Patrick McKenzie is the founder of 4 software companies, two of which sell SaaS - Bingo Card Creator and Appointment Reminder - and currently works on Atlas at Stripe. This talk was moderated by Upekkha Partner Prasanna Krishnamoorthy. Edited transcript.
Why SaaS founders anchor low: 00:38
Customers pay you for in-built expertise not software: 3:53
Talking about value: Marketing & sales : 9:37
Here’s why SaaS Founders anchor low
So I've had this model - Charge More, Charge More, Charge More for many years. And despite having this motto, at the point when I founded Appointment Reminder, I started with three pricing plans - $9 a month, $29 a month and Call me! And when I put the $9 up on the website, I thought this is too low; it is tough to make a business on $9 a month, but maybe there are some bloggers who will like it. And it would get good press from them.
I fell into the same trap that many startup founders have fallen into before. And that trap is that the people who are willing to pay consumer grade price points, like for example $9 a month, are terrible businesses to have as customers. They disproportionately have a high churn rate, both because they are often extremely constrained in what their business can pay for - example freelancers - or because their businesses fail very frequently.
If the expected lifetime of a business is six months, then your expected lifetime of a SaaS contract with them is three months. And it is very difficult to make a business on $27 of revenue.
So then why do so many founders fall into this trap even when we know better. I think there is a fundamental impulse in the engineering community that says when I'm building software as a service, the majority of the value is created by software.
As an engineer, I consume a lot of fabulous software. And it is either entirely free to me or so super cheap enough to be meaningless. My entire stack for Appointment Reminder - Rails, MySQL, Ubuntu - all of that is given to me for free. And here's some of the best software ever written in the world. And then I have the audacity to charge for my tiny little bit of Rails code on top of it. And then, the actual things that software developers do pay for - developer tools - are extremely low priced relative to the value that they get from them. So I think that is the biggest reason why we anchor low.
Rethinking value: Customers pay you for in-built expertise not software
There is a reason why this is a disconnect in how users perceive value from us. And I don't think the software community understands this well enough. In Software as a Service, a lot of the value comes from the service part of it to a degree which is under-appreciated.
The software itself includes domain knowledge, which is often superior to the domain knowledge that the operator of the software as the customer has. When I was writing code for Appointment Reminder, I had thought about the challenges of appointment scheduling more than almost anybody in the world. Certainly almost anybody who worked at my customer domain perhaps.
If you were simply the receptionist at a doctor's office, you would have made a lot of appointments. But how much have you thought deeply about the lifecycle of the appointment. I had thought much more than that.
So I knew all the things that could go wrong for an appointment, how they would have to be rescheduled, the likelihood of people forgetting about them, etc. And I took those learnings and encapsulated them in the software. And so you could have done the scheduling on a pencil and paper and done the phone calls via phone to remind people of the appointment. But if you hired Appointment Reminder to do that for you, you got not just that capability, but that sort of encapsulated learning of someone who is irrationally obsessed with that one little problem.
That is one of the fabulous things about the SaaS model; I think it allows the world to elect an expert who should obsess about one little part of the economy more than anyone else would find rational, and make their services available at an extremely reasonable price for the world.
So I tell people, if you have a Software as a Service offering for, for example, travel reimbursement for employees, you will know more about travel reimbursement at the end of three years than anyone in the world does. The only folks that could compete with you are the folks that have been running an internal travel reimbursement desk for 50 years, and they've been doing just that job and not been promoted out of it for 30 years. And companies are very willing to pay for expertise.
Have conviction in the value you have to offer
I tell people that you shouldn't be comparing your SaaS price points to other subscription offerings. For example, don't compare it to the price point for Netflix. I don't actually know what it paid for Netflix, I think it's about $12 a month, but $12 is far less than what a business spends for anything. Even if it's just a business that has one location in the United States. I tell people $12 a month is literally less than we spend on toilet paper.
The things that you should be comparing your price against are - what does the business spend for professional services? What do they spend for lawyers, for accountants that they are hiring. Because they are experts and because they consistently do work up to a particular standard. And that those numbers in the United States and other companies in countries with a similar purchasing power are extremely high.
Like on an hourly basis in the United States, a company would expect to spend, at the absolute low end, $100 an hour for a lawyer. And next to that, what is $50 a month, what is $200 a month, what is $1,000 a month for a SAS service - quite reasonable.
The other anchor that I often use a lot when telling people to charge more is that if you have an office in the United States, and you don't want your employees to have to take the trash out of the office themselves overnight - because you think your employees time is more valuable - you can have a trash company come in and clear out the office waste bins for you and take them off to the trash. And that will cost you $800 a month.
We as a community have to develop sufficient confidence that we're producing value for businesses. So I would encourage you to have that level of conviction that the thing you are doing is producing value.
Marketing & sales: what is the value story you tell the customer?
Taking the case of Appointment Reminder, my pricing page - by the way, never call your pricing page, the pricing page, it can be at slash pricing. But there are better headers to put on the top of it. Here was my header - “pays for itself with one saved appointment". And then I have the standard SaaS three-pricing grid with the name of each plan targeted at a business type. And the numbers against those business types were designed to be less than the value of one appointment for them. So the one that I attempted to sell for two hair salon - a haircut at a salon in the United States, starts at about $60 - and so I was asking them for $50 a month. And so if one appointment comes in that wouldn't otherwise come in. They're good for it.
Doctor appointments in the United States are unfortunately, extremely, extremely expensive. The lowest possible price point for medical providers was just under $200. And it is virtually impossible to see a doctor in the United States even for a minute and pay less than $200. Well, it's possible to do that, but it is impossible for the doctor to sell services for less than $200. They might be selling the services to you or to a combination of you and an insurance company or strictly to the government. But someone will pay $200 if the doctor is involved. And so that was the pricing anchor I used.
How I used my expertise to get clients to pay me repeatedly
So one thing I did is - consider if you are a professional services business and you have three service providers who work at 75% utilisation, and they're fronted by a front office, and let's say their average appointment is an hour. Just backtracking the math there - that means that 75% utilisation means they see probably 30 clients a week, three providers, that's 90 clients a week, call it 50 weeks a year, so they do 4,500 appointments in a year.
And so if the front office is absolutely on top of their game, they will have 4500 opportunities a year to learn how to schedule appointments better. I had many, many, many more than 4500 appointments here. And I have enough data to get insights on what is the email response rate, if we email first versus what is the response rate if we SMS first, versus what is the response rate for phone first, or what is the response rate if we do an SMS, merely the day before and the day of versus if we do it three days before and the day of etc. And having played with that over time as the default option. And seeing which one was most effective for my users. I had the default setup so that we're going to send a text message first, because text messages get acted on the most frequently and we have the best results for that, then we're going to send an email, then we're going to upgrade to a phone call only if they don't respond to the first two, because customers complained about phone calls the most. But they never complained about texts.
That's the kind of thing that you would know if you cared more about appointments than anybody in the world cares about appointments, but that you wouldn't necessarily know even if your business was doing a very high number of appointments a year.
Also, if you think of both the type of person who was the operator for this business, a receptionist, they have other things to do besides just keep the calendar up to date. They have to greet people when they come in, they answer questions over the telephone. In many cases, they're responsible for doing billing or aftercare or marketing for the office.
And so I was able to successfully tell them, you don't have to feel threatened that I'm taking this part of your job away. Because this is not the way that you produce most of the value for the business. It's just something you spend a lot of time on. I will do this thing that is low value, but high-time cost much better than you will. And you will have your time freed up to do the things that are high value right now. And then the next time you have a conversation with your employers, you can say, Hey, I feel like I've been really valuable to the firm this last year, can I get a raise, and they'll be more inclined to give you a raise than before.
That, by the way is a tactic for every b2b SaaS company, you should have features that are explicitly designed to get your user a raise.
And so I wrote a line in my code that literally said - “get the user a raise. Ruby”. Because I wrote in the Ruby language. At the end, I would just email someone every month with an estimate of how much money we saved their company, and gave them a way to download it in a PDF file. I chose PDF deliberately because I thought a PDF is something which is easy to forward to your manager and say, ‘Hey, take a look at this. I saved us $2,000 this month because I pay Patrick $200’. I wanted to give people as many reasons as possible to continue paying me $200 and getting them a raise would be a good reason.