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Matching Price to Value—3 Lessons in Monetization

January 4, 2021

This article originally appeared in Business Insider.

Naomi Ionita, Partner at Menlo Ventures

I joined Menlo Ventures as a partner after years of building Growth Product teams focused on activation, retention, and monetization.

I gravitated towards SaaS businesses because I always thought of my role as an opportunity to create a long-term value exchange between products and users. The goal was to create compounding value for customers over time, but also to ensure that, as a business, we were being compensated appropriately for that value.

Monetization is the most underutilized lever for growth in SaaS

Typically, when you hear the word growth, it’s referring to user acquisition.

While acquisition is a critical part of the flywheel, what many companies don’t realize is that monetization can actually have the biggest impact on growth.

A study from Price Intelligently, a software engine for pricing, looked at more than 500 SaaS companies and analyzed what a one percent improvement in acquisition, retention, and monetization did to their bottom line. Their results were astounding—the impact of improving monetization was 4x that of acquisition in building business value.

With this in mind I wanted to share three lessons on how to create value and maintain trust with your customer while driving revenue. I hope these lessons help you create a better balance between price and value, in an effort to better monetize your business.

Lesson 1: Know who you’re building for and segment users by what they value and what they are willing to pay

Knowing who you’re building for means understanding who your customers are, why they pay you, and how much they’re actually willing to pay you. 

I regularly host workshops on Pricing & Packaging, and in a recent session I asked whether participants’ companies had defined customer segments—only four or five hands went up out of 75.

The excuse is often, “We’re heads down building the product,” but creating product value and business value aren’t mutually exclusive—to maximize revenue potential, prioritize your roadmap based on solving clear pain points for customers and capturing their willingness to pay for the solution.

One great example of this segmentation that’s not an SaaS company, but is familiar to all of us, is Uber.

Everyday, everywhere, people need to get from point A to point B. What Uber has done is segment those offerings, differentiating how one gets from A to B. If you’re on a budget and have time to spare, choose Uber Pool. If you’re in a rush, pay more and opt for Uber X. If you want to arrive somewhere in style and aren’t price-sensitive, choose Uber Select or Uber Black. Uber maximizes revenue by effectively matching price to value.

Now, let’s bring this example back to SaaS. A typical pricing page shows a series of pricing tiers, with a list of quota limits and features that grows with the corresponding price. An issue companies often face here is thinking that value automatically translates to perceived value, but this is not the case. 

If prospective buyers don’t understand or don’t need the features you’re offering, then nothing else matters.

I love an example from “Monetizing Innovation” by Madhavan Ramanujam and George Tacke, a tactical pricing book that I often encourage founders to read—this first lesson is a nod to my key takeaways from the book.

In the example, a client was disappointed with their revenue growth and revisited their pricing and packaging as a potential solution. They were building for the SMB customer segment, but in reviewing their 27(!) features, came to the realization that only 8 of the 27 were truly valued by SMBs.

Their response was something that might seem counterintuitive—the company reduced the package from 27 features down to eight, increased the price, and drove a sales lift of 25%. In decreasing the “value” of the package (removing 19 features), they actually increased the “perceived value” since it was more aligned with the needs of the target buyer.

By better matching price to (perceived) value, you’re less likely to leave money on the table.

Be able to answer these critical questions:

  • Who are my customers?
  • Why do they pay me?
  • How much are they willing to pay me?

Lesson 2: Balancing sticks and carrots

This lesson is about aligning your pricing and packaging with building accretive value.

I like to use the metaphor of sticks and carrots here. A stick represents the core utility of the product, or your value metric. Users are often given a quota limit in a free or entry-level plan such as terabytes of storage in Dropbox or number of messages in Slack. A carrot represents a premium feature—something a user doesn’t have in a free or lower-priced plan, and must upgrade to obtain.

These two levers work together to drive both conversion and expansion. 

Sticks get users to upgrade beyond their designated quota limits by showing contextual upsells (“Your storage is full. Upgrade for more space”)—these are highly effective since they catch users in a high-intent state (“but I need to store this file!”) and no additional education is required since users have already been trained on the core product offering. Carrots typically require additional work around awareness and are dangled in front of users as a way to drive upgrades.

Let’s walk through how to pick the right sticks and carrots with an example from one of our portfolio companies, Carta. Carta is a platform for managing equity ownership, and its typical entry point is around cap table management. The company thought deeply about what the right stick, or value metric, should be.

First they considered charging based on the number of admin seats; what they quickly realized was that only a small handful of employees would need to use the tool on a regular basis (HR, Finance, Legal), but the vast majority of employees would only need to login a few times a year. As companies scaled and got more value from Carta, Carta wasn’t going to be making a lot more money, so this wasn’t going to be a successful stick.

Next they debated charging based on equity grants—the problem with this one is that it would disincentivize usage. You can imagine if a company had to pay something every time they granted equity, they might reduce the cadence, batching their equity grants in a different way, and Carta didn’t want that either.

Where Carta landed was something really smart. They decided to charge based on the number of shareholders, or lines on the cap table. As a company scales, takes on more investment, and hires more employees, the complexity of the cap table increases, but so does the value that a company derives from Carta. With this model Carta has achieved a strong alignment between price and value, using a number of shareholders as a successful stick.

Now let’s shift to carrots, or the right premium features to drive revenue for your company. When Carta first started, they tailored to early-stage startups, helping with things like company formation and 409A valuations. What they noticed was that as these companies grew they had new needs—handling more complex board dynamics, managing liquidity events, integrating with different HR and payroll tools, etc.—all areas where Carta wanted to play a role. 

Carta decided to grow alongside their customers by prioritizing their roadmap to offer more mid-market and enterprise-grade features. As customers scaled and adopted these new features, or carrots, they derived more value from Carta. Carta kept raising their prices to be compensated additionally for this new value, and the decision has served them very well.

Lesson 3: Improve monetization with predictive data

We’ve covered a few lessons in how to better match price to value in an effort to drive revenue, but let’s take it a step further by personalizing the monetization path for a given user—the conversion, upgrade, renewal experiences—using predictive data.

The benefit of doing this is meeting customers where they are.

When I ran Growth Product teams several years ago, we had a hypothesis that a subscriber’s behavior (how they used, or didn’t use the product) could inform their likelihood to upgrade or renew.

We started building propensity models to understand which variables were not just correlated, but actually causal to downstream monetization actions. We then used the most predictive variables to create a scoring mechanism for our customers in order to segment them based on propensity (i.e., very likely, likely, not likely, and very unlikely to renew).

The next step was to operationalize these segments. For customers who had a low propensity to renew, we increased perceived value by reinforcing the benefits of core features and building awareness of premium features that were likely relevant to them. Beyond increasing value, we also reduced the price by offering them targeted discounts and promotions.

On the other end of the spectrum, we looked at our customers who had a high propensity to renew. By deepening our understanding of how they were using the product, we unlocked an opportunity to not just drive renewal, but to drive an upgrade in the process. When we predicted that subscribers would benefit from the features packaged in a higher-priced plan, we offered contextual upsells in their renewal experiences.

By understanding a customer segment’s needs and willingness to pay, we could effectively tweak different knobs to drive perceived value and revenue, all in an automated way across the product experience and related marketing channels.

One important note: Companies should be mindful when experimenting. Be sure to balance creating value and maintaining trust with your customers when driving revenue via higher prices. New customers likely won’t realize prices have gone up, but to existing customers, it’s easier to swallow a price increase when you communicate it clearly and they feel that you’ve earned it.