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You’ve seen them before. The technical books on everything from Python programming to user mapping, Unix systems to sustainable design—each one featuring an engraved image of some sort of cute animal. That’s O’Reilly Media’s signature style, and we're breaking it down with them in this week's episode. 

 

This fellow Boston-native company has an authoritative brand in the education and technology market, backed by decades of success in publishing. And though their subscription learning platform is an awesome tool, O’Reilly doesn’t do a good job of building their pricing strategy to capitalize on the huge opportunity they have to win with this product.

How much does O'Reilly Media cost?

O'Reilly Media's Online Learning platform starts out with an Individual package for $39 a month or $399 annually. The Team tier is also $399 annually, but on a per user basis. For their Enterprise tier, O'Reilly asks that people reach out to their sales team directly for a custom quote.

O'Reilly pricing tiers are too similar

“A problem with a lot of online learning platforms is that the unlimited nature of a lot of the content just doesn’t work. Customers don’t care about 90% of what they’re paying for, it’s overwhelming, and it’s really complicated.“

It really doesn’t feel like O’Reilly has put a lot of thought into how they structure the pricing tiers for their online learning platform. They offer way too much in the Individual tier, which sets them up to underdeliver for both the Teams and Enterprise tiers. It’s really all about packaging for this kind of product, and they need to do a better job of it to appeal to the right target buyer personas.

Below is the breakdown of what’s offered in every tier. Though more circles are filled in for the final two tiers, customers don't gain much from paying more for their “extra” benefits.

Pricing tiers for O’Reilly Online Learning.

The Individual tier is by far the most appealing and includes almost everything that someone would want from an online platform for $39 a month or $399 a year.

The Teams tier is the exact same annual price with the addition of Discounts on O’Reilly Conferences, Direct Billing Options, End User Usage Reporting, and the Ability to Reassign Licenses. While the end user and licensing reassignment are worthwhile for team management, the discounts and direct billing aren’t altogether that appealing.

The Enterprise package adds a few more customizable options but also doesn’t feel like it’s been targeted to a specific subsection of O’Reilly’s current customer base. All in all, it feels really old school, like O’Reilly is a publishing company that just slapped together a subscription pricing page based on what they’ve seen around.

Take a look at a value matrix that plots the relative preference of features against overall willingness to pay (WTP) below. We see a lot of opportunities for better feature differentiation between these tiers.

Value matrix based on 1,407 current and prospective O’Reilly Media customers.

The Core Features quadrant is pretty much on par for what we would expect from a publishing company, with Books, Audio Books, and Personalized Recommendations considered table stakes. There’s also not a lot going on in the Differentiable Features quadrant. O’Reilly does offer webinars as a part of their platform, but it isn’t their main focus.

Add-Ons is where things really start to get interesting. O’Reilly already offers Discounts on Conferences and Usage Reports in their Teams tier (which, again, is the same price as the Individual on an annual basis). The addition of a Dedicated Account Manager and Live Online Training and Single Sign-On Integration to the Enterprise package make a bit more sense.

The biggest takeaway here is that these Add-On features offer a huge opportunity for expansion revenue, and O’Reilly isn’t doing anything about it. With some simple repackaging of their Teams and Enterprise tiers, they could definitely tap into the revenue potential of features they’re giving away for free.

Just look how low the value is for Discounts on Conferences in this quadrant. If O’Reilly started giving away those discounts as a perk to existing customers, it would make a much bigger impact on loyalty, boosting trust and perceived value in their brand much more than a Premium tier feature ever could.

Understanding WTP is O'Reilly's best path to better pricing

“When you average out your pricing, you make no one happy. You’re too expensive for a lot of people and you’re underpriced for the rest, which ends up meaning you don’t capitalize on the willingness to pay of half of your customers.”

O'Reilly is way underpriced, period. Their next move should be to target specific types of buyers with different pricing tiers. Right now, they’re not taking advantage of anyone’s willingness to pay, and that means they’re leaving lots of potential revenue on the table.

We looked at the monthly willingness to pay based on user experience first, trying to see who their Individual tier really appealed to.

Monthly willingness to pay for O’Reilly Online Learning based on overall job experience.

Right now, their $39 a month fee is just slightly above the lowest possible willingness to pay for people in the 0 to 1 Year Experience segment. That’s not good because these people are likely just getting out of college or another training program and feel like they’ve already spent a lot of time learning and honing their skills.

O’Reilly could easily start charging up to $50/month and targeting users with 3.01 to 5 Years Experience. That would put them in a great spot that’s basically in the middle of the median willingness to pay for all of the current and prospective O’Reilly Media customers we surveyed. And it’s still under for a lot of them.

When you get into the 10.01+ Years Experience and 55+ segments, the ranges are really high. It wouldn’t be out of the realm of possibility to start offering a Premium package aimed at continued learning for upper-level management, who’ve been around longer and are familiar with the O’Reilly brand.

We see some worrying trends in the annual willingness to pay based on whether or not a company has an existing training program as well.

Annual willingness to pay based on whether a company has an existing training or learning & development program.

O’Reilly’s Teams tier is $399 per user, right in the middle of these two data points — in the upper ranges for companies with No L&D/Training Program and almost $100 under for companies with an L&D/Training Program. This is why averaging out your pricing is so bad: O’Reilly’s positioning makes them less appealing to everyone.

Now, if they were to increase their prices to tap into the increased willingness to pay of one segment, that would cause problems for the other. It’s paramount that O’Reilly digs into their existing customer base and starts making decisions based on who is already providing them with the most value.

They may end up needing two different tiers to satisfy these two groups, but if companies with an L&D/Training Program already make up a significant amount of their customer base, it would make more sense to go after only those users instead.

Bad pricing can hurt even the most authoritative brand

Overall, we both find O’Reilly’s pricing pretty underwhelming. They have a huge opportunity to capitalize on their established status in the industry. Peter gives them a round 6.0 because of this. I go a bit higher at a 6.7 but with the understanding that it’s not their price that bumps up the score; it’s their potential.

Right now it feels like O'Reilly has pieced something together last minute, and it could start causing them issues in the future. O’Reilly does still have competition in the market and, with a little bit of work, their pricing could put them in a position where they can't lose.

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You think you know what your board wants to hear: exponential growth, overwhelming booking numbers, and a bulletproof business.

But what they actually want to hear is the truth.

Your board members want to see the numbers behind your company's progress laid bare, and they want to see your framework for improvement. They have the same goals as you—to build a successful business—and they have the expertise and perspective to help. But they can only do that if you give them the right numbers to work with.

The metrics you present should speak to your higher-level goals while showing a complete picture of your company's current state. This means being clear, transparent, and forward-thinking. Learn from the decks of real companies and a sample deck we've built for a fictitious SaaS company—then put your own metrics to work to show your board what they really need to see.

The strategy: Candidly show your work toward your vision

Board meetings present valuable opportunity: they might be the only times some of your board members get to check in and hear updates on your company's progress. It's also a chance to access their learnings from the industry or from building a company. You have to give them good data so they can provide this necessary perspective.

Many early SaaS companies measure metrics every month, so here we're focusing on monthly metrics. Other companies, especially more mature companies, might measure their progress quarterly or annually, in which case they would focus on different metrics.

