in something i can roll back pretty easy and i would just be monitoring that's if it's an experiment if it's a certainty quote unquote i would recommend usually it's a good idea to make it a marketable event meaning you announce it you pre-announce we're raising prices so back in when is this 2015 this is me again drips pricing goes up tomorrow so i owned it still then right drip spreading goes up tomorrow i was trying to figure out why

[32:26] i put tmrw but i think this is back when uh twitter what do they have 140 characters isn't that crazy so drip's pricing goes up tomorrow existing customer slash trials are grandfathered if you've considered drip now is a good time link to the pricing page we also emailed you know if you think about it you email all your customers and you tell them and whether they are grandfathered or not you email all your trial users and you say you're already in a trial but just so you know if you decide not to convert if you ever come back pricing is going to be higher then you email all your just your

[32:54] marketing list and you promote the hell out of it and you say if you're not already tr if you're trialing and drip as of tomorrow you will be at this old prime you know it's a marketable thing i learned this from dharmasha of hubspot at uh at a business software dinner he mentioned this i think it's a great idea so when we did this it's an email from me to reuben um gomez the founder of signwell and it basically just says we got a bunch more trials the numbers aren't that important but um i thought it was just a funny little artifact from six years ago

[33:22] grandfathering so what does that mean it means if i'm going to raise prices on my pricing page what do i do with my existing customers do they keep the same pricing do i upgrade everyone how do i handle it well in a perfect world you wouldn't even think about it you just upgrade everyone right you'd email them and say hey price goes up if i have a restaurant and you eat this week and then i change my prices when you come back next week you don't pay the same amount right sas is different because there's some type of you know a little bit of a contract

[33:47] i'll say with subscriptions right so you have to communicate this why do we even consider grandfathering well first thing is because you're concerned that if you just raise prices people might churn you might find a competitor second is it might if you have thousands of customers they might write in angrily and be angry or support people and third is it is possible to do this so poorly i think many of us have seen it that you can actually damage your brand and your reputation right so that's the only reason to consider it and you know in my opinion if it was just a business concern you would just

[34:19] raise for everybody so i don't have a hard and fast rule but i have some some things here um actually i guess i do have a hard and fast rule and i literally call it rob's rule yeah it's like two slides from here i don't even think about it all right so even if you're not going to grandfather right and it's just like i'm gonna raise prices on everybody y'all i've never seen it go well if you do less than two months three is more comfortable in my opinion i think it's gotta be your kind of founder gut on this but i've seen three to six work like netflix does a year and

[34:50] people still get angry they get angry when they announce it they get angry 12 months later to me two three months is perfectly fair six is a lot of time they forget about it and then they think you're raising again is what happens so if i'm going to not grandfather at least two months all right so what is my rob's not rule of ten rob's rule of ten if raising prices on existing customers will not grow mrr by at least 10 percent it is probably not even worth considering raising prices on everybody does that make sense because the idea is let's say i'm doing 50k mrr

[35:22] the amount of a headache the amount of support burden potential brand damage and potential churn communication is so onerous that if i'm gonna grow by five grand is it my opinion this rob's rule you can have your own role and name it too um is ten percent it isn't worth it now i think once you're gonna grow fifteen if i'm going to go from 50 to 57.5 that starts getting interesting if i'm gonna go to 50 to 60 all right maybe it's worth it right and so you have to you have your data you can see what's going to happen um obviously if it's five percent i mean

[35:56] you know again this is my opinion a couple tips never promised your grandfather for life that's the worst thing you can do because then the next time whether you sell the company or you raise prices in a year or two or three you may want to not grandfather that time right so just don't leave for life lifetime deals for life like that's for one-time sales stuff don't do that in sas because you don't know what life means final tip before we get into the messaging this is totally random but it's something we've realized uh enterprise customers if you're signing annual contracts they almost expect annual increases build those into your

[36:30] contracts just write them in five percent ten percent is usually pretty reasonable put it in up front say it'll it auto renews or as we renew it'll go up seven percent it's pretty rare i see pushback on that that's just kind of been a standard for a long time all right last section here this is on the message so if i were to do it if i were to raise prices and i guess i can't cover both grandfathering and not actually so there's you've seen good like help scout did a really good job of this um i did a couple with drip that i think they went

