Episode 104: Demystifying Pricing Strategies with Patrick Campbell
Welcome to another episode of the Product Thinking podcast. This week, host Melissa Perri is joined by Patrick Campbell, CEO of Profitwell. They discuss all things pricing, diving deep into the psychology behind pricing models and how to choose a pricing strategy. Patrick talks about the biggest mistakes businesses make when pricing, when and how often you should be raising your prices, how to align your price changes with your value metrics and communicate those changes to customers, and more.
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You’ll hear Melissa and Patrick talk about:
Patrick's team developed a financial analytics product and decided to give it away for free in order to get more data and improve their algorithms. 37,000 companies have used it in the past seven years.
Patrick's company was acquired by Paddle for $200 million in May 2022, with a mission to grow subscription companies automatically.
Pricing is a core competency for a business and should not be treated as a quick task to be done and moved on from. It is the very essence of a business as it represents the value of a product or service and how it is perceived by customers.
Businesses should experiment with monetization once per quarter and raise prices once per year.
Raising prices too often can lead to customer churn. However, this eventually normalizes as ‘fence-sitting’ customers leave.
Make sure your price increase is justified by the value you provide to the customer. Align your pricing with a value metric, such as revenue.
Packaging and pricing go hand in hand and can be thought of in terms of charging different prices for different pieces of value of the product.
Sustaining a social media platform like Twitter is difficult, and it can be hard to monetize.
Adobe's move from selling Photoshop for $1,000 to a subscription model of $32 a month was an "eye-opening" change that allowed for more investment in the product.
It's important to get the finance team aligned with the move to a subscription model, as costs will initially go up and revenue will initially go down.
Pricing is a whole company problem, not just a product problem.
Resources
Patrick Campbell Website | Email | LinkedIn
Transcript:
Melissa:
Hello and welcome to another episode of the Product Thinking Podcast. Today we're talking all about pricing, and we have a great guest with us, Patrick Campbell, who is a c e O of ProfitWell, which was just acquired by Paddle. So welcome Patrick.
Patrick (00:15):
Yeah, thanks for having me. Excited, excited to chat about all things, pricing and whatever else we want to go down.
Melissa:
Yeah. So how did you get into pricing? I feel like that's a very specific niche to get into.
Patrick:
Um, well, you know, I studied pricing as a four year old and just really fell in love. No, I, uh, I, I, you know, it's funny, I never wanted to get into business. I was never, I have a union dad, so like, management and business is evil, you know, that type of thing. Um, not too f I'm, I'm joking, but not too far off. Um, I ended up, um, getting a background in econometrics and math. Um, so great party guest, that's what that's code for. And ended up basically, um, going and working in Intel, uh, US Intel in, uh, dc. So I worked at NSA right outta school. Um, uh, before that I wanted to be a lawyer, and then there were more lawyers than jobs. And so I was like, oh, let me go like work for the government. Hated it. Uh, loved the job, but just bureaucracy of government.
Um, so I thought, oh, let's go to this, you know, tech company. It must be so much better. And that tech company was Google, uh, which, you know, was 30,000 people at the time, so very bureaucratic as well. Uh, so I jumped into the startup scene and the first company I worked for was this company called Jim Vara, which was a competitor to Blue Nile. Uh, so Blue Nile, they're jewelry companies and the, their kind of thing is they have, um, customization so you can customize the stone and the, the color and all this other stuff. So they gave me this kid, basically a couple years outta school, this pricing problem, uh, because at any one point there was like 1.6 million different skews, um, based on all the com or permutations and stuff. So we would make these little changes when it came to price and we would see these giant swings in revenue up or down depending on what we did.
And so I wasn't really enamored with the culture there, and you're seeing a theme, you know, this is, this is more about me than I think these places. And basically it was like, well, you know, I was in my early to mid twenties, like, if I'm gonna do something, you know, I don't have a mortgage, don't have kids, like I might as well jump in. And this pricing thing seemed like a thing that people didn't know a lot about, but they thought it was important and it actually had impact, like, let's start exploring that. So I, I kind of jumped in with, with little to no knowledge of it and started exploring, um, which is kind of funny. And to round this out, it was funny because I started posting content about pricing. Cuz we started just using, we as in me working 18 hours a day in a room, um, started just kind of publishing content to, to bring people in.
And what was really funny about the content was these pricing PhDs would be like, this is the most basic thing that you just published. Like, not in a mean way, but sort of in a mean way because they're pricing PhDs, right? But then all these product leaders and these marketers and stuff, stuff would be like, this is amazing. You just synthesized all this information down to like a 1200 word blog post. This is great. I'm gonna take this to my board and, you know, figure out what we should do. So that, that's kind of when it really was like, okay, you know, there's, there's a market for this. It's just not amongst pricing people.
Melissa:
That's really interesting. Uh, so you, you were studying the pricing, you started to write about it. What made you start profitWell, and I, I think profitWell you started as a consulting business, right? It wasn't a, a pure hospital.
Patrick:
Yeah, it's a little, it's a little, um, and it's one of those things like, I haven't given up on it yet. Like it's not, it wasn't a consulting business. We had a software product, but yeah, it was a services business. It was so, so created this, this piece of software that allowed you to do pricing research basically. So, um, you would send out a survey, the data would come back, it would crunch the numbers and give you like an elasticity curve and, and some other insights. We started trying to sell that. Um, and what I found was basically, um, people were like, I don't wanna do the work to get the data. And we're like, well, what if I did the data, got the work and did the data for you? Okay. But I don't want to, you know, interpret the data cuz you know, there's, there's a lot of like fear when it comes to pricing because pricing sits at the intersection of uncomfortable and important.
And whenever you have something at that intersection, people get kind of scared and anxiety to do anything. So they were like, can you come in and like basically settle an argument? And I was like, oh, VCs don't like services, we can't do services. I didn't say that to them, but that was in the back of my mind. And then they were like, we'll pay you a lot of money. And I was not funded, I didn't know anything about how to get funding. And so I was like, okay, well let's just do this and, you know, I can get paid basically to do customer development. Um, which was great. And so yeah, started doing services and then that started kind of taking off and, and kind of started fueling and really funding the business.
