In an ideal world, the goal of any business starting up is to make money. In most cases, the profitability of a product is closely tied to how you as a product manager choose to price your product. Apart from building a product that provides real value to its customers, profitable monetization is the second most important aspect of running a successful business.
Even then, product pricing strategy gets very little attention and is not a subject of major discussion or debate. Products are very often priced by taking into account production costs, plus some margin or by looking at what competitors are charging. Pricing conversations usually happen later in the product development lifecycle and PMs often wait for the product to gain some traction before discussing a robust monetization strategy.
I have made those same mistakes, and my career as a product manager has taught me that monetization is something that needs to be thought of from day 0.
Here are some key takeaways from my experience of growing an enterprise SaaS product from 0 to 100 paying customers.
#1 Focus on retention, make your product sticky and then acquire users
As soon as product launches, the first step intuitively that most of the product managers take is to acquire more and more customers, gain the market share and charge money profitably only when there are enough customers. 2 ideas drive this approach —
- A product funnel dictates that acquisition is the first step, followed by activation, followed by retention, and then finally monetization.
- The fear of losing your customers to the competitor until you become the leader in terms of market share.
But the problem with focussing on the acquisition only, without optimizing your product for retention, is that there are never enough customers to monetize. To counter this, more money is pumped to acquire more customers without realizing that the product needs to reduce customer churn as well. This leads to very high customer acquisition costs and very low customer lifetime value (CLTV) which is detrimental to the health of a business. The ‘hockey stick’ growth is never achieved and the growth is only a function of money that is being spent on the acquisition and number of people that are hired to sell the product.
A sticky product automatically drives acquisition through referrals, invitations, and word of mouth.
Higher retention lowers the cost of acquiring a new customer. It increases the CLTV and reduces the time to breakeven the cost of acquiring a customer. Early monetization and higher CLTV also provides teams the leverage to spend more money to acquire customers as compared to their competitors and keep them at bay.
#2 Rework the pricing model frequently to reduce add-ons. Keep it simple!
Pricing plans are initially created taking into account the feature set that the product launched with. Over time, as new features and capabilities are developed, they are usually offered as add-ons on top of a base plan because updating plans after each release might seem tedious. This a la carte menu approach creates a two-fold problem —
- There comes a point in time when these pricing plans become so complicated for the users to understand that they end up not buying the product and look for other alternatives. No user ever knows what product capabilities they’ll need and choose products that identify and pre-empt those needs and serve them right away!
- Managing pricing plans with add-ons customized for each customer becomes a cumbersome task internally. Customizations to pricing plans reduce the opportunity to automate subscription management. This makes it difficult for sales, customer success, support, and product management teams to track and manage those subscriptions. People end up managing a lot of data in different tools and spreadsheets which is prone to human errors. These errors pose the risk of leaving a lot of revenue on the table.
Take a step back, unlearn your product, think from a new user’s perspective and ask yourself periodically — Is the pricing as simple as it was day 0?
Review your pricing model frequently, keep it as simple and as standardized as possible. Be transparent about what services and capabilities are included and not included in a plan. Optimize the subscription management in a way to reduce the team’s time on operations and help them increase the time spent towards the growth of the product.
#3 Do not shy away from raising the prices for your product
Pricing is one of the most intricate business processes for a product. Initial pricing is done taking into account a lot of factors like customer’s willingness to pay, competitor’s pricing, cost of substitutes, market research surveys, etc. I have usually observed that these values are then set in stone and not updated for the longest periods, even when the product has grown in its capabilities and value it provides. Stagnant pricing indicates 2 things —
- Your customers are not ready for the additional value you are providing or they do not find value in those new capabilities.
- You are operating in a highly competitive market, product differentiation is low, and raising the prices might make your customers move to a more affordable alternative.
For example, Spotify launched in the US in 2011 and has been offering the premium subscription for USD 9.99 since then. Has the product not grown in terms of value it provides to its users? This stagnation is because of a highly saturated consumer market, fierce competition from Youtube and Apple music, and low product differentiation. On the other hand, Netflix has been raising its subscription price every 12 to 18 months. Tesla is quite vocal about raising the price of autopilot software every few months owning to the fact that the product is getting better over time. I wonder why companies often do not do that.
If your product adds value, improves over time and customers love it, they will pay for it.
Differentiate your product’s value proposition from the competitors. Avoid price wars, it only leads to cannibalization of revenue. Create products that customer value, improve them iteratively based on feedback, and charge for what your product is truly worth.
#4 Make the product’s revenue talk back to the team
The bottom line of the product usually sits only in the spreadsheets and presentations of the financial team. The product team’s lack of visibility into the subscription data only makes them an employee and not the owner of the product.
Everyone in the team should be able to look at and dissect the customer’s subscription data at will.
Instead of sharing high-level metrics with your team once a quarter in a Powerpoint presentation, setup tools to make the data accessible and real-time. This accessibility helps people align with the final goal that the business is driving. It brings accountability within different functions of the team and helps people see the impact that their work creates. The product’s revenue should be owned by the whole team and not just the management.
Have any thoughts, comments, or feedback? Feel free to share it below!
Previously published here.