Lenny's Podcast: Product | Career | Growth
00:47:52 · Lenny Rachitsky, Jason Cohen
[00:47:52] S0: Oh, man, this story is so powerful. Who does not want to change some copy on their website and double their growth and triple their price? And the biggest takeaway here is when you say is pricing correct, it isn't what is the number? 20 or 25 or 100? It's almost is the market we are going after correct? Is the way we are selling to them correct? Is this price communicating the right sort of story? And then also, is the positioning of what problem we solve for you correct? So there's a lot here, and luckily, I've done a bunch of episodes along this stuff which we'll point people to. We could go much deeper because this is a deep skill and there's a lot to do here. One thing I'll mention specifically, so Jen Abel, a recent podcast guest. [00:48:38] S1: I love her. [00:48:39] S0: It was her second visit to the podcast. She has a lot of really good advice on this of just how to price and how to reposition the way you're selling it. Specifically, she had this really interesting insight that enterprises, their sweet spot for contracts is 75 to 150K. That's how they normally buy SaaS software. And it sounds absurd, but that's what you want to ... You want your product to be in that bucket versus a thousand a month, 2000 a month. And everything just gets easier if you're like, "Okay, this is one of those. Okay, cool."
00:49:05 · Jason Cohen
[00:49:05] S1: It gets easier. I don't want to go off too much of a tangent, but the thing you have to remember is that pricing is not this knob that you can turn separate from the rest of your strategy. So when you say, even when I just said raise prices or whatever, but you can't just raise prices. These new customers have different demands. Now, maybe you need SOC too. Now, your other governance stuff matters. Now, integrating to certain systems you didn't know about matters. Maybe now, they need professional services. You can't just raise prices and change market and that's it. And maybe that's wise to do, but maybe it's not. Maybe you realize that sure, of course, that other market has certain advantages, but they also have disadvantages and we don't want those, either because we'll no longer be competitive because the way that we're distinguished, competitive, special, interesting, valuable, is only valuable in the market we're in. The next market does not value it like that, and so uh-oh, actually, that would be really bad for us. Or it could even be cultural. We are a company... Like Buffer's a great example. Buffer could go up-market and try to sell social media tools to whatever, but they realized, "We are a company for the little people. I don't want to sell to a big company. We're never going to make a product for them, we don't want to. This is who we are, this is what we want to do. This is what's fulfilling to us, so we're not going to go there." So it can be cultural, it can be certain goals, it can be other aspects of the business model or the strategy, but it's not this kind of like, "Oh, I'll just change this." It's a decision about the whole strategy, and that too, we could talk about for hours, but let's just caution that, "Oh, I'll just go enterprise," is of course not how it goes.
00:50:54 · Lenny Rachitsky, Jason Cohen
[00:50:54] S0: [inaudible 00:50:54]. We got this. [00:50:55] S1: Yeah. I love Jen. Her pricing and sales stuff is good. She's great on Twitter too. I love Jen. [00:51:00] S0: And that is such an important nuance. Don't build the thing you're miserable building and just like, "Okay, I listened to a podcast. We're going to raise our prices 10x and life will be grand." There's also downsides. [00:51:09] S1: Yes. [00:51:11] S0: Yeah, okay. Amazing advice. Okay. There's so much here. Again, this could be some conversation, pricing, positioning. [00:51:11] S1: Yeah, for sure. [00:51:17] S0: I'll link folks to a bunch of cool advice that we've covered on this podcast too. If you're a founder, the hardest part of starting a company isn't having the idea. It's scaling the business without getting buried in back office work. That's where Brex comes in. Brex is the intelligent finance platform for founders. With Brex, you get high limit corporate cards, easy banking, high yield treasury, plus a team of AI agents that handle manual finance tasks for you. They'll do all the stuff that you don't want to do, like file your expenses, scour transactions for waste, and run reports, all according to your rules. With Brex's AI agents, you can move faster while staying in full control. One in three startups in the United States already runs on Brex. You can too at brex.com. Let's keep going through this checklist. So one was look at logo churn. Two is look at is your pricing correct?