Your board meetings—beginning with how you craft your board deck—should be guided by principles that facilitate the easiest and cleanest transfer of information for everyone involved. This means building your deck around clarity, transparency, and goals for the future.

Keep it clear

Your deck should be concise and well-curated to reflect the most important issues that you want to discuss with your board. Notion Capital, an investment firm that focused on early stage B2B companies, recommends keeping your deck to about a dozen slides.

The best way to maintain clarity is to zero in on the issues that are most important to your company at the moment:

  • Structure discussion time around very specific questions; vague agenda points will enable distraction. For example, “improving marketing campaigns” isn't a productive agenda point. A better discussion point would be, “Are we prepared to redirect $5,000 in marketing spend from channel x to channel y in the upcoming month?

  • Keep the design of your slides simple. Don't overwhelm the slides with excessive numbers or text, and use graphs where you can show rather than tell.

  • Send your deck out to your board members at least one full day before the board meeting, and ask them to review the deck before the meeting. This ensures that everyone knows exactly what you want to talk about and comes prepared with relevant questions.

For example, this slide from a deck by Front shows how clarity helps deliver a powerful message.

[Source]

The design of the slide is clean and uncluttered. There are only a select few metrics presented, and they tell a complete picture of how Front uses their capital. No information is lost, and the metrics take the spotlight.

Be transparent about struggles

When Bill Gates sits on the board at companies, he is reported to require that at least 50% of what CEOs report to be bad news.

That may be extreme, but you shouldn't hide bad metrics or concerning news from your board. No one wants to hear about month-over-month growth if that's not really what your growth looks like. Imagine: you wouldn't want to pretend blood pressure is 120/80 if it's not truly that healthy. That's not beneficial to you. You'd want to measure it, and then get your doctor's advice on how to maintain or improve it.

You should do the same to take care of the health of your company and be honest about your growth metrics. When thinking about what to discuss with your board, consider what “bad news” reflects about your current processes:

  • Where have metrics fallen, and what has changed in the way we operate that might have caused that fall?” Learning these self-reflective processes when you are a small company will establish good business practices for when your company is more mature and your problems exist on a much larger scale.

  • How do our metrics compare to industry standards?” Show that you have a thorough knowledge of the industry you're in. Comparing yourself to other successful businesses in the industry shouldn't put your company down, it should shed light on possible ways to improve.

  • What are we going to do to improve X?” Your metrics aren't always going to be great. What's more important is figuring out how to improve situations and working together with your board to develop solutions.

In a slide from Pendo's deck below, they acknowledge that their average revenue per new user in the past has been low.

[Source]

But they show a positive trend upward and pinpoint the action that leads to the improvement. By sharing this with their board, the board has a better understanding of how Pendo will troubleshoot other lagging metrics.

Show goals for the future

Wistia CEO Chris Savage swears that your company's growth isn't dependent on being a fresh-from-the-accelerator startup. It's about building for long-term success and not being distracted by short-term validation.

Focus on how you can build structures that enable long-term success:

  • Determine what customers value most in your product and brainstorm ways to expand out upon that value. This will help you acquire more customers and drive expansion revenue from customers who want more of this value.

  • Forecast how the market might evolve given the past trajectory, and understand how this will affect your acquisition channels, your customer acquisition costs, and your market-product fit.

  • Create internal feedback systems and work on aligning your team around specific goals. Alignment will make everyone's efforts more productive, and a sense of community and teamwork across your entire team will help make the company a great place to work for all of your team members.

A slide in a 2014 deck from Mattermark puts its goal of 3M companies by September 2015 goal front and center.

[Source]

Communicating this goal shows that Mattermark has a long-term growth plan. They also clearly map out the appropriate trajectory for obtaining this goal. At this point Mattermark was looking to raise VC money, so their growth trajectory accounts for an increase in capital.

Above all, the information you present in board decks should be forward-looking. Showcasing short-term wins is gratifying, but developing a sustainable strategy for growing metrics over time is smart.

The nitty-gritty: Show the right metrics that describe your growth

A good board deck hinges on choosing the right metrics to talk about. “The right metrics” should be a combination of numbers that describe your current revenue growth, show current spend, and indicate how customers will contribute to your company in the long term. Make sure you keep the metrics the same from meeting to meeting so that the board can track progress over time.

These are the metrics that you need to include to give your board the true picture of your company's current state. We've assembled a deck for a fictitious SaaS company, SmartSaaS, to show what these metrics would look like in your slide deck.

1. Net MRR Growth

Net MRR Growth is the core of the SaaS business model. The attraction of a subscription business is that you pay customer acquisition costs once to build a base of customers that bring in revenue every month. You need to include this in your deck to show your company's momentum and provide an overview of your month-to-month business activity.

Break down your net MRR into new revenue from acquisitions, expanded revenue from up-sells and cross-sells, and lost revenue from downgrades and churning customers. This is a visual representation of your company's quick ratio, or a comparison of your revenue gains and revenue losses. This is vital to include because it prevents any gains or losses in revenue from slipping through the cracks.

2. Payback period

A SaaS company's payback period is the time it takes to recover the costs of acquiring a customer. You want to aim to shorten your payback period to recover those costs as quickly as possible. Then, incoming revenue from a customer can go toward profit or be put back into the company to fuel growth. Payback period is essential to your deck because it describes a limiting factor, which has a huge impact on how fast your company can grow.

VC at Matrix Partners David Skok recommends that SaaS companies keep their payback period below 12 months so you don't sabotage your own growth with the weight of your customer acquisition costs.

3. Cash Flow

This is a very important slide because cash is the fuel for a bootstrapped company. It's imperative that you keep a close eye on your cash flow and preempt any possible cash issues far in advance. Co-founder and manager at Bigfoot Capital Brian Parks points out that you should never leave yourself in a position where you absolutely need someone else's cash to keep your business running.

If you're a bootstrapped startup, your board isn't going to expect you to have the same type of long runway that venture-backed companies might have. At the same time, if you run out of cash, it's a sure death for your company. Balance your growth and scaling, as well as your customer acquisition costs, with your cash in the bank to make sure you always have a reliable cash flow.
zoo

4. Churn rate

A low churn rate indicates happy customers, an effective product, strong marketing, and good retention strategies. Your board will always want to know your churn rate, because it's a huge indicator of how well your product sticks in your market and how likely your company is to have long-term success.

Include user churn and MRR churn in your deck to show your board how customer attrition impacts revenue. You should show both gross MRR churn and net MRR churn—a very low net MRR churn will indicate that you're expanding plans from current customers significantly, which is an excellent growth strategy.

5. LTV:CAC

A SaaS company has to meticulously analyze its LTV:CAC ratio because it is the foundation of your unit economics. A high LTV:CAC ratio means that a customer's lifetime value is much greater than your company's costs to acquire them. Customers with high LTC:CAC ratios are very valuable for steady revenue growth over time. The LTV:CAC ratio needs to be over 3:1 in order for the company to be successful in the long-term.

When you present LTV:CAC ratios to your investors, you should break down your customer base into different buyer personas and different acquisition channels. This will show you and your board where your most valuable customers come from and where you need to focus your marketing to spend efficiently.

Measure and communicate these metrics every month to build a rock-solid foundation for your board meetings. Other information, including hiring information, critical discussion topics, a product roadmap, and key wins and challenges, can be presented in additional slides. But these core metrics are the basis for a strong and productive board deck that ensure you get the most out of your meetings.

