Category: Strategy

Bessemer Venture Partners has a great new white paper up on Software-as-a-Service (SaaS) pricing strategies. Pricing is something that entrepreneurs labor over on a regular basis and there’s always multiple quality answers. Besides the standard advice that products should initially be priced higher than what you think it’s worth since it’s better to have push back and easier to lower prices, there’s a good bit of gray area on the different types of pricing options.

Here are the four categories Bessemer identified:

• Freemium (Dropbox, Asana, Skype) – Basic services at no charge and then fees for premium features. This is further sub-divided into capacity-based freemium, feature-based freemium, time-based freemium, and use-case freemium.
• Consumption (Amazon Web Services, Twilio, ZipCar) – Pay-as-you-go pricing based on usage, similar to buying electricity.
• Tiered (Salesforce.com, Pardot) – Pricing tied to value and usage (e.g. a combination of functionality and quantity) and is often found in enterprise software as well as SaaS.
• Perpetual License (Oracle, Microsoft) – Initial payment followed by a smaller annual maintenance and support contract. Typically, annual subscription pricing is 3 – 5 years the cost of a perpetual license.

As expected, some companies do a hybrid of the four categories listed above.

The authors do a good job diving into the details and trade-offs of each of the approaches as well as case studies of SaaS companies employing each pricing strategy. If you’re interested in SaaS and pricing, go read the report.

What else? What are your thoughts on SaaS pricing strategies and Bessemer’s white paper?

Yesterday I was talking to an entrepreneur about product / market fit. His startup is making good progress and has a minimum viable product in the hands of a couple friendly, paying customers. After getting an overview of the market opportunity, and digging deeper into the business, the question of assessing product / market fit came up. I asked if every customer so far has found bugs and run into issues. Yes, the friendly customers are happy, but they’ve all run into problems, which is normal.

So, if a handful of friendly customers are using the product and getting value from it, how do you know when product / market fit has been achieved? Here’s what I recommended:

• Sign up as many friendly-introduction customers as possible as they are key for helping identify issues, providing feedback, and acting as references for future customers
• Start acquiring traditional customers that aren’t from warm intros and assess customer engagement (daily active users, breadth and depth of module usage, etc)
• Calculate the net promoter score for both your friendlies and your traditional customers
• Look for a pattern of 10+ new customers signing on to the system, receiving significant value, and not encountering any bugs or problems

Product / market fit doesn’t happen immediately, but by paying attention to context clues it’ll gradually emerge that fit has been achieved and it’s time for stage 2 (building a repeatable customer acquisition machine).

What else? What are your thoughts on assessing achievement of product / market fit?

Not all startup ideas work. In fact, most don’t. One of the more difficult things to do is to quickly determine if an idea isn’t going to work and to kill it. Almost always, entrepreneurs wait too long to admit failure and give up. In my post mortem on a failed product, I share a number of mistakes that I made. Of course, I waited at least six months too long to shut down the product.

Here are a few indicators that it’s time to kill an idea and move on:

• Repeated customer discovery interviews with no product interest
• Prospect needs are too inconsistent resulting in no way to productize an offering
• Personal passion and interest has seriously waned
• Product value is treated too much as a nice-to-have instead of must-have

It’s never easy to admit an idea is no longer worth pursuing but each experience provides an opportunity to learn and grow. Most ideas won’t work and it’s critical to find out as soon as possible.

What else? What are some other indicators that it’s time to kill an idea and move on?

PandoDaily has a new post up today titled Seven dirty, gritty, real startup lessons that cost me $2 million by entrepreneur Pablo Fuentes where he offers some solid advice. My favorite of the seven ideas is that of Cross-10. Cross-10 is pretty straightforward: manually deliver the value of your product to 10 different customers by hand. For example, if you want to build software to do text message marketing for small businesses, get 10 small businesses to pay you to do a campaign manually on their behalf before you jump in and start building a product. As Steve Blank likes to say, get out of the building.

Here are a few ideas around the benefits of Cross-10:

• Getting a prospect to pay to money is incredibly hard, so doing it before product development helps improve the likelihood of success
• It’s never too early to solicit input from potential customers
• Most entrepreneurs build a product in a vacuum and fail (see my failure with eCrowds)
• Sales and marketing is often more difficult and expensive than engineering, so start with the toughest thing first

The goal of Cross-10 is to find out if the dogs will eat the dogfood before you’ve invested significant time and energy in a product. When you’re going to jump in and start your next venture, do Cross-10 right out of the gate.

