Subscription Pricing: Uncovering the God Metric with Patrick Campbell
Just as with any pricing model, metrics are only as good as the use case. In this episode, subscription pricing guru, Patrick Campbell from ProfitWell, joins me as we take a look at the key considerations with subscription pricing for achieving three key areas of growth: acquiring customers, monetizing them, and retaining them.
If you want to take the discussion offline, then tweet at me (@SwEvangelist) with the hashtag #pricingmatterscast.
Gabe Smith 0:00
Hello, everyone, and welcome to episode six of Pricing Matters. This is a series of discussions we plan for 2020 around various topics that we think are under discussed and interesting in pricing, and how it’s changing with technology. Today’s topic is subscription pricing. And our guest is a guru in the matter, although, he may cringe at that. Patrick Campbell, the CEO of ProfitWell, thanks so much for joining us, Patrick.
Patrick Campbell 0:25
Yeah, thanks. Thanks for having me, man. I’ve definitely cringing at that. But I’ll take it, I’ll take it.
Gabe Smith 0:30
Alright. Well, it’s great to have you on. And it’s always fun to geek out on pricing topics. I think the first time we met over at the Hypergrowth conference, we started to geek out a little bit too much. But so it’s good to have a little bit of a forum that’s dedicated to the topic here. Let’s start off with kind of talking a little bit about what you do at ProfitWell and Price Intelligently. Do you want to explain that to the listeners a little bit?
Patrick Campbell and Subscription-Based Pricing
Patrick Campbell 0:52
Yeah, definitely. So, we’ve evolved into, we have multiple products now. And so, we actually started off, specifically, in the pricing space. And we still have that product, we work mainly with subscription companies doing research in the market to help with their pricing. But now we have kind of a suite of different revenue operations products that help with revenue automation. So, we have a free subscription financial metrics product that basically plugs into your billing system and gives you all of your financial metrics. And then we have a couple of products, and the way we make money is through the pricing product, a product that helps with retention, and then one that helps with revenue recognition. So yeah, it’s one of those things where it’s been a fun journey, so far, that kind of started in monetization. And now it’s kind of cool, we have about 20%, depending on how you measure it, of the entire subscription market using our metrics product. And so there’s a lot of data that you and I have geeked out about that we’ve been able to kind of study of what’s working, what’s not, not only when it comes to pricing, but also just different aspects of the subscription world.
The Key Metrics in Subscription-Pricing
Gabe Smith 1:55
Right. Yeah, so some of the key metrics that I’ve seen are around like churn and retention. And obviously, there’s the pricing angle, you want to talk a little bit more about some of those other key metrics that subscription companies care about?
Patrick Campbell 2:06
Metrics are only as good as the use case, right. And, so, I think when you think about a subscription company, like all companies, you have three areas of growth: acquire customers, monetize and retain them. And some of the metrics that I think that are kind of the God metrics besides growth, obviously, which is the ultimate God metric, or things like lifetime value, their overall net retention, as you kind of mentioned, and then when it comes to pricing, I think that the big number that you should be focused on, at least in my opinion, to see if it goes up, not necessarily wanting it to go up at the expense of other metrics, is your ARPU, your average revenue per user. And you may measure that as ACP or ARPA, average revenue per account. But just the amount of revenue you’re getting per customer, you want that number kind of going up and to the right over time.
Gabe Smith 2:52
Absolutely. What have you seen with regards to customer acquisition costs lately? Speaking of metrics, because that’s one that’s also a key for, you know, all different types of subscription companies, including ourselves, and we’ve been tracking it closely. And I was just wondering what you see as the trends, overall, in enterprise software, but also generally in subscription businesses.
Patrick Campbell 3:12
They’re not good, depending on how you look at them. So if you think about it, and not to go way too far back. But over the past 20 years, we basically have had this really interesting trend, particularly in software. But I would also argue in a lot of businesses that have anything to do with the Internet, which is mostly everyone. Basically, from the 90s, probably around 2000/2005, all the way through 2020, making product or shipping features, these types of things have gotten relatively inexpensive. They’re still expensive, don’t get me wrong, but relative to needing a server room and a bunch of people to manage servers and things like that. It’s got cheaper, we’ve been able to ship faster and faster. And if you really think about the last kind of age of product, it was very focused on how do we ship as quickly as possible the rise of Agile, Kanban, a bunch of these different things, in the world of software. Similarly, what happened is over kind of 2003 to 2015, we were getting a brand-new marketing channel, like every single quarter, you know, Google AdWords for a penny a click, remarketing, Google Display Network, all kinds of crazy stuff.
And so if you were building a company in the past 20 years, it was kind of an amazing time where it wasn’t easy, but you were riding these waves of cost effectiveness as well as like so many acquisition channels and what this caused, which is a wave that a lot of us have ridden, is just this delusion of tons and tons of companies. And so, I think the past five, six years, competitors have gone up about 4X just because there’s so many people out there competing for attention, and we haven’t had a brand-new marketing channel since 2015.