Melissa:
That's awesome. I really love that growth story too, about it. So when you were going in and doing this customer development, they basically just hired you to come in, figure out the pricing problems, and then how did you translate that into a software product? And what did your software product do or what does it do?
Patrick:
Yeah, so it, we started to realize that the survey method was really effective because we were, we were kind of competing against more just inertia than anything. Like when you think of getting help with pricing, most of the time it's, oh, I got my MBA with this guy or the gal and they're working at McKinsey or they're working at Simon Kutcher and it's gonna cost like 300 grand just to kind of get a six week assessment. And then to get the actual data, it was gonna cost probably another half a million. So we were kind of like, we're not gonna take you out to dinner, we're not gonna like handhold you. If you really need that, you should go and, you know, purchase from those folks, but we'll get you the data and we'll do it in a cheaper way. Right? So it didn't start overnight, but it, it got to the point where we were doing, you know, our average deal size might maybe was $200,000 for a year and we were delivering a bunch of this data and a bunch of this kind of content.
But what we quickly realized is there were, there were two things. One, we were like, how do we get this data in a cheaper way? Like how do we get real pricing data? And this kind of led to this, how do we, you know, to kind of skip to the end, how do we create a unified theory of subscription growth? Because every subscription company kind of thinks about their business very similarly. Like, you know, L T v, cac, you know, mrr these types of things and the influences on those things are all very similar. So we were thinking, well, if we could get different data, maybe we wouldn't need to send the surveys. And while this was happening, we were helping a company that was about to ipo o with their pricing and we found out that they were calculating churn and MRR completely incorrectly.
And for those of you who aren't in the SaaS space, um, that's basically like opening up your bank account, reading the number and getting it wrong. Like they're super fundamental numbers for a subscription business. And to, to make a long story short, we kind of started putting these two things together and we're like, well, what if we created this analytics product that would get us this data? And we were like, well, which data? And every model we came up with and just did very basically was like, well, top of the funnel data's great. Engagement data is great, but really the financial data we're gonna need to do anything interesting. And so it was like, let's get the financial data and we were gonna charge for that product. But, um, to kind of skip to that end of this part, um, we basically discovered that no one wants to pay for analytics tools.
Like they're notoriously terrible tools. We were sitting down with an investor from emergence just cuz we wanted to get more business from their portfolio. And she, um, she, she was amazing. Um, she was just like, yeah, you guys should not do this business <laugh> because she's like, this is, you can't raise money, no one wants to buy it. They all have to go enterprise. And this is why we, we were like gonna give up or go enterprise or the third option was give it away for free. Cuz now we could get more data in which each incremental customer on that product, which is a financial analytics product, um, our algorithms all got better when it came to our pricing product or our churn reduction product or things like that. So yeah, a little rambly there, but that's like the, the most succinct, you know, three year story and, and you know, two minutes there that I can give.
Melissa:
Yeah. So you, so so what did you end up doing? Did you give it away for free to like boost the algorithms?
Patrick:
Yeah. Yep. So it's, it was given away free right now it's got 37,000 companies using it, um, in the past like six, seven years. Um, and it's improved, like our pricing algorithms are now, I mean, it, it depends on how you look at it, but right now our accuracy is like plus or minus 3%, which is great. And like just off the shelf pricing algorithms might be plus or minus 30%. Um, and it's just because of like the data and refining all the stuff, um, you know, in many, many different ways. But that was actually a really hard transition to kind of speak a little more broadly from a product perspective because it's really quote unquote easy to build like a services business or an agency because you're filling people instead of products. You're like, well I don't know how to build that product even if it's a spreadsheet, so I'm just gonna put a person here to make some judgment calls.
And then you can get pretty addicted to the cash flow because you can sell a hundred thousand dollars contracts, right? And so all of a sudden you can get some pretty decent profit. So what really took us was really having a wider vision to be like, no, we need to use this to get to a software business. And this is where a lot of people make mistakes with services business, when they start that way, they get too addicted to the cash flow, they end up not really thinking of how to productize everything. Um, and they just end up being a services business. For us, it was like, we have a mission and that's what kind of led us to keep, you know, going aggressively towards product.
Melissa:
Yeah, that's a great mission. Having run a services business myself, I definitely, uh, feel that pain, but that got to a point where I was like, I have no good ideas for products that we can build right now, so we're gonna Yeah, it's hard. Yeah.
Patrick:
Good. I think getting paid to do customer development is kind of my favorite because you, we like the amount of boardrooms or exec team meetings that I was in as like, honestly a kid who shouldn't have been there, but I was like bringing this expertise that all of these smart people didn't have confidence in. It was just an amazing thing, like to see like the questions they were asking. And I couldn't treat it like a product manager as much as like I probably should have because I still had the kind of like, I don't wanna say front, but like put up a bit of a front, you know, in terms of like, you know, being confident. But it was, it was one of those things that accelerated the business pretty substantially.
Melissa:
Yeah. And I don't think that's a bad thing, right? They tell you when you start businesses do things that don't scale. So course you were basically doing that at the beginning was here's all the things that we can learn and then we can, uh, put the gas on it and actually scale it, which yeah. Worked out pretty well. So you, you got acquired by Paddle. Yeah. Tell us a little bit about that.
Patrick:
Yeah, um, there's a lot of things we could, we could talk about there. Um, so Paddle, like our mission ultimately to, to kind of give a little bit of context was to run, or excuse me, grow subscription companies automatically. So you should have been able to plug ProfitWell in, you get all this cool reporting for free and then the products you pay for automatically lower your churn, automatically optimize your pricing. And when we say, when I say automatically, I mean you don't have to set up emails, a wizzywig editor, you don't have to set up workflows, like it just does it right. Um, and I think that's really the future of a lot of product where we're headed because it used to be you had to like show your boss you're doing work, um, you know, and this is how, this is how look at Salesforce's design.
Salesforce is designed for the VP of sales or the director of sales to like look at the reporting and you have to like deal with putting all this stuff into all these different fields. Um, that kind of software is just not, not, it's not gonna exist in like 20 years. It's gonna be all about like, I need to focus on my customer, my product, et cetera. So we were like, you plug it in, you should grow. Paddle is very much, you plug it in and you run your business automatically. All of your taxes are taken care of, all of your financing, your payments, your currencies, your, you know, different, you know, currency, conversions, everything like that from a billing perspective's taken care of. And so, um, you can kind of see where this is going and you know, the combined vision is very much to like run and grow subscription businesses automatically.