What else? What are your thoughts on startups doing Cross-10 as their first task?

There’s a great Quora post from entrepreneur Mike Sellers in response to the question As first time entrepreneurs, what part of the process are people often completely blind to? His core response is so concise and complete, I had to repeat it here as 8 ideas every startup person should know:

1. An idea is not a design
2. A design is not a prototype
3. A prototype is not a program
4. A program is not a product
5. A product is not a business
6. A business is not profits
7. Profits are not an exit
8. And an exit is not happiness.

The next time someone asks me what they should know if they want to get involved with startups I’ll send them straight to Mike Sellers’ answer.

What else? What do you think of the 8 ideas every startup person should know?

Early on in my first company we hit a nice period of growth and hired a bunch of people. Fast forward 18 months and the business was fine but the people side of things was a mess. There was no cohesive corporate culture and we were suffering mightily because of it. At that point, I went on a reading binge and worked at assimilating as much information as possible on the people side of the business. Finally, we worked through a number of tough changes and came out stronger because of it.

I tell this story not to highlight the importance of corporate culture, but rather to emphasize that entrepreneurs need exposure to many ideas early and often. Yes, it was important for me to experience things first-hand, but I should have been more proactive earlier around gathering ideas and learning from others.

Here are a few ways to seek out ideas:

• Join a startup or entrepreneur group like EO
• Subscribe to blogs (including this one!) via email or RSS (try Feedly or Digg Reader)
• Network with other entrepreneurs in town
• Follow entrepreneurs on Twitter

The goal isn’t to spend a ton of time away from your business learning everything about everything, rather the goal is to continually learn and gain exposure to a wide variety of ideas.

What else? What are your thoughts on entrepreneurs needing to seek out ideas?

The topic of pricing and request for advice on how to price a product comes up on a regular basis. I always like to share the Pardot pricing experience, including lessons learned. Pricing is something that is best treated as yet another experiment in the startup process with the caveat that all things equal, it’s better to start too high and come down.

Here’s the early progression of pricing at Pardot:

• $65 / user / month, minimum three users – At launch in late 2007, we priced the product based on Salesforce.com (how cool is it that Salesforce.com now owns Pardot?!?). The idea was that each marketing user that used the product would pay for a seat. Note: it didn’t do email marketing at the time, so there weren’t any email volume concerns.
• $325 / account / month, unlimited users, unlimited contacts, with an allotment of 10,000 emails, 100,000 page views, and other modules (e.g. 10 landing pages), plus a required $2,500 quick start fee to set everything up. Email overages were billed separately. We quickly raised prices to $500 / month to reflect value and market dynamics.
• $1,000 / account / month with the same characteristics as the previous offering but now a quick start package was included at no additional charge. By getting rid of the quick start fee, we were able to shorten the sales cycle, increase the average recurring revenue, and capture more of the value provided by the software. This was a major breakthrough for the business overall and this was the pricing for 3+ years of the business.
• $1,000 / account / month for up to 30,000 contacts with unlimited emails and additional fees for more contacts. This became the standard in the industry and allowed vendors to capture value based on the size of the database such that accounts would grow as their marketing efforts grew. This change worked well and allowed us to grow the average size of an account.

Pricing should adapt to the market and continually change over time. We didn’t get the pricing right originally, but we kept improving on it and built a great business.

What else? What are your thoughts on Pardot’s pricing progression through the years?

Earlier today I was talking to an entrepreneur in the finding product/market fit stage of the startup adventure. He’s making progress collecting information but is still trying to understand if there’s a viable market. After hearing an update and sharing a few ideas, I recommended that he get to “no” with a bunch of potential customers as quickly as possible. The idea is that it’s often easier and faster to figure out if an idea isn’t viable, such that you can then move on. Too often, entrepreneurs take too long to kill an idea.

Here are a few labor-intensive ideas to get in front of a number of people to determine viability for an idea:

• Make a methodical plan to reach a certain type of person (e.g. take the last 100 people featured in the local business journal and contact them via phone)
• Find a list of award winners (e.g. the Inc. 5000) and contact at least 500 companies on the list
• Reach out to 100+ people that you know and ask for a referral to someone that could be a potential customer or could point you in the right direction

Now, if this sounds like sales, it’s because it is sales. Most startup founders like building a product and don’t like selling. Whether it’s sales or customer discovery, the best thing to do is to get in front of as many people as possible, as quickly as possible.

What else? What are your thoughts on getting potential customers to “no” as quickly as possible?