Your board is an extension of your team

Your board members provide important perspective during board meetings because they are removed from the day-to-day struggles and celebrations—so they can view your progress less emotionally and more clinically.

Building a clear, transparent, and forward-looking deck is the best way that you can help your board do their job and set your business up for long-term success. Hit these key metrics to showcase your company's unique personality and growth, and be honest with your board, and yourself, about how you can improve.

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For this week's episode, Peter and I are going to the land of time, also known as Hubstaff, the employee time-tracking & productivity monitoring software. They're used by all types of folks, from landscapers and construction crews to attorneys and software companies, blue collar and white collar alike.

 
How much does Hubstaff cost?

Hubstaff has 4 pricing tiers: Free, Basic for $6 per user per month, Premium for $9 per user per month, and Enterprise at $16 per user per month.

Hubstaff's pricing page is sure and steady

Fundamentally, Hubstaff's main pricing page looks pretty good and their overall pricing strategy is sensible. Annual plans include two months free: This is a very smart move, proven to outperform percentage offers almost every single time on annual deals.

Pricing content correct as of 06/10/19

Design-wise, the page lays out which features are available in each plan. The differences between the Free, Basic, Premium, and Enterprise options are broken down clearly.

However, it would be nice to see this tailored for specific kinds of users. For example, what plan is best for me if I just want to track time? Or what if I want to manage my business better overall? There's a huge range of features, so the customer has to do a bit of extra legwork to figure it out for themselves.

Plus, considering their wide range of customer types, industry-specific plans would be ideal. That extra delineation would help people choose. Every percentage point counts!

Hubstaff's tier plan is too rigid

Businesses, like Hubstaff, that try to throw everything into one tier or a couple of tiers end up losing out on the extra money to be made with add-ons. Hold on tight, reader — we're going headlong into the value matrix.

Data correct as of 06/10/19

Time-tracking and Invoicing are both core services, and given where they sit in high value/low WTP, that's where they should be. You don’t bundle these kinds of features in premium because they’re already included as free features in so many different products.

However, the positions of the Productivity Monitoring and Team Scheduling features are really interesting. Productivity Monitoring is in the base tier, while Team Scheduling is in the premium tier. However, their positioning as high value/high willingness-to-pay (WTP) suggests that, actually, they both should be in the premium bracket.

Now, add-ons. One of the heuristics you want to use is this: If there’s a feature being used by less than 35% of your user base, you should probably consider turning it into an add-on feature. Every one of Hubstaff's features is included in one pricing tier or another, which isn't the way to go. Features like Payroll have serious potential as add-ons.

Add-ons are Hubstaff's missed opportunity

Let's take a closer look at the add-on potential of a few Hubstaff features. The pricing shown below is hypothetical for three potential add-ons — project budgeting, payroll, and mobile GPS tracking.

 Data correct as of 06/10/19

These add-ons are competing against the same price for the core Hubstaff product. People are willing to pay over $50 a month for Project Budgeting, even more for Payroll, and a bit less for GPS tracking.

Now, aggressively pricing pricing these add-ons would not be smart. You don’t want customers saying “Well I’m already paying $50 for the time-tracking, so why would I want to pay another $50 for the budgeting add-on, too?” But, charging even a $20 fee for each of these three add-ons would positively affect Hubstaff's cumulative revenue. It amounts to a lost opportunity.

Offering industry-specific pricing could be key

Digging a little deeper, and looking at all the different industries Hubstaff serves, we find yet another missed opportunity. Look how different the spreads are on the data points based on type-of-industry in the graph below.

Data correct as of 06/10/19

The per-user WTP gets incredibly high for architects, and attorneys/accountants: $10 or more per month per user! The blue-collar industries, on the other hand, all sit closer to a $5 lower price point.

Hubstaff has tried to be democratic with their price-points because they're serving an array of customers, but by having those price points flat like this Hubstaff aren't doing themselves any favors. Raising the base price for some of the white collar industries, for example, would be an excellent approach - because based on this data there’s a huge amount of potential revenue going begging.

Takeaways

In a lot of ways, Hubstaff's doing great: They have a rich product with a huge number of features, their subscription plans are versatile, and their pricing on the whole is good. But they could be doing better (way better) by making a few key changes and tailoring their approach.

  1. When your product caters to so many differing industries, make it obvious which version of your product is best suited to each one (i.e. even packaging separately for different industry types, if that's possible).
  2. Don't offer too much in your core deal! Leave room for add-ons. They're a great added revenue stream for more specialist-use services within your product.
  3. If you're serving both blue- and white-collar industries, don't just average out the price. On the surface it might seem great for retention, but Hubstaff can make a massive increase in ARPU just by refitting their pricing for some of those clients (accounts and legal, architects and design) who're willing to spend bigger per month.
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This episode is going to be a little different. Instead of tearing down the pricing strategy of another popular SaaS business, we're looking at an influential player in the marketing and branding space, the one and only Gary Vaynerchuk. While Gary doesn't have a subscription offering at the moment, we've put together some data that speaks to his ability to monetize the existing relationships with his followers.

 

Much like our look at Kanye West, this episode is all about how the subscription model helps brands (or people) turn relationships into a predictable revenue stream. Peter and I talk about the importance of fostering these engaged relationships with followers and how those relationships are at the core of building a successful and sustainable business.

Who is Gary Vaynerchuk?

One of the leading voices in the hustle economy, Gary Vaynerchuk is an entrepreneur and branding consultant with a big dream — he wants to own the New York Jets. And while he sometimes veers into sounding like a charlatan, Gary's authentic voice is one of the driving forces behind his success.

Gary Vaynerchuk talking about hustle.

He is an outspoken and staunch advocate for the power of hard work and taking ownership of your success. Starting out as one of the first YouTubers, Gary has grown his personal brand into a powerhouse company, VaynerMedia, and solidified a place as a formidable presence in the marketing community.

The subscription model is one way Gary could monetize his fanbase

“The data tells us that Gary can monetize for at least some of his access. That doesn't mean that he should stop giving away the free access he already provides, but there is something here that he can offer.”

Without an actual pricing page to dig into, we decided to look at what would happen if Gary decided to offer his fanbase a subscription product. He has a huge following on social media and already offers a lot of content for free via his VIP groups and text communication, but we wanted to see what his fans were actually willing to pay for.

To do that, we put together a value matrix based on responses from 3,113 current fans.

The types of features that Gary would be able to charge a subscription price for.

This matrix shows what Gary's fans are actually interested in, and it all comes down to access, whether that's Early Access to something he's created, Access to Pop-Up Meetups, or Live Feeds of his content. Everything in the Differentiable Features quadrant is built around the idea of getting closer to Gary's insight and information.

We actually see the highest willingness to pay (WTP) value ratios ever in this matrix. The chance to get time with Gary for 1:1 Advice is valued so far above everything else that even Peter almost missed it. Gary's fans are willing to pay more than a 50% premium for this level of access. While that isn't scalable for him or any business owner, it proves that access could very well be Gary's subscription value metric.

The idea of access shifts a bit in the Add-Ons quadrant but continues to show us how invested Gary's fans are in the content he creates. Providing behind-the-scenes content would satisfy those people who are willing to pay for an Insider Look, and offering Producer Credits is a great opportunity for expansion revenue. Both of these features speak to his fans' interest in what Gary makes and how he makes it.