TikTok is still a little TBD whether it’s going to be effective and b2c let alone b2b software. But it is one of those things where you now are seeing, essentially, CAC or customer acquisition costs over the past six years by about 70%, on blended basis, and there are some channels that are faring a little bit better than others. But overall costs have gone way up over the years, which is kind of to be expected. And that’s not great. But the silver lining in it is it’s causing us to look at acquisition as almost table stakes where we have to be good at it to survive, you know, sales and marketing. But now where hyper growth comes from is monetization and also retention, when you’re looking at a subscription business.
Gabe Smith 5:32
Absolutely. Yeah, I think there’s definitely an increase focused on that. And I mean, in our business, we have quite high retention. So, it’s so high, it’s actually difficult to actually calculate lifetime value. So, it’s great, but it’s also kind of problematic when you look at some of these, the CAC versus lifetime value and that kind of thing. So, but yeah, we’ve seen some of those similar trends. And it’s good to hear that it’s not just us. But at the same time, I know that you also do these pricing, tear down pages. And we talked a little bit about that yesterday. And maybe you can get into it a little bit and talk about some of your favorite ones that you’ve done, or maybe some of the upcoming ones that you want to share with the listeners.
Analyzing the Pricing Pages of Subscription-Based Businesses
Patrick Campbell 6:15
Yeah, totally. So, we have this series called pricing page tear down, which we originally thought only pricing people will like it, which isn’t necessarily our target customer. And so, we were like, why are we doing this, right? But basically, we collect a bunch of data, you know, using our software on the brand that we’re going to talk about that week, and then what we end up doing is basically tearing down the pricing page and seeing what’s good and what’s bad, and what we can all learn from it, right? And we don’t have any inside knowledge. So sometimes it’s hard to know, oh, did they make that decision because of this or that, but you know, it’s still entertaining and educational, I would say.
What we’ve kind of learned after looking at a lot of different pricing pages is that effort really pays off, which I know sounds kind of ridiculous and a little condescendingly pedantic but it’s, it’s one of those things where you can see the brands who have really kind of thought through not only the user experience of going through their pricing page, but also thought through about which segments that they’re selling into, and then based on those segments, what they’re going to present, and then you can kind of see their flows past that initial purchase. One of the ones I am a little bit excited about coming up in the next season is actually Twitter, which obviously doesn’t have a subscription right now, they’ve hinted a little bit here and there that they might come out with one.
But it’s something that you kind of see in the market where the ad kind of monetization model works really well for some brands, and just doesn’t work that well, for others. And Twitter, great, obviously, it’s the revenue stream that they had, but they’re not getting, you know, Facebook-like scale, right, just because they’re not, you know, gaining as many users. So, we were thinking, Oh, it’d be really interesting if they have a subscription. And we recorded that episode already. And then after we recorded it there, it came out, oh, yeah, we’re gonna consider one and we’re like, we gotta get this episode out. I’m excited for that one in particular.
What Salesforce Got Right in Pricing Strategy
Gabe Smith 7:59
Nice. Great. And I know you also had some interesting takeaways from the teardown that you did on Salesforce. Can you talk a little bit about that one?
Patrick Campbell 8:07
Yeah, Salesforce is one of those, I think it’s, it’s kind of like alluding to Apple sometimes. There’s a lot that went right. And they’ve been around for a long time. And so, it’s sometimes hard to learn from them. But I think that when you look at Salesforce, what was interesting about studying them is, if you just look at their pricing page, and let’s talk about their sales CRM product, it’s a lot. They have lots of different features, so many add ons, so many different things. Because again, they’ve been around for, you know, 20 some years now. And I think what’s really, really interesting about Salesforce is that they, even with those constraints, were able to come up with a pricing page that yes, is sometimes hard to navigate, but still gives you complete information in a fairly organized way.
And they are really, really good about separating out features that are kind of what I would say unapologetic about going to the segments that they target. If you are, you know, we’re a perfect example, as a company. When we first started, you know, when it was just five of us. We were, oh, we should use Salesforce because that’s what our, you know, salesperson at the time had used previously.
But we were also using HubSpot. Right. And we were kind of more sophisticated in other areas of our business versus you know, just one salesperson. Well, we wanted the HubSpot integration. And the HubSpot integration was available to us. But the API calls on the integration weren’t available until we were up on the next tier. And for us it was a little frustrating because we were like what we have to upgrade in order to get this, but we weren’t really that great of a persona for them. And using HubSpot, things like that. And so I think that I love when I find brands who are okay giving up or ruffling some of the feathers of certain types of segments that just aren’t their target because they’re so focused on who they’re going after. And it’s kind of cool to see that Salesforce was able to do that even they’re obviously a giant, giant company.
Gabe Smith 10:02
When I was at Cisco Systems, we were one of the early, I think we were the biggest enterprise deal that they had ever signed at the time. It was like 6,000 seats, which was that was in 2001/2002, or something like that. And so, I was actually party to some of the negotiations that were going back and forth. But it was a lot simpler then it was really just, you know, they didn’t have CPQ, they didn’t have the marketing that, you know, they didn’t have a lot of the stuff that they have now. So, over time, it’s, yeah, it’s gotten… Yeah, with those bells and whistles, it gets a little bit more complicated. You know, that the other thing that I kind of have, from that experience with regards to subscriptions, was when they actually had formed a SWAT team at Cisco in kind of the early 2000s, that I was part of when we were looking at what we call them managed services, right, which is now you know, at you know, whatever, AAS, right, SAAS or PAAS or, you know, at IAAS or whatever, you know, the different terms are now, but we started looking at it, especially around IP telephony, right?
So, because customers had basically said, look, we don’t, we don’t care to buy a switch and a bunch of phones, we want to pay $5 per user per month for their phones. We started doing some analysis and looked at like, what are the implications of that. And it really touched almost every single business process that we had, right. And so, and I think a lot of companies are looking at subscription right now, especially like more established hardware companies that have processes that are set up to sell widgets at a certain price. And moving that over into this subscription model can really be a challenge. And so I was just wondering if you could provide some guidance and insight, like as you’re going through that process to companies that are considering it, how to get started and what they should be thinking about during that.
How to Move from a Traditional Pricing Model to Subscription
Patrick Campbell 11:45
Yeah. So, I think that so basically, how to move from like a traditional model to like a subscription model. I think that what’s tough about this is that you and I can probably look at this and go into any company, you know, being in the pricing game here, and probably figure out their pricing relatively quickly, like how they should, cool. So, you should have this, let’s figure out your value metric. Let’s do some research. Let’s look at some data in the market, etc. The bigger problem that ends up happening is management and internal politics.
And I know that sounds bad, it’s your own politics, like oh, we don’t have any, like everyone has internal politics, just kind of how it happens. And because you have to kind of think about this is where a lot of brands, especially large brands that move from kind of a perpetual license model to a subscription model, they have their like, especially the public ones, they have to really educate Wall Street, like Wall Street wasn’t ready when they were.
So, they had to delay, it’s just a lot of moving parts. And I think that, the first thing to do is make sure that your team is very, very, very much on board, and that you have the right pricing committee basically formed. And there’s a lot of theories on pricing committees. To me, I think that you need kind of a leader of most of the major groups. So depending on your size, and your stature, probably head of sales, head of marketing, head of product, head of finance, and then if you have customer success, throw them in there, get a research team that had probably should be the one doing a lot of the legwork on this stuff. But it’s important to get everyone in the room and everyone on board with, hey, the reason we’re gonna switch to this model is it’s better for evaluation, it’s better for EBITDA, it’s better for all these different things.
But we’re going to go through and I think Zora might have been the team that came up with this first, the kind of the fish they have, it’s a fish graphic, where it’s like, your costs go up, and then they come down and your revenue actually kind of comes down, and then it goes up because it compounds right, because you’re kind of like forgoing that traditional perpetual revenue that’s coming right to get that typically cheaper subscription.
Once you kind of have that buy in. And that’s hard. That’s a hard buy in. It shouldn’t be but it kind of is everyone’s a little emotional. And pricing is you know, it’s one of those things unless you’re pricing team, it’s just one of those things that everyone has an opinion on, because it’s so central to what you’re doing. And every team touches it in some way. So, people, this is why most people don’t change the pricing often enough is because they just kind of keep kicking the can down the road. Now a little more practical, beyond kind of the softer skills necessary for pricing changes, I think, the number one thing, and this gets into kind of how you allude to, is that value metric, like how you charge right. There’s typically three big features of a value metric, there’s, you want to make sure it’s easy to understand for your sales process.
So, if you’re doing something touchless probably can’t have like three value metrics that are really hard to calculate in the customer, the prospect’s mind. If you’re doing like a big enterprise sale, you could probably have a bunch of different SLA metrics and things like that, depending on the usage of the customer. You want to simplify it but simple is a little bit different when you’re in an enterprise sale. The next thing is it has to like grow with your customers’ usage or the value that they’re getting. And I think this is the one that a lot of people miss out on it’s because they think oh it should be usage. Well, sometimes it’s not usage, you know, right back in 2005, we couldn’t measure, we barely could measure usage. And that’s why everything was very per user per device. Now we can actually measure usage. And sometimes it doesn’t make sense.