And we weren't looking to sell, um, we were actually looking to raise money for the first time, so we were bootstrapped the entire journey. And uh, you know, when Christian kind of approached me, the paddle, c e o to like sell the, the ego kicked in and I was like, oh, you can't, you can't have my baby. But as soon as, as soon as we kind of started thinking about it, my business partners and I, we were like, well this is another way to get funding basically and take some money off the table and stuff like that. So yeah, we, we ended up doing that and, you know, diligence was terrible, um, as it always is, but that's just kind of how it is. I had no idea what I was getting myself into. And yeah, we sold for, for over 200 million, um, in May of this year. So that's, that's kind of the, the, the headline number, which is great. So, which worked out really well being bootstrapped. Um, I think if we were funded it wouldn't have been as cool. Um, still cool, don't get me wrong, but not as cool. So yeah, it's been, it's been a fun year. It's a really good year,
Melissa:
<laugh>. Yeah, that's a really good year,
Patrick:
<laugh>. Yeah, yeah, yeah, yeah. No complaints. Only champagne problems. Yeah,
Melissa:
That's good. So when you've been looking, you know, you've been doing this for quite a while. When you look at how people are doing pricing, especially for subscriptions, what do you find are the biggest mistakes that they start to make?
Patrick:
I think, uh, the, the biggest kind of mistake from a high level is you don't treat it as a core competency or like, you, you both put it on a pedestal and also treat it as this like thing that we just do quickly and then move on from. And the thing you have to understand about pricing is that pricing is not to sound soap boxy or preachy, but it's the very essence of what you're doing as a business. And what I mean by that, you've created some sort of value. And because we don't trade goat for wheat in most of the economies that we play in, you're basically saying like, this value is worth this much money. And then when you think about that one layer down, that means that everything in your business is used to drive someone to a point of conversion or for a purchasing decision or to justify the product or the price.
And so there's all these different value vectors around who you sell to, which vertical you go into. What part of that vertical, um, do we include these features in this tier, this tier? Do we pull them out and make them add-ons? Do we localize in this currency versus that currency? And then those are all things apart from the actual price. And the thing you should think about when you're thinking about are we doing monetization or pricing properly, is, is your average revenue per user or customer a cv? However you're measuring it, is that number going up over time? And when you start to kind of realize that, to answer your question, you start to realize a lot of businesses, they're like, they don't treat it as that core competency where they're trying to improve that number every single quarter. They, that number is typically very flat within a business.
And I would argue that if you started small and were just, just like, we're gonna do one thing per quarter, which is the average amount of experimentation, the best companies at pricing do, this quarter, we're gonna figure out our value metric next quarter we're gonna figure out our add-on strategy the next quarter after that, we're gonna figure out our actual price, what it should be, then the next quarter after that we're figure out our discounts, then the next quarter and so on and so forth. You find that you make those gains to make that a c v or that ARPU go up. Um, and the best way to kind of do this, which a lot of people don't do, is with unfortunately what's called a pricing committee, because pricing sits at the center of so many different things. If there isn't like a committee and someone kind of running with the football, you're just not gonna end up having any progress.
And if you kind of go it alone in product, you'll come up with the best data and the best idea, then you'll go to John and sales or Sally and customer success and both of them will be like, whoa, wait a minute, we can't make this change because they didn't feel like they were bought in and they might have actual feedback that's really valuable. Most oftentimes they do, but even if they don't, they're just not gonna feel like they're gonna be able to implement this and they're the ones who have to implement this. So committee is typically made up of everyone you think with obvious, um, sales, marketing, finance, um, normally product, definitely the people who kind of own the decision product and marketing. And then normally you have a product or a marketing manager for 20% of his or her time just owning pricing.
That's all you really need. And I know that sounds like a lot, but like four meetings a quarter, 20% of one person's time and you get to grow your, you know, the very like serious growth lever that you're not really using right now. It's just an amazing trade off. And that little bit of process is a big mistake we made in the beginning cuz we would make, we would work with our poc, which was normally in product or marketing, then we'd be like, Hey, here's this perfect data. And then they would go try to implement and they would just run into all these internal politics and we were like, well have a better culture. And it's like even the best cultures have politics when it comes to this stuff because everyone's a little scared of what they're doing. Um, and then I think the, the last kind of mistake people make or the misconception is your customers know things cost money.
Like it is so patronizing to not talk to your customers about pricing and be like, well we can't do it cuz they're gonna like leave. No, you're not doing it because you're uncomfortable <laugh>. And it's really just like, there are ways you can ask about willingness to pay, there's ways you can ask about pricing, um, in order to not make it weird. And then you can raise prices and if you just communicate with your customers, you know, directly and you make it about them, not about you, all of a sudden people are like, yeah, I don't wanna pay more, but I will, you know, because you're creating that value. And so, um, to give you a benchmark, you should be doing some experimentation about with your monetization once per quarter and you should straight up raise your prices once per year. Um, so there's just a lot of things that you should be doing, at least based on the data that we see with the best companies out there.
Melissa:
Is there ever a case where raising your prices too often causes a lot of churn and I'm thinking of Mail Chimp right now, <laugh>.
Patrick:
Yeah,
Melissa:
Well it keeps raising their prices on me. Like I know it feels like every four months
Patrick:
That's, that's the post exit, that's what happens, right? Um, well and you just saw there, there was a company called Gum Road that just raised their prices. That was a big brew haha. Um, there's been, I can name, you know, plenty, I, i I don't want to name and shame as much as as much as I can, but I think that, um, oftentimes the problem, so, so the short answer to your question is yes, you can raise prices too much. And the thing to kind of think about, let's say we're not gonna do any other pricing experimentation, but we are gonna do a price increase. You want to collect data from your current customers and also people who are your prospects who have, who are not using your product right now. And the reason is, is because what you'll typically find in most businesses is that all of a sudden your current customers will be anchored close to where your price now, cuz that's what they're paying.
