Jon Buda and I are getting closer to launching our SaaS.
So, we need to figure out our pricing. We realized a lot of pricing depends on who you’re selling to. Should we sell to startups? Should we aim at the enterprise? Hobbyists?
We reached out to Patrick at Price Intelligently to help walk us through the pricing process.
During our chat, Patrick said:
“In your early stage two things are essential; if you can nail these two things (even if you get everything else wrong) you’re typically fine.”
According to him, the two things to focus on are:
- Your customer focus
- Your value metric (I’ll talk about this in a future post)
Choosing your target customer is incredibly important. “From the beginning, you want to figure out who is going to be a sustainable, profitable customer,” says Patrick “it’s going to determine how you do your marketing, and also how you’re going to structure your pricing.”
Patrick helped me realize something:
If you’re bootstrapping, you shouldn’t sell to beginners, new startups, or hobbyists.
When you’re building a company, there’s an inclination to sell to folks who are “just getting started:” new companies, people building their skill set, beginners. After all, they need the most help, right? But increasingly, I see this as a trap.
Why?
“Selling to your startup friends probably won’t be profitable,” comments Patrick. Startups and beginner customers might be easy to attract (they sign up for free newsletters, guides, and free tools), but they have three significant downsides:
- They’ll use free tools and resources if they can.
- They don’t have the same capacity to pay as experts do.
- Most new startups fail, so they don’t make stable, long-term customers.
Simply put, it’s hard to build a sustainable business for beginners. They can’t pay as much, and they don’t stick around as long, which results in a lower lifetime value.
In B2B, it’s the intermediate to advanced companies who need our help and will pay you for a long time.
They’ve proven they can survive the startup stage. But now they’ve exhausted all of their free resources, and they’re starting to plateau. To get to the next level, they’re going to need outside help, and because they have revenue, they can afford to pay for it.
“Targeting beginners requires you to do more work on the periphery of your core skill set. When you get hyper-focused on what you do best + combine it with supporting intermediate/advanced businesses, you love your work and get paid well for it.”
– Val Geisler, valgeisler.com
The best target market is “professionals who are already heading in a specific direction.” They’re in motion towards a specific goal.
For example, my friend Brennan’s company (RightMessage) is almost at $20k in MRR. They’ve proven they have traction. My guess is their first milestone is to reach $5 million a year in revenue.
To accomplish that goal, they’re going to need specific assistance. Things like:
- “Help me increase sales by 30%.”
- “Teach me how to podcast so that I can reach a bigger audience.”
- “Take away my downtime.”
- “Equip me to design better onboarding flows.”
They’re going to hire outside help to assist them with these things; to help them get to their goal.
One way to visualize this is a delivery truck driving towards a destination:
Along the way, a rockslide covers the road:
Who are they going to call?
(If you yelled out ROCKBUSTERS, you and I could be friends)
To me, B2B products and services we build are a lot like that. We’re removing obstacles for businesses, helping them achieve their goals.
But targetting the right customer is critical. For example, the delivery company has already proven a few things:
- They’re investing heavily in their equipment (the delivery truck).
- They’re investing in their personnel (trained truck drivers).
- They have high-value customers who can pay them to haul big loads over long distances.
- They’re committed to building a company for the long-term.
Contrast that with a solo bike courier who is just getting started:
The biker courier is sending signals that show they probably wouldn’t make a great customer for a B2B business:
- They have minimal investment in their equipment (bicycle).
- They’re likely serving low-value customers (short routes, small payments)
- They probably don’t see themselves being a biker courier for 5-10 years.
There are all sorts of services the delivery truck company will pay for:
- Nitrous injections, to give their engines more power.
- Roadside assistance, to get the truck back on the road.
Logistics software, to map the fastest routes.
Here’s the crazy thing: you and I could invest the same amount of energy building products for the truck company as the bike courier.
Sure, we can sell the cyclist PowerBars (for energy), roadside assistance, and a mapping app, but they don’t have the same capacity to pay.
As product people, we need to focus on the right customers. Let’s not invest in customers who might not be around in 6 months. Instead, let’s build things for professionals that help unlock their potential.
Hope this is helpful to you!
(Feel free to leave a comment below if you'd like to discuss this article further)
Cheers,
Justin Jackson
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Reminded me of "Have Rich Customers" rule from Sequoia Capital's "Elements of Enduring Companies" article. Seems like a good extension of the idea — not just go after markets that have businesses that can pay you a lot, but also have those rich customers from Day 1.
For reference: https://www.sequoiacap.com/article/elements-of-enduring-companies/
@anant90 that's a great post! Hadn't seen that one. 👍
Haha. That's a good one too. 😉
RIP Blockbuster :_(
This hit home for me. I'm always wanted to market to startups because I love the startup world so much, but I have to remember who has money and who doesn't!
YES. We also need to ask ourselves:
To have a successful business long-term, you need customers to stick around. We can't keep finding new customers every 6 months!
Awesome post, the analogy with the truck and the bicycle make it very clear. I think this is a trap many of us startups fall into: selling to people that are similar to us, even though that target group may not be the ones we should go after.
That's very true. I can't block startups for signing up to my service, but the wording and pricing helps to filter them out. However, some of them still subscribe, but they are not good customers. They have very high churn rate, are very price sensitive and expect a lot of support.
Even if it's nice to talk with the founders(they are friendly and open), it doesn't help your business.
This has been my experience as well. New upstart companies have no revenue, so it's hard to justify high monthly expenses. (This is true for my new startup too)
Damn this is solid advice! Thanks for sharing
I listened to the podcast and I got a slightly different impression from Patrick's point of view. I hear you on the fact that we need to look beyond our social circles and actively seek out high paying customers. But totally excluding a segment might be a bit extreme. I thought Patrick was making a point more about applying segmentation by designing value metrics with the difference between payer profiles in mind. He talked about not excluding these low paying customers - his freemium ProfitWell product scoops up low paying customers and keeps them around so they can convert later when they can afford to upgrade or hire his PriceIntelligently service. This is also a standard practice in design agencies, it's standard practice to price people based on what they can pay. The same designer will charge a small business $100s to design a logo but charge a global corporation a million. My takeaway from the conversation wasn't that we should serve less customers, but that we should be mindful of how much value we can extract from each segment and ensure we're not over-serving low paying ones.
"The same designer will charge a small business $100s to design a logo but charge a global corporation a million"
I believe this does not happen at all. A designer that targets global corporation will pass any job that would pay 10x less
Different people will do different things. I'm not trying to predict what every designer would do, I'm just pointing out that it's ordinary for service industries to practice segmentation. But I'm not making this up the AIGA recommends that professional graphic designers price based on the customer.
Great article Justin! Aren't you targeting people starting businesses (startups) with your Idea Validation checklist product? What made you decide that use case is an exception to the rule?
@crowe this is a recent self-discovery. ;)
A few things I've observed:
Makes sense :) Thanks!! BTW - love your
Build Your SaaS
podcast!Startups have people who are intrinsically more open to new relationships because they're starting out. When you're first starting, how do you get the busier people of larger companies to talk to you to get them to use your product/service? I'm struggling with that right now :(.
Not sure I agree with this. I've had a significant share of my profits come from startups and people who are bootstrapping. You build a dirty MVP to prove viability in the marketplace and when it takes off which it has on occasion, you're now already a trusted development partner and you can command higher rates as long as you set these ideas in-place at the start of the relationship / project build that as the company grows, the technology has to mature and stabilize with it too. Also, any startup or company that is making top money enough to pay like this article hints at surely already have a team or in-house people to help develop whatever it is that they want building? It feels to me like you need to get these people at the start and help them grow into a top paying client.
I respectfully disagree. Most startup could be gone in 6mo or 1 year, but the people remain and they will join other teams or create new startups. They are trying to build the future just like yourself. They are more than customers, they are partners. Seeing them only revenue wise is short-sighted for me. Of course if you want to work with this kind of customers, you neeed a special strategy to get the most of it, and it is totally worth it.
I'm definitely open to being wrong. ;)
Who have you seen use this special strategy for reaching new startups, and are doing well from it in the long-term?
Well well well @patticus, funny seeing you here 🙃
All the worlds collide. :)
P.S. Pumped for your launch.
Hi Justin - thanks for sharing this. The analogy of the truck and the bicycle really helped solidify your point.
