In this episode, the second part of our SaaS Primer trilogy, we deep dive into Sales and Pricing in the Software-as-a-service space. For further context, please listen to episode 15, in which we did an Overview of SaaS and its intrinsic Business Models. Please look out for our next episode that will conclude our Primer, with deep-dives on Financing/Fundraising, Benchmarking/KPIs, Lessons Learnt and Predictions.
- Introduction (01:24)
- Section 1 – Sales (01:52)
- Section 2 – Pricing (20:40)
- Conclusion (36:58)
- Please check below to download our SaaS Primer PDF deck, serving as reference for our episodes 15-16-17
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Nuno: Today in episode 16, we will have our second episode on our “software as a service” primer.
For further reference, please also listen to our episode 15, where we started this discussion.
Today, we will talk about sales and pricing, and we will go a little bit in depth into these topics. And we will see where the discussion heads. As always, we always get very verbose when we get excited, as you guys know.
Section 1 – Sales
Bertrand: Exactly. Let’s start today on the sales side. The sales motion, the sales process is obviously a critical part of any business. But, SaaS has its own approach to sales, and it’s very tightly connected to the financing, obviously, we’ll talk later about financing.
What do we see as a benchmark of percentage spend of sales and marketing, as a percentage of ARR? What we can see, and we are leveraging some slides from Openview Partners, is that across the range, you are at the lowest, around 30 percent of spend in sales and marketing early on, below the $2.5 million ARR barrier.
And then it goes up, 35, 40, potentially 45 percent of spend, on median. From $2.5 million, to 10, to 20, to 50, beyond 50. This is a median, so we see a pretty wide range, plus or minus, 15 percent of these numbers.
So if I were to take a different stage, we can see that the wider range would be from 15 to 60 percent being spent in sales and marketing. So widely different range, and usually it depends on the business model. If you have a more product-led growth, you will spend less in sales and marketing. If you’re a more traditional, I would call it old-school, SaaS approach, you will usually end up with higher sales and marketing spend.
Nuno: And I would highlight two interesting pieces of this chart.
One. It seems once you get to a certain critical mass of ARR, let’s say about $15 million in this case that the costs will start reducing as a percentage of your ARR, which makes sense. You can start optimizing you have a certain scale and a certain brand, and there’s a lot of things you can do.
The second effect, which might actually correlate to that as well is in many cases, companies are growing really fast to get into the 50 million ARR or a hundred million ARR. So they are spending way into the market, and we discussed it in our previous episode, they’re doing a land grab type strategy.
And so there may be overspending on sales or on marketing overall for customer acquisition. And therefore, once they taper at 50 million or 100 million, they might actually then optimize their sales and marketing costs.
Also underlines at some point, let’s say the a hundred million mark, 120 million mark , would you want to go public as a company and therefore at that stage, you definitely need to align your sales and marketing costs so that the markets are like, okay, this seems like a good the amount. So again, I don’t think there’s anything, shocking about this chart, the next chart, which is sales and marketing spend by dominant sales channel for me was a little bit more surprising.
Certainly indirect, seems to have the lowest spend as percentage of ARR, which makes sense in a certain way, because you’re really going through a channel that should be the valuable channel that it takes away some of your marketing and sales costs.
The part that I think was a little bit more counter intuitive to me, certainly that self service actually still has very significant, sales and marketing spend. And I would assume that a lot of is driven by marketing rather than sales, but it’s still very significant. And from a median perspective seems very similar with, for example, field sales, which for me is almost mind blowing that they would have such similar cost basis again on a combined sales and marketing basis.
What do you think Bertrand?
Bertrand: Yes, I think, it’s what it is, it’s combined sales and marketing, if I take some situation like self-service, self-service without freemium, it’s a lot of marketing actually to convince people to go to your site, to come and use your product, and pay for it immediately, without a chance to have a proper trial or free usage of the product, build the trust step by step. so you are going to spend more. so i am actually not surprised that on the freemium side it’s probably where you have the opportunity to spend the less in combined sales and marketing, and at the same time if you are self service only or field sales, you have an absolute minimum to spend that is significant enough in sales and marketing and we are seeing that with a median of 30%, the minimum is actually 20 percent It can go as high as 60 percent spend in sales and marketing for self service.