But it is one of those things that is, you know, super, super important when you’re thinking about the new wave here that your value might be the money you bring to them. And if you can measure that, the customer agrees with that. That’s how you should charge right, you shouldn’t find a proxy. But a lot of us need to find a proxy. So, you want to think of what’s that perfect value metric. And then all of a sudden, you want to take a step back and realize, well, we can’t charge based on happiness, or something like that. Sorry, that’s a pro proxy. A proxy might be how often they use it, might be contacts for a marketing product, might be something like that.
You Can Set the Price but the Customer Has to Agree (Value)
Gabe Smith 15:47
Yeah, that like, in our example, you know, we there’s been a lot of discussion and a lot of kind of experimentation on value as a service, or charging based on kind of gain or gain share type of model in the pricing space, and even in the pricing software space. And there’s been some remarkably successful attempts at that by consulting companies, and even some software companies. But it can be pretty contentious, right, to assign the gains to the tool and like, well, what people process versus systems and people agree with it in theory, but then it comes time to write, you know, a multi-million dollar check based on a gain share calculation, that formula that you set up six months prior, it can be pretty tough. So, we use a proxy metric, just revenue under management. And we have a CPQ module, where we’re competing a lot of times with companies that are licensing per user, which is more an efficiency metric than an effectiveness metric, right? The reason why we feel like revenue under management is a good proxy metric is because you’re typically seeing gains of half to 4% of sales. So, having that sales metric in there is what we use, and it’s simple. And we don’t charge for API calls or storage or anything like that. So that’s a way of keeping it simple using that proxy metric to kind of approximate the value.
Patrick Campbell 17:05
I think it’s also, you bring up you bring up a really good point that if you don’t mind me interjecting is, the third thing is the customer has to agree. I think that’s often what happens is everyone especially like, if you’re coming out with a new product, or you’re like switching, you’re like, well, this is how we should charge. This is the vision, you know, I read it in a Fortune article, or something like that, right? And it’s like, oh, but your customer doesn’t care about that, or they don’t agree. And this is, what’s funny is this kind of cuts both ways. Because I don’t think CRM should be priced based on a per user basis. I don’t think that’s where the value is at all like in that CRM software. But it’s so ingrained in how like sales managers and sales leaders buy CRM software, that there’s really no alternative and everyone who’s kind of tried, they’re not able to get over it. So, there is an element of your customer has to buy into it.
Gabe Smith 17:53
Yeah, thanks, Salesforce. No, just kidding.
Patrick Campbell 17:57
No, no, it’s fine. That’s just kind of how it is. And I think that, you know, because that’s the one that they buy into so strongly, that’s the right one, even though it’s probably not really where the value perfectly kind of scales.
Gabe Smith 18:08
Yep, absolutely. Yeah. And I’d say you know, all pricing, all best practices around pricing, really start with the customer and understanding that value that they get from the product. I’ve done a couple presentations with Madhavan Ramanujan from SKP, you know who wrote Monetizing Innovation, and they kind of make the argument that, you know, you should even determine willingness to pay before you develop a product, right.
And you should actually develop the features and capabilities of the product aligned with that willingness to pay, which is, unfortunately, kind of the opposite way that most, especially in technology that products are generally introduced, right? You kind of come up with an innovation, you’re like, Oh, this is a cool thing. And then and then you’re you develop it, and then it’s up to like, you know, the product management team to try to figure out okay, now, what should we charge for this, right? You do a lot of kind of assessments and these pricing tear downs, and you get involved with a fair amount of companies that have existing products. Do you ever get involved with companies as they’re developing new products? I was wondering if you have experience or insight on that process?
Patrick Campbell 19:11
Yeah, we help with a lot of companies kind of in this process. I think that what’s really interesting is you have to understand the limits of your data and the limits of the totality of the decision that you’re making, right? Because when you’re working with a company that’s just like coming out with a new product or brand new depending on how different of a customer base they’re going after, or depending on like a whole host of different things. It’s one of those pieces where you have to make sure that you’re continually testing through the launch and post launch, right, just in terms of collecting research. And this is why you guys know this better than anyone, you know, pricing is that process. Pricing is not like a one-time activity.
But some of the pitfalls that you tend to find are, you’re never truly going to know what reality is until you get it out there and the product is developed. But what you’re trying to do with doing this research before you even put a line of code in, and then during the code being written, or built, if you’re manufacturing, I guess, is you’re essentially trying to figure out, how do you minimize as much risk as possible, right? And so when you use these kind of models, and these research methods, and there’s a lot of them, and they all have pros and cons, and there’s some that are really high leverage, and there’s some that if you have, like, all of the money in the world, or all the time in the world, it’s totally fine to spend the money in the time, even though they’re not necessarily like the most leveraged. But they all have limits. And when you’re collecting this data, what’s really kind of interesting about it is you can start to figure out, okay, the data says this, and there’s some really, really obvious things that you’re like, yep, that’s exactly what I thought about this market, then there’s some things that you didn’t think about, or that you thought about that were just completely wrong, that are also obvious.