If he wanted to, Gary could start monetizing the content he already creates by letting his fans in on his thought process even earlier.

Higher WTP makes aspiring entrepreneurs Gary's best choice for a subscription

“You should never average out your price. Gary could easily get $12, up to $15, a month by going after the people who truly care about his product and his brand.”

Gary's authenticity is the backbone of his relationships with his fans, and it is what appeals to the aspiring, young entrepreneurs who would be willing to pay for a subscription. That's not to say that current entrepreneurs don't value Gary's advice as well; they're just not as willing to pay for it as their less established counterparts.

So what type of entrepreneur makes up the target buyer persona for a Gary Vaynerchuk subscription?

We'll let the data decide.

Monthly willingness to pay for a Gary Vaynerchuk subscription based on age.

The 18-to-24 segment is where Gary has the biggest opportunity. They're willing to pay the most at an average of $11.98 per month. With the 25-to-34 segment slightly below that at $9.48, you might think the most logical monthly price would be around $10. But that would be too low based on this data.

If I were in Gary's position, I'd go higher than the average in the 18-to-24 range, pricing his subscription product at between $12 and $15. Focusing on the upper ranges for willingness to pay gives him a way to derive as much value as possible from the relationships with these customers. It also helps the subscription feel more “premium” to potential customers.

To build on this baseline, I created a Gary Vee, or GV Index. This scores a person based on their tendency to view Gary positively or negatively. Someone with a high GV Index score is one of Gary's hardcore fans, the type of person who consumes all of his content and has fully bought into his message. A lower GV Index score doesn't necessarily mean they dislike Gary; these people still listen to his message, but they also get insights from other entrepreneurs.

Monthly willingness to pay for a Gary Vaynerchuk subscription based on the GV Index.

Based on this data, even someone who is lower on the GV Index still has an increased willingness to pay over the general population. Someone with a high GV Index score, however, is where Gary should focus his efforts. Both Aspiring and Current Entrepreneurs with high scores have a significantly higher willingness to pay.

What's interesting is to see how much more Aspiring Entrepreneurs are willing to pay than someone who is currently running their own business.

We can tie this back to Gary's overall message, which resonates more with people who are just at the beginning of the entrepreneurial journey. His recommendations are targeted at the people who don't yet have a handle on how to run their business, which is why more seasoned entrepreneurs aren't as willing to pay. They've already gone through the process of figuring out their branding, their message, and their work ethic.

By targeting aspiring entrepreneurs with a subscription offering, Gary can leverage their higher willingness to pay and start building relationships with business owners at the very start of their careers. All of this works together to bring Gary towards his end goal of owning the NY Jets.

Takeaways

“The beauty of the subscription model is that, for the first time in history, we are putting the customer relationships directly into how you make money.”

Gary Vaynerchuk's hypothetical subscription business is a great example of monetizing the customer relationship and offers a few takeaways for anyone trying to get their own subscription started.

  1. You have to get close to your fans and foster strong relationships to make the model work. If they don't see value in whatever it is that you provide, their willingness to pay can't sustain any sort of company growth.
  2. Don't average out your price; go after the higher end. The people who truly care about your product or your brand will pay a premium for it as long as you have a strong relationship to build upon.
  3. Collecting data is important. When you know why someone cares about your brand and how that translates into monetary value, it's easier to build a pricing strategy that strengthens your relationships
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First impressions last a lifetime, just like misspellings, erroneously addressed greetings, and missing commas—that's why we highly recommend using editing tools like Grammarly to check important emails before you hit "send."

 

Since 2008, co-founders Alex Shevchenko and Max Lytvyn have quietly grown Grammarly into a freemium product reaching millions of daily active users, many of whom pay for the extra features that come with the Premium tier. That massive growth and wide-ranging customer base bring their own set of headaches, though, with a vague pricing page and weak persona targeting holding back sales. In today's episode of Pricing Page Teardown, Peter and I check out how Grammarly can raise their pricing game and continue saving the world from bad emails.

How much does Grammarly cost?

Grammarly offers two tiers: a Free plan that includes only critical grammar and spelling checks, and a Premium plan with advanced checks and writing suggestions for $29.95 per month. Paying quarterly brings the price down to $59.95 per quarter, or $19.98 per month—a hefty discount of 33%—and an annual plan is available for $139.95 per year, or $11.66 per month, a savings of 61% over the monthly rate.

Grammarly's pricing page is confusing

With users spread across a huge range of fields, from academics to English language learners, Grammarly has their work cut out for them to create a sales page that appeals to everyone. While well-designed, the page doesn't address specific personas, focusing instead on the features and writing checks included with the product.

What isn't clear, though, is what features are available in each tier. When I first looked at their pricing page, I was a little confused about what exactly Grammarly was offering. The pricing page does include a handy feature comparison table, but the page doesn't explain, for example, how “critical” and “advanced” checks are different. There's also no way of knowing which of the “Other Features” in the list just below the table are included in the Free or Premium tiers.

Grammarly's pricing page doesn't distinguish which features come for free and which are premium.

"People do that all the time, get better results, write with confidence. So, it's just one of those things where I'm a little bit like, 'Why is this different or why isn't this as obvious?"

Looking further down the page, we find a lengthy tabbed list of “Premium-Only Checks.” Grammarly once again falls back to placing the focus on features over benefits. The problem they're trying to overcome here is that the core benefit of the product—helping people communicate more effectively—is so difficult to quantify.

Grammarly's pricing page fails to link features to benefits.

Looking further down, the pricing table is clear—anchoring the discounted annual and quarterly plans against the monthly rate is smart, and they clearly emphasize the best value (and no doubt the highest-profit) annual plan. Once again, though, it isn't super clear what Premium users get in addition to the Free tier. It's great that Grammarly Premium helps me “level up” my writing and “reach the next level,” but won't the free version bring the same results? Tell me what I get in return for my 30 bucks a month—which, to be honest, isn't exactly cheap.

Grammarly's pricing feels high for a B2C-style product.

Even after the discount, the annual plan costs $139 a year—I think that could easily be raised to $150 without losing sales. We see this “Amex effect” time and time again. Customers land on the page and see how much they could save by going with the yearly package—for Grammarly, it's over 60%—and they're more likely to whip out their credit card and pay for the full year. If people are OK with paying $139, they'll be OK paying $150—it's the $10 a year that Grammarly's missing out on for no good reason.

Grammarly could benefit from better targeting

Everyone can benefit from better writing—it doesn't matter if you're running a marketing department or earning a college degree. And while Grammarly does a decent job of casting a wide net with their positioning, they have plenty of opportunities to improve conversions by targeting specific buyer personas and feature requirements.

The data backs this up—we asked 1,519 current and prospective Grammarly users across a number of different job functions how willing they were to pay for the product.

Grammarly customer willingness to pay based on job function.

Business roles that rely on written communications, like sales and recruiting, were among the least willing to pay for improved writing. That's surprising, and it suggests a gap in positioning.