And then the prospects who your target customers are probably willing to pay considerably more and nine outta 10 times someone's gonna go, well the data must be off, right? Well, the data's not off, it's just you never set your prices properly so your customers are anchored to what they're paying. But that's not what the willingness to pay in the market is. You then have kind of a decision to make, right? Most of the time what you should do is you should raise the price on your new customers immediately. Your existing customers, you should think about not going after more than a 50% increase per year. So you might have to increase those prices over three years. Um, unless you're gonna rip the bandaid off, which some people choose to do. If there's a ton of product development, you can do more than one increase per year.
And there's a ton of things you can do that are effective increases, meaning it's not like a straight up price increase. You like lower the amount of emails you get in a tier, that's an effective price increase, but it doesn't feel like that to the customer. So it doesn't mean we're not gonna effectively raise the price, but it doesn't mean like a straight up, Hey customer, you've gotten a ton of value, here's all the data you have in your product. Here's the new features that launched the past six months. We're raising prices that you can really only do once per year because customers, they, they churn. But I will say even if you lower your prices, you're gonna see churn. You're reminding people they're buying something. Same thing that if you sent all of your receipts on the same day of the month, that's your highest churn day. You're just reminding people. Um, but if you're doing this properly, which is at least a 10% increase, if not more, um, the churn normally is, is is not not bad. Um, and we'll see actually in the data churn will go down after that increase of churn, that little bump because you kind of got rid of the fence sitters. And then if you change nothing about your funnel, the churn will slowly increase back to where it was previously because you're getting kind of the same types of customers in your funnel.
Melissa:
That's really interesting. Yeah, I feel like it, it comes down to, to me, this is what it seems like a price versus value justification. Like if you're gonna raise your prices on me, what's the value you're providing and is it justifiable to, you know, what you actually wanna charge? And I just had the thing where we have, um, we are on teachable for product institute and we're actually building our own,
Patrick:
They just raised prices as well.
Melissa:
They just raised their prices too. Um, I've been on them since 2016 and their product has just steadily gotten worse with the bugs. Yeah, with the, like they, they have never fixed their API it goes down all the time. We have to email them. Um, and then that price increase comes and I'm like, well, definitely time to get off. Right? Yeah. So when you're thinking about, you know, your value justification versus price increase, what can companies do to make sure that, you know, you, you're sounds like the survey, but like what should they do to make sure that the value is there for that price increase before they attempt something like that?
Patrick:
Yeah, I think the biggest thing, the, the, the hardest part, but the most impactful thing is to make sure your pricing aligns with some sort of value metrics. So value metric's, how you charge, and I think teachable, it's based on how much like money revenue kind of flows through. So it's a really pure value metric. It's like, Hey, you know, you made a hundred thousand dollars, we're taking $4,000 or whatever it ends up being and some not everyone has an elegant value metric like that HubSpot, it's contacts, right? Whiskey, it's videos, right? But I think the reason you want that value metric is because when I go to raise prices, I wanna collect a little bit of data to understand where my pricing power is. And that basically means people are paying a hundred bucks, but the willingness to pays 200, my pricing power is a hundred bucks, right?
And if it's like non-existent, like $105 is my pricing power, I'm not gonna change, you know, my price because I don't have, I don't have any power there right now if it's like, you know, 10% or more. So, you know, then, then I have some power that I want to go after. But then it becomes like making sure that my customer is in the best position to take the price increase. Well, and that includes looking at NPS s data, um, CSAT data, bug data. Like if we had just had a major outage, we're pushing that price increase three to four months away, right? But people don't think about this. They're just like, yeah, well it's scheduled, we have to follow the schedule, right? If NPSs is low, typically you don't need that high of an NPS to raise prices, but NPS over 20, you should be raising prices and NPS of 20 is not great.
Um, but it's not terrible, right? But then I would wanna look at individual scores. Like if you had given a CSAT or an NPS score of below, like a seven, basically I might kick the price increase or I might do a little price. Uh, there's a whole host of things depending on the circumstance, but you wanna look at that data and then when I send you the email and people, it's such a high leverage email, but people suck at it so poor badly because the amount of emails I see that are like, inflation's up, our costs are up, we're gonna charge you more. It's like, it's such a, a terrible email, right? And the email you should send, and this is, I'm gonna tie it back to the value metric is, you know, Hey Melissa, last year you made a hundred thousand dollars on teachable. Congratulations.
That's amazing. By the way, in the last six months we also launched this new creator academy. We're seeing so many people use this. And then we launched, remember that feature, that feature a, we launched it and we noticed you use it every single week. I just pulled in a bunch of value data and you're primed now as a user to be like, yeah, yeah, I didn't like that bug, but I did make a hundred thousand dollars. That's great. Then I'm gonna go in that email and I'm gonna say, Hey, for us to continue to invest in making teachable better for you and your company, or just you, if it's a consumer product, we have to raise our prices. We want to hire this, we want to do this, we want to do that. Now it's connected to you because you're gonna say, oh, they're hiring more DevOps engineers, that means it's gonna get more stable.
Amazing. It's always a shock no matter how good this value statement is. So then what I'm gonna do is, I'm gonna say, but because you've been with us for so long, Melissa, you've been us since, since 2016, that's amazing. We're gonna raise prices on everyone else, all these new people who aren't loyal to us. You know, you're not gonna say that, but you get the gist. But for you, because you've been with us for five years, six years, whatever it is, we're gonna keep you at your existing price for the next six months. That's $3,000. We're giving you $3,000, Melissa, it's not really giving, but you get it. And then after that six months, we're gonna raise you to the new price. If you have any questions, let us know and we'll work something out. And then my favorite part, just to close this out, is I like to add Ps if this materially impacts your business or you, if it's a consumer product, let us know and we'll work something out because it's for two people.