And then in the middle, there’s a lot of what I call these little margins of opportunity. And what I mean by margins of opportunity are essentially, okay, so when we’re getting and going after this customer, this is the value proposition that they really, really want. So that’s how we’re going to make our ads. And then when we get this customer in, and they do this, and XYZ, this is, you know, what we should, you know, offer them up in an app expansion revenue kind of opportunity. But the thing you have to think about is that it’s constantly evolving, and no data is going to be perfect. But that’s okay. A lot of people hear that, and they think, great, so now I’m supposed to not do anything? And it’s like, no, no, you’re supposed to do it, you just have to realize you’re going to be looking at a bunch of different data, including the goals that your company has, and the goals that they have for the product. And that’s going to help you make that decision as a product leader or a marketing leader, whomever is kind of making the final decision.
Freemium Pricing and Learning from Near Perfect Slack
Gabe Smith 21:43
It’s good advice. Cool. So, let’s shift gears a little bit and I want to talk about freemium pricing, we kind of collaborated. I asked to use a quote of yours from the Slack analysis that you did on the pricing tear down for them. And I was writing an article on Slack and Fortnight Pricing and I love that quote that you had in there where you said, Slack is about as close to pricing perfection as any company is going to get. You want to talk a little bit more about like what they got, right? And just some of that analysis that you did there?
Patrick Campbell 22:13
Yes. So Slack, they’re kind of like Apple, which I alluded to before, where I think they did this very intentionally, but it might not have been intentional, I just worked out. But I think that it doesn’t really matter, they get the credit for it either way, I think what Slack was able to do is build a product that focused on packaging almost exclusively. And I’ll explain what that means. But if you really think about Slack, there are lots of other chat products out there, like HipChat was out there, there’s a lot of other things out there.
And it, you know, did hit the market at the right time, I think there was a lot more need for these types of products versus, you know, the five years prior, but with their pricing, they looked at the axes that they had. And they had axes, such as you know, the number of messages that you could search. So basically, you could search a limit of 10,000 messages, then the number of integrations. And then there were a bunch of different features that they could kind of like separate out into different tiers. And I think what they realized through the packaging is that, the big thing that was the whole that was in the market was really around the integrations, like getting every single thing, Google Docs, etc., everything in Slack. So, it’s kind of like your besides email on there trying to quote unquote, kill email, I don’t know if they use that that marketing speak anymore. But it’s kind of like your command center for your day and your business,
Gabe Smith 23:33
Right. Kind of operate operating system for the for the business, right? Yeah. Absolutely,
Patrick Campbell 23:39
Totally. And so, the perfection came from realizing that in terms of packaging, and then putting together a quite perfect value metric for the freemium tier, which was those 10,000 messages. So as soon as you started to get, you know, depends on the team, but 10 to 20 people inside Slack, right, when you’re more than happy to pay for that tool, because of the efficiency and the effectiveness you’re getting out of it. All of a sudden, you’re finding yourself not being able to search past 10,000 messages, which is really hard, because you’re like, I want to see what that doc that John sent me the other day, I can’t find it, that type of thing. And then all of a sudden, your three figure MRR company or customer, you know, you’re at least $100 maybe you know, $200 of a customer, which means that a lot of their unit economics don’t have to worry about chasing $20 customers, which is really, really tough. And then the next step up, basically the difference between their first paid tier and the second paid tier is essentially if you have a CIO or a COO, which is all the fun, you know, legal stuff and these types of things. And then you’re upgrading everyone and you’re more than happy to upgrade everyone because you need to have that searchability, you need to have that data retention, all these different things. And then the next step up is enterprise, which they weren’t doing so well for a long time. But it’s just because they were new, you know, they grew so quickly so and yeah. Whenever you have two axes, one upgrading of the users and the number of like a value metric, in this case users in an account, it’s a really good recipe for, you know, fast growth.
Gabe Smith 25:11
Mm hmm. Yeah, it’s multiplicative, that’s great. So a lot of companies, though, have gotten freemium wrong, right. And I was wondering if you could talk about some examples there and what they did wrong and what they could have improved to make it better.
Revenue vs. Acquisition in the Freemium Model
Patrick Campbell 25:26
I think the thing with freemium is you have to think about it as an acquisition model, not a revenue model. And I think a lot of people want to put it in pricing, because it obviously is related and very, very closely related. But the thing you have to think about freemium is that you’re trying to lower the activation energy of a prospect becoming a lead, essentially, or becoming a prospect. And with all of the CAC implications we talked about previously, one of the easiest kind of things or is going to be one of the easiest or low-cost things to do is to offer up either a kind of MVP version of your product, or even a tangential product that brings in the right type of customers. You have to think about freemium essentially, as a premium eBook. That’s the better way to think about it. And I think where people get this wrong, is first, they start freemium too early.