"We write a ton of email and, look, our first impression to a lot of people is via email ... First impressions last a lifetime and if this can help you present yourself a little bit better, I'm all for it." - Peter Zotto, General Manager


Jumping back to Grammarly's pricing page, it's easy to spot the disconnect. Most of the benefits listed—like how 99% of students see improved grades or how 76% of users find writing more enjoyable—just aren't relevant to business folk. There's also plenty of room for improvement by targeting other high-value job functions, like product and engineering.

Digging further into the data, it's also interesting to see which features Grammarly's charging for versus which ones are available for free. Mapping the relative value from each feature against how willing customers are to pay for that feature, the Value Matrix shows some interesting areas of opportunity.

Grammarly willingness to pay based on relative feature value.

There's a lot that Grammarly's already hitting on the nose. Two big features in the upper-right quadrant—genre-specific writing style checks and vocabulary enhancements—are already in the Premium plan. People who like vocabulary enhancements—I'm guessing the majority of folks—are willing to spend about 20% more than the rest of the group, so making these features Premium-only is a great move.

Now over in the upper-left quadrant, the plagiarism checker could easily be turned into a paid add-on. It's a highly valuable feature—but only for a limited set of users, mostly students and other academics. By charging these users extra to unlock this feature—say, $50 a year—Grammarly could easily eke out some additional expansion revenue.


"You're playing a volume play when you have something like Grammarly."


Of course, there are two sides to every argument. While Grammarly has a huge opportunity in front of them to gain more sales, it probably isn't their highest priority right now—and for good reasons.

Grammarly shouldn't change a strategy that's working now

Taking a step back to look at Grammarly's overall acquisition strategy, their current approach to product marketing makes a lot of sense. Grammarly uses their Free tier to bring in as many free users as possible—then they offer the Premium tier to their hardcore users who rely on the service.

Grammarly is rolling freemium hard. The Free tier includes a ton of features, including the Chrome extension, Microsoft Office and Google Docs integrations, native Windows and Mac apps, and performance stats delivered via email each week. It makes sense, then, that their primary goal is to get users to sign up for a free account before upselling the most active users to the Premium tier.

For those hardcore users, springing for Premium—especially with the extra discounts for longer contracts and the frequent offers they send via email—becomes an easy decision.

Yes, Grammarly could improve their pricing page dramatically with better targeting and clearer benefits. But, given where they are in their growth trajectory, Grammarly's biggest barrier right now is awareness. How can they get more users to hear about them and try out the free service? It's not that revenue's an afterthought, but solving the awareness problem will have a much bigger impact on sales than tweaking their product page to go after a few percentage points here and there.

Grammarly's pricing model needs some work, eventually

Grammarly's in a great position. They have a huge base of freemium users, and they're dominating the market with a strong product.

Right now, Grammarly's pushing their current freemium strategy, which I think is the right move. But continuing down the path of having one big funnel for too long is a dangerous game. At some point, they'll need to switch their focus to improving how they monetize the service to keep the dollars rolling in.

From a pricing page perspective, Grammarly has done a poor job, and that's why I'm only giving them a 6.5. But with just a few small tweaks, I think they have a huge opportunity to boost sales when the time comes.

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Before we get to the formula for calculating revenue, let's make another revenue formula very clear:

Understanding revenue = understanding your business = growing your business

Revenue is the most fundamental metric for any company, and yet it is seldom understood perfectly. First, there is more than one type of revenue. Second, recording it and calculating it get progressively more complex as your business scales. And third, after you've calculated it, you must know what to do with it.

The future of your business starts with one simple equation.

What is revenue?

Before we get to the revenue formula itself, a definition: Revenue is the sum of all sales across a time period. Because this number often shows at the top of a company's income statement, it is called the “Top Line.”

It might be listed on that statement as revenue, sales, net revenue, or net sales. They all fundamentally mean the same thing, and they all stand for the most critical single figure in your company's accounting.

With that being said, not all revenues are equal. Literally. Being able to differentiate between types is vital, particularly with respect to net and gross revenue.

Net revenue vs. gross revenue

Misconceptions about net and gross revenue can significantly affect a company's income tax. Therefore, it's important to be able to distinguish between the two:

  • Gross revenue concerns all income from a sale, with no consideration for any expenditures from any source. If a retailer sells the latest in a new line of sneakers for $100, the gross revenue would be $100.
  • Net revenue subtracts the cost of goods sold from gross revenue. Fees for production, shipping, and storage, as well as any discounts, allowances, and returns, can all potentially contribute toward this cost. Net revenue from an item worth $100 that costs $25 to make would be $75.

Net revenue is often listed on an income statement at the bottom, hence the term "the bottom line.”

If your Top and Bottom lines already look like this, you may already be a master of revenue...

How to calculate revenue

Now, let's take a look at the revenue formula itself. There are two principal variants of the revenue-calculation formula. Choose which to use based on whether your business is product or service-based:

  • For a product-based business, the formula is Revenue = No. of Units Sold x Average Price.
  • For service-based companies, the formula is Revenue = No. of Customers x Average Price of Services.
A sample sales-revenue salculation
  • Last year we sold 1,000 game consoles for $350 per piece.
  • Sales revenue = 1,000 x 350 = $350,000
Why this simple calculation causes so many problems

It seems so simple, but incorrectly calculating revenue has hurt many companies. Keeping track of revenue manually (e.g., using spreadsheet formulas or inputting the values by hand) can cause untold problems:

  • Tracking revenue manually can quickly grow out of control. You must work out when you are entitled to payment for every subscription. Do you take it on billing? Do you take it incrementally over the course of a month of payment? Do you charge per unit of use?
  • Every revenue-affecting change in your business needs to be accounted for. For example, if you alter a pricing page, underlying spreadsheets will have to be changed to account for this. Discounts, refunds, new pricing, and enterprise tiers can all complicate the amount of data that needs to be reconciled at the end of the year.

The stuff of which nightmares are made... (source: alltheshopsonline)

If you're a subscription business, revenue can be even more difficult to calculate. Now it's time for another round of “vs.”

Recognized revenue vs. deferred revenue

Recognized revenue is simple; it is recorded as soon as the business transaction is conducted. Once the sale has been completed, you can record it — all of it — in your revenue records.

A subscription-based company regularly receives payment for goods or services that they deliver in the future. As the company has received money in advance of earning it, this is known as deferred revenue. Therefore, this must be recorded not as actual income but as a current liability.

Let's say a company offers a video subscription service for $8.99 a month, totaling $107.88 per year. On receipt of a yearly subscription purchase from a new customer, the company cannot simply record the entire year's subscription. Each monthly payment is recorded as it is delivered to the company, before being reversed and booked as revenue at the end-of-year cycle.

Cash is not revenue, and treating them as the same thing could be fatal for your business. Bear the difference in mind when calculating and recording your revenue.

What to do with the data

Calculating revenue properly is the compass by which you can orient your entire company. It determines the possibilities you can pursue (or, alternatively, what drastic evasive action you need to take to get yourself back on track). Use it to help guide the direction of your company in a number of ways:

  • Plan expenses
    • The basics. Based on revenue you can plan both immediate and future expenses (inventory, pay for employees and suppliers).
  • Determine growth strategies
    • Historical revenue data can help guide your long-term plans for growth: how much you can invest in R&D, and how much you spend upgrading property, plant, and equipment.
  • Analyze trends
    • Historical revenue data also means you can identify customer behavioral patterns and adjust operations around it.
  • Update pricing strategy
    • A clear picture of your revenue will help you recognize if you are charging too little. Are you making enough profit vs. expenses?
Increase revenue by improving your pricing strategy

Nailing your pricing strategy is a great way to increase revenue, and unlocking the data is key to first-rate pricing strategies. We can help you with that.