00:52:13 · Jason Cohen
[00:52:13] S1: Is the pricing right? And why do we think it is? Because we probably don't have good reasons yet. Okay. So the third one is our existing customer is growing. I think everyone probably knows this, but just to say it. Okay, if cancellations overtake marketing in magnitude, one way to come back, one thing is, okay, make cancellations lower, but they can't be zero. So what else do we have to combat cancellations that would be proportional to our size so that it keeps up, unlike marketing or basic direct marketing? So one would be, all right, 2% left, but of the remaining 98%, some of those upgraded or otherwise paid us more, maybe it's usage based, whatever it is. They're paying us more, and so that covers the gap, and yes, if I tripled the company overnight, that would triple, and so that's the answer. So that is the answer, and maybe that's obvious but it's useful to tie it back to the sort of mental model we've got going. And of course, the metric here is NRR, net revenue retention, and the way that's computed is you say what is the revenue of customers right now? So existing customers, existing whatever, just the whole total, and then one year from now, what if that remains? So not new customers coming in, not talking about them because we're asking about the cohort that exists. What remains? So with cancels, it goes down, with downgrades, it goes down, but with upgrades, it goes up. So when I say remains, it could end higher than we started if upgrades exceed cancellations and downgrades. And now we are talking about MRR and not n, because n doesn't have this. N doesn't have an upgrade. N just only goes down, which again is why I think the n is actually the most important one. Because think about it. A lot of times, people think ... So if you've heard of NRR, you... ... because think about it. A lot of times people think... So if you've heard of NRR, you might think, "Well, that's my golden metric. I'm done." But the issue is if NRR is positive, but N goes down too fast, it doesn't matter because not enough people are left. And so there's not enough people left over to upgrade. And so actually, you're wrong. And so NRR does not include that, and therefore, it actually undercounts what's going on in a bad way, in a way that hurts you. There's yet another way to see why what I'm saying is right.
00:54:31 · Jason Cohen
There's this thing in investments where, let's say I started out at $100 and the stock goes down 5%, so now it's at 95, or no, it goes down 20%, now it's at 80. Then it goes up 20%. Is it back to 100? No, because 20% more than 80 is 96. So if it goes down 20% and up 20%, it does not come back to zero. It's worse. When you have a loss, a percentage loss, you have to have a greater percentage gain just to get back to where you were. In this case, a loss of 20% requires a gain of 25% to get back to where you were. This is why NRR isn't quite right, because NRR is saying that a loss of 20% from cancellations is offset by 20% from upgrades. As we just saw, no, it's not. That only gets us to 96% actually. So this is why, again, I believe in NRR. I'm saying you got to track it. It's good. Just in the back of your mind, realize it's not quite that good, and looking at N keeps you honest about what's really going on with these customer cohorts. So that's why they're both useful, in fact. This is why they're both useful. So NRR, of course, is important. A nice way to see this is, if everything I'm saying is true and there's these limits and stuff because of cancellation, then there should be no way to get a big company like a public SaaS company unless NRR is greater than 100. Otherwise, cancellations should just win. And that is in fact the case. There's over a hundred SaaS public companies, and something like two of them have NRR less than 100%. That's how it goes. And those companies have horrible financials and their valuations are bad. It's not good. It's not a good thing. And in fact, the median for an IPO SaaS company, like at IPO, the median NRR is 119%. So yes, that's what it takes. You can't do this. You're limited in less. Now, your goal may or may not be to get that big, but the point being it's mandatory for growth. Now, if the literal customers are just leaving, you got to plug that hole first, like you said. But okay, if they're okay, that's why this is in order, if that's generally okay, now we turn to NRR to say, "Okay, but the ones who stay, they're hopefully happy, they need to grow. Okay." So that's the full story of NRR. I think people who've heard of NRR don't necessarily think about all those things and realize that. So a good question is, okay, what do I do with NRR? But I think the answers are pretty clear.
00:56:51 · Jason Cohen
You add features, you have different tiers, you change the pricing in some way with usage or seats or something that kind of goes up automatically as they get more value out of it, so I don't think that's terribly interesting to double click into. It's sort of obvious. I would say, "Oh look, it's tied into pricing because their behavior," but the main thing is you want it to where the customer themselves would agree when they pay more, that they are getting more value. Hopefully they even think they're getting far more value than the price going up. I'm going to say this as if it's precise, which it's not, but they need to feel like if the price doubles, "Yeah, but I'm getting five times the value, so that's fine." That should be the feeling, whether they can measure it or not. A good way to do that is to say, "Well, then you should be measuring whether they're getting value out of it." Often we measure usage metrics and other kinds of metrics within our product because we can. But actually, what's really important is to measure how does the customer value this? And we need to measure that so that we make that go up because if we make that go up, they'll be willing to pay in whatever structure. And if that isn't going up, they won't be willing to pay. So even if we start making them, they'll leave. And we all know, we've all probably done it ourselves, we've all had products we love, but then as we scale, the price goes up faster than we feel the value is, and then we start looking for other products. We've all experienced that. So that's what I'm saying. To do that, you want some sort of measure of the value the customer's getting. If you're really lucky, that can be a number. That'd be wonderful. Then go do that and maybe that's your North Star. But admittedly, it's not always possible. So then the question is, the usual questions and metrics, are there proxy metrics that we understand are not the full picture, but they're helpful, they're part of it? And I'm a big believer in saying not all important things are numbers. I mean, even things like how differentiated are we in the market? Not a number, but it's very important. So this might be one of those things that's important, but not a number. So okay, can we get some proxy metrics, even of behavior and other things that's something better than some metric that's just operational?