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Kevin Hale - Startup Pricing 101 — Transcript

by Y Combinator · 3,088 words · 446 segments · language en · Watch on YouTube

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0:00this was a highly requested talk from
0:02last year or lots of people had
0:04questions about pricing or really
0:06confused it's actually was well
0:07requested both at YC itself that's a
0:10very very popular workshop that we run
0:12and so we're gonna go over a lot of
0:16basic fundamentals for pricing that
0:18hopefully will just help you understand
0:20how to approach your pricing and
0:22monetization from first principles and
0:25then you help you help yourselves same
0:27thing with the landing page lock so
0:28we're gonna go over first principles for
0:30pricing we're gonna go over why is
0:33pricing particularly hard for startups
0:35for people making innovative products
0:37and new markets like why is it extra
0:40difficult how do you do price
0:44optimisation like how do you actually do
0:46it what does that actually look like and
0:48just kind of demystify that whole
0:50process when we look at the challenges
0:53of pricing you start recognizing why
0:56certain types of customer segments that
0:59you're going after are difficult like
1:01SMB and we'll talk a little bit about
1:02that we're gonna talk about how pricing
1:05affects your acquisition strategy it
1:08changes what you can do and what you
1:10cannot do and it's extremely important
1:13because a lot of companies get caught up
1:14doing the wrong position strategy or
1:18wasting too much money use the price is
1:21incorrect and then I'm gonna give you
1:25some rules of thumbs some pricing tricks
1:27just to help make it a lot easier when
1:29you're encountering different pricing
1:31problems I call them pricing trick
1:33sprinkles okay there are three lovers
1:37you can pull to improve growth so in the
1:40last talk I talked about conversion rate
1:41and churn but monetization is actually
1:45the Big Dawg it's the one that I really
1:46like now there was a survey done with
1:49over 500 SAS companies and they talked
1:52about sort of like amount of effort that
1:54they put into each one of these
1:55strategies and the returns that they got
1:57as a result of it now acquisition is
2:00really fun and exciting it's the one
2:03that everyone kind of understands simply
2:04it's like I get more customers I get
2:06more logos gives me more growth
2:09retention of course is about keeping
2:11customers and
2:12zatia is about getting more money per
2:15customer now if you increase just your
2:20efforts or resources by one percent your
2:25work on acquisition usually get a return
2:27of about three point three two percent
2:29in retention it's about six point seven
2:32and when you're optimizing pricing that
2:35gives you your biggest bang for your
2:37buck in terms of impact on your business
2:39yet and it's the one that is most
2:41neglected and I think it's the one that
2:43everyone is so afraid to touch because
2:46they're so scared that if they get the
2:47pricing wrong that they will lose all
2:49their customers now the first principles
2:53the basic idea about pricing the thing
2:56the concept that really opened up in my
2:59head how to think about pricing how to
3:01understand the problems that people are
3:03facing and why startups get it wrong is
3:05to use a concept called the pricing
3:07thermometer and so you have to
3:09understand that when you price something
3:12there's actually like two other factors
3:15at play and so there's a cost there's
3:21the price and then there's the value and
3:24the interplay of in relationship between
3:27these items affects how growth happens
3:33inside of your company now the gap
3:35between price and cost that is your
3:38margin that is your incentive to sell
3:40and so the bigger that gap is the more
3:43you are driven to want to push your
3:47product to your customers to have your
3:48sales people etc this gap here between
3:53price and value is incentive to buy and
3:56the larger that gap is the easier it is
3:59to have your customers to want to sign
4:01up or views your product now to figure
4:05out price there's really two ways to go
4:07about it you either start with the cost
4:09if you know what it is and you figure
4:12out where your price is based off of
4:13that that is called cost plus the other
4:16way to do it is figure out what is the
4:17value of your company or product or
4:19service and then you figure out your
4:21price from that and that is called
4:23value-based pricing
4:26in startups and almost pretty
4:29consistently across all businesses
4:31everyone will tell you you should strive