ProfitWell's Price Intelligently is an industry-standard pricing-strategy software that uses data to drive revenue. Our software and methodology combine our proprietary algorithms with a market panel. To that, we add a team of the best subscription and pricing economists in the space.

With it, your pricing strategy is revitalized by data and pricing becomes a core competency throughout your company. Moreover, your revenues will soar.

ProfitWell's rigorous and precise revenue-recognition service, Recognized, is also an industry wave maker to keeping track of your revenue. Understanding revenue can take time — time that can be used vitally in other areas of growing your business. With our rigorous, precise solution helping you keep on top of that precious formula, you can strike the perfect balance.

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If any unfortunate high school kids find this article, hoping it holds the secret to reducing their own personal rate of being burned by friends, these are not the burn rate calculations you're looking for.

If, on the other hand, you're the CFO of a burgeoning startup concerned with the speed at which your company is tearing through its funding, these are the exact burn rate calculations you need to get a handle on it. 

What is burn rate?

Burn rate is the speed at which a company is using up its cash reserves to fund overheads. It's also referred to as a measure of net-negative cash flow. If your company has cash reserves amounting to $250,000 with a burn rate of $50,000 per month, your company will run out of cash in five months.

You can't afford to ignore your burn rate

The fact that 82% of startups fail because of cash flow problems tells a story of just how often cash flow is taken for granted by young businesses. Understanding burn rate is key to both recognizing areas for improvement within your company and planning for the future. Especially if you're a funded startup, ignoring your burn rate is not an option.

Burn rate identifies necessary budget cuts

A company's burn rate can hint at overspending. And if you're running a startup, you're almost certainly overspending somewhere. The following three areas are likely contenders.

  • Branding: With so many branches and a varied ROI, branding can often be a point of overspend for new companies.
  • Vendor Relationships: Many young companies let inertia set in early with vendor relationships, even when rates need to be renegotiated or new partnerships sought out.
  • Office Space: Your lust for brand new office space may prevent you from enjoying it for long. Lengthy leases and slower-than-expected staff growth can turn a luxurious workspace into a burn-rate albatross.

Presuming you spot it fast enough, a high burn rate due to factors like these can be a blessing in disguise, pointing you toward more effective replacements for needless expenses. If your burn rate's up because of overspend on branding, consider organic means of building your brand profile instead of paid advertisements. If it's because you're getting a bad rate from a vendor, use it as an opportunity to shake things up.

And if the burn is coming from that corner office, it might be time to move back to the basement for a while.

Burn rate informs how much revenue is needed

Put simply, you can’t go bankrupt if you make more money than you spend. Beyond that, responsible growth and planning (and so the success of your business) are not possible without knowing how much money is left after expenses to reinvest in your company.

For funded startups, the relationship of burn rate to revenue is especially important. You'll have used funding cash to build the company in the early stages, with the aim to reach positive cash flow before the money runs out. Sometimes called “cash runway,” this metric tells you how long the money will last at your current burn rate.

You should ideally target having 12 months or more of runway at any given time, particularly in early seed rounds. That way, you can take the hit of an unexpected expense, a market downturn, or a complication with your product without feeling the heat of a sudden burn rate increase. Pilot has an excellent line of runway calculators.

Company A has prepared their cash runway fairly well, and was able to cope with a few unforeseen spikes in their burn rate during their first year. Their runway will not last much longer, though.

High burn rates ARE bad for business

Burn rate is exceedingly important for startups that are using venture capital finance to cover their overhead. And for all of the reasons above, the higher the metric, the worse shape a startup is in.

And burn rates aren't just for startups either; mature businesses can also find the metric useful as a means of measuring cash reserve, building and targeting later investments. Nevertheless, all this talk is purely academic if we don't have a sure handle on the way we actually calculate burn rate itself.

Companies A, B & D have the right idea, but Companies C & E clearly need a change of approach.

How to calculate burn rate

Burn rate calculation is not quite as tough as Fermat's Last Theorem, but a robust understanding of both the core burn formula and its variation is critical for business success.

Gross burn calculation

Gross burn paints a picture of how efficient your company is, regardless of revenues streaming in:

  • Gross burn rate = cash/monthly operating expenses

Having understood this basic formula for gross burn, you then need to incorporate your monthly overhead costs to attain a picture of your net burn. You can do this with the following formula:

Net burn calculation

Net burn shows the rate at which the company is losing money; if your revenues increase, your net burn rate will decrease.

  • Net burn rate = cash/monthly operating losses

Now that you can compute your burn rate, how do you know what rate is acceptable?

There's no one-size-fits-all answer to this question. All companies should maintain a burn rate that's sustainable relative to their revenues: if you're growing at a rate of knots and there's inbound interest in funding your company, then a slightly higher burn rate can be satisfactory. If growth is stalling, then you need to look at reducing burn.

You should expect a measure of fluctuation as you scale and as you deal with bumps in the road, but it should remain steady and in the shade of your revenue.

How to reduce your burn rate

Your burn rate is intimately tied to almost all commercial activity in your business. This means that, in case the burn needs to die down, strategies to reduce it can come from a number of different angles.

  1. Reduce churn rate: Even if your monthly overheads haven't been going up, if your company is churning customers like crazy, your revenue will suffer, and your burn rate will go up. An out-of-control churn rate is fatal. Use these tried-and-true strategies to keep it under control.
  2. Focus on core competencies: For companies young and old, trying to be everything to everyone can be a problem. Pursuing every idea that seems halfway decent will lead to funding that's spread much too thin, sluggish performance, and a high burn rate for low return. Return to your core competencies, pare down the features of your service, and stick to what's essential: efficiency is the fastest way to douse the flames of a high burn rate.
  3. Defer or reduce expenses: Which expenses aren't directly leading to more revenue? You could make the case that while the $700/month on gourmet coffee for the staff is going the distance and bringing in value, the rock-climbing scholarships probably aren't.
  4. Cut off products that don’t sell: Many companies offer products for the sake of variety, even if they don’t sell. Not all may be worth keeping, and the company may benefit from (even temporarily) cutting them.

Burn rate can be an anxiety-provoking statistic in the early stages of a funded startup. Maintaining a low burn rate allows all overheads to be accounted for and growth to be steady.

Consistently monitoring your burn rates is not only good for your company's bottom line; it's excellent for focusing your attention on areas in your company that need a rethink (growing churn rates, huge expenses, or ineffective products). If your company isn't feeling the burn, you're heading in the right direction.

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No company—no matter how massive—can escape the consequences of bad pricing.

The early 1990s saw the stumbles of giants like General Motors and IBM. In response, business management authority Peter Drucker published a diatribe in the WSJ on “the five deadly business sins—avoidable mistakes that will harm even the mightiest business.” Three out of Drucker's five deadly sins were related to pricing, meaning bad pricing is both treacherous and ubiquitous.

One of Drucker's sins is the practice of cost-driven pricing. Instead, he proposes what he calls “price-based costing”:

"The only sound way to price is to start out with what the market is willing to pay -- and thus, it must be assumed, what the competition will charge and design [your production process] to that price specification."

