“There’s no such thing as the perfect price—but there are ways to get it wrong.” —Ian Clark, founder of Crescendo Consulting Group
From defining a business model to advising on pricing and packaging, Ian Clark has spent the last decade helping teams figure out how to monetize. Based on his experience in pricing as a consultant, software engineer, product marketer, and investor, he has seen both startups and public companies struggle with similar challenges: “Should I be charging for subscriptions, or are usage-based models a better fit? Am I even tracking the right metrics in the first place?”
In a recent Founders + Leaders conversation for CEOs and revenue leaders at GGV portfolio companies, Ian tackled some of those frequently asked questions. Read on for his insights on monetization strategies that work, why customer segmentation matters, how to conduct qualitative interviews with customers, and more.
Based on Ian’s experience advising startups like Evernote and ClassDojo to public companies like LinkedIn and Cloudflare, here are some basic rules of thumb:
Remember: The biggest thing is to shift “from thinking about the price level (is it $9 or $10?) to thinking more about the price model, which is how the packaging and the pricing work with regard to the customer segmentation,” Ian says. “So pricing is not actually about economics and elasticity … It's actually customer segmentation in disguise, which is how can we better quote different price points and different packages to different pieces of the market? That's really the magic about pricing strategy.”
Ian breaks down the seven components of monetization:
Pro tip: Better monetization has 8x the impact on revenue over acquisition–and 2x the impact on revenue over retention/renewal.
The golden rule of packaging, according to Ian, is your packaging should reflect your market segmentation.
Pro tip: For free trials, it’s easier to change from three months to six months, but “it’s a massive endeavor to change from freemium to a time-based free trial,” Ian says.
Ian points to two common methods to assess a customer’s willingness to pay.
Van Westendorp: Using this unaided direct pricing method, you can generate a demand curve for a single customer by establishing:
Gabor-Granger: With this aided direct pricing method, you can offer specific prices and ask if a customer would buy it (typically up to three times). Using the yes/no responses, you can then generate a demand curve based on the individual price points.
When your pricing is public, the bounce rate is typically much lower. “That’s where you should spell out the value prop,” Ian says. “You’re effectively buying customer attention. Consider keeping your pricing as private “if you plan to do a lot of negotiation or have an issue with sticker shock.”
To tease out a customer’s willingness to pay, Ian recommends focusing on value—not price. As Ian jokes, “it's a little bit like dating where you want to start off with questions like ‘Tell me about yourself.’ And then at the end you say, ‘And how much money do you make?’
Other tips include:
Ian recommends that startups complete monthly studies, though you likely won’t do the same study each time. Instead, consider looking at different facets of the market with each study—professional services, students, or a deep dive of your freemium product.
“Usually I cycle through primary research (which is customer interviews and surveys) to data analysis (where we’re doing some internal work) and to experimentation, where we’re often doing some sales testing,” Ian says. “If you do that monthly, you’re going to see the market changing before it happens.”