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Ramli John:
All right. Welcome everybody to another live export session. And I'm literally excited. I don't know. Literally, I'm so excited to have Kyle here. I've been reading his stuff and watching his stuff on LinkedIn, which yeah. You follow his LinkedIn stuff is pretty, pretty legit, and good. I mean, although Kyle, just a little bit about Kyle, he's an operating partner at OpenView. He lives in Boston and he thinks lobsters are overrated, which I think so too. How's it going, Kyle? How are things for you?
Kyle Poyar:
Things are good. Although I think I'm about to get kicked out of Boston after folks hear about that.
Ramli John:
Yeah, so, I mean, that's well, a fun fact you're going on vacation tomorrow, so we're catching you on a good mood. A good time. You're thinking about vacation right now probably, right?
Kyle Poyar:
Yeah, absolutely. I had a construction project finished yesterday and going on vacation tomorrow, so best time to catch me.
Ramli John:
Well, we have a ton of questions, while I do. And for everybody else who are tuning in live, feel free to drop your questions in the comments below. I mean, we're going to be talking about pricing today and pricing is such a hot button topic for ProductLed companies. Because if you get this wrong, you're going out of business probably, right? Is that something you would agree? How, I mean, you write all about, I'm sure you're going to say yes, but can you share with the audience exactly why pricing is even more critical for ProductLed businesses?
Kyle Poyar:
Yeah, absolutely. Well, and I guess just as a starting point in the startup community in general, there's a belief that folks have that's still prevalent about, "Hey, we can build it and then think about monetization later." Or "It's all about product-market fit. And we would just want to acquire users and get them to give us feedback and that'll get us on our way to building a really successful company." But pricing is a really important part of finding product-market fit because the idea is you want to find a product that people actually need and value so much so that they're willing to pay for it, and find enough people like that, that you're able to build a large and enduring business based on that. And if you don't have a revenue model in mind around how the business is going to operate, it's really hard to know whether you actually have product-market fit or people just like using a free product.
Kyle Poyar:
And for a lot of companies, it's hard to fund the business and future growth. You need to be able to bring revenue in the door, prove that you can grow revenue. And also that that revenue trajectory allows you to then pay for product improvements, to add new product capabilities and new features that allows you to pay for customer acquisition, or for a team that can work on Product-Led Growth. And so it's really important to get right, even earlier than many companies believe. And it's not saying, "You need to launch with the paid version, you can certainly test and iterate your way into it." But companies should be thinking about pricing in a very strategic way early on in their business to have a plan for how they'll monetize.
Ramli John:
Really fascinating thing about that because often what I see and, building an audience first, give it out for free, figure out pricing later. And you're saying, "Hey man, maybe you should think about that sooner." I mean, I'm guessing it depends, but at what point, or when should companies start thinking about that or when should they start releasing that because you're right. You might have product-market fit when you're free and then next year you're released your pricing model and then it becomes broken. That's what we saw. We saw with Medium when they released their pricing model. And then people like, "What the heck is this?" So, I mean, for you, based on your experience on seeing a bunch of ProductLed companies, when should they start thinking about this probably sooner than later, but as well as when should they open and start getting people to pay for their product?
Kyle Poyar:
Yeah, absolutely. Well, and it'll vary based on the company. And so there are going to be some companies and some products where there are network effects or viral loops where the more users you acquire, the more overall value you're able to create as a business in six months, a year, or two years. And so for them, they do want to be pretty generous with the free offering because they're actually going to have a much better monetization opportunity given that free audience. But many businesses aren't really in that category. And I think for other folks who are actually looking for us to sustainable way of building a business that funds itself, and from that standpoint, you need to be able to know "Hey, for every dollar I'm going to spend on marketing or X of my business, I'm able to acquire customers. Those customers can activate in the product, convert, and then expand."
Kyle Poyar:
And then that covers that ability to go acquire more new customers. And you're essentially building a really healthy customer journey around your business. And that allows you if you can get that right, especially if you can get CAC payback within 12 months, you can then actually spend an unlimited amount of money on marketing and sales. I went ProductLed growth activities to go acquire more new customers because every dollar you put in, you're going to get more than a dollar out of it. And to me, it's really important to think about price as part of that foundation. And if you're not able to have a sustainable revenue model for the business, you're really handicapped and how much you can spend on acquiring new customers and you have to resort to really cheaper low-cost acquisition methods which can work for some businesses especially if the constraints create are forced people to be creative in how they acquire customers. But it's not setting a strong foundation for drawing 10X, 50X, 100X, your current size.
Ramli John:
Interesting. So what I'm hearing, and I just want to reiterate this for a lot of people who are tuning in, you should start thinking about your pricing monetization very earlier on. Especially if a company isn't going from sales side to the ProductLed is something that they should start thinking about. Maybe at the same time, they're trying to figure out the right ProductLed model for them. So, I mean, let's dig into deeper into freemium first because you've written a lot of content about usage-based pricing, and you've created this playbook. Can you share a little bit about, well, how do you figure out the right usage base? Because people can base it on by seats, or by type, or by usage. Can you talk a little bit about that playbook that you've put together for usage-based pricing?
Kyle Poyar:
Absolutely. Well, to me as a starting point, when I think about the journey that software has gone through we started at on-prem right where you sold really expensive software generally to the CIO or CTO of an organization. That software would get used for 5 to 10 years. And once the deal was sold you handed the customers the keys, you were available for some maintenance if they needed it, but you just came back number of years later, once you wanted to sell them something new. So you weren't very close to the customer and you've got a lot of revenue upfront. And so it was very predictable, right? That you were able, and you were able to then spend that money to go acquire more new customers. It was very profitable business model from the vendor side, especially early on, but it doesn't create this long-term attachment to your customers.
Kyle Poyar:
And it certainly doesn't allow you to innovate and then see the results of that innovation over time. So folks moved more towards a SAS subscription model, which is what we know as SAS and that made things a little bit less predictable for the vendor because you didn't know if the customer's going to renew. You were taking a lower amount of revenue in year one, but we're hoping that eco customer would stick around and keep paying you year two, year three, year four, and you'd eventually, recoup what an on-prem deal would cost. And you were forced to be really customer-centric and make sure that they were adopting the product, they were happy with you. They were trained up on it in order to be able to see the growth that investors were ultimately looking for.
Kyle Poyar:
And to me, usage-based pricing takes that a step further. And it says, "Hey, we are only going to get paid when the customer is seeing value. And every part of our organization is going to be aligned around customer success." So marketing is going to help educate folks about how they can use the product, even go so far as to train people or certified folks into the product and emphasize new use cases that people might not have considered. Your product ore has to have resources that focus on product engagement and ongoing usage and stickiness rather than just building new features that the sales team can sell. Sales has to be aligned, right? Instead of selling a big upfront subscription, in regardless of whether the customer uses it, they're actually having the right size of the customer based on what their true usage is.
Kyle Poyar:
And they also typically get paid as the customers adopt more and more of it. And so to me, this shift to usage base is actually a shift towards the promise that SAS had in the first place of bringing you a lot closer to your customers, and building this really healthy customer-centric business. But I guess zooming out, why I wrote the playbook is that I saw that the leading-edge companies were doing that more and more but that there were still a lot of companies that were very hesitant about usage-based pricing and a lot of myths about it like, "Hey, usage-based pricing, isn't recurring. So it might not be as valuable as subscription revenue." That's a myth, or, "Hey, the usage-based pricing is so complicated. It's such a big change in my business that we're going to put off doing it."
Kyle Poyar:
And so trying to get people to realize why it's valuable for their business. I think the final thing I'd add is that when I as from working at a VC firm when I look at the next generation of software companies, they're doing things around helping automate processes. They're leveraging AI to help people save time and reduce the need for manual human-centric activity or their API-based business models, where the value is in software talking to other software, rather than people logging in. And at the end of the day, the products grow in value not from having more people log in to them, but by having your customers use the product for more complicated workflows or to take on more activity for you. And so a usage-based revenue model, it's really the only viable path to success for many of the next-generation software companies and companies need to start thinking about that now, rather than defaulting to the traditional seat based SAS subscription that we used to know and love.
Ramli John:
Thank you for that backstory. That's a really interesting from the history of on-prem to this, all the way to now usage base. And I like how you said that it all ties back now to your pricing is tied to your user success. And it's something that we say a lot here, Wes says a lot is when your end users is successful, that's when you become successful. Now you're tying your reward directly to their success. I mean-
Kyle Poyar:
It's the ultimate goal of Product-Led Growth, right? It's literally intertwined with, with PLG. And I think what's also great about it is we wonder with PLG, "Hey, how can you get your product team to be really fundamental to how you acquire, convert, and expand customers?" Well, in this case, you can go measure exactly how successful they were based on how much adoption they really generate and therefore how much revenue they generate. And so there's the link of attribution around your product investments, is so much clear in a usage-based model and can help create a lot more buy-in for PLG in organizations.
Ramli John:
And what's fascinating, you wrote in the article is that companies that have usage-based pricing are growing 38% faster. I mean because when the customer see that, "Hey, you're helping me grow." And when I'm a child or when I'm a startup, you didn't charge me as much you're growing in trust with that product or company. So is that the reason why companies that apply usage-based pricing growth 38% faster than ones that don't?
Kyle Poyar:
The way to look at it is that it's a compound interest. And so I would say in the initial years up until your first few million in ARR, usage base companies might grow slower than a more traditional subscription company. You're not locking in that big commitment upfront, and then letting people use it over time, your revenue is really trued up with customer engagement, but what's great about it is that expansion is really organic. It just happens as your customers are successful, whether they want to use the product for more things, or they're just growing as a business. If you think about a Stripe customer, if someone using Stripe is just a more successful business, they're processing more in payment volume. And so Stripe gets paid more, customer doesn't even think about it. They're not making another purchase decision.
Kyle Poyar:
They're not going through an expansion with a sales rep. They just pay more because they're getting more value now. And so that's what ends up happening with a lot of these usage-based companies is that they have this organic expansion that happens in an exponential way. And so it continues or even improves as they scale their business. And that is counter to a traditional subscription company that is overselling upfront, and then constantly playing catch up. And it's harder to expand that customer over time. So that's a core part of how usage-based companies have these really healthy revenue models. Then I guess the other thing I'd add is that usage-based businesses have to be really customer-centric. They have to be building products that your customers are adopting and seeing value out of. And so many of them have an organizational structure that is better aligned with getting more engagement and therefore more spend from existing customers. And so I think it also forces customers to be really innovative or forces companies to be really innovative otherwise they won't be able to build a large and enduring business.
Ramli John:
Really, really fascinating. I love how you tied it to expansion. And I want to stay on this, why usage base is better in... Trying to push it, and it's not in the article, but I'm also have a hypothesis. That churn might be even better for usage base because now you're tying success to their success. And they're using it, but for one study a year contract, a year later, you're going to review your stuff and be like, "I haven't used this tool for a year. Why the heck are we paying for this?" I mean, I'm curious, is there a data around this or is that hypothesis based on some proof that maybe having a usage-based pricing actually might reduce churn and might even result in that positive churn?
Kyle Poyar:
It's tough to wrap your head around that, right? Because in some ways it looks like, "Hey, that customer could actually churn at any time because they're not really locked into this big commitment. And we don't have this multi-year subscription generally speaking that we know and we can predict and Hey, this is the SAS model that we know and love." But I think the reality is that the customer is experiencing a right-sized payment along with their usage. So if they're having trouble as a business, if they're they're shrinking, reducing headcount, they naturally pay you less. Also, if their business spikes, they have a boom or there's maybe some seasonality where it's Black Friday or Cyber Monday, and they really need software more and more. They can pay for that specific event rather than having to make a commitment that's at the high watermark of what their usage would look like over that entire year.
Kyle Poyar:
So I think it's really aligned with keeping customers where they are, and aligning the price that they're paying with value, and giving customers an option of downgrading seamlessly rather than churning altogether. And I'd rather have a customer downgrade and stay on the product. And that way, when the business is healthy, they come back and start using the product more and more again. I'd rather have that happen than have them go away, churn, lose all of that data, lose the integrations with the workflow. My preference is always to downgrade. I don't have a ton of real hard data around the retention figures, but I can share a couple of examples that I think are helpful. The one is Zocdoc which is, I think of it as a marketplace connecting physicians with [inaudible 00:18:34] patients and they used to charge a fixed fee per provider.
Kyle Poyar:
And so, that sounded like a really simple predictable model. Physician knew exactly how much they were going to pay for that year on using the service. But what was challenging is it was hard to acquire new customers because they had to make this pretty big payment upfront without knowing how much value they'd see. But then I think more importantly, retention was challenging because people would look back at the end of the year and say, "Hey, did I get the value that I paid?" Many of them would realize I got dozens or hundreds of new patients. This was an extremely great value and I would be willing to pay more. And then others would say, "Hey, no, maybe it was only worth $1,500. I'm going to churn." And there's no option to just scale price with value, but they moved to a model where you pay a much smaller upfront fee, and then there's a charge per patient booking for a new patient.
Kyle Poyar:
And that way that customer doesn't ever need to turn off the platform, they can just get their bill right size with the amount of value they saw from the product. And they have reported that churn has significantly gone down, but at the same time, they're able to better monetize some of their most successful customers. And they never had that path in the past. So they certainly reported better churn figures. I'd also point out HubSpot. So many folks don't realize this, HubSpot back in the day used to have fixed packages, I think even called them small, medium, and large, and that each package had a certain amount features and number of users that were included. And there was no way to scale as were successful.
Kyle Poyar:
And it was pretty limiting from a customer experience standpoint. Their net retention back, and this was, I think series B series C time. They've shared that their net retention rates were only around 75% and given the expectations on the public market, that would not have propelled them to a successful IPO. And it wasn't until they layered in contact-based pricing where customers pay more, as they generate more marketing contacts, that HubSpot was able to get their net retention closer to 100% and put them on a path for a lot more sustained growth. And it's because they were able to grow as the customers adopted more of HubSpot and they were able to invest in capabilities that made their customers more successful. And, from what the company has shared in the past, their retention rates went up and their net retention in particular went through the roof once they made that change.
Ramli John:
Thank you for sharing those two stories. I'm writing in the comments while this recording live that you're just blowing my mind on these examples. I mean, we're all fanboying right now on usage-based pricing. Also in your guide, you talked about how pure usage-based pricing isn't for every product. Can you talk a little bit about like, yeah, sure. It works for HubSpot and for other companies, but are there any products, or industries, or other types of companies, or audience or users that you would advise people to think before applying the usage-based pricing model?
Kyle Poyar:
Yeah, absolutely. Well, I'd start by saying, incorporating usage into your pricing kind of work for everybody. I mean, and it does. Even we're on Zoom right now recording this, Zoom charges per user, but the reason they're a freemium model is so successful is they have a 40 minute time limit on group meetings before you need to upgrade. And that is a classic example of usage-based pricing, but it's just applied to the paywall, and then they have a user-based subscription for everyone else. So you can find creative ways, whether it's in paywalls between plans, paywalls between free and paid, or having a subscription, and then usage on top of the subscription. There's a lot of creative ways to layer usage-based pricing into even a traditional subscription model. I guess what's challenging is going all the way to purely transactional or pay-as-you-go pricing.
Kyle Poyar:
And there are a number of folks who are not ready to go all the way there yet. Certainly some enterprises have a hard time signing off on a purchase for an unknown expense that they can't budget for. And so those folks want to have budget predictability. They want to have a commitment, they might want volume discounting given their size. And so to get legal and procurement and others through the process, you might want to have a usage-based subscription, for example. And then there are companies that have pricing metrics that don't work quite as well for usage-based pricing. And so there are folks that can't really find a metric. One specific metric that is, that equates to the value of their product. It might be that there's a combination of things where there's user seats, there's data, there's storage, there's X, Y, Z.
Kyle Poyar:
And so if they were to charge and in a usage-based model, if they pick just one, they're really at a hard to spot for a monetization standpoint. They might even have some unprofitable customers who use the product a lot in another area, but not on the metrics that the charge for. But also a pure subscription is challenging at the same time. And so for many of those companies, they have platform additions with a certain amount of usage included, and then the ability to pay more on top of that on a usage basis. So that's more of like if you look at Cyprus that IO is pricing or Zapier's pricing, they have those elements of subscription plus usage on top. And that's something that I had also encouraged folks to consider if they have a hard time picking just one metric for their pricing.
Ramli John:
Interesting. Thank you for sharing that, that totally makes sense. I mean the last half hour we've been talking about how great usage-based pricing is. Let's talk about details now. Companies who are looking to go from subscription to usage base. What would be a suggestion? And I'm just looking at this your poster on, you call it something up patient zero analysis. I'm not sure if that's either part of it. I just I thought it sounded cool, especially with a time of style we're at, but what's your advice for companies who are looking to, "Hey, usage base makes sense. Retention is great for all of this." What should the ProductLed leaders start with implementing this to their business?
Kyle Poyar:
It's a great question. And I'd say there's very few companies that have publicly at least made a really big transition of their business model from traditional subscription to usage base. I think New Relic is a great example of one. That's been doing it out in the public and sharing their insights. And frankly, there has been a lot of challenges and they've talked about how they've had to retool their entire business and org structure around Product-Led Growth and a usage-based model. And there's certainly a short-term revenue hit too because you're rightsizing customers based on their exact usage. And if someone over-committed, that doesn't really work in a usage-based model.
Kyle Poyar:
Then I'd start by saying, "Hey, look at whether a usage model makes the most sense and really do your due diligence on what is the right usage-based pricing model for your business. And whether there's this hybrid subscription plus usage, or you want to purely go down the usage-based route. And if you are going down the usage-based route, what's the right metric to charge off of? It's the right usage metric. And can we build on it? Can we measure up, measure it, can we report it in the app so that people know exactly how much they're using?"
Kyle Poyar:
You need to go through that diligence. I'd probably the core diligence part of any pricing change. But let's assume you've already done that. You're convinced a usage-based model is right for you. And now you're just worried, "How am I going to implement it?" To me, the first point is probably to start with your new customers and you want to prove that usage-based pricing helps open up your customer acquisition because you're reducing the barriers to buying your product.
Kyle Poyar:
People don't have to figure out how much they're going to use, how many people they need to license for. They can just start the product and pay once they're successful. And I think more importantly, they can share the product with as many people that want access to it in the organization as possible because they're not normally limited based on how many user seats they bought. And they're only paying later on, on the value delivered based on usage. So test on new cohorts, you're looking for new customer acquisition, and then you're looking to see, is that usage consistent? Is it growing? And is it driving future expansion that we want to see? And that is a way to de-risk usage-based pricing because you're not going and changing model on your entire existing customer base who are used to paying for your product in a certain way.
Kyle Poyar:
And therefore you're not seeing a lot of downgrades all at once or a lot of really tough customer conversations, and it creates a lot more internal confidence around the model and allows you to work out the kinks before going and making a bigger change. Then I'd say, you're going to want to look at your existing customers that have been asking for usage-based pricing. So many cases, folks might feel like they've been limited based on your historic pricing. They've expressed concerns in the past, and they're very open to increasing their commitment or increasing their spend with you, if you can open up the flood gates and let people buy on a usage basis. I see that all the time that and especially with more tech-savvy buying groups. And so step two, is go after those existing customers that want to expand and use this as a great way to start having those conversations.
Kyle Poyar:
And I think that you'd be surprised by how many of your existing customers are open to it. And then you have to start thinking about the org structure changes across every team. And it really looks at going team by team and saying, "Hey, is this team going to be incentivized to do what's in the best interest of growing usage and adoption of our customers?" And if not, how do we make that happen? And so sales comp for example, is a major thing that that changes in a lot of orgs, instead of paying rather based on the commitment, you need to find ways to better tie compensation based on that customer adoption over time, right? Because if you, for instance, are only paying based on the initial contract value of the customer, then a sales rep is incentivized to hold that deal as long as possible to get that biggest possible commitment from that customer, which slows down the deal might mean that they lose more deals too, the customer feels like they bought more than they needed.
Kyle Poyar:
And then that customer doesn't really use that full commitment that they've prepaid for. At the end of the year they want to downgrade, or they want to turn all together because they didn't find that they got all the value that they were promised. You'd much rather have someone have a right-size commitment or be on a purely pay-as-you-go model, see value, have it take off, and then want to grow their commitment later on after they've seen success. And so reps need to be rewarded, not just for that initial commitment, but for revenue generated over time. They want to be doing what's in the best interest of the customer whether that's pay-as-you-go, a commitment, a hybrid model. And so that's something that's really important to look at as an example, but it applies to every different part of the organization.
Kyle Poyar:
And so you might want to think about customer success and have they been set up to be proactively generating more usage from your existing customers at scale? And that's actually where the patient zero analysis that you mentioned comes into play that I'll just add a little bit of color too. So the patient zero analysis is that you look at customers that started small and really dramatically scaled their adoption over time. And you're going back in time and saying, "Hey, who is our first user in that account? And why did they come and find our product in the first place? What did they do in their first week, their first month? And where were there moments when their usage growth skyrocketed?"
Kyle Poyar:
And then you get a lot of insights around what were their use cases. Was there an integration that they set up that then led to a lot of growth in the future? When did they collaborate with other people? And you can find experiences that are really common across a lot of these accounts. And then this ends up being the jury that you want to take all your new customers on, and you want to replicate what your best customers are doing. And so, essentially learn from your best customers and apply those learnings to the rest of your customers, and have an organization that can support you in that journey.
Ramli John:
There's so much good stuff in there. I was just mentioning to the folks I'm going to get this transcribed because you're just dropping knowledge bombs here in this session. I have a few follow-up questions here. Definitely org design. I get asked that a lot from companies who are going from sales to ProductLed. What organization looks like, but before I do you've talked about the transition from, usage base product to usage-based pricing. You talked about starting with new customers.
Ramli John:
I love that you were building up from easiest to hardest. Second is next to go customers who are asking for it. What do you do with customers who are resistant to it? They don't want it. And particularly Victoria, from the predictive index, asked about people who are in the unlimited plan. And now they're going to this usage like, "I have unlimited, why would I want to go this? I might have to pay more." What would you suggest for companies now that they've launched the new customers, they've launched it to the ones that want it, but now how do you get the other customers in? Or do you just leave them to whatever pricing they're at?
Kyle Poyar:
It'll vary based on the company and their appetite for supporting different skews and customer types. I think my preference tends to be to give customers multiple options and you want to nudge them in the path of, that's the new pricing. But know that it might take them a little while to get there. And if you force them to change, that's going to be really disruptive for their organization. And so as a starting point, let them keep their existing plan, especially for at least the next year, but make sure that that plan is not growing in value over time. So they're not getting access to all of these great new features that you're releasing. And that will mean that at the end of the year or maybe two years or three years, they're going to be really interested in moving to a usage-based model where they're going to get access to a lot more valuable capabilities. And they're going to feel like they're not just paying more for an instance, but the value is consistent with how much they'll pay.
Kyle Poyar:
And I think it's just important to meet your customers where they are, and also educate them on the benefits of a usage-based model for their business. And so you could look at it and say, "Hey, customers would be paying more and getting less usage or getting the same amount of usage." That's going to be a non-starter for them. But another way to communicate it to them would be, "Hey, you're going to be able to unlock access to your entire organization. You're not limited based on seats. We're going to give you a lot more product capabilities and teach you how to use them. And then you have flexibility to pay based on the success of your business. So if your business isn't doing well, or you find that you don't need our solutions anymore, you're going to be paying less in those periods. And then if your business is doing really well, or you find that our products are really important for the organization, it's only then that you're going to be paying more."
Kyle Poyar:
And I think customers often appreciate that flexibility. And one way to think about it too is in a post-COVID world. I mean, if you look at a year ago, businesses had no idea how they would perform over the next 12 months. It was really hard for them to make a big commitment with that in mind. And so you should think about it too of, "Hey, you're not sure what your business is going to look like post-COVID." And instead of trying to get you on a commitment right now, and spending a ton of time figuring out exactly how much you'll need. Wouldn't you rather just have this flexibility of paying based on your usage in a totally flexible way. That way your bases are covered regardless of the outcome.
Ramli John:
Man, that's so good. So just reiterating, you're communicating it in a way that they would want. Let's say your business doesn't... Business right now is uncertain. This is a great way for you to get X, Y, and Z. So goes back to Human Psychology 101 communicated in such a way that what's in it for them versus like, "Oh, well, we're actually, this is just a way for us to money grab in a way that that makes a ton of sense." I mean, in terms of pricing, I just want to stick on this before I move over to org design. Paige asked a really interesting question where let's say you have a product that's a set it and forget it kind of thing.
Ramli John:
And I'm trying to think of an example where once you set it. Let's say, well, simple or something like that where once you've set it, it's an investment, it's there, it stays there. And then how do you communicate that they've reached the next tier and telling them that, "Hey, maybe it's time to upgrade to the next usage tier." Or something like that, would you probably communicate the same way or differently?
Kyle Poyar:
So I don't know if I believe that there's such a thing as set it and forget it because you should be having conversations with your customers and teaching them the benefits they're seeing from your product that should be a consistent part of how you end up driving upsell and renewal, and it helped them make the case internally for continuing to adopt the product. So I think that you should be having these conversations around value and outcomes with customer in regardless of if you have a usage model. But if not, it's first, you need to make the usage more transparent in the apps that people should be able to see how much they use. They should know how much they have available in their plan so that they can see for themselves, "Hey, work, on our trajectory we're going to exceed our limits going forward."
Kyle Poyar:
And then once someone has tripped the limit on their usage, it's very common for companies to charge overages. And these are normally pretty punitive. They might be a double the rate of a traditional kind usage price point and charging over doesn't tell that customer upgrade to the next tier. My view is that you, well, first of all, I am very anti the term overages because I think that they sound like you're penalizing the customer for being more successful than they expected, as opposed to celebrating that they're going to getting a lot of value and they're paying more because they're seeing more results and better outcomes from the product. So don't go with overage, go with having more flex or on-demand usage. And for that on-demand or flex usage, you are going to want to look at things like, "Hey, is this a one-time thing?" Was this a seasonal spike because of some unforeseen thing in the business, or in a worst-case scenario, did the customer do something wrong or on accident where their usage spike, but it wasn't really corresponding to them seeing any more value.
Kyle Poyar:
And this is not something that's going to continue happening. If that's the case, you might even wave the extra usage, or you might charge for it as a one-time fee. But if the usage is consistent steadily growing on, they're using more of it than expected. That to me is a great time when the customer success person can reach out and say, "Hey, it seems like you're getting a lot of value in the product and rolling it out to more folks. Why don't we get you into a plan that's going to be at a higher commitment, more aligned with your usage, giving you more headroom to keep growing with the product. And Hey, we're also going to get you a better per-unit price. So you save money as you grow. And if you make this commitment, we're able to waive the last two months of on-demand usage as a thank you, or apply that as a credit towards that commitment."
Kyle Poyar:
Now, all of a sudden the customer success team is going to the customer with the solution. They're rewarding the customer for making this bigger commitment, and they're explaining it in a way that makes it a lot easier for the customer to go get approval internally, as opposed to having an overage bill that their finance team gets mad at them about because it wasn't a budgeted expense. And creating a lot of headaches and frustrations internally, and all of a sudden CS it's dealing with billing disputes versus generating value to the customer. I want to focus on how do you have the right conversations with your customers in these really important moments.
Ramli John:
That's so good. Thank you. Thank you for sharing and answering that question particularly for Paige. I mean, I think I glaze upon this, and I was assuming that already answered this, but I believe that there's maybe some details that I might not have connected around figuring out the right usage metric to monetize on. And this goes back to the value metric and give you a related to patient zero. And this is something that Fair ask, is it just looking at your data to see, what are your best customers already doing? And based on that, figuring out the right value metric, or do you have any suggestions for companies who are okay, sure. I use this base metric. Pricing makes sense to me now, what should I base that on?
Kyle Poyar:
This is one of the hardest things, especially on pivoting to a usage-based model is picking the right value metric. And I have been in many, many conversations where we've debated this. The starting point to me tends to be, "Hey, brainstorm a list of 10 or 12 potential metrics." And users could even be on this list. It doesn't need to be just limited to usage-based metrics. And these shouldn't be a huge surprise to anyone. They should probably be things you're already measuring. They should be things you're talking to your customers about. They should be things maybe that also drive your costs so that you have some assessment of the profitability of your customers. And so you'll start with 10 or 12, and then I go through five criteria and, "Hey, is this value-based?" The more a customer does this, the more value they see, the better results they see. Is that true?
Kyle Poyar:
Is this flexible where the customer could start small and then they're going to grow as they need more? Is this scalable? Which means does this typically grow in the average customer consistently over time, you're looking for 30, 50, 100% year on year growth in a customer? And that scalability is important for being able to see that expansion, making more money from your customers over work time. You can use your existing data for that. Also is this feasible for you to implement? Can you build around it? Can you measure it or does your customer measure it? Are you looking at the same numbers your customer is looking at? There are a lot of potential metrics that you'd love to charge on, but it's just not going to be possible. And so you're looking at those types of factors, and you might even start by scoring it on, from one to five, how does each potential value metric perform?
Kyle Poyar:
And I think from that point, you'll get to a list of three or four candidates that bubble up as, "Hey, these are really interesting." And maybe only one or two that are particularly good for your business. And then it's that point that you start doing a lot more diligence with your existing customers of how consistent are patterns. What's the correlation between how much people are using and how much they're spending today. For people that are using a lot, but not spending a lot. Do we think they actually would pay more? And this is a good time to go raise the price for customers like that in the future for people that would be paying a lot less. Is that fair? Or are there other that would explain how much value they're seeing that we want to incorporate in the pricing? And then I honestly go ask customers too. And these are conversations that you can go have. I don't typically position them as pricing conversations, I position them as product needs and feedback conversations.
Kyle Poyar:
But you can ask great questions around value metrics in these conversations, and happy to share more examples with folks outside of this conversation. And then you're taking all of those inputs. And then I think you start to really get clarity as an organization normally around one or two metrics that are most impactful for your business. Then at that point, it gets down to some financial modeling, figuring out exactly where you want to set the price points, how you want to operationalize it. How do you want to communicate it to customers, but going through that consistent process tends to deliver clarity and alignment across the leadership team.
Ramli John:
I love that. Yeah. And that's something that we've been taking a look at in terms of helping out the people that we work with. I mean, I guess another question I have around that is that you figure out your value metric and maybe this is more for usage usage-based freemium, but at what level do you set the free stuff? And then what level do you set the dipping point over? And I'm guessing it once again, going back to data, figuring out, at what point this year, your best customers tip over to become a good paying customer?
Kyle Poyar:
Exactly. It's all about offering value before the paywall. And this is that, especially that freemium paywall you'll want to do a lot of testing and experimenting around, but I would say, make sure that your customers are able to get to an aha moment in the product where they're really seeing that the value that they're receiving is what they were promised that they would get going into it. Make sure that they experience that before this paywall hits because otherwise they're going to still be in trial mode When you're asking them to take out their credit card and buy, and the free product experience just isn't going to be good enough. But you'll also want to make sure that the metric is something where a customer has been consistently using the product for three, four, or five months especially in a sophisticated way, then they'll eventually hit that limit and it won't take them two, three, four, or five years to hit the limit. They will hit the limit relatively quickly and that creates more urgency around converting.
Kyle Poyar:
And, I think that it's something that there'll be trade-offs that you want to make. You'll have debates at the executive team level. Are you focused more on acquisition of new customers and want to have a really generous free version or expansion, or sorry, conversion of customers from free to paid and those objectives might change over time for you as a business. Are there things that you're going to be doing in the product that are going to double or triple your usage, and you want to give people some headroom room in advance of that? There's going to be different scenarios that people are going through. One tip I give for folks though, is that I think there's a typical mistake of setting that paywall limit too low because everyone's afraid that they're going to be giving away this free product and sustaining all of these costs from free users.
Kyle Poyar:
And there's never going to be a reason to convert from free to paid. The challenge with doing that is that if you set the limit too low, your free product actually doesn't look viable anymore. And these customers that you want to attract that the enterprises is the mid-market, the more sophisticated users will look at it and say, "Hey, this isn't really a free offering because there's not much I can do with this." And you'll end up attracting folks really small businesses, hobbyists, those that never have any attention in paying. And so you'll set up this cycle with freemium where free attracts the wrong users. It doesn't attract that many users, conversion is bad, so you limit it going forward and it never really takes off. And I think that's why when you look at a number of businesses lately, Octa has I think increased the limits on their free plan by 10X. Mixpanel increase the data limits on their free plan by a 100X. There's a trend actually towards app making free more valuable rather than less.