Figuring out how to price your product falls right in the Price Intelligently wheelhouse. And while Drucker is 100% correct that companies always need to start with customer willingness to pay, his solution of price-based costing doesn't ring true for SaaS.

The unique economics of SaaS products mean you can use willingness to pay in a different way to best monetize your customers.

SaaS is unique in its low marginal costs

The economics of a product are divided into two parts: the setup cost and the marginal cost.

  • The setup cost is the cost to make the first unit of your product.

  • The marginal cost is the cost of producing every additional unit after the first.

For a retail company that sells physical products, the setup costs are the costs of assembling the team, equipment, materials, etc. to make the first unit. The marginal costs include the materials and labor that go into making each individual unit, every single time you produce a unit.

Marginal costs are—and always have been—a huge limiting factor for traditional businesses that rely on physical production, and therefore have been taken into account when creating prices. In the fourteenth century, Ibn Khaldun presented some of the earliest ideas in commerce for adding value on top of marginal costs, writing that “labor and skill is added to techniques and crafts and then sold at a higher value.” In the eighteenth century, Adam Smith proposed using the division of labor to lower the cost per unit and gain larger production returns.

Marginal costs posed significant constraints on pricing—right up until the rise of SaaS.

Subscription software does not face the same manufacturing costs that traditional retail businesses face. According to many SaaS leaders and investors, the marginal costs of SaaS products is approaching zero.

Most of the costs associated with creating a SaaS product are encompassed in the product's setup cost, while the cost of one additional server for one additional customer is almost zero.

This means that marginal costs are nearly irrelevant for SaaS companies—so “traditional” ideas about economics of pricing need to be reinvented for the success of software businesses. Though they may have played a part in pricing for businesses in the past, using them to shape a SaaS pricing strategy is useless and steers you away from the things that you should really be focusing on.

Marginal costs don't have a place in SaaS pricing

As a result of the significant marginal costs for traditional retail companies, many companies use cost-based pricing as a knee-jerk reaction. It most obviously incorporates the traditional costs associated with production. First, a company starts with their marginal costs. Then they add an arbitrary profit on top.

This is the company-first way of creating a pricing strategy. It requires minimal effort from the company to ensure a profit and disregards the customers' perspective.

Drucker calls cost-based pricing a deadly business sin, and we agree. Cost-based pricing is inefficient on two levels:

  • Consumers don't care how much it costs you to make the product. Customers will purchase products because it helps them solve a problem or adds value, not because they want to help your company earn a profit. When you don't consider what the customer actually needs or what they're getting from your product, you're creating a disconnect because you're not tapping into the essential buying motivation that will drive your customer to your product.

  • The costs of servicing a SaaS customer are likely much lower than the value of the solution that you provide. If you simply add a profit to the top of your costs of doing business, you're likely going to leave money on the table and undervalue your product in the eyes of consumers who may be willing to pay much for a solution.

Though cost-based pricing ensures that you recover costs and make a profit in the short-term, it's a poor long-term business model because it alienates your market and has the potential to erode your product's inherent value. Thankfully, it's not the only way to enable profitability.

Drucker's solution: Practice price-driven costing

“The only thing that works [in pricing],” Drucker writes, “is price-driven costing.” His proposed solution—the inverse of cost-driven pricing—involves two components:

  1. Determining your market's willingness to pay

  2. Designing your product so that the marginal costs are within the market's willingness to pay

For SaaS companies, half of Drucker's advice applies. Determining your target market's willingness to pay is an important first step in any pricing strategy, for SaaS and non-SaaS companies alike.

It's important for SaaS companies to take the time to research their market because customer willingness to pay is often higher than companies realize. Wistia CEO and founder Chris Savage recounts his first experience with his market's willingness to pay that describes the same surprise that many founders feel:

"In an initial meeting with our first paying customer, I proposed our [Wistia's] solution for privately hosting their collection of medical training videos. Then, I slid a piece of paper across the room. That paper read, 'Lite, $99/mo—Medium, $200/mo—Heavy, $400/mo,' a pricing grid that I had handwritten an hour before the meeting. To my surprise, the stakeholder across the table picked it up, looked at it, and said, 'We'll take the best.'"

Your solution needs to match with a pain point and makes your customer's workflow easier/more efficient/more lucrative. Then you need to understand how much customers are willing to pay for a solution to that pain point.

SaaS companies don't rely on willingness to pay to determine marginal costs

Drucker's advice to design your production so that the marginal costs are within the market's willingness to pay is solid advice—for traditional businesses that manufacture their products.

Drucker uses the consumer-electronics industry as an example when explaining price-based costing. He cites price-led costing as the reason the Japanese consumer-electronics industry overtook its American counterpart:

  • The Japanese industry started with consumer willingness to pay and then optimized its process technology to minimize the marginal cost of each unit

  • The American industry added up the costs of production and then added a margin on top, and then were forced to cut the product's price, undergo expensive redesigns, and ultimately take the losses

This is a good case for price-led costing because producing consumer electronics involves significant marginal costs. The same principle applies to car manufacturing, which has high inherent marginal costs: Toyota gained a huge competitive advantage by redesigning the car manufacturing process to minimize marginal costs.

For companies that need to produce a physical product every time they serve a new customer, Drucker's advice lands: start with the market's willingness to pay and whittle down production costs (which will be non-zero) accordingly.

However, engineering your marginal costs based on your market's willingness to pay does not work for SaaS companies. “Whittling down” the marginal costs to fit within your market's willingness to pay range doesn't make sense for SaaS companies because there's nearly nothing to whittle down.

Willingness to pay is nearly useless—in this context. It's actually a very powerful tool in creating a strong SaaS pricing strategy, but it has to be adapted to the SaaS market and understood differently.

Price Intelligently's solution: Use willingness to pay to expand value

The low marginal cost of SaaS products is one of the major reasons why software is eating the world. The ease of software distribution means that it can be widely adopted on a large scale. By virtue of these low marginal costs and the distribution potential, this also means that a SaaS company can use their market's willingness to pay to expand, rather than to reduce:

  • Drucker's price-based costing for manufacturing is reductive. He proposes that once a company understands the market's willingness to pay, they constrict the rest of their business to fit within these economic confines. It's a race to reduce marginal costs as much as possible: the mentality is, “the floor's the limit.”

  • Pricing along a value scale for SaaS is expansive. A SaaS company can use its market's willingness to pay as a vehicle deliver varying degrees of value that are suited exactly to that customer's needs. This is a way to increase revenue through increased pricing rather than through decreased costs: the mentality is, “the sky's the limit.”

Create a value scale to expand

Without the need to fit marginal costs within the market's willingness to pay, a SaaS company can look for places to create value.

Imagine your market is willing to pay $100/month for a solution. Since it will cost next to nothing to service each customer, you'll have to deliver $100 of value to that customer in some form that justifies their price. This means you can create to meet customer's needs and fill in that value.

But it's likely that your market's willingness to pay will fall over a range of price points. This gives you an opportunity to engineer value that corresponds to each of these price points so that you can provide each different portion of your market exactly what they're willing to pay for.

The costs of each unit stay low as long as you increase the value you provide along the metric defined by the market's willingness to pay. As the customer's willingness to pay increases, you can offer the customer greater usage of your product. This allows you to capture and monetize a wide market and think expansively about your product and your company.