One, it's for people. You're kind of in this camp where you don't want your price increase, but if you read that you believe all the value statements, you're gonna go, fine, I'm probably gonna give a lower NPS score next time, but I'm gonna take the price increase. Or you're gonna go, Hey guys, your increased by price. I was down for two weeks, I lost a bunch of money because of that. You, you can't raise my price. And then the CX rep is probably gonna be like, oh, you're fine. We'll, you know, we'll, we'll keep it at your existing price for a year and negotiate with you. And it's obviously for other people are actually affected because you don't know what your customers are all going through. Um, right now you should be raising prices even though there's a bit of a downturn, not because like, you know, you want to be a stickler, but because the people who chose you who aren't churning from your product, you have some pricing power there. Like they chose you and you can expand the revenue on them, you have to do it right, but you want to give people that out to have that conversation. But I think most of the time people miss everything I just talked about and they don't tie it back to the actual value that their customer sees on the product. Like, if I didn't know that, why would I accept a price increase? Like I'm just begrudgingly going to do it rather than being like not happy about it, but accepting of it, if that makes
Melissa:
Sense. Yeah, I think that's a much better way to actually do that. And it's very rare that I see people execute that as well as you just put it out there. Like, I don't, everybody does what you said. Well, it's inflation. We're raising our prices and it's like, that's your problem, not my problem <laugh>. Like totally. I also have less money in my pocket now because of inflation, but
Patrick:
Well you're also reminding yeah, you're reminding people that their life sucks too. Yeah. So you, both of our lives sucks, so I have to suck more. You know, it's just such a, it's such a weird, like I, and no one's, I don't think anyone's ill intentioned, I just don't think they think through it. They're like, I have this project and I have to get this email out. And it's like, yeah, but let's think through like the perception of it and make sure we're doing that price to value that you just talked about, um, to kind of keep things moving.
Melissa:
Yeah. I actually saw this in action once, um, I was working with a company that did, uh, tax software and they had a low cost model for smaller companies that were out there. Mm-hmm. <affirmative>. And the companies were actually giving them feedback and saying, you charge too little for this and were worried you're gonna go out of business, so can you please like, charge us more money because we really need you and we wanna make sure you survive.
Patrick:
You can be priced too low. A lot of people don't realize that like about 80 to 90% of the companies that that I see, the ones I work with and not. So there's a little bit of confirmation bias. There are underpriced and it's just most people are underpriced because you, you pulled a number outta the air or copied someone else and no one does their pricing homework. So you like copied the dumb kid in class, typically when you're copying a competitor or something like that. And all of a sudden what ends up happening is, is that like you end up sometimes being priced too low, especially European companies because there's, I don't know why there's some psychological thing. And then we'll see companies that will 10 x their price overnight for new customers. Not only does their like revenue per customer go up, obviously, but their conversion rate goes up because there's so many people who didn't trust that the product actually could do what it was doing, or they had the feeling of like, there's no way this is sustainable, so I'm not even gonna try to like get onto this platform or whatever it ends up being.
Melissa:
That's really interesting. That makes a lot of sense though. It's true. Like you, you look at things and you go, oh, that's really cheap. It must be bad
Patrick:
<laugh>. Yeah. Like we humans, we have this weird, it's, it's a psychological phenomenon and we just, we have, we have a perception bias, you know, if it's something cheap like, you know, it's, it's disposable or it's only for a short amount of time, it's not something you're gonna get into a, you know, for lack of a better phrase, long term relationship with from a subscription perspective. So yeah, it's just, it's just, you know, we're, we're funny creatures and I think that's, that's good and bad when, but you have to kind of study it a little bit to, to take advantage of it from a pricing perspective.
Melissa:
So one of the other things that, um, caught my eye when I was asking you to come out here as you made this beautiful thread about Twitter blue and about the packaging and pricing around there, and I don't think we talked a lot about packaging yet, right? Which goes hand in hand with pricing. We're talking about how much should you charge per subscriptions, but I thought that was such a great example of both packaging and pricing and how you can think about charging different things for different pieces of value for your product. So can we talk a little bit about where Elon is getting Yeah, his uh, Twitter, blue
Patrick:
Elon call me? No. Yeah,
Melissa:
<laugh>. Seriously though, Elon, I I was like retweeting. I was like, Elon, call him
Patrick:
<laugh>. Yeah, yeah,
Melissa:
Yeah. This doesn't make any sense. So when you looked at Twitter Blue and what you wanted to do, what did you think?
Patrick:
Yeah, so the, the basic idea, um, so, so to give a little bit of background, um, obviously if, if you're not on Twitter, which a lot of us are if we're listening to this, but like basically Elon Musk bought Twitter, um, his whole thing is we need half of Twitter subscription revenue, so billions of dollars in subscription revenue to make, make this work because the ad model's tough, blah blah blah, blah, blah. Um, and the initial idea was this $8 a month subscription where you could get verified, you know, the little check mark. And I thought when I wrote that thread, I thought verification meant like actually uploading your id, you know, like, like Facebook, it turns out it wasn't that, it was literally just, you just pay $8 a month, you get a blue check mark <laugh>. So I, I wrote that thread with that in mind and then I was like, oh, this is for lack of like, this is dumber than I thought it was. Um, and it's even
Melissa:
Worse.
Patrick:
<laugh>. Yeah, it's so much worse. I thought it was bad just cuz I was like, well we're not really like optimizing here, but it was like, no, no, no. Like, and, and you know, bless him for moving fast, right? Because I think that that's important because Twitter was, it's been so slow with innovation, but here, here was kind of the issue that I saw with this. And, and to give a little bit of the backstory further. So if you think about a hundred million dollar subscription business, I mean you're, you're an inve or we're an inve, I don't know how you classify your investment career now, but you were an investor for a while and all of a sudden now, um, when you look at the world of like a hundred million subscription business, that business is not valued that highly. That's like a $3 billion valuation, not in this market, in the last market we were in, right?
So my premise was, was basically like, no, no, no, no, we need billions of revenue. We have to cut this up to find the different layers of revenue because Twitter doesn't have the advantage that LinkedIn has or some of these other social, social media apps has, um, where they have a lot of people willing to convert at $8 a month. Um, it's just not something that you typically see unless you're like a very professional network like a LinkedIn. Uh, so to give you the, the breakdown of, of what you were kind of suggesting, I basically went in and I said they should have a very cheap a hundred bucks a year subscription plan for verification. And ver my assumption was verification was actual verification. This not only gives them some revenue to cover the costs, but theoretically you can still show ads to those people and they're verified cuz there's a Twitter bot problem.