Ramli John:
That's so good. And I know you posted it up on LinkedIn and people should follow you there. I mean, an example I brought up in your post, there was around Melodics, I'm learning piano and it's a free freemium product. And they limit my playing lessons five minutes a day. And I'm like, why? It's really stopping me from really playing on with this. Thank you for-
Kyle Poyar:
I would rather for I'd rather for that kind of product, limit it to 60 minutes in a week or 30 minutes in a week, right? And it's enough that people can really experience it before they're being asked to pay and you're not making someone pay each and every day where they hit the limit. It's the usage can accumulate over time.
Ramli John:
Yeah. And I love how you call it the freemium death cycle. And I really that's what happens. I want to get to this before we do wrap up around org design, especially for companies that are listening in, most of them are going from sales to ProductLed and I get a ton of questions around randomly what this is my org design would look like when I make this transition. And I'm still trying to find resources around that. It seems like you've seen a lot of ProductLed companies, especially at OpenView. What's your best steps around an org design that supports a ProductLed model. And you've already talked about a sales compensation, but just broadly across the org, what does a good ProductLed org look like?
Kyle Poyar:
Yeah, absolutely. To me, I think about what is the role of each team. What is their north star that they're trying to do with keeping in mind, every function in a PLG business should be thinking about ARR as ultimately an objective for their team. It's not just the sales team drives ARR it's the product team contributes. The marketing team contributes, customer success contributes, and everyone needs to be thinking about the end-to-end customer journey and not just one specific part of the funnel. But that said marketing typically is attracting a qualified audience that is interested in experiencing the value of your product. The growth team, which might report to product might report to marketing, or increasingly it might be a standalone function. Growth is helping people that helping that audience experience that value as quickly as possible.
Kyle Poyar:
So focusing on activation, time to value, that free to paid conversion funnel. Product is making sure that the product delivers on the value proposition, right? So the customer experience is great, it solves a clear pain point for a user. You have NPS and a high usage retention where people keep coming back to the product because of how much they like using it. And then sales and customer success help amplify all of that existing motion. And so they're and reduce friction from the customer standpoint. And so, you might find that self-service works great and everyone loves it and you're free to pay conversion rates are through the roof and you're off to the races. But you might also find that you've got a fairly complex product, or you're selling to customers that are larger or have just more sophisticated needs.
Kyle Poyar:
And they need to have conversations with experts on your team to help them navigate the product complexity or their internal buying complexity, which can be equally as challenging to navigate. And so from that standpoint, you're layering in sales and customer success at the right time in that customer's journey based on what you know about that customer. And so it might be that there's a customer success experience early on in the funnel for your business because you're trying to help the customer set up, integrations, or do some complex onboarding. And you want them to have an extra resource to go through that process. But it might also be that you don't need that person or a sales interaction is the best initial conversation with that customer. And so for sales and customer success, I'd say they play a really important role in scaling, but it's a lot harder to give a one size fits all answer around how large that org looks like. And what is the function in each PLG company?
Ramli John:
Well, thank you for sharing that. I know we're about to hit the hour that we have together. I mean, just one final question. Well, two final questions. The first one, I mean, we talked a lot about usage-based pricing. We talked about just org design right now. If you can give what would be your one or two pieces of advice to ProductLed companies who are watching this or listening in right now they're ProductLed leaders, what would be one or two piece of advice? And it could be something we talked about just right now, or it could be something that we haven't even touched upon yet. What kind of advice would you give them?
Kyle Poyar:
So pick one key usage-based metric as the north star metric. It doesn't necessarily even need to be part of your pricing or your core pricing model today, but it might be in the future and that metric, you need to be aligning your team around driving that adoption among your customers. And that's a great way to start operating a usage-based business, even if you aren't already monetizing with usage-based pricing.
Ramli John:
And just one final question, where can people find out more about you, about your work at OpenView, if people have more questions, where do you want to send people to listening in right now?
Kyle Poyar:
As you mentioned earlier, I am hooked on LinkedIn. And so I share a lot there definitely connect or follow me. And then I started a Substack a couple months ago. It's called Growth Unhinged, and it is all of my random thoughts around revenue growth, whether it's PLG, pricing and packaging, or more. But it's all about growth and it is a little bit unhinged. So definitely recommend folks to subscribe to get that in their inbox.
Ramli John:
Awesome, Kyle. Well, thank you so much for your time, and have a great vacation tomorrow.
Kyle Poyar:
Thanks for having me. This was fun.