So, what I mean by that is, unless you have like a growth hacker of a growth hacker, or whatever we’re calling them these days, or you have someone who is, there’s some viral efficiency out of a freemium model, you probably shouldn’t start freemium until you’re like three, four years into the business, when you’re starting to realize, hey, this is how we are going to convert people, we already know how to do it, we know who it is, and now we just want to open up the top of the funnel, in order to get more leads, like aka that premium eBook. The other thing that they do is that they oftentimes will make freemium too much of a cheaper version of their product, it has to be full featured, it can’t be something that’s weak, you have to keep in mind that people are coming in and like seeing your product. And this is the first impression, in a lot of cases, of what they can expect.
Packaging the Free Product
So, if it looks cheap, or it doesn’t work, or there’s problems with it, you know, people aren’t gonna stick around and there’s no way they’re gonna want to talk to you. For context, I railed against freemium early in my career. So, I was very anti freemium, and then I saw the writing on the wall, and now I have a fairly large freemium product. And the thing that we realized is that your freemium product has to be better than the paid alternatives in the market to work. And I think it’s one of those things that is really, really important to kind of keep in mind. And then the third big thing that people get wrong with freemium is that they don’t focus on the right type of freemium.
So ProfitWell is essentially a forever free model or a tangential free, which means we’re attracting the right type of customer, we are giving them a ton of value, but we’re not selling like a premium version of our free product, we sell these different add ons that help them and the free product kind of tells them, hey, you need this, and then you know, they go find that other product. The other type of freemium is a faux free trial.
So, this is, hey, you get 10,000, you know, Slack messages or something like that. And as soon as you’re, like, ready to convert, it’s typically at a particular point. For a lot of faux free trial, it’s, you know, 14 to 21 days of your target customer using that product, they’ll want to convert within that kind of artificial timeline. But if they don’t, then it resets the next month. And you can keep nurturing that lead. And the last thing, I’ll say, sorry, you got me put a quarter in here, is you can’t look at just the first 30 days and determine if it’s successful or not there, you have to look at essentially a cohort of, hey, this person came in free, and then look at the first six months, 12 months of who all converted, because that’s what really proves premiums worth. Because again, you’re nurturing that lead, and you kind of own that lead to nurture over time. And it’s okay if they don’t convert right away because, you know, you’ll get them eventually.
Gabe Smith 29:00
Yeah, yeah, I think I mean, what Slack was able to do is kind of move from typical process of like MQL, SQL, SAL, that a lot of enterprise software companies to actually use that premium offer and the way that they market to develop like a product qualified lead, right, so where they understand that the users already qualified, so they don’t have to have as heavy sales team, they don’t actually… Slack doesn’t have a big sales team, the way a lot of enterprise software companies do with BDRs and AEs, right, they do a lot of paid search. They have the right packaging, and that freemium offer allows them to capture it without a whole lot of friction in the buyer journey.
So, I think that’s been really responsible for a lot of their growth. In that article, I was kind of making the case that freemium is a good fit, if you know… it’s the best if you have a strong network effect like a Slack, right, where people are selling it internally and getting value, collaborative value, also that the total addressable market’s big enough, right obviously, if you only have 300 customers or potentially then, maybe it’s not the best thing to think about. And then lastly, you have to really do the work on the value metrics to delineate those different tiers, like you were talking about, which Slack did a great job of. Let’s switch gears now to kind of the current environment and talk about, I hate to talk too much about COVID-19, or the quote unquote, new normal, which is I hate that term. But what are you seeing happen in 2020? Yeah, right. Yeah. unprecedented. Yeah.
And, you know, so I mean, but let’s just talk generally about this year, I mean, it’s been a challenging year for a lot of companies, subscription companies and other companies. I think subscription companies have the benefit if they are providing value, that you do have a more dependable revenue stream than if you’re selling widgets for one-off things where people, so you have that ongoing relationship. And obviously, if you have a model where it’s easy for customers to turn it off, and it’s not as key, that’s different. But what are you seeing happen in 2020 or in the subscription pricing world in general, that, it may be in response to this pandemic, or but just in general, in 2020? What’s hot, what’s emerging? What are you seeing as someone that has a lot of data and thinks deeply about these things?
2020 and the Impact on Pricing – How Companies Adapted
Patrick Campbell 31:07
We came out with this ProfitWell index, which is basically, we aggregated everyone who’s on ProfitWell, and we can look at their data and aggregate it not anytime, individually. But, we looked at what was growth looking like in the market? And how did COVID basically impact, different verticals, so b2b consumer, all these types of things, all in this subscription space, but on your business, you extrapolate that a little bit. And so essentially, anyone who was having anything to do with going outside, you know, obviously got hit really hard to have. So, people supporting restaurant software, gyms and gym software, like all that kind of stuff got hit really hard. A lot of those folks did end up pivoting to either helping restaurants, you know, do my orders, helping gyms do kind of remote fitness, these types of things. But you know, everyone else, you had one group that were just absolutely crushing it, those b2b companies that were there to help you transition to working from home. So, a lot of Slack Zoom, obviously, is in the market, very, very, you know, aggressively growing. And then everyone else was really fascinating. And we’re all kind of in everyone else, right?
