Which is the most suitable pricing model for your company? How can you organize free access to your product? And, what are some efficient value-based monetization strategies? These were some of the questions we got the chance to discuss with Daniil Pavliuchkov during our latest Q&A session.
A few weeks ago, we had the pleasure to host an eye-opening webinar focused on value-based monetization strategies. Our guest, Daniil Pavliuchkov, product & growth leader, speaker and coach shared with us insightful ideas as to how startups should approach monetization when it comes to deciding on their pricing model.
If you’re a regular reader of our blog, you’ll know that we generously share our learnings with our audience. And, this time is no different. We’ll give you a sneak peek on Daniil’s insightful presentation and then we’ll dive on the Q&A part of our event.
A few words about Daniil Pavliuchkov
Daniil has been working on product leadership for the last 8 years; in the fintech and mobility space. Today, he is the Head of Product Growth at Tier; a European mobility startup that trades in Berlin, Paris and other European cities. He leads several product teams in the growth area and helps companies acquire new customers, through product innovation.
To achieve that, Daniil helps companies in the following series of steps:
- activate new customers
- help them build a habit so that they’ll get to use the product more frequently
- monetize them
- retain them over time
- develop brand loyalty
- make sure customers refer the product/service to their friends
That’s a whole framework according to Daniil. In his own words:
You need a strategic mechanism to attract people and engage with them.
But how do you achieve the monetization part? Well, that was the keynote of Daniel’s presentation. Let’s get an idea of how things work in practice.
Value-based monetization strategies: which pricing model should you choose?
Daniil presented several cases of companies focused on value-based monetization, highlighting some good and bad examples. All of them, to illustrate how you can organize free access to your product; be it on a freemium or any other pricing model.
Setting the ground for product-market fit
Product-market fit starts from the market, according to Daniil. And the market is actually your customer’s profile. Things like geography, demographics and customer needs shape up the profile of your target customers. The first thing to do is to answer — in advance — questions, such the following:
- Where are my customers (location)?
- What language do they speak?
- What kind of culture do they have?
- And what are their demographics?
- How flexible are they with technology? Can they adopt it easily?
Have a deep understanding of your customers’ needs , as part of your value-based monetization strategies
Apart from these questions, you also need to answer questions that refer to customer needs, according to Daniil . So, ask yourselves: What do they need to accomplish with my product/service? Is it to get more customers? Is it to optimize their costs? You need to be clear on that.
As Daniil explained, customer needs fall into three big categories:
And, it’s of paramount importance to understand the market’s needs, in order to deliver value with your product and gradually get closer to a product-market fit. These same needs will also affect your decisions, regarding your pricing model. Let’s get a taste of Daniil’s presentation, focused on that aspect.
Pricing models, in the foreground
Once you’ve identified what your customers’ needs are, you need to come up with a good model to sell your value; to sell your product, according to Daniil.
Pricing models fall into these, following categories:
- Subscription model; which is the most popular one
- One time purchase — or premium — model
- Transactional model; where you have a small fraction for every sale that’s happening on your platform.
These are your options, when it comes to models. As our guest mentioned, you may combine them into a hybrid model, if you wish; but it’s best not to do so, because it’s confusing for people.
Daniil elaborated on the pros and cons of using each one of the pricing models above; emphasizing on the free access that most companies offer to their products. In particular, he explained, in detail, the constraints and benefits of using a free trial or a freemium model instead.
With an overview of successful use cases, where you can combine monetization models with the pertinent value messaging, we got the chance to get insightful perspectives on the subject matter.
Now, let’s get into our Q&A session.
Q1. Focusing on the B2B space, some companies choose the free trial approach, offering the full system for, let’s say, 14 days; while others opt for a free tier; the freemium model. Which approach is better for you? And how can a product team wisely decide as to which of the two value-based monetization strategies to follow?
I prefer freemium, because it’s a more humanistic approach. You offer something for free, before you ask for something. And that’s more suitable for software products; at least, the way I see it.
But, for freemium to work you need to be able to give a portion of your product for free. Ideally just the part of it and not the whole functionality.
With Slack for example, you don’t have access to unlimited integrations or shared spaces with other companies. There are limitations.
You correct technical architecture for a freemium model. If you’re charging by the number of collaborators, you should be able to limit their number on a freemium plan. And if they need more seats, they should be able to quickly upgrade the plan.
While Freemium includes a bit of a technical challenge; whereas, with a free trial, you just give access to the full environment and after 14 days you automatically “kill” that access. Technically, it is usually much easier to organize a free trial compared to freemium.
It’s also good to remember that with a free trial model, you ideally should involve sales or customer success teams. They can collect valuable feedback and upsell your product. So, while it’s easier on the tech side it might be heavier on the people’s side.
With the freemium model, you usually don’t limit access by the number of days. You are sending a very welcoming message like “Take your time and whenever you’re ready you can upgrade”. Freemium requires less commitment, less pressure and less sales forcing. And, to me, that’s a more humanistic and fair approach.
Q2. With a freemium value-based monetization strategy you have the amazing advantage that you can let users test your product; see how it works for them and, thus, validate their assumptions. But, say you’re trying to upscale and target bigger companies with more than 500 seats in your product. There is some sort of urgency to deal with bigger problems; and there’s no time for testing. What are your thoughts about that? How can you deal with this aspect?
That’s a valid point. A company with 500 people is close to an enterprise. There are different approaches to deal with it. Of course, you can still go with freemium. It could be a small team of 25 people within the company, with whom you just do a pilot; give them the chance to see if this works for them. And then you start to build up and expand from that group. