Taking the pricing plunge
David Peterson

First, Happy Rosh Hashanah to those who are celebrating!

Now, onto the newsletter.

Recently, I’ve been speaking with a lot of founders about pricing, so I thought I’d write up a few quick thoughts based on my experience experimenting with pricing over the years (most recently at Airtable).

The first thing to realize is that no pricing strategy is set in stone. Most companies are constantly optimizing their pricing and monetization strategy.

Now I don’t mean to imply that these companies are changing their price points that frequently (though this happens more often than you might realize for companies selling into the enterprise!). But they may be changing their packaging, experimenting with add-ons, altering their price points for a specific customer segment or a specific geography, testing out discounting…the list goes on.

In other words, you’ll be spending the rest of your life experimenting with pricing so you may as well get started. So, let’s take the pricing plunge!

To build your v1 pricing strategy, there are two primary questions you need to ask:

First, who are you selling to?

You probably have a pretty good idea of who your ideal customer is, but let me push you to be even more specific.

You might tell me you’re selling to SaaS sales leaders, to which I’d say, no, you’re selling to sales leaders of SaaS companies with revenue between $1-$10M, $10 -$50M, $50-$100M and $100M+.

Each of those segments will have a different willingness-to-pay, different features they care about, and different sales processes that you will need to master. Choose one to start.

Second, what will you charge for and how will you charge for it?

Ideally, you should charge for what your customer values in your product. Perhaps you’ll charge for seats, or messages sent, or contacts, or something else entirely. Figuring this out can be surprisingly challenging, but Patrick at PriceIntelligently has published a great article here on identifying your product’s “value metric,” which is an excellent place to start.

How you charge is a function of your value metric and how your customers want to buy your product. We all love ARR, of course, but there are monetization models other than subscription. Perhaps you can leverage dynamic pricing (that is, flex price based on supply and demand). You may be able to take advantage of auction-based pricing, especially if you run a marketplace. You can also go usage-based with a “pay-as-you-go” model. And finally, many companies take a hybrid approach, for example, charging a platform subscription fee and then charging for usage on top.

Ultimately, your goal is to find a monetization model that aligns the value your customers get from your product, with the way your customers want to buy your product (e.g. do they demand predictability or not?), with your plans for growth and expansion over time (e.g. does this model make expansion easy or hard?). Threading that needle can be hard, but finding the right value metric and monetization model is critical to setting your business up for growth.

I’ll leave you with one final pricing thought. At the beginning, what’s more important than the specific price is the price range.

For example, Airtable charges $24/seat. Do you want to know why? Because it was 3–5x the price of the other bottoms-up darlings of the day (Dropbox, Evernote, Slack). We were determined to prove that we were in a different range than those products.

Now was $24/seat the right price? No. Who knows. Maybe? It doesn’t matter. At $24/seat, we had a whole different set of GTM options available to us than a company selling their product for $5/seat. And at $24/seat, our path to $100M in ARR looked a whole lot different than that of other companies in our cohort.

In other words, your price range reveals something fundamental about the kind of business you’ll be able to build. Our ability to charge that price was evidence of something critical that we needed to prove to ourselves and to investors. Make sure you set your price range accordingly.

David

EVENTS

Jan 25 / Lessons Learned From Investing Early in Over a Dozen SaaS Unicorns Including Salesforce, SuccessFactors, Box, Gusto, SalesLoft, ServiceMax, Veeva, Bill.com, Doximity, Yammer and Zoom Among Others
Jason Green, Founder & General Partner, Emergence Capital

Feb 15 / The Evolution of Collibra’s Product Positioning & How They Created a Category
Stan Christiaens, Co-Founder & Chief Data Citizen, Collibra

FROM THE BLOG

How to Think About Revenue Quality as an Early Stage Founder
What does “quality revenue” mean when you don’t have much revenue at all?

It’s Not All About Bottoms-up
Two recent trends indicate that we may finally be past the mistaken belief that bottoms-up is the only “fundable” business model in town.

Don’t be Fooled by the PLG Mullet
How to know if you should be building a PLG Now, PLG Later or PLG Never company.

PLG Now, PLG Later, or PLG Never
Why there is no helicopter shortcut to the summit of Mount PLG.