Harnessing willingness to pay is an opportunity for SaaS growth

You should always be looking to create more value in your product for your market. Building a SaaS company gives you an opportunity to capitalize on huge potential for creation and distribution without the traditional economic constraints of manufacturing that have been present for most of the history of business.

Harnessing the demands of your market is a major factor in a SaaS company's development. The most destructive business sin of all would be disregarding the importance of creating pricing that allows for, and encourages, growth.

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Both Busuu and Duolingo are huge players in the language learning market. Duolingo is arguably the more popular platform and is well-known for its fun and playful branding and gamified learning approach. Busuu, on the other hand, positions its brand as the practical learning alternative.

[video embed]

In this week's Pricing Page Teardown, Peter and I talk through these opposing strategies, focusing on which one is best suited for expanding into a more business-focused market. Busuu and Duolingo are both going after personal users at the moment, so whichever company gets a head start on this larger market share is largely dependent on their pricing strategies.

How much do Busuu and Duolingo cost?

Busuu starts out with a freemium plan, offering upgrades to premium based on the plan length. For three or six months, it is $8.33 per month; for 12 months, that decreases to $5.83; and for 24 months, it's only $5.41. Duolingo also starts with a freemium plan with the option to upgrade to Duolingo Plus at a flat $6.99 a month.

Busuu's pricing model will help them beat Duolingo to the business market

“Busuu's price scales depending on how long you sign up for, and I love it! Three months vs. six months at the same price is a really effective strategy that a lot of people don't think about.”

From an acquisition standpoint, both Busuu and Duolingo rely on the power of the freemium model. After that, Busuu definitely comes out ahead with their contract-length pricing tiers. Duolingo's one-size-fits-all approach doesn't give them nearly as much room to expand into the business market.

Busuu's value proposition and page design also do a lot to promote their practicality in the face of Duolingo's fun and playful branding.

On their home page, Busuu speaks directly to the value and efficiency of their platform, saying 'Speak a language in 10 minutes a day™', and adds in some social proof by calling out their 'global community of 90 million learners.'

These sentiments are what underpin Busuu's unique value proposition. And you can see that carried through to their Busuu Premium pricing page as well.

The features they call out are all focused on showing potential customers how practical and effective their platform can be. This is especially true when you consider their offer of native speaker conversations, certificates, and personalized study plans.

But Busuu doesn't differentiate their pricing tiers based on these features; they use contract length instead.

This is a great tactic because it gives Busuu a way to show the Most Popular and Best Value plans, as well as drive potential customers towards an annual package. Annual pricing, in general, helps potentially decrease churn and keep average revenue per user (ARPU) high.

Duolingo goes for a much simpler and straightforward approach, with a home page that plays up the freemium aspects of their platform.

Their 'Learn a language for free. Forever.' value proposition is not as specific as Busuu's and only showcases one aspect of what Duolingo's overall platform has to offer.

You don't get much more on their Duolingo Plus pricing page either.

The 'Boost your learning.' statement doesn't provide any qualifying information about why a customer should pay $6.99 a month for this plan. You only get to that by scrolling lower down the page.

Their biggest selling points are No ads and Offline courses, which according to some data we'll talk through a bit later, isn't the best position to take. That said, their page design is a lot more colorful and fun than Busuu's, which is on brand for an app that's trying to gamify their user's language learning.

That gamification is what Duolingo is known for, and likely one of the main drivers for their growth, at least in terms of their mobile app. But if they want to expand out of the personal market and appeal to more businesses, they need to switch up their positioning.

If you're asking yourself why either company should make that change, take a look at this data from current and prospective customers about their willingness to pay:

Business use cases have more than twice the willingness to pay than personal use cases. Both Busuu and Duolingo currently sit squarely in the willingness to pay range for personal use cases, with Busuu priced higher in their three- and six-month tiers. Using these tiers, they can more easily move up towards the $14.58 average we see for business use cases.

At $6.99 a month across the board, Duolingo would have to do a lot more restructuring of their pricing to meet what businesses are willing to pay. And in doing so, they'll potentially alienate some of their current user base, who see it more as a game than a learning tool.

Localization should be a part of everyone's pricing strategy

When we dig into the data a bit further, interesting opportunities arise for both companies in terms of willingness to pay. Probably the most important of those opportunities is related to price localization, which is when you tailor your price to the willingness to pay of a specific area.

“Localizing your price points is actually a really strong growth lever because the demand and the cost of living are going to be different based on the country or area your customers are in.”

Of the 2,108 current and prospective customers we surveyed, France/Germany and South Korea definitely have the most potential.

Using the $6.31 Overall - Personal willingness to pay as our base, France/Germany averages more than a dollar higher at $7.44, and South Korea above that with an average of $8.78. If they're not doing it already, these two companies can make a direct impact on their revenue just by localizing price for a few specific countries.

Busuu and Duolingo also have a bit of an opportunity when it comes to language proficiency. Right now, it looks like they're only really targeting beginners.

If they continued to target beginners, both companies only have the opportunity to raise their prices above the $7.49 average, up to about $11. While that is higher than both currently offer, it doesn't consider any other segments. While there's a bit of a dip when it comes to Intermediate speakers, willingness to pay increases again for Advanced language proficiency.

Both companies could easily create a premium or enterprise tier that speaks directly to the needs of these Advanced language learners, thereby justifying a higher price tag for Differentiable Features.

Busuu does this somewhat already, offering their premium package with Native Speaker Conversations and Personalized Study Plans, but their pricing doesn't match the uptick in customer willingness to pay we see in this value matrix. They could easily break these out into a higher-priced package for Advanced learners and target them with specific messaging. Busuu also misses the opportunity for an Add-On with their offer of Official Certifications.

Duolingo is behind the curve here as well, and more so than Busuu. They differentiate their Plus plan with the offer of No ads, Progress Quizzes, and Offline Mode. An ad-free experience isn't something that many people are willing to pay for, and the quizzes and offline offer are pretty much table stakes for a language learning app. Duolingo will need to do a lot more to catch up with Busuu if they're going to capitalize on this feature preference.

Duolingo needs better positioning to compete with Busuu

While both companies are doing well in the personal market, there's work to do if they want to expand into businesses. That's part of the reason both Peter and I would go for Busuu as a user and investor. Busuu has a better grasp on their strategic positioning and has obviously put a lot of thought behind their product marketing.

That's not to say that Duolingo hasn't, it's just that their playful branding and gamified learning don't really appeal to us, and would be a harder sell as a business use case.

There's definitely work to be done by both companies, but in the long run, Busuu definitely has a lot less to do to expand their product offering into the larger, business-focused market.

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And we back, and we back, and we back. 

Five seasons and we're still cranking. We are pumped to announce the season 5 launch of Pricing Page Teardown, as Peter and I continue tearing down the pricing pages and strategies of subscription spearheads from all over the space. We get fancy with teardowns from Grammarly to GaryVee and Quilting vs. Knitting of the Month Clubs. Find out who comes out on top by signing up here to get episodes straight to your inbox each week.

 


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But I want it now. 

Too eager to wait for season 5's drop? You're in luck. Take a look back here at some of our favorites from last season.


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Pricing Page Teardown: WoW vs. Fortnite

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