So it kind of helps solve the bot problem. You can get more advertising. And then it was like, great, that's a, a, you know, hundred million dollar, maybe a 50, a hundred million dollar line of business. Then I think Twitter goes premium because I think the thing that Twitter has that the other networks don't have is you have this like very, uh, captured class of people like the iPhone crowd versus the Android crowd where it's like, you know, you teach at H B S, I'm an exited founder, we use Twitter a lot, probably more than we should, and we're probably willing to pay more than $8 a month if there was enough stuff in it. Now, not everyone, but there's a few hundred thousand people who are willing to pay 50, a hundred bucks a month. If there were some like really good features and we collected actual data on this to verify this.
So all of a sudden you have hundreds of millions of dollars in revenue there. Then there's business folks, the business folks, they want to control their brand, they wanna be able to do a bunch of different things. They're willing to pay hundreds of dollars a month at and mass. So there's another few hundred million dollars of revenue. And I just kind of went through this and then the, the kind of like, you know, climax of this was how do we get even more subscriptions? Well, we can get people to subscribe to creators very similar to like an only fans or a Patreon. And the advantage that Twitter has is I log into Twitter every day, I, I don't even see some of my Patreon notifications to even go over there, right? And so Twitter can have that captive audience and then maybe I subscribe to, you know, 1.2 creators and all of a sudden there's a bunch more like subscription revenue that, that Twitter basically can get.
And I think the lesson there is like multi-product, even if you're a B2B company is huge because you have different constituencies and different willingness to pay. And then also just really thinking through, you know, those use cases and where the value is because one of the biggest mistakes people make in pricing is they try to be everything to all people. I wish Twitter was big enough where an $8 a month product just kind of sustained billions of dollars in revenue, but it's just really, really hard to build a social network. Like LinkedIn has more, more subscribers and more users than Twitter does. Um, and they're able to monetize through that and ads, whereas Twitter just hasn't been able to get over that hump. So hopefully that was enough context to make it interesting if you didn't see the thread, but uh, yeah, it's, it's, it's, there's a lot of lessons there for Elon and you know, just pricing in general.
Melissa:
Yeah, I think that thread was really awesome and it did hit home on a lot of stuff. I even, you pulled in all these calculations, which I thought was amazing too, to show even if we priced it this way, we won't get to billions of dollars. Yeah. Which feels like what you should do in pricing 1 0 1 is like model it out and be like, yeah, worst case scenario, best case scenario and try to figure out how much money you get.
Patrick:
It's a big red team with pricing changes is like, okay, hold on a second, if we do X, like does it even do anything? Right? This is why I was saying like, if you're not gonna do more than a 10% price increase, it's probably not worth it because most of us don't have the user volume where like 5% is significant, some of us do, but it, it, it's gotta be worth the squeeze and doing, you know, some calculations on stuff like even this is what we did with ProfitWell, right? Like our metrics product, this is why it ended up being free because we were like, okay, we did pricing research, we discovered that like a startup would pay 50 bucks a month, maybe a hundred bucks a month. We didn't see that much lift when we went to like a pre-public or a public company in terms of willingness to pay.
Like you normally wanna see your smallest customer and your largest customer have 20 x or more difference because that's how you get expansion revenue, right? But we're like, well there's only like 25,000 SaaS companies, there's only 150,000 subscription companies. Even if they all paid 50 bucks, it's a cool business. It's out a multi-billion dollar business, right? Um, and not all of them are obviously gonna pay for that. So that's, that's the type of napkin math that can save you from going down a path that is very, very dangerous in terms of sucking up a bunch of resources and then just really trying to grind in a market versus have that market kind of pull you.
Melissa:
Yeah, and it felt like too with the Twitter example, you know, one of the things you brought up was the businesses. Like Twitter is a prime spot for a lot of customer service now. I know it's the only way airlines will actually answer me if, if I tweeted them <laugh>. Um, but
Patrick:
Four people will DM you from the airline and you in the same thread and you're like, yeah, who has context and who doesn't? I have no idea.
Melissa:
Yeah, exactly. But at least it gets done <laugh>, I'm like trying to call them and it feels like that was a huge opportunity that was kind of missed for persona segmentation too, of like, who do you charge for? Who do you not? Instead of like going after the consumers with a, with a marketplace like that.
Patrick:
Yeah. I think it's just hard. I mean that, that was a good lesson in like, this stuff's really hard because you can have, you know, one of the most success, like measurably successful people in the world, you know, depending on how you, me, if you're measuring it from like a business perspective, but I don't know, it's a really tough problem too because I think that like social media and I'm not, I've never built or worked at or studied that much social media kind of unit economics. It's just like the ad model is the wrong model, but it's kind of the only model that's really worked for a lot of folks. And so, you know, sustaining these types of things gets really difficult and you'll have, even in B2B products that is are like that, you'll have products that are just so difficult to monetize and you kind of have to make a decision like, should we be mo even trying to monetize this? Or should we like give up or should we give it away for free? Um, and oftentimes the answer is like, this could be a really good free product for a feeder, for something else, um, especially in b2b. And I think that that'll be a more powerful way to kind of quote unquote monetize these products. Um, you know, rather than like going direct when it just doesn't seem like it's a viable business model.
Melissa:
That's interesting. If you were thinking about LinkedIn, what do you think, I mean, not LinkedIn, Twitter, do you see it as a potential feeder for something?
Patrick:
Um, I think LinkedIn does really, really well because they have, they have a premium ad network and then on top of it they have, you know, a subscription that people are begrudgingly or are fine paying for and they're willing to pay real money. Like sales Navigator is not 10 bucks a month. No, it's expensive. Like the recruiting product is not 10 bucks a month. And I think that's the thing that like the, the was in that thread as well is that there's a lot of, like, there's a lot of people who don't realize that like, I would rather have a hundred thousand users at this much higher price than a million dollar users at a dollar per user. Um, especially in like a B2B context, you know, the numbers are obviously much smaller in b2b, but like, it's just one of those things where that, that is a better way to kind of get up the mountain because those people don't churn as much either because it's a, it's a true purchasing decision.