EUROPE & ISRAEL FUNDING NEWS

Israel/Industrial. 4M Analytics raised $30M for its unique technology that provides a subsurface utility map with a complete, accurate, and up-to-date subsurface-infrastructure database in the US.
UK/IT Infrastructure. Hadean closed $30M for its distributed computing and infrastructure computing stack looking to power the metaverse.
Switzerland/Financial. Ledgy raised $30M for its equity management software for startups and businesses.
Israel/IT Infrastructure. groundcover (an Angular Ventures portfolio company) raised $20M to help companies monitor the performance of their cloud apps.
UK/Payments. Sequence closed $19M for its “low-code” modular software product so companies can build products with elements of billing, payments and revenue data.
UK/Industrial. Disperse closed $16M for its artificial intelligence-based construction site monitoring solutions to help project managers track work and capture data from building sites.
Austria/ERP. Prewave closed $11M for its AI-based supply chain risk intelligence platform.

WORTH READING

ENTERPRISE/TECH NEWS

What is eBPF? eBPF may not be mainstream yet, but given how many companies may benefit from this technology, that soon may change. So what actually is eBPF? “eBPF allows you to run event-driven programs inside the Linux kernel. Programmers can run custom bytecode inside a sandboxed kernel environment without directly modifying the kernel source code itself.” Its primary use cases “fall into three overarching buckets: networking, observability, and security.” One of the best applications of this technology we’ve seen thus far is in our portfolio company, groundcover — which recently raised their $20M Series A round and launched on Product Hunt. They have figured out how to use eBPF to help teams monitor their K8s applications effortlessly, at scale. Working on an eBPF-related project? Send us a note, we’d love to hear more.

IPO drought. While 2021 was a record year for tech IPOs, with many highly anticipated companies going public, 2022 has officially been “the longest US tech IPO drought in 20 years”. Given their inherent risk profile, IPOs have been especially hit hard in the market downturn with many recent IPOs seeing their valuations plummet. “The tech-dominated Nasdaq Composite has fallen nearly 28% this year compared with a drop of just over 19% in the S&P 500, while the Renaissance IPO index, which tracks US companies that listed in the past two years, is down more than 45%.” What will it take for tech IPOs to make a comeback? According to Matt Walsh, head of tech equity capital markets at SVB Securities, “there’s a tremendous amount of uncertainty in the market right now, and uncertainty is the enemy of the IPO market. I think we’ll need to see some stabilization in the outlook and investors stepping back in to buy existing public securities before they’re willing to move further out on the risk curve and buy tech IPOs.” Until market stability and investor demand returns, this drought may have no end in sight.

Deep tech funding slows. As the venture investments pullback continues, “tourist” investors who dabbled in deep tech during the frenzy of 2020 and 2021, seeking outsized returns, are now pulling back from the space — going back to investing in sectors where they feel more comfortable. By the numbers, in deep tech sectors like robotics and quantum, funding to VC-backed startups in 2022 has been less than half the total amounts of last year. For many large funds, deep tech is back to being “on the fringe”.

HOW TO STARTUP

The art of pre-seed storytelling. Marc Schröder of MGV wrote a great piece on the minimum founders need in order to secure pre-seed funding. The entire post is worth reading, but the key point he touches on is the importance of the art of storytelling. “Before there’s a product and a sales team, there has to be a story that people can rally around. Oftentimes, VCs will be assessing the storytelling of a founder through the lens of a customer, other investors, employees and advisers. Can this founder convince all of these stakeholders that their vision is solid and that they’re able to deliver on the promises they are making? This storytelling isn’t just product-focused either, it’s about combining the personal life experience of the founder into the ambitious vision and eventually tying it all into the product roadmap. Succeed at sharing that compelling vision and sprinkle a bit of network validation on top, and you’ve got a recipe for raising early-stage venture funding.”

HOW TO VENTURE

VC dry powder. The Information recently released a piece on how VC firms’ $290B in dry powder would revive startup funding — “startup founders should expect a tidal wave of venture capital interest next year as a record level of dry powder pressures VC funds to step up their investment pace”. However, this may, unfortunately, be an overly optimistic take. As David Sacks points out in the latest All In episode, there are a few factors at play which would reduce the amount of actual VC dry powder available… 1) There is typically a long lag from when a VC fund is raised to when it’s announced. So while these funds were announced in 2022, they may have been raised in 2021. 2) Many firms may have partially deployed their funds, prior to publicly announcing the fund itself… Thus, we don’t really have an accurate sense of how much of the “$290B of dry powder” has already been deployed and how much was raised before the downturn. Sacks warns that founders should be cognizant that the market will likely remain tight for some time.

PORTFOLIO NEWS

Steadybit announced the general availability of its reliability and chaos engineering platform along with $7.8M in seed funding led by boldstart ventures, with participation from Angular Ventures.

Datos Health was selected as a top five emerging health IT solution for improving outcomes by KLAS Research.

Forter appointed Eran Vanounou as Chief Technology Officer and was deployed by Save the Children Australia to thwart donation fraud.