Do you have any advice for what to do next if you happen to be building a product for other beginner entrepreneurs right now?...
That would be me...ha! (project is www.tribefive.me for reference)
Any insights appreciated because I can tell you've thought about deeply about this topic.
Cheers,
Jonathan
Have you asked people on your list how much they'd be willing to pay?
The short answer is no...not directly in a while at least. I'm sure part of it is hiding from the difficult question, but part of it is because I find people have a hard time articulating how much they would pay for something.
For instance, if you would ask me, "how much would you pay for tools and tips and techniques to write better email copy", I'd tell you $0.
But just yesterday, I paid for a $297 course...!
I'm sure you have a better framework / mindset about how to approach this and figure out how much people are willing to pay for a product / service. Any insights greatly appreciated.
Cheers!
Jonathan
I see. You should check out the content from Price Intelligently they do price optimization for SaaS businesses. But the short answer is you can do a price sensitivity survey.
Loved your landing page Jonathan!
Your tribe of five concept can stay the same, but focused towards more experienced people, instead of people just entering the startup world (following Justin’s logic).
For example, to facilitate the creation of mastermind groups of Shopify store owners that make more than $5k per month.
The challenge is to find those people, and getting them to know your product.
Since you mention mastermind group...I'm curious, do you participate in one?
Thank you for the wonderful suggestion. It's a really good idea and way to move to a more stable customer.
From all our beta testing, it's become abundantly clear that the "tribe" of five people need to have some common bond. And it can't just be "I want to read more". Over a period of 30 days, unless people have a strong reason WHY they need to read more (or do any habit), they fall off.
That is why I'm going after entrepreneurs. I believe entrepreneurs have a much deeper understanding that reading is important and acquiring new mental models and frameworks is valuable because that knowledge can be applied back to their businesses.
Now with your idea, I can potentially move upstream to more seasoned entrepreneurs. And I think most of my underlying assumptions still hold up about why entrepreneurs are open to working with accountability buddies.
Cheers!
Jonathan
Hey!
I've never been on a mastermind. But, what I tried to convey is that you are better off laser focusing on a niche, than targeting people who understand that reading is important, or even the general entrepreneurship self-categorization.
I'd go way narrower, at least at first. Try at most two niches in parallel, if you must.
Have you listened to the IH podcast of Nathan Barry?
Do a search of the word niche here:
https://www.indiehackers.com/podcast/008-nathan-barry-of-convertkit
Spoiler alert, 21 instances of the word niche :-)
Added to my podcast list and will give it a listen later today. Thanks!
Fascinating idea to go more narrow into a niche. I've already started moving in that direction by focusing on entrepreneurs, but know that there is way more I can do too.
At first I started off thinking (naively), "Tribe of Five is a tool for EVERYONE to build better habits, because who wouldn't want to get better?"
However, when we ran multiple iterations of beta tests, we found that while everyone will tell you they want to build better habits...most people aren't ready to put in the work. Their mindset is more like this, "it would be nice if I developed a better reading / writing / etc habit...but if it doesn't happen, it's not a huge deal".
Put another way, they didn't have a strong "why" that would keep them going. And at end of the day, Tribe of Five is only a catalyst to help you take action. It won't actually do the work for you!
In contrast, we noticed that for entrepreneurs, they had a strong "why". They understood that if they read more, then they could learn new mental models and frameworks to apply back to the business. And the same goes for a number of other habits they knew they should work on but for one reason or another just hadn't put into practice yet.
Now, I've been thinking more about what niche of entrepreneurs would get the most value out of the app.
Initial thoughts:
What were the niches that you were thinking about? Would love to hear your thoughts!
Makes sense.
I’d go for niches in which I am already part of.
Tech entrepreneurs are ok, just narrow it down a bit more. For instance, as I said in the example above, tech entrepreneurs in Shopify with non negligible income. Another instance, bloggers with 10k-20k subscribers. Justin’s article IMHO is about serving people with purchasing power.
Another instance, Justin himself has info products for tech entrepreneurs with coding experience and without coding experecience.
By the way, could you describe your beta testing, it sounds fascinating!
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I'm specifically talking about "new" startups. Upstart companies that aren't yet profitable, and haven't been around that long.