Like, am I truly gonna want this product at this price point rather than just getting in what's called the Amex effect where I'm just willing to swipe the credit card and like I forget about it and then I'm like, oh crap, can I get a refund? Right. So I think that's, that's the thing when you think about it through lifetime value and not just through that price, it's also really powerful. I think for LinkedIn. There's a world where I, I have now realized why integrations of companies are so difficult. Like I didn't, I, before this acquisition, I was like, why is it hard? I don't understand why everyone says it's hard now. I'm like, oh my God, it's so hard. Even when everyone is really well-intentioned and the vision just perfectly aligns. It's like not even just like, oh we need to combine these systems.
It's like all the, like we gotta figure out this way in that way. So I think that's what LinkedIn has been suffering from for like years now with Microsoft. Cuz obviously these are very large entities. I do think there's a world where that starts to be a feeder for Discord. If Microsoft can get that purchase, which they've wanted to do before or some of the other Microsoft Suite. Microsoft is really, really good at bundling and they bundle in we ways that no other company can. Like for example, if you look at the Microsoft Office bundle, you get Skype, you get teams, you get all of this stuff and you end up not using a lot of it. But there's so many companies that are like, why would I buy Zoom and why would I buy this and why would I buy that when this includes everything else? And I'm sure there's something that they could do with LinkedIn if they haven't done it already.
Melissa:
Interesting. Yeah, I really like that when you think of bundling too, I think one of the best examples out there is when Adobe went from buy Photoshop for yeah. A thousand dollars to like get all this stuff for 32 bucks a month and yeah. Wow. Was that like eye-opening that that could change so much?
Patrick:
Well people were, it's funny because people who were used to buying the perpetual licenses, a good portion of them were pissed and it was mainly because they were able to buy, like, I don't know how relevant it is to a lot of folks, but like we used to sell software on a license basis, you know, <laugh> and like basically it wasn't Saas, right? And what's kind of brilliant about that was, you know, every new, uh, iteration of the product, every new license you wanted to buy because the changes were so dramatic, the problem was, is like version 42 of Photoshop, the changes end up like, it's okay, I can use version 40 or version 41. I don't really need version 42. It's a problem for Photoshop, it's a problem for Adobe, it's a problem for the user as well because the pace of innovation is slowing because of the model because there's no more money coming into it and therefore they're not gonna be able to invest more into it.
So, long story short, moving to the cloud was, was brilliant because it just dropped the entry point. Um, same thing with Microsoft Office, but it also was, there was a transition that needed to take place and most people stopped complaining cuz they're not gonna, there's not an alternative. There are alternatives now, but, you know, Adobe bought Figma one of the alternatives. So like they, they understand that market. I think that m and a, that that corp dev shop is, is very good a lot better than people give them credit for. Cuz it's Microsoft or, or Adobe, Microsoft kind of get the same vibe where they're like old school. It's like they're not as old school as you think they are.
Melissa:
Yeah. People hated Adobe when they bought stigma. I just saw everything explode on Twitter and I was like, oh, okay. I thought it
Patrick:
Was Yeah. But it's like they're not gonna, like, Adobe's not going to like, they're not gonna be like, great, we're shutting it down, use Photoshop. Like that's not No, of course. They're just like, we recognize this is a lightweight version of photo or, you know, couple of products technically and therefore we, we bought the thing that was gonna kill us. Fantastic. And I think, I mean the, I hope the deal goes through because I think, you know, they deserve this multiple Yeah. That they probably wouldn't get today <laugh>. Um, but I think it's gonna, it's, it is one of those things where like, they deserve a lot of credit. Adobe deserves a lot of credit for putting that deal together, even at that, that size of multiple.
Melissa:
So one of the things you mentioned too was the differences between like licenses one time fee, right? And then subscriptions. Um, and you see more and more companies now that are moving into the cloud. I think almost everything's on the cloud, but when I was working with Insight, we did a lot of move on-prem into SaaS and then start to change the model of how we charge subs subscriptions. When you're like looking at your product and trying to figure out, should I do that? Do I move from my license model to a subscription model? What are the types of things you should take into account?
Patrick:
Yeah. So the first thing is getting your finance team aligned to, Zora came out with this really cool, uh, it's like a, it's called a fish graph where basically your costs are gonna go up and then come back down because, you know, or, or, um, perpetual licenses are notoriously more expensive, but switching to, to kind of a SaaS system or cloud system, it's gonna go up and then your revenue's gonna go down because it's 50 bucks a month, a hundred bucks a month versus a thousand bucks per, per, you know, license. So it's gonna go down and it's gonna come back up. And so that's kind of how you get this fish diagram. They, they made it into a fish. So it's just 2, 2, 2 lines. One goes up, one goes down. Um, so the first thing is like just really getting your, your counting into place because if you're public, you need to really, there's not a lot of public companies that are, uh, there's some that are going private or going public, but there's not a lot of like big names that, you know, need to worry about this.
But even a private company going and doing this with like serious stakeholders, you need to be ready to do this. And then I think it becomes about the transition point. You have kind of like a couple of options. So one, you're normally gonna develop this in parallel. You're gonna have your quote unquote last perpetual license kind of come out. And then you should hopefully have your cloud-based license ready to go pretty quickly. You can rip the bandaid off. This is what Microsoft did. Adobe kind of did this where it was like Microsoft was more, you will not be able to buy a new license of this, you have to buy the online product. Um, so they didn't allow a transition period. What Autodesk has done for a lot of their products, they have a much more persnickety like, you know, group of of customers. What they started to do is they offered them next to each other, especially when the cloud offering wasn't quite as good yet because it was, you know, still coming out, but it was much cheaper.
And then what some companies do is they, they start to increasingly make the perpetual license more expensive and they'll come out with more releases, but they'll be less included in thoses and more expensive because there are people who want the perpetual license, think of like chiropractic software, dentist software, stuff like that. People who want like very serious like investments and they wanna look at it like, you know, on one side of the balance sheet versus another. And so what ends up happening is all of a sudden what, what some of these folks have done is they make the luxury item the perpetual license for that small group of people, they're able to invest that cash and then they're able to slowly over time it becomes the cloud product becomes better than the perpetual license, just by a mile. So they start shutting down that luxury product.