4:33for value-based pricing it allows you to
4:38charge a whole lot more it allows you to
4:42manipulate this incentive to buy the
4:45problem is because people do not
4:47understand their relationships or even
4:50understand what are their costs and what
4:52are the value that their customer is
4:54going to think about their product they
4:56put their price in a kind of arbitrary
4:58place and they don't know what are the
5:01forces at play that drives it and it
5:02results in four different types of
5:04mistakes
5:05the first one is startups will price
5:08their products too low basically you
5:12consistently under charge is the number
5:14one piece of advice we give through most
5:16startups to fix their pricing and I'll
5:18talk a little bit about why most
5:21companies fall into that trap you
5:24underestimate your costs and the result
5:27is you have a problem where your margins
5:34aren't enough to cover sort of
5:36acquisition you don't understand your
5:39value you don't understand how your
5:41company thinks about the problem that
5:43you're solving for them or how they
5:45value it and either they don't
5:47understand your value or you don't know
5:49how to convince them of the value that
5:52you think you offer and as a result you
5:54can't get the price that you want and
5:57lastly you focus on the wrong customers
6:01that you think man
6:03man if I built a better product and I
6:06charge half the competition I win the
6:11thing is that almost never happens and
6:15the reason is because you as a start-up
6:20you as working on something to create a
6:22new market are working on innovative
6:24products you are focused on the wrong
6:26customers they are not the mainstream
6:29people who are going to look at the
6:31price and make most of the determination
6:32based off of that so this is the sales
6:36and profit over a product's life from an
6:39Shinto demise that's what it's called
6:41all you need to know is that these are
6:44five different stages of a company and
6:48this is what sales might look like over
6:50different stages and what profits might
6:52look like over those different stages
6:55you who are in start-up school you who
6:58are getting seed funding your are in the
7:01first two stages product development
7:05stage introduction you are not in the
7:08growth phase and the thing to keep in
7:10mind is that the customers in the first
7:12two stages the ones that you're going
7:15after they don't look like mainstream
7:17customers that you find in growth and
7:19maturity stages they're not mature
7:22customers they're early adopters and
7:24thing to know about early adopters is
7:29you kind of don't really get a lot of
7:32momentum and growth until you get past
7:34the first two to five percent of
7:36potential buyers of your market these
7:40people in that two to five percent
7:41they're called early adopters and the
7:43thing that drives them it's very
7:45different from mainstream people so one
7:50there's a couple things to keep in mind
7:51about pricing innovative products what
7:54you are trying to do fundamentally is
7:56require users the change to their
7:58pattern to stop doing it the old shity
8:02spreadsheet way and do it in the new
8:04better your way and getting someone to
8:09change their pattern is actually
8:10difficult right especially if they're a
8:12mature person partly because the average
8:16user lacks
8:17information needed and the trust in you
8:22or whatever it is that you're making to
8:25make that change to take that risk
8:27you are entrepreneurs you're comfortable
8:30taking risks your customers are not
8:33entrepreneurs for the most part they're
8:35probably less comfortable taking risks
8:37and so in the beginning you're going
8:40after people who are willing to take a
8:41risk and those are early adopters those
8:45are people who care about benefits above
8:47all else that the highest value to them
8:50is beating their competition
8:53doing something much better and taking a
8:55chance that something new will give them
8:57that edge over anybody else those early
9:00adopters therefore are not price
9:02sensitive if anything if you've built a
9:06better product and you charge less it
9:08looks like you have reputation risk it's
9:11like why is it too good to be true what
9:14is the catch and what will end up
9:17happening is it makes it much longer to
9:19get to not understand this is basically
9:23all price optimization this is those
9:24complicated way that you can try to show
9:26price optimization this is a demand
9:28yield curve and when you have on this
9:30side is different prices and on this
9:32side you have sales unit sales and
9:35basically what you are trying to figure