What’s interesting for me is also indirect business model can be actually quite efficient. Based on these numbers nearly as efficient as a freemium business model. But we also know, that indirect sales business model is usually coming with a slower growth on one side, and also less controlling the way on your future. So I always have some suspicion on the indirect business model. I think some companies manage to do it very well, like Shopify. But for some others, I’m not sure about that indirect business mode, channel based approach, was really the right decision.
Nuno: What about inside sales? it seems to be the least efficient by far, is it because it’s a hybrid dimension, there’s marketing costs on it and there’s a lot of sales costs on it as well. It seems to be the most inefficient if you look at certainly as a percentage of ARR, is it because it’s a mix of both? It’s aggressive mix of both?
Bertrand: It’s a mix. It cannot be as efficient as freemium, where it’s coming from the product. It cannot be as efficient as self service, because you have sales people to really pay, and sales people, ultimately it will always end up being the mass, make it worse than a marketing lead growth, like you would have in self service. I’m not totally surprised, and usually inside sales is focused on a very small business with a lot of churn.
It’s a game where you keep putting bodies. So I’m not totally, surprised, and field sales is a more traditional enterprise approach. And this one has been optimized for I would say a long while. And we know that there is less churn in enterprise business model. So all in all, to see that freemium is probably the most efficient model, followed by self service and field sales, I’m not totally surprised. For me the surprise is more on the indirect channel. But again, I think if it looks efficient, if we were to look at other metrics like growth rate, indirect might not look as exciting as it sounds.
Nuno: Exactly. Which is the next slide. Maybe not that exciting.
Bertrand: Exactly. so this next slide is actually, pretty good, because it’s showing a comparable of how fast you can go depending on how much you rely on external channel partners. And here, what we can see is that your growth efficiency is actually, much better if you don’t have indirect sales channel. The number is 1.39, if you have zero percent going through sales channel, and keeps going down to 0.48 if you have more than 25 percent of your customers acquired through sales channel.
And what it means is the growth rate also is halved the more you go through sales channel. And having some experience with that, it’s not surprising, because when you have to manage conflict between external sales channel, your own sales channel, very few companies just rely on indirect. You have to manage conflict, you have to train partners. Partners might talk a lot, but ultimately, don’t deliver much. There are some industry metrics, where only one third of your partnerships actually deliver value.
I’m not surprised. It’s a lot work, a lot of management to deliver something that is truly efficient. My take is that if some like Shopify manage to be very successful with this approach, is that it was not a traditional channel partner approach. It was more a freemium type of, partner approach, where you let the partner do, some little work, some advertising, some convincing. But ultimately, the partners were close to irrelevant beyond advising the product to the customers. Everything else could be done, by the SaaS business
Nuno: Moving to sales commissions. I was actually quite surprised by this chart. Obviously in median initial contract sizes above $250K we do see obviously a drop around the sales commissions, where the median there’s between 10% and 12%, so 10% for direct and 12% for fully loaded. But overall it seems like the medians are between 10 and 13%.
Again, 10% for direct, and 13% for fully loaded. Very surprising to me because actually, there’s some variance here in the middle, in these smaller contract sizes, like $5K to $15K and $15K to $25K range. But honestly, very similar across, initial contract sizes up to $250K.
Bertrand: I’m not totally surprised because ultimately the amount of effort to sell something is usually directly correlated to its price. So the more work you have to put in place, the more expensive the price, the more time you spend on. And ultimately at the end of the day, people have to eat, people have to get paid, and so if you are selling very cheap stuff, you better sell a lot of this. And if you’re selling very expensive stuff, you don’t need to sell as much.
And as a result, ultimately, proportionately, you have to pay your sales people, similar amount of money per unit of paid product. So it’s a good confirmation. It will have been interesting [laughs] if it was not, so there in the data. But it’s definitely there in the data. Your sales commission as a function of the median initial contract size, is very stable across all contract size, and as you said, it’s hovering between 10 to 13 percent overall.