[37:05] really well so it tells me they're well written but the one that i think codifies that codifies it all really well is jordan gaul did it with kart hook about a year or two ago i was involved in that i reviewed the draft and then when he sent it out he was and he was doing crazy stuff they were they raised the price a lot they added they increased a bunch of fees and they didn't do any grandfathering so they went pedal to the metal on it and it it made the business amazing but he had to be very very astute in his communication so as not to

[37:35] have something explode on them so these are there's six points and it's kind of that six things you should cover um now if you're if you are grandfathering it's simpler because you basically only need three of these you're just trying to communicate it and then say hey as an existing customer we love you and now you know you're not going to pay anything more thanks for your support right that part's easy it's easy to communicate that you need more if you're going to be like oh by the way in three months six months you're going to be price is going to be doubled so first thing in your message structure

[38:03] and i'm gonna have an example i'm gonna pull up his thing from internet archive and show you but so you set the stage you basically say um you know we're raising prices we're cart hook we've been around for two years blah blah i kind of give some background right high level we're changing our pricing then give a high level justification this is why we're changing our pricing we realize we're in a completely different space we're not email service anymore we're a marketing automation provider um you know we're providing tons more value than when we started blah blah blah then a couple optional pieces you have more specifics about who it impacts and

[38:35] when more justification and then reach out if there's questions all right so again i went back through emails because i've received a bunch of these the one that i like the most is this one and it's uh it's a blog post i went to the kart hook blog and it's not there anymore so i went to internet archive wayback machine and i found it and i put it at this bitly url so it's bit.ly carthook pricing so you can go look at it now or later to see those six points and how he covers them and then figure out if you would like to reorder them or whatever

[39:09] so um in the interest of time because i think i'm out of time i'm just gonna kind of step through these set the stage we're changing our pricing high level justification optional more specifics and reach out with questions wait was there five yeah optional more justification reach out with questions um so that's it it's pretty interesting to do something that's complicated and could potentially get people to flame you here's what you do you look at people who did it really poorly and you don't do that and then you look at people who did it really well and you do that and this was done really well

[39:42] so with that i think uh take a few questions thank you [Applause] you said you're gonna email all your existing customers at some point what if you have a customer who doesn't use your product at all based on metrics they haven't done anything in the last 24 months do you still send the email or do you just keep that silent not to wake anybody up i mean you're still sending them an invoice every month that's for sure i would probably email everybody but it's it's up to you i suppose i never liked i didn't like having zombie customers um a lot of the fact is what is it one it depends on the space

[40:29] but like between 15 and 35 percent of sas customers or zombie customers depending on the market marketing auto and not marketing automation high pressure marketing tools have are like a third to forty percent of their customers already zombies so um i hear what you're saying i don't know it's your call i would probably email everybody but i'm not saying everyone in here should use user judgment you know it's the same yeah we would email we would have customers not using the app every month we'd email everybody with you just got charged here's an invoice so it's not as if they hadn't heard from us for a year if they weren't

[41:02] using it they were still getting an invoice every every month hi rob um very interesting data points on the on the slides i've got what's your take on last year where there's very big gap between each tier versus one there or it's more incremental let's say 29 49 69 and all right versus like 29 and a thousand yeah right something like that so i've seen some folks do that i've actually seen i mean like reddit redis is it called no no is it redis no it's sidekick which is a runs on reddit sorry sidekick is open source so it's free and then it's a thousand dollars a year which i guess

[41:47] isn't that bad but um because they that's their model right and then we were using a tool at one point that was like that it was like free to try or 50 bucks a month and it was a thousand or more a month i think that um when i saw that i said these people really know their customers if that's working that's genius like that's a great way to do it right we talk about dual i talk about dual funnels all the time where it's like having a bunch of ten dollar customers you can imagine squad cast has like you know once ten dollar customers and uh uh then has a

