Pricing for Retention
Jasdeep Garcha
·
08/13/2024
Daniel Hellerman has spent the last decade of this career with high growth companies like Terminus and Cloudreach. He most recently co-founded a company called Saleo, which is a popular interactive demo product. In this article we draw on a recent conversation with him, exploring three crucial monetization lessons he took away from leading product, marketing, and engineering at quickly growing startups.
Be greedy later - get new features into users hands fast, and worry about monetizing them later.
Align pricing with your customers, not your business model - What works for your business model doesn’t matter unless it works for your customers.
Price for maximizing retention - Making money today is less meaningful than forming a long term relationship.
Imagine this scenario: you and your team have spent months developing a new feature, you predict all of your customers will love it and immediately buy it, but when you release it to your sales team, no one bites. The feature ultimately doesn’t get adopted, the team is dejected, and you chalk it up to simply missing the target.
Now imagine this alternate reality: you finish developing the feature, then you immediately release it to your entire customer base for free (albeit for a limited time). Adoption spikes, sales gets inbound to upgrade to a full version, and you’re off to the races.
We all prefer the alternate reality, but creating the conditions for it can sometimes allude us. Why? Because we rush too quickly to monetization for a variety of reasons. Instead, companies should be a bit more patient, letting customers use features quickly, assign what value they’re accruing from new functionality, and then monetizing appropriately. This not only results in stronger product, but also more natural expansion and stickier customers.
At Terminus, Dan saw this first hand when they acquired a new company. Instead of releasing new, additional value for their existing customers from the acquired company, they tried to sell it in for 5 figure upsells. This backfired and resulted in low adoption and ultimately a weaker acquisition overall. Notably, this wasn’t a value statement on the acquisition, but instead on how they approached monetization.
We all guess pricing when we start building products, and that’s what it takes, particularly with entirely new businesses, to triangulate what customers might pay for your services. As you grow, though, it becomes more obvious how your business model will work, including what it costs to deliver your services, how long it takes to implement, and how the market is developing around you.
This is common advice, but focusing on value-based pricing and packaging models is the only viable path towards long term customer loyalty. This is not theorized, but learned, as your product gets adoption, and it becomes more and more clear what customer preferences are.
When Dan started Saleo, they landed on a simple 2-seat model: one for creators and one for users. This worked well through their Series A, but now they’re maturing that model to one that is a bit more granular, allowing customers to define more specific roles that have corresponding price points. That evolution was driven by feedback they’ve repeatedly received in-market, guiding them towards a model that is just more appropriate and natural for their customers on a day to day basis.
We are often told that pricing is a fantastic lever to drive growth, but we less commonly discuss the impact it has on retention.
The goal for pricing and packaging should of course be growth, but Dan would argue that your main motivation should be retention (and natural expansion). Maximizing for landing revenue is a short-sighted practice that not only creates friction in the sales process, but limits lifetime value and long term, natural growth with your customers.
This has become even more obvious with the injection of AI across many products we use regularly (e.g. Slack AI). Consumers are still trying to figure out these products, and the input costs for the underlying technology are changing rapidly. The result is a wide spread of pricing, and accelerated discussions about models like “performance-based” pricing that prices per output rather than on cost or with some arbitrary flat monthly fee.
As companies think about truly pricing for retention, they’ll likely move towards models like “performance based” pricing to more naturally partner with their customers.
Monetization is a growth lever, yes, but it’s also core to retention and customer loyalty. Operators should think about the following when balancing the two:
Let your customers tell you what’s valuable (through their usage) rather than telling them what’s valuable (through your pricing)
Listen carefully to feedback about your pricing model not only in new prospect conversations, but within your existing customer base – you’ll find the right balance much sooner and much more intuitively
Explore what “output” your customers are truly getting from your product - if you can price according to that and find a true “performance-based” price point, you’ll be skating to where the puck inevitably may be going.