Lenny Rachitsky: preference

Transcript context

…I do believe in that. That was tied to... We had done this experiment at my last company, Invoice2go, where... Typically on the demand curve, the higher you raise the price, the average revenue per user or ARPU, the lower the conversion rate. So, these things are inversely correlated. And we were able to do this rebalancing of our pricing and packaging so that we actually doubled our upgrade rate from our starter plan to our pro plan. ... We doubled our upgrade rate from our starter plan to our pro plan while also increasing the price of the pro plan. So, to actually get twice as many people to upgrade while paying something like 30% more for that new plan is pretty rare to get the compounding benefits of that. And what we did was thought a lot about what is a day one premium feature? What is a premium feature that you can get value from the very first time you engage with the product? That's different than your day 100 features. Those are the ones that represent more advanced functionality. Maybe they're ones where the value is derived from having a certain scale of data in the platform. And so, those you shouldn't waste cognitive load for your users to have to even understand or try to appreciate when they're first getting going. Push those into a more advanced pro version of your product, and monetize them down the road through an upsell. So, big believer in how do you really keep pricing simple? And we've all seen those SaaS pricing pages where there's a laundry list or just a gnarly matrix of features and functionality. So, do what you can to think about that journey for a user and how they're going to continue to increase value with your product over time, and how you can map your pricing and packaging against that journey. I really like that framework, because it's so straightforward and simple. As you use it, you'll need more enterprise features innately, because you're sharing it more widely. Your head of security's going to be like, "What are you doing with this thing?" Your finance team's going to be like, "Oh, how do we pay for this thing?" And so, that's a really nice simple way of thinking about what to put in freemium in your free plan versus not. So, glad we touched on that. Okay, so we were going through the three things that companies and founders do wrong when they're starting to price. And so, the first you said was they go too late and I tangentized us, so I'll give it back to you to keep going through this. [inaudible 00:15:53] This is by far the most common issue. And so, one framework I like to use here is matching price to value. When you do that, you create alignment with your user. So, this entails picking the right value metric. So, this is the unit of value that they derive from using your product, and it creates this natural escalator, because as people use it more, you get paid more over time. SaaS was historically built on a seat based model. That's been historical SaaS pricing. And now with the rise of PLG, we've seen more of these usage based approaches gaining speed, so that's pretty exciting to see. Whether it's number of API calls or messages sent or terabytes of storage used or words written, this usage-based approach really matches price to value over the lifetime of a customer. The other thing that happens when you match price to value is it helps you understand who you're building for, and it lets you target different customer segments. In doing that, you're able to better serve each segment, but you're also able to maximize revenue for the business. Evernote always had a business model. From its beginning, it had $45 a year for an annual subscription. And this set the foundation for the company and tens of millions in revenue, early revenue growth, but the approach was suboptimal. So, as a growth team, we started doing surveys. I was really curious to understand why people converted from our free version to our premium subscription. And one of the most popular answers without fail was, "Well, I just feel guilty. I use it so much. I get so much value from it that I just feel obligated to pay." And take that in for a second, because if guilt is one of the main reasons why people are paying you, then your free version is too good, and you are leaving money on the table. So, a single premium tier is often a mistake, and you're going to be leaving money on the table for specific segments, and it's important to drill down and understand who those are. Our additional research helped us understand that brand-new users with low perceived value of Evernote looked at it like their Apple Notepad app that was pre-installed on their device. And so, they couldn't understand the idea of paying $45 for Evernote. But then we talked to avid users, and these were people that were cross client using it on desktop and mobile, every device they had. They were using it for work and personal, they were leveraging OCR capabilities and the web clipper, and it was truly their second brain. They could not imagine life without it. And these people were floored that they were only paying $45 a year. They told us that they were getting hundreds of value from Evernote. Here, the perceived value for avid users was far outpacing what we were asking from them. And this intuition and research really led to a bifurcated strategy of having different plans for different personas based on the value they got from the product and their willingness to pay.…

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