Which is a key metric, and I think a lot of these benchmarking activities, when you access companies, is quite critical to understand, are you running your business more or less rationally, more or less like other companies? And if it’s widely different, that might be okay, as long as you have a very good, clear, strong explanation about why.
If we look at distribution of quotas, for the sales people, account executives they have very different quotas, depending on the type of market you are looking at. If you are targeting very small businesses, your quotas, might be below $250k for more than 50 percent of the sales team. However, on the opposite side, if you are in the enterprise side, you might have above a million dollar for 32 percent of the sales org of the start ups targeting enterprise markets.
Depending on the target customer segment, very small to SMB, to mid market, to enterprise, you will end up with higher and higher quotas for your sales organization. And I would say that in lot of cases ultimately you are hovering in that range of $500K to a million dollar in quotas for most of the segments, except again, the very small business or the very large enterprise, where we have two extremes.
So again, another good benchmark to think when it’s time to set quotas for your sales organization. And very often, some companies, people would tell me, oh, my quotas are much lower, it’s much more difficult to sell my enterprise product, or something like this. And I’m like, no, actually. If you are truly enterprise, you should have higher quotas.
And if you don’t two options. Either your pricing is wrong, and you need to change your pricing model, or you have a product market fit issues, and that’s where you start asking the questions. That’s where you try reverse engineering the process, the business model and potentially have to make some change.
Nuno: And moving to sales efficiency, the magic number, which shows the revenue contribution from every dollar spent on sales and marketing. Interesting analysis from OpenView. It shows certainly early on that sales efficiencies actually vary quite a lot, but they’re probably at their highest.
And then later on, as companies scale dramatically, in this case above 50 million in annual recurring revenue, that sales efficiency, dropout dramatically. So actually the revenue contribution from every dollar spent on sales and marketing drops dramatically down.
On average, we’re told that sales efficients about 0.7.
So every dollar spent on sales marketing contributes 70 cents of revenues.
Bertrand: Yes, I’m not surprised.
When I’m hearing people that explain that their efficiency will get better over the years, that’s a funny point, but an interesting point, because history shows that’s not true. Why it’s not true, it’s because you will have multiple ways to distribute and monetize your product. Again, you can have your direct sales force, your own product, you can have paid marketing, paid advertising, you can have free ad, advertising, SEO.
Basically, you will use initially your best, most efficient channels. But step by step, these channels would dry up, and you will have no choice but to manage multiple channels, to just keep the volume in. And because you want to keep the volume in, and you want to keep increasing fast, even at very large scale, you will have to add more and more channels, which would be more complex to manage.
A much more complex organization to manage, to report, to analyze the numbers. And ultimately you decrease your efficiency, because again, if you have to start a business from day one, you better find initially the best channel to push your product, just to survive. But step by step, you will need to take, I would say, nearly any channel, so that you can get to your growth numbers.
To keep going on the sales efficiency, CAC, customer acquisition cost. How much is spent, to get a customer. Another way to look at CAC is a pay back in months. How much does it take you to pay back from customers gross margins, your initial spend in customer acquisition. And what we see is that, it varies, quite widely. And here, the payback, no surprise again, is faster early on in the life of your business, a median around seven, eight months.
Then you go up, you accelerate your scale, and around 10, 20 million of ARR, you are around 15 months. And then beyond that, you stick around 15 months. And what’s happening I guess is that it’s becoming your maximum. People don’t feel so comfortable if you go beyond the two years in term of CAC payback. There is to much risk, usually. The only way to feel less risky is how long is you average contract duration.
If your average contract duration is two years, three years, taking the risk, in a longer term CAC payback is still a possibility. But we see a lot of business if you are not pure enterprise, that are closer to the 12 months to 18 months contract. Therefore, you want to feel that you have a payback that is faster than that, ideally.