Like a lot of us listening to this, including, I think you and I, our businesses that weren’t going insane off of this. And we’re getting crushed. But what ended up happening is, there was in b2b, there was like a four week pause, basically in the market. So, everything’s going up into the right and then all of a sudden, there’s this four week just flat. And what was interesting is when we broke that data down, wasn’t that new deals weren’t happening, although there were some extended sales cycles. It was actually that everyone kind of went through everything in the spreadsheet, and just kind of canceled the things that they probably should have cancelled six months ago inside their businesses.
And then all of a sudden, after that four weeks, the whole market just went up into the right again. So, that’s what’s interesting with b2b, I think, in terms of pricing and b2b, and I could talk about consumer in a second. Pricing and b2b, I think a lot of brands started experimenting with freemium or freemium like things, you saw a lot of extended contracts. And this was a very reactionary and I don’t know if they’re doing this anymore, because this was kind of in the heart of Q2, where they’re all nervous. And, you know, everyone’s like, I don’t know how this is going to go. And kind of now everything, at least we’ve seen, is kind of business as normal, as normal as can be, which is probably some gaslit thought in my head, because obviously, things aren’t normal. Yeah, it was kind of interesting. We also saw a lot of people who were getting kind of hit, really get scrappy around their pricing models.
They started doing some lifetime deals, which normally I’m not a fan of, but when you put your lifetime deal of your product ahead of where your lifetime value is, I mean, you can’t complain, right? You know, because it extends your lifetime value, and essentially what your lifetime value is of a customer. And then we saw a lot of people trying to do longer term contracts by giving some good healthy discounts, which again, you know, normally I’m like, a one to two months to get an annual front is great, but you know, go into four to five, depending on your product. I don’t know, it’s a little scary still, but it might be okay. Again, depending on your circumstance. Consumer subscriptions just went out of control, like especially subscription e-commerce more specifically. I think they like the market was definitely growing slower than b2b but also just went skyrocket.
Everyone was buying their subscription toilet paper, there’s a really cool company Who Gives a Crap, that’s their actual name, I love it. But they also like donate, they build, you know, facilities around the world of people who don’t have plumbing. But, and then all of a sudden, they got hit really hard with their retention because in a lot of new customers this first couple of months, and then all of a sudden, you know, there was a bit of a drop off. So, a lot of those companies, they’re so acquisition heavy because it’s e-commerce and it’s very competitive. So, a lot of their resources, even more so than b2b, go there. Over and then their retention just isn’t as good. But I will say that overall, it’s scary how okay, it is. And we’ve kind of seen this with a disconnect in the market. And obviously a lot of people being unemployed and things like that. So, I think for me, as kind of an economist, I look at this and I think, well, there’s never been an economic downturn where there weren’t aftershocks. And I know this is a very unique, or this is just unique in the world. But there probably will be some aftershocks. But normally, aftershocks aren’t as big as the initial shock. So, we’ll kind of see. And this is why economists always made predictions in the past, they never make them in the future. It’s complicated.
The Future of Subscription and Monetization Models
Gabe Smith 35:34
Yeah. So, that actually moves me to the next question, which is asking about what you see in the future for subscription pricing and monetization models. You know, lots happened over the last five to 10 years in this space, right, with subscription economy, as everyone likes to call it, and more and more companies moving to these models, but also just different monetization models, within subscriptions as well. I’m just interested in, yeah, I guess I have you on the record here a little bit. So I want to hold you to it in 10 years, but I’m just wondering what…
Patrick Campbell 36:03
It’ll all come back on me in 10 years, I just know it! I think we are going to get to a point where the subscription model turns into recurring revenue. So, there’s no actual subscription anymore, there isn’t like $30 a month for x. And the reason for that is kind of going back to the value metric conversation. If you just look at the history of that, well, we used to just charge for one-time purchases in the 90s. And then the first couple of pieces of software that allowed for recurring billing, it was still kind of just like, very transactional, and then it turned into, well, we can kind of measure users or seats. And that’s kind of like the seats we used to sell with the professional software.