9:37out when you're optimizing the price
9:39that you're charging your customers is
9:41like basically what is the perfect
9:43balance between how much I charge and
9:46how much sales volume I get and then
9:49your price optimization is basically
9:51that try different prices and then see
9:53what the effect is when I have my
9:56companies optimize their prices they
10:00just use a very simple table you don't
10:01need to try to figure that weird ass
10:03graph basically you want to have a
10:05column that says these are the prices
10:06I'm gonna try and then what is the
10:08result in conversion rate what is the
10:10result in sales volume and then how much
10:12revenue did I generate that's all it is
10:15and so let's say I have prices at these
10:19different price points and I get these
10:22different conversion rates and I get
10:24this sales volume I should immediately
10:27be able to see who the winner is here we
10:31go now the one thing to keep in mind
10:34once we have figured out something like
10:36this what a simple product is that these
10:40areas at lower prices if you can afford
10:43them in terms of your margin or actually
10:46lost opportunities and what you want to
10:48understand about these are these are
10:50what you're going to see if you offer
10:52discount pricing or offer tiered pricing
10:55at different price points another
11:01exercise I like to go with companies
11:03when dealing with pricing is how them
11:06understand is like
11:07are you in a danger zone and so what I
11:11usually do with my companies that I help
11:13have them sort of calculate what would
11:15their business look like or what does it
11:17gonna look like to be a billion dollar
11:19company and usually the rule of thumb
11:21there is to be doing a hundred million
11:23dollars a year in sales and revenue and
11:27so that basically is like what at your
11:29price that you give how many customers
11:31do you need to have to make a hundred
11:33million dollars in that year so let's
11:37have a bunch of different price points
11:38then we know okay great
11:42I need these number of customers in
11:44order to make this formula work you
11:49understand what that looks like at a
11:51hundred dollar price point with a
11:53potential about million users right
11:55this is consumers that's what that
11:57consumer space looks like and you know
12:01what this down here looks like $100,000
12:03here we call this enterprise this area
12:07here is the part that a lot of companies
12:10are in and really really struggle
12:12they're on the struggle bus and it tends
12:15to be SMB these are people who kind of
12:19treat their money like consumers right
12:21but they kind of look like they might be
12:23an enterprise and the reason why this is
12:25such a danger zone is because it will
12:30tend to fit in the wrong place on my
12:32next diagram so let's imagine that this
12:37vertical axis represents a price you can
12:40charge either high price or a low price
12:41for your product and this represents
12:44complexity of your sales process low
12:46complexity to high complexity if you are
12:51having a product that is two thousand
12:55dollars or less and is basically
12:58self-serve then you have something in
13:01this quadrant here and this affects
13:03completely what you can do in terms of
13:06what drives your business what you can
13:08spend on to get that sort of growth that
13:10price point here at $2,000 it needs to
13:13be have almost all marketing be inbound
13:15you can't spend a lot of money outbound
13:17or ads etc
13:19your support has to be completely
13:21self-serve or very very minimal you have
13:25no sales team at this price point you
13:27can't afford it right but conversions
13:31can happen on the same day must be in a
13:33self-serve model transactional so
13:37between two and ten thousand dollars
13:39when you're able to charge this you're
13:41able to have a few new toys at your
13:45sleeves and so marketing now can be
13:48focused on generating qualified leads
13:50your customer support can now offer like
13:52SL A's or you can start paying for
13:54training that people get on boarded and
13:57for sales you can't hire a dedicated
14:00salesperson but maybe you can have an
14:01inside sales rep to sell within
14:03companies are within your customers you
14:06could maybe have an SDR
14:07and you can maybe have someone dedicated
14:09to giving product demos sales cycle here
14:12should not be longer than one to three
14:13months enterprise it's over twenty five
14:18thousand dollars now for marketing you
14:21can start spending things on branding on
14:24building up trust with customers your
14:27support is very very high touched that
14:29you can afford you can do phone support
14:30you can have a customer success person
14:32dedicated to the client and for sales
14:35you're going to start thinking about
14:36sales managers dividing stuff into
14:39territories and having sales engineers
14:41that participate in terms of conversion
14:43and the sales calls these will have a
14:46sales cycle about six to twelve months
14:50this is the garbage zone right and you
14:55know if you're potentially in this and
14:57this is the big wake-up call for you if
14:59it's taking you months and months and
15:01months to close someone but you're not
15:02making a lot of money to cover it you
15:06have a process where your acquisition
15:08costs are just too high for you to be
15:11sustainable and you have to get yourself
15:13out of that problem all of your work
15:16should be towards increasing the
15:18perceived value of your product or
15:22service I'm going to end on a good rule
15:27of thumb so if you are
15:32starting with some kind of price but you
15:33don't know how to sort of optimize it or
15:35figure it out then here's a good place
15:37to get going the first thing is I like
15:40to have things where the value is 10x
15:43the price of whatever it is I'm charging
15:45and I want to have it so that the value
15:47is easily understood to be 10x so for
15:50example if I charge for a product that
15:52is $10 then it should be in terms of
15:56perceived value by my customer that it's
15:59worth $100 to them if they do not
16:03immediately understand the 10x value of
16:06the price it's gonna be hard to get them
16:09to move their incentive the buy might be
16:12too low
16:14once you have any kind of price and this
16:17is particularly important for people are
16:18doing b2b or enterprise sale you should
16:21start practicing raising prices and I
16:24like to just start by raising prices by
16:265% if you feel really confident jump it
16:30up by bigger numbers if you want but
16:32this is a pretty safe way to do it so
16:33that you can feel comfortable with it
16:34and you want to keep raising prices
16:37until you're losing 20% of your
16:40customers that's about a good balance to
16:42have in terms of understanding that like
16:45I have a good price here I'm losing 20%
16:47of my deals it's not too high it's not
16:49too low
16:50in summary for pricing pricing gives the
16:54most bang for your buck you should work
16:57on pricing if you've never touched the
16:59pricing of your product then you're
17:01losing out on lots of potential growth
17:04understand the variables do you really
17:08understand your cost do you understand
17:10why you've plate the price where it is
17:11and do you understand the value when you
17:14go into a sales meeting or call do you
17:17talk to people and you basically say
17:18it's like I know exactly what this is
17:20going to be worth to you
17:21so when I tell you what the price is
17:23going to be you're going to be like damn
17:25that's totally worth it
17:29go after early adopters remember as a
17:32startup that is who you're going after
17:34so when you are talking to customers and
17:37they are taking a really long time to
17:39make a decision or they're wanting to
17:41have a lot more proof that other people
17:42are using it
17:43are not talking to an early adopter
17:45you're wasting a lot of time on
17:47non-believers go after them first don't
17:51take it personally when these people who
17:54are much more mature aren't ready for
17:56your products they were never going to
17:57be your job is to get through that first
18:00two to five percent of the market those
18:03early adopters care more about benefits
18:05than price so don't under your products
18:08when you have something that is of value
18:10and easily understood to have value get
18:14organized when you're doing proper price
18:16optimisation it's really really easy
18:18don't over complicate things
18:20figure out a bunch of different price
18:22points you want to check understand
18:24sales volume conversion rate and the
18:26revenue that's involved and that will
18:28help you make the best pricing decision
18:32your price will determine your
18:34acquisition strategy if you realize that
18:38your sales cycle or all the things that
18:40you're spending on is way too much for
18:43the amount of money that you're charging
18:44you either need to increase the price or
18:46completely reduce your acquisition
18:48strategy costs use the 10 520 rule set a
18:55price that is 10x that is a tenth of the
18:59value increase prices by five percent
19:02until you are losing twenty percent of
19:04the deals thank you very much guys
19:08[Applause]
19:12you
19:21you

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