Nuno: And if we move to retention rates versus growth. The interesting piece here is, we’re analyzing average logo retention and average net dollar retention. So just to be clear, average logo retention is: a logo is a client, my customer, and average dollar retention is, how much money I’m going to making off each company that I’m working with, which obviously can be above a hundred percent.
Two really interesting lessons learned here. Clearly the best in class have an average net dollar retention above a hundred percent, which means they’re actually making more money year on year as they’re growing really rapidly, than they were making before. So in this case, if you’re a company that has an annual growth above, or equal to a hundred percent, basically your average net dollar retention is 108%. Interestingly enough, the median net dollar retention for public companies was 107%. So this stays true while companies are effectively, becoming public, so at the time of the S1 filing.
The other side is also interesting to take a look at, the logo retention or the average logo retention. Seems to be less of a prominent issue in some ways. So there’s good enough logo retention, which means there’s natural churn. I will lose customers. And for example, even for companies that are growing app or above a hundred percent, the average logo retention is 86%, which is slightly better than those at a growth rate below 30%, which is 85%. So again, it seems to be an interesting factor almost like a sanity factor, but there is natural churn. And in some ways I would say there’s a nuanced view on this, which is sometimes you actually need to let some of your worst customers churn out.
And if they churn out, then actually you focuses on your better clients and you step in and part of your growth comes not just the logo growth, but it comes through upselling and cross selling your products to some of your existing clients that actually are very positive contributors to your margin.
Bertrand: Not sure I would put it that way, that you let churn your worst clients. I don’t see anywhere in the data that its your worst clients that are churning. But what is clear, is that, there is natural logo churn, client churn, simply because companies go out of business, companies change business model, companies lose so much market share, have negative numbers, then they have to cut costs.
So there is something natural to it, at least in terms of logo churn. But as you say, net dollar retention I think is a key metric to follow. And this one, around 90 percent, you have lower growth, if you are significantly beyond 100 percent, you will have much faster growth. It’s simply because you don’t even need to add new clients if you manage to get more than 100 percent from your existing clients year year.
So therefore, you can much more fine tune your business, your sales motion is more efficient, you will have better word of mouth, all of this. So it’s really a different business model. So if you can manage to build a business model that gives you a higher than 100 percent average net dollar retention, you are in a good place.
And to close this section around sales. going back to product led growth, there was this interesting slide from, Open View partners, around what is the impact of COVID-19 on product-led growth companies? And what we see is that, actually, product-led growth companies significantly outperform, their SaaS peers, on the stock market, in term of revenue multiple.
We see a significant gap of, close to 6X of the product led growth companies, versus the traditional SaaS companies since COVID-19. And for me it makes sense, because if product led growth is the backbone, actually, COVID-19 didn’t change anything to your sales and marketing motion. It’s still centered on your product, on people having easy access, or free access to a version of your product, and going higher up in term of spend from there.
Where, more traditional approach would be focused on traditional marketing, traditional sales approach. But if I take traditional marketing, there is no more event going on. You cannot meet your customer face to face. You cannot send your sales team to a sales convention, or to go meet your clients. So you need to have a different approach. We use Zoom, we use other stuff, but obviously there is some disruption in that approach, you cannot build the same rapport. At the very least, you have to significantly change your business model in a rush. And ultimately, these companies in a way got punished by the markets, because of that.
Section 2 – Pricing
Nuno: And moving to pricing. We had quite an interesting, or at least I had quite a bit of sharing on pricing in the first episode and sharing some of my pet peeves around pricing, probably one of the most underused levers, early on in the history of software as a service company, we start with average contract value by target customer type.
Nothing surprising in the numbers. I’ll deep dive in a little bit on some of the dimensions and dynamics of these numbers. Obviously enterprise has average contract values, and so one would expect that if you’re targeting enterprises, most of your annual contract value is going to be, around 10 to $50K or 50 to $250K.
So again, your annual contract value would be around, the five digit six digit mark, for these companies. The interesting piece here for me is actually you see companies that target enterprise that obtained very small annual contract values and their average annual contract value is probably in the below $10K mark. Now there’s something wrong about that. If you’re focused on enterprise and your annual contract value on average is well below $10K there’s something wrong.
