Lenny's Podcast: Product | Career | Growth
00:35:11 · Jason Cohen
[00:35:11] S1: So I look at it like a question. So the first question is are people leaving too much? Because if your monthly cancellation is 2% for S&B, that's good. So you could try to work on it, but since it's already good, it's still probably a good idea to work... It's probably a good ROI for you to work on it, but it's possible that you've got diminishing returns and that this isn't really the reason or it's not really reasonable for it to go. How low can it go for S&B? There's some floor and you might be near it. So the first question is is logo churn too high? And trying to set a threshold lower than what people normally want to do. So the next question I have is is the pricing correct? Which of course, pricing is a perennially interesting topic, I know. There's this funny thing, especially with newer companies, that the pricing is always too low. It's not always, but that's the common thing. Patrick Campbell, who has 4,200 data points about startups, let that sink in a little, has this great quote which goes like this: "Your prices are way too low because you just guessed and you haven't changed them." Yeah, if you really look deep within, you realize like, yeah, or we just picked whatever our competitors are doing and that's it, or we added or subtracted something because reasons. Right, that's probably not good. And people are scared to rate prices for obvious reasons, but if we set aside the emotional reasons, whether they're correct or not, the economic reason people normally give is they have in their mind this microeconomic supply and demand curve thing, and the demand curve says that if you raise the price, demand goes down. That's why demand curve is always going that way. And so they understand, I think everyone understands, right, but maybe you raise prices by 10%, but signups go down only 5%, so overall, it's better. But the opposite could happen too if I'm on the other side of the demand curve, and okay. So that's how most people think of it. However, this is not how it works. So that's how it works in microeconomics 101 textbooks, that's not how it works in the real world often. So what often happens is you raise prices and signups don't change. When I say signups, I mean signups per month, the rate at signup. Or signups go up. This happens all the time.
00:37:31 · Jason Cohen
Even for solopreneurs on Twitter who have strange projects or everything, it happens all the time. They raise prices, they're like, "I was scared," but then signups went up. I once talked to a guy, this is really funny. I'm going to not say the name to protect the name. So he had a product that he was selling essentially to enterprise and government, so larger companies, and it was to me way too cheap. So he said something like, "Yeah, I charge $300." I'm like, "$300 a month, that's not enough." He goes, "No, per year." They're like, "Okay, wait." I said, "Okay, how many signups do you get a week?" And he's like, "One or two," because this is enterprise and it was a startup. I said, "Okay. Just for fun, just change it from per year to per month," So in other words, we're 12x-ing the price. So he did, and he still got one or two per week. Nothing changed. I'm like, "Okay, what are you going to do next?" And he goes, "Oh my gosh, well, now I have so much more money and profit, so I'm going to hire an engineer. I'm going to do this marketing." And I'm like, "Time out. What you're going to do is raise prices again. You just told me you 12x-ed the price and nothing observable changed. That means you're not near the price yet, right? You don't have to 10x it again necessarily. Maybe 2x, maybe 50%, but you're not done. You can do those other things too, but you're not done with the price." It didn't even occur to him still. Okay. So why does this happen? The reason is that pricing selects the market. So if you only think of the market as people with very limited budgets, barely can do anything, not getting much value out of it, then it is true that if you raise prices, you'll get fewer of them, because they were never getting that much value out of it anyway. They don't have that much money so if you raise prices, they're gone. But think about just even a midsize company. Forget about enterprise, just think about a company with a thousand employees and 400 million in revenue or whatever, and if they see a product that's $2 a month or even $100 a month, the thought is like, well, that can't be good enough. They're not mature enough, it's not going to do enough. The support's not going to be good enough. They probably don't have good governance policies or other things that we need, et cetera.
00:39:52 · Jason Cohen
Whether that's true or not, this is what it looks like because is it's low quality, cheap, whatever, aimed at SMB. So they just won't buy, they're not in the market for the thing. So it's not true that they have this demand curve where, oh, since it's cheap, they all want it. That's what microeconomics curve says. It's so cheap that they should all want it. No, they don't. None of them want it because it looks bad. So as it gets into a price range that makes sense for the kinds of things that they need, then their demand actually goes up. Then it can stay up while it's in a good range, and then of course, at some point you are priced out of them. That particular kind of company's like, "Look, I'm not going to spend $10 million a year on it. Are you kidding?" So yes, it does slope down and go away. So it's not a normal curve, but it is like it slopes up and then it's something and slopes down. Who knows exactly what shape it is? Probably none of us know, but it's more like a Mesa and not a line that goes up to down like in the textbook, for that market. It's only the very lowest, you might even say worst in terms of metrics end of the market that has the microeconomic slope that you're worried about. So what happens is you raise prices and you enter a different market, and that's why the signups go up or okay. You leave behind perhaps a worse market anyway. And of course, everyone will tell you the more they pay, the higher retention is, and all the kinds of stuff gets better when you charge more. So this question, is pricing correct? This is what's in my mind when I ask that question. Probably the answer is no because pricing's very hard. It's just as much art as it is science. You've had some really good people on here on pricing. In fact, so good that I've bought some of the books that those people have talked about because I loved the interview so much, so I believe in all that. No problem, I believe in it. Nevertheless, they also say it's art and science and it's very difficult to ... And also, once you auger it in, the world changes. Five, 10 years later, the market is different, the world's different, and so it's still unclear. Also, price is not just the number on the webpage. It's easy to think that, but how it's structured is just as important, how the product's positioned is just as important.
00:42:14 · Jason Cohen
So for example, this example I've written about before online is this example, it actually was something that happened in my life but I changed the story to make it simple, and it's real unclear without having to get into lots of detail. So the story version is how this company was able to charge eight times as much for the same product just by talking about it differently. So just by positioning it differently, eight times as much. Again, this happened to me but it's too complicated. Those details are not interesting. So say there's this company called Double Down, and the idea is that it halves the cost of your AdWords because it makes it so efficient, so that's what it says on the webpage. "Cut your AdWords cost in half," which is a very good pitch, isn't it? It's simple, obviously valuable. But when you think ... So let's suppose I'm a customer and I spend $40,000 a month on AdWords. What am I willing to pay for double down? Well, if you do cut my AdWords in half, then all right, I saved 20K, but I'm not willing to give 20K to Double Down because then I'm not saving any money. In order to actually save money, I need to give Double Down less money. How much less? I don't know. Let's just call it a quarter. So I pay Double Down 5K to save 20, so I'm really saving 15, Double Down's making 5K a month, that's pretty good. Everyone's pretty happy at this five grand a month price point. So there's nothing wrong with this. No one's doing anything wrong, that's a perfectly valid company. However, think about these two situations that the CMO might be or the chief product officer might be in in talking to the CEO at the end of the year. Well, scenario one goes, we started using this tool, Double Down, and it had our costs, so we're able to spend that money on some other stuff. We were able to save money." And the CEO would say, "Great, that's good. We're going to renew and I'm happy to hear it." Again, nothing wrong here, but let's take a different tact altogether. What does the CEO want to hear more? Growth or saves money? Both are good, but I know which one is healthier for the company, increases market share, is better competitively, and also makes the company more valuable. It's the growth. So what we'd really like the CMO to tell the CEO is, "I increased the growth rate of the company." Not so much, "I save money." That would be way better.
00:44:39 · Jason Cohen, Lenny Rachitsky
So here's how we could do that with Double Down. Yes, Double Down halves the cost, but what that means is right now, right now, the company is paying 200 bucks per lead. Let's call them leads, whatever this is outputting. Well, if I halve the cost of a lead, I could get twice the leads for the same money. I'm already willing to spend $200 a lead and I'm already spending 40K a month for it, so if Double Down halves the cost, it means I can get more leads. So the way I could pitch Double Down is double the leads per month, period. Now, if I'm willing to spend 40K for this number of leads, how much am I willing to spend to double the leads? 40K. I just said I'm willing to spend 40K for this number of leads, so doubling it, I'm willing to spend 40K to double it. So if I give Double Down 40K, not five for the same product, which is the leads are cheaper, but now the pitch is I doubled the leads for 40K instead of having the cost for 5K. So Double Down gets 8x the money because it gets 40K for this product, not 5K for this product. [00:45:43] S0: Amazing story.
00:45:44 · Jason Cohen
[00:45:44] S1: And everyone's happy because the CEO goes, "What did you do?" And they said, "Oh my God, I doubled leads." "What?" "Yeah. At the same ROI as we had before, same CAC, I doubled leads." CEO goes, "How can we do more of that? " Just everything is so much better, same product. Now, I know it's a little bit of an exaggeration, et cetera, because I'm trying to make a point, but the big point is, the largest point is pricing is not just the number on the page. It's positioning, it's how their budgets work, it's how it's structured. It's per site or it's per usage or it's per seat or it's per ... All of this stuff is part of what pricing is. And often, even if it's the same price or the same product, depending on how that's structured, it either seems fair and good or it seems unfair and too expensive or whatever. And so in particular with the positioning, the big lesson for product managers is sell more of what the company values like growth. It doesn't have to be growth. It could be something else, the retention for their customers, how competitive they are in the market. There's various things they could value. Growth is an obvious one. Sell them that they're going to get more of what they value as opposed to saving, cutting, ROI, saves time, saves money, more efficient. And again, there's nothing wrong with saving money saves time. It's just that it caps this price and this value that they perceive that you do. Whereas if you deliver more of the value that they already value, it's I don't want to say uncapped completely, but the cap is maybe an order of magnitude higher than saving. So again, it's valuable to save. They're not doing anything wrong. That's not how to talk about what it is, and therefore help set the price. So it's a long way of saying ... So again, when I think, "Is your pricing correct?" I'm thinking in maybe a more general way than just the number. I'm thinking about the structure, the positioning and all that, and my guess is when growth is slowing, that there's a lot of improvement that could be had there.