So it just depends on like what type of ripping the band-aid versus slow transition you want. And that'll just depend on your customer base and how fast your product team is. But I think that's a big second thing. And then maybe a third thing is just like, I don't know, your whole go-to-market model changes because it depends on the price of the software, but you know, now an inside sales team looks a bit different, your marketing looks a bit different. So you just kind have to think about, you know, understanding as much as you can about this industry. This is where like hiring, you know, I know people like crap on like a McKinsey and stuff like that. This is where they're really good, they're really good at the change management stuff. When people would come to us with these pricing transitions, the first few, we took them because we were like, yeah, we can, we can set up your value metric.
We can get you on the right billing system or like suggest the right billing system and help. But there's so much internal questions from the VP of this, the C level of that that like, this is where like a McKinsey like really shines because they, they're, it's, they will put up with those conversations <laugh> when we're like, we delivered the data. What else do you like want from us? You know, we'll, we'll help a lot more than that, but it's just to show the kind of extreme, um, you know, kind of between the two. So yeah, those are just some things to kind of consider. All the measurements are different. M r r you have to teach people what r is. It's, and it's not the easiest thing oftentimes to understand. So, um, you, it's just you have to kind of really change, manage your business, for lack of a better phrase.
Melissa:
Yeah. I feel like a lot of companies I've worked with who made this transition, they don't anticipate all that. They're just like, we're going to the cloud cuz cloud is the new exciting thing, but, and
Patrick:
There's a Gartner report about moving to the cloud. That's why we gotta do it. Yeah, yeah,
Melissa:
Let's do it. And the big thing I saw too, like coming from a product perspective is what you said at the beginning, they don't anticipate the costs. They don't understand that it's, it costs money to go from on-prem to hosting your own databases in cloud.
Patrick:
Well, their cloud, their entire infrastructure is made for perpetual licenses, like their entire product team, how they ship code, everything like that. And so that's, and like how they pack, like, not, not physical, but not packaging like this feature here, this feature here, the packaging of how they like send a license, you know, like that type of a thing. So yeah, it's interesting. Yeah, I think the, I think it's like 70% of software products are now cloud-based. So I, we're gonna, near the end, we crossed 50% last year. I can't remember. Um, but yeah, it's, it's, it's growing and anything under like two years old is all cloud, like, there's very little perpetual licenses anymore.
Melissa:
Yeah, it's really interesting because it feels like that's just a pricing problem, but it's a whole company problem is what it really looks like. And people are like, oh, I just want a subscription. But they're not really thinking about all those things that go into actually changing to it. Yeah. So if you are a chief product officer, I guess leave our audience with this. If you are a chief product officer or product leader, you are in this company or an executive, right? And you're, you're thinking, I've got pricing issues or I really wanna look at pricing, what would you advise them to do to start looking into their pricing? Like, do they hire somebody? Do they go to a McKinsey? Like where do you start?
Patrick:
Yeah, yeah, yeah, yeah. I think if you're, if you're, if you're a company like let's just go with like a, a SaaS or a subscription company, you're, you know, you weren't a perpetual license or an on-prem solution like we were talking about. I think the, the first solution is get buy-in from like either the board if you're big enough, or the board and the exec team of just like, we're gonna make this a core competency, meaning like, we're gonna get good at pricing, but just like it took us a while to get good at product retention, content sales, whatever it is, it's not gonna happen overnight. And that means we're gonna like, we're gonna start with some big things, but you know, we're gonna implement over that quarter, over quarter. Like this is gonna be a thing form your pricing committee. Um, you can hit me up.
I wrote a big article and have a video on like how to form pricing committees and stuff. But it's, it's just getting the right people in the room making sure, like you, you just have a tempo and a cadence. I think tempo is like a really important thing here. Like how often you're like pushing stuff and then once you have like that buy-in, now it's, do we have the expertise internally? Ping's not hard, it just is like a process and sometimes you're uncomfortable if you haven't done it before. Um, but then if you don't have the right folks internally, I think if you need like massive change management where you need someone to help with a lot of the internal politics, let's say like, you know, you just have really hardhead and you'll judge this, but really hardheaded execs that you're gonna have to deal with Go Hire and McKinsey and SK p if you need the bandwidth, Simon Kutcher partners.
If it's something where like you have a really good working team that like gels well and is open to like, we understand the cloud, we're open to learning, et cetera. We just need some bandwidth and we want the data and we're, you know, not necessarily cost constrained, but like, we don't wanna pay for a bunch of handholding. That's when you can like come and hire a price intelligently or there's plenty of like, you know, solo consultants that are also really, really good. Um, but if you have the right, you know, product manager internally like that, you can hire someone like us or an S K P for a little while and then, you know, not use us anymore and then all of a sudden you can have your, your product manager. Cause I think that's like, that's our success. Like, oh, you're shipping pricing without us, great, we'll help you with the data if you need it, but then eventually you can probably do that ourselves, yourself and maybe use our software if you need to.
So I think that's kind of how I would think about it. But eventually you'll probably also hire someone full-time. Like if you're over a hundred million in revenue, you should have someone full-time dedicated to pricing. Um, and you know, Autodesk, like, they have like six pricing people. They're still, we're still a big, you know, vendor of theirs and stuff like that because they have 130 products. So it's a little, little bit of a different thing. But yeah, I think it's one of those things where you wanna make it a core competency and you wanna lay that groundwork properly.
Melissa:
Cool. Well I learned so much from you. Thank you so much for being on the podcast. If people wanna go and read more about what you've written on pricing or reach out to you, where can they go?
Patrick:
Um, I'm Ticus on Twitter. It was a childhood nickname, so I just get, get ahead of that. What the heck is this guy? Um, I'm also a pc@patas.com. If you just want to email me, I I've probably written or have data or have a video on the thing that you have a question of. Um, we even did a a, a video series called Pricing Page Teardown where uh, I think there's like a hundred episodes where we looked at a pricing page, broke it down, what was good, what was bad, um, all that kind of fun stuff. So we have a lot of content on pricing. Um, I don't check my LinkedIn messages. I'm trying to figure out how to handle my LinkedIn cesspool of my inbox. So just know that if you, you send me a LinkedIn message, I probably won't get it. So, uh, yeah, hit me up on email.
Melissa:
All right. Well thank you so much for being with us today. And if you enjoyed this episode of the Product Thinking Podcast, please subscribe so that you never miss, miss an episode. We'll be back next Wednesday with another Dear Melissa and make sure that you submit your product questions to me@dearmelissa.com.