Either you’re not creating very much value for those companies or your market is by necessity very depressed or niche, not that exciting or you’re targeting the wrong type of clients.
And maybe you could be untapping much larger pool of clients if you’re going after small businesses or after the mid market. So again, basically, I think OpenView is a little bit facetious in saying pro-tip stop selling enterprise deals for below 25 K. If you’re selling to enterprises with the cycles of sales that we know are longer with the complexities of selling, and then you’re getting away with an annual contract value that is 5K or 10K, there’s something wrong.
Again, either your target is wrong, your target market is wrong, or your pricing is wrong, but there’s definitely something wrong.
Bertrand: I agree, there is something wrong. I see a few explanation. One is that you are most selling to SMB and mid market. You are going step by step to enterprise, you have not priced it yet correctly to the enterprise market, you are still pricing it as if it was SMB or mid market. Obviously it’s a mistake, because usually it’s more difficult to sell to enterprise, it requires more time and effort.
But at the same time, if it’s a purely self service product for instance, it might not be such an issue actually. If we take some of the typical SaaS companies that manage to move well from mid market to enterprise, Box, and Dropbox for instance, what we can see is that the more they move up market, the more they started to build enterprise type features, as well as build up a separate enterprise sales team. So I think you can start putting your toes in the enterprise market in a cheap way, as long as you are very careful about being efficient selling at these price points. And step by step, it can give you the insights to build a better matched offering for these markets.
If we look at what are the primary modes of distribution of your software, based on your average contract size, no surprise. If you are selling very, very cheap, below $1K, the biggest chunk at 29 percent of your distribution will be through internet sales. After that, at similar level, actually, inside sales, also at 29 percent. And we also see, mixed channels being at 29%.
From 1K to 5K, 5K to 15K, 15K to 25K [laughs], what we see is a huge importance of inside sales. Below 1K, it’s tough to pay an inside sales team on average. It’s just too cheap. If you go in that sweet spot of 1K to 25K, then your inside sales might be your best weapon, especially if you are not product-led as a company.
But then step by step, you move into field sales and starting at 25K, and beyond that’s really what you need.You need a strong, team of fied sales, that can go after these bigger accounts, and know how to sell in a more complex way bigger amount to bigger customers. And if you go beyond 100K, what we see is that, you have a huge preponderance of field sales, around 90 percent.
Nuno: One interesting thing about the dataset. Obviously this is based on a sample of 251 respondents. but one interesting thing is internet sales. It disappears at a median initial contract sizes above 15 K. It just disappears. So the whole notion that I can still sell high value contracts online, through internet sales and optimization around it, is simply not true. Or at least for this sample size. It’s simply not true.
Bertrand: I’m not surprised.
Nuno: The average billing frequency. One year, and this takes me to one of my pet peeves as well. With young entrepreneurs in particular that are sometimes great engineers and great product people, but maybe a little bit more challenged on the financial side.
Again, bookings is not the same as revenue. You acknowledge your revenues over the time period that you need to fulfill your services in. So if it’s an annual contract and let’s say I am rendering my services on a monthly basis, your revenues are acknowledged on a monthly basis, right?
And, the booking is not the same as revenues. And the shocking thing is that there’s still a lot of entrepreneurs that when they come in and pitch venture capital firms, they still confused bookings with revenues as shocking as it may seem. Interestingly enough, very high proportion of billing frequency around one year.
I thought it would be lower. I thought monthly would actually be a little bit more pervasive, but certainly 57% apparently, at one year.
Bertrand: Usually these metrics depends a lot on your type of client, the amount of your contract. The bigger the client, the bigger the contract, the longer will be your contract lengths, and the less often you bill, which is obviously a better thing for you, because if you can bill six months, 12 months, 18 months, you will be about to bring a lot of cash before having to run the service.
So it’s huge key part of the financing strategy. The more you can get your clients to finance you, by paying in advance a year of service, the better you are, and the less you will need external financing. So this one for me is really critical, as soon as your contract size is big enough, you should really push to one year contract, at least. That’s really the industry norm, nobody would push back too much.
And yes, now, during COVID, it might be a bit more difficult, but ultimately, that’s something that’s widely accepted. And one reason being, most companies think on a yearly basis. You are not making investment for just three months, for just six months, you are going to keep being at it for at least a year. So nobody will be shocked in enterprise at least, or mid market to go after a one year deal.
There is this famous saying about, bundling versus un-bundling every new business opportunity is either a bundling or an un-bundling of an existing offering. So pricing is the same. It’s a question of how do you bundle or un-bundle your offering.
So when do you want to bundle pieces of your offering? You want to bundle when these pieces of the offering address the same customer needs, the same pain point, or use case.
You want to bundle items that target the same buying center. Because if it’s different buying center, you will want to have a different approach. And what you want to bundle also is lower value items that could be a distraction for the sales discussion. And everything has to be efficient when you’re in a sales motion. So now that we saw what to bundle, what is that you should not bundle?
You should not bundle if it’s really highly valuable or differentiated functionality, no point to give freebies. You want to not bundle if the value is only for different sub-set, or different buying center. Because then it would be a separate discussion, a different painful discussion. And better to have it separately, or at least to make it very clear why it’s separate, how much it is. And then finally, you don’t want to bundle if the different items have different perceived value, and you feel it’s not the right approach for your clients.
Nuno: And switching to actually a really interesting slide from McKinsey on how to think through pricing, the units of pricing and how you price for it, and also the premium and the logic of value add . I think it’s one of those cases where I’d say that the right hand side, which is really the link of premiums when a unit of pricing scales the closest to value.
So basically when it’s very clear that the unit that you’re pricing the product for is very aligned with the value that it provides, obviously commands premiums, right? I would say the “D’oh” from Homer Simpson, but it’s obvious, right? And the point here is you need to be very close, your pricing needs to be very close to what your customers see as value of your product. So if you’re charging for something that actually has no alignment with the value creation unit for your client, then they wouldn’t see the premium in it.
Past, what one would call the almost blindingly obvious, let’s talk about pricing units episodes 15 I already referred in particular to one case study that I recently have with when a discussion with a startup, there’s horses for courses, there’s different pricing mechanisms, depending on the market that you’re in and who you’re serving.
Obviously seats is very much well used. So paper seats it’s actually close to the old licensing agreements that we had in pure installed software. There’s variations on it, from named users, so people that have access to the software as a service, instance, concurrent users, time use and companies in there would be classically companies like SAP, Zendesk, Salesforce, Oracle, and others.
There is software usage. So you pay for what you use. Like number of marketing campaigns, a subscription revenue, API calls, companies like Marketo are more on the Mar-tech side, Apogee, which is obviously on APIs. So that makes a lot of sense. I’m charging for the things you’re using from me.
Hardware linked usage, normally more linked to companies that are in the infrastructure as a service or platform as a service space. So I’m paying for cores, for devices for data volume. So again, Amazon web services, Palantir and a few other companies would charge according to that.
Buyer’s business metrics are where companies are charging really for your core business metrics. So it’s not so much per number of seats. So companies like Workday that are more in the HR space, where you’re paying for the number of employees that you have, or you’re paying based on the revenues that you have, or you are paying based on the COGS that you have.
And finally, and definitely not the least, which links back to the case study that I illustrated in episode 15 “success based” pricing. Sometimes you’re creating so much benefit for your customers that you should take a percentage of that, you should take a percentage: on an increase in return investment, on an increase on collected debt by that client, on an increase in revenue by that client. Again, it depends very much on the ecosystem that you’re in, what players already exist in that market.
If that’s a well known practice or not, in some cases, people do resist dramatically to you charging. To get some money that, you know, in some cases people would see as their core business, the generating of revenues or the reduction of costs, but in many spaces, this is wildly accepted and you shouldn’t leave money off the table.
If you’re making your clients, tens of millions or hundreds of million wealthier because of your operations and transactions, maybe there is
Bertrand: I agree. I want to highlight that how you price your product is genuinely very tightly connected to your product itself. What it does, how it works, how it’s used, how it’s designed. So there is only so much you can put, a seat-based type of pricing on a product that doesn’t make sense on a seat based pricing: simply because all the users see the same view of the product, you don’t have your own value by using the product under your name, for instance.
And, on the other end of the spectrum, success based can be great, and at the same time, if no-one in your industry is using that approach, and all your competitors have a different approach, it might be extremely difficult competitive wise to push for such a business model. You will need to have very strong argument around your product, and how it’s different from others, to be able to sustain a value proposition else your clients will always go to the cheapest one. Because if you can get the same value delivered, why not pick the cheapest offering?
Nuno: And Bertrand, maybe just to interject, there’s this notion that sometimes things that seem obvious are not that obvious. And I remember very early on there were companies that said, okay, this other company is charging on API calls. So I should charge it as well. But in some cases they forgot that company was charging on API calls from developers and they were charging on API calls from big corporates, and charging on API calls from big corporates might not be intuitive to whoever’s the customer on the other side and is paying for it.
And I was like, what does that mean? So again, horses for courses, right? It’s not even the competition dynamics or the dynamics around how it is. You need to adapt to what’s your customer, to its value too. And sometimes even what they understand.
We noticed very well coming from the mobile space and being consumers in the mobile space when people were charging for megabits in ways that were very unclear. We didn’t know, what a megabyte was of consumption on our mobile phones, and so that was not the right way to chart.
So again, horses for courses.
Bertrand: That was not the right way to charge, but at the time, let’s not forget, it was 3G networks, very slow, very limited capacity. So there was a scare that you simply cannot afford it as a telco. But with 4G, suddenly you have a different product, and you can have a different business model. I still believe ultimately it’s tightly connected to your product capability, and your customers. And customer, it’s not just the company overall as you say, is it corporate, is it sales, is it engineering?
And it’s very well known that for instance, your engineering clients are very different buyers than your corporate. So there will be different approach depending on your, target customers. But there is only so much you can push, in a business that is not widely expected by your customer base.
So a few takeaways, that I like, it was coming from Open view.
One is don’t be too cheap. I think a lot of entrepreneurs are not worried, actually are worried to go too expensive. So don’t be too cheap.
Two, the right value metrics, yes, that’s very key. The more efficient you are aligning your price with the value, and finding the right metrics to do that, as we just saw, will help you sell faster, and more.
Three, sell to customers the way they want to buy. There is only so much you can push a client to pay per seat, if he is used to pay per API for this type of product, for instance.
Four, usage based pricing, and the right feature packaging drives net negative churn. Or another way to put it, drives higher than 100 percent net dollar retention. And I think that one is key. Depending on your product and client base, and therefore ultimately what you can achieve in pricing, you can have a type of pricing that would drive better business models.
So you cannot always push in that direction, if it’s absolutely not natural for your product and industry. But there are some pricing models that you can achieve, that can drive better returns.
And five, experiment and iterate on pricing, yeah. I think that’s great. Be careful not to do it too much, too often, because your customers might get lost. But, experimenting iterating is a key part of the game. Especially if you can do it based on data and scientifically.
Nuno: I would a sixth pricing takeaway which is, you might sometimes get stuck on a price you really don’t want to get stuck with by making a very simple mistake very early on in your life. I think a lot of people underestimate the power of early pricing to big clients. And they say, I’m just trialing it out, and it’s proof of concept and it’s trialing, et cetera.
And by the time you’re on your fifth client and similar client, you have anchored around the pricing. So again, be very thoughtful, actually much earlier on. What I see with early stage startups is they think about pricing way too late. I think thinking about pricing very early, very thoughtfully is important.
Bertrand: I totally agree with that. I think that pricing is probably one of the most underused lever, and at the same time, in some ways, one of the easiest lever to change and adapt, all things considered, where you can drive a lot of value. At extremely limited cost for the business.
So we are going to conclude episode 16 on our SaaS primer. This is our second episode on our SaaS primer, and in our next episode, episode 17, we are going to finish our SaaS primer. See you next time.