[42:21] bunch of customers paying them thousands a month like that's actually a really interesting model i like the idea of having more graduated um but i think it would i'd probably have to sit down case by case you know what i mean i think customers will complain as what'll happen and you'll have to figure out if that's worth it and if the customers who complain are the ones that aren't going to pay you much or if the customers who complain actually have a point so that's the hard part to suss out anymore yeah hi rob thanks for the talk sure um i wanted to hear your comments

[42:52] about um monthly versus annual um as a as a lever to increase the revenue because on one side you are losing on revenue per customer basis because you usually discount and on the other side usually you also reduce your churns substantially right so what's your comment on that uh that strategy i love annual i wish i could sell all of mine even at a 16 discount or whatever it went you know if you give two months free it's 16.7 i get my money now i get 10 months of revenue so suddenly my cost to acquire is negative right let's say i paid 500 bucks and i get a thousand over you know

[43:29] for 10 months i literally just made 500 instantly now i can go acquire another customer that's how you build an incredible thing so i like annual eff because like you said churn goes down more money now as a bootstrapper right and we need more money now so good question yeah what else um so i'm curious like have you seen good examples of free to paid like where people just say no more free you all have to pay kill a free plan yeah i've done it i did it i acquired hit tail and i had a free plan and i killed it um and it was on a smaller

[44:03] scale right i mean it was a 500 for you and that's not true there were 1500 free users at the time um yes i have so much like i said dropping your lowest pricing plan you know can increase your average revenue per customer um dropping a free plan can as well i a lot of companies you see try that you that we see try free they don't do it forever because they do realize it doesn't work you know i think the challenge then is if you drop it do your grandfather or not right and i think in most cases you do because probably it's not worth it if you have

[44:38] thousands of free users what are they going to upgrade to your 29 plan again it comes back to the rule of ten like if i'm not gonna you know get get folks out of uh into the several thousands of revenue or tens of thousands is probably not worth it when i killed their free plan it had been around for five years i mean since the app started so um i basically the service wasn't solvent with the free plan like it was it was losing money and so i did wind up there were a few folks who like one guy was a professor there were exceptions i'll

[45:07] just say where they were like look i've been on the free plan since the beginning blah blah blah and i was like great you're comped your copter comptromp you know and then for the rest of them it really pulled the reduced the load on the server so that could be a whole talk right there hey rob um over the years you probably saw a lot of price increases and also probably some bad ones what was the worst one you saw what are you laughing at um i'll give you the factors that i saw in the worst one it was breaking it broke all the rules that i just said

[45:43] two weeks notice i think they said in two weeks your pricing's going up and i think it was like doubling and the email itself wasn't actually that clear about what your new price was gonna be and it didn't do any of the justification it didn't say what it was like because right it didn't say because we built these features and this is what we're gonna do and a commitment like if you read jordan's thing it's like here's our commitment jordan grandfathered for six months i think through the black friday season because it was e-commerce right and then he said here's my commitment we have to we got to building the

[46:17] features and doing a good enough job for you that you don't churn you can go anywhere i love that communication he was he wasn't acting like they're prisoners he was saying you can go anywhere and so i have to earn this from you now over the next six months so that in january when it comes time that you don't go to one of our competitors right and uh if you don't do that it can go poorly so not grandfathering and that's the thing so you know you will see people some people say you should always grandfather forever always always in all caps or you should never i don't hear many people

[46:46] actually if most developers in this room would probably say well we should always grandfather and most salespeople would probably say we should not grandfather right it's the business sides of it there are two sides there's nuance to it i honestly believe if you really take a look at it so uh do you have any thoughts on add-ons and when it makes sense to like feature game with an add-on rather than including in a higher priced here i do um this one's tough and i have thoughts on it but it's all i don't have a framework around it i don't have general thoughts if that makes sense yet i've had

[47:19] probably three of these conversations around it in the past couple months and each time i'm still thinking through what are the criteria i don't have the criterion bulleted list in my head yeah does that make sense so yeah i do think there's a right time to do add-ons versus tears i just i'm not there yet with a good like a good generalized answer but i have made specific you know in these instances i was like that's why i work or that's what you should do and now i'm trying to reverse engineer that thought process still

[47:58] [Music] [Applause] [Music] you

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