So, let’s charge on that. And then the past 10 years or so, we now can measure things and billing systems, you know, Zora, etc., they’re now able to take that measurement and charge based on it in a very programmatic way. And what’s really funny is I think that billing is the thing that makes or breaks the development of subscription pricing models because they’re the ones who make this relatively easy. Even if you’re large, you never want to like have a huge billing engineering team, because you just don’t think of how valuable it actually is, it can be very valuable. It’s just you think of it as like sunk costs, right. So, I think that what’s going to happen is over time, it’s going to get easier and easier and easier to measure a more precise type of value metric. And I think what will happen is, all of a sudden, we’ll go to the world of like AWS, which for those of you don’t know, you only pay based strictly on usage. And you can prepay, which you get a little bit of a discount, but you don’t pay for a set amount on a subscription basis.
And so, it’ll kind of be I don’t know, if it’ll get quite as like Black Mirror of, you just pay for the little squeeze of toothpaste every day rather than paying for a whole tube. But I think that we’re going to get to a world where you kind of have this like perfect equilibrium with your customer in terms of the actual value they’re getting. And you saw some experiments with this. Here’s a little funny anecdote, I actually found this out from Amy, who leads the Subscription Institute over at Zora, she was telling me about in Barcelona, and I don’t think it’s there anymore, but there’s a theater that for an experiment, it’s like a comedy theater, what they did is they put cameras on the back of the chair, so it was facing your face. And what they would do at the end of the show is they would say cool, you have to pay for the show, here’s how much you would have to pay based on the amount of times you laughed. And here’s like their flat rate, and they let them choose what they wanted to pay. It was more of like an art experiment. But it’s not crazy to think and then that gets a little nickel and dimey of course.
But it’s it makes you think and imagine what the world is. But I think that’s going to be the future as we can measure. And then I don’t know if pricing becomes like a specific role in certain subscription companies. I think once you get big enough, you always have like a pricing team or there’s a pricing person or something on a team. I think it’ll become more ingrained within products or more ingrained within marketing again. I think there will be more hires on monetization,and depends on how the marketing and growth teams evolve. But you’ll probably will have like more pricing specialists of some sort inside companies earlier in their lifecycle rather than waiting until they’re public or a hundred million plus, I think it’ll happen earlier just because it’s getting harder and harder to grow. And you know, these two other levers of monetization and retention haven’t gotten a lot of attention in the world of subscription. Even now, they don’t get a ton of attention. They’re getting more attention than they were five years ago, which is always good.
Gabe Smith 39:25
But I’ve seen some interesting monetization models in places where you wouldn’t necessarily think are ripe for innovation. So, one of our customers is a water treatment chemicals customer, and they’re actually doing pricing based on not consumption of their own product, but how many gallons of water their customers are treating. Right and their customers are actually measuring it reporting it back and then they have a really consistent way of knowing what their cost base is going to be. And they just give them back the report and say…
Patrick Campbell 39:50
That’s the value. The value is the clean water. So I like that.
Gabe Smith 39:53
Absolutely. So, I’d heard about that pay per laugh kind of experiment. That’s an interesting one, but probably it takes you a little bit too far, but gives you… It’s thought provoking, right? It’s interesting.
Patrick Campbell 40:04
Like, it allows you to imagine that maybe we can go beyond perceived.
Getting Smarter About Business and Pricing
Gabe Smith 40:09
Exactly. OK, we’re about to wrap up but I like to ask guests about your favorite books, websites, blogs. Anything you’ve read recently that you love or want to share, either business wise or personal.
Patrick Campbell 40:21
So, the one I always say when asked this question before is High Output Management from Andy Grove. I’m the biggest Andy Grove acolyte, I suppose. He has since passed but it is just one of those books I read twice a year. He ran Intel for a long time, and he goes into a large organization as well, like, as you’re growing in a large organization, the lessons that you should take about how to manage. What makes the best management style? A bunch of different things. And he wrote it, basically, before email was a thing. That’s kind of funny because the preface of the newest edition talks about, hey, there’s two big things that have happened since I wrote the edition and one of them is about Intel and the other was about email Ð this will probably change the way we manage. So, this is one of the things you can get a lot out of like, so, these are the fundamentals, the fundamentals don’t really change. And it’s a book that does it very succinctly without a lot of fluff, and, yeah, there’s anecdotes but it’s not like a lot of business books you read where you could have summarized it in 10 pages rather than read the whole thing. So that’s a good one that I can recommend.
Gabe Smith 41:23
So thanks a lot for that and your time and insight, overall. Just wondering if there’s anything you would like to add in conclusion, or wrapping up here?
Patrick Campbell 40:21
My email address is firstname.lastname@example.org if you ever want to get hold of me. Sometimes, it takes a bit to get back to you, but I always get back to everyone. Or at least, I think I do. And if you were wondering something about subscription pricing or pricing in general, very similar to Pricefx folks, there’s probably something out there that we’ve written. So, don’t be afraid to hit us up and we can save you some time in terms of your research, but I appreciate the time.
Gabe Smith 41:55
Thanks a lot, Patrick. And thanks a lot everyone for tuning in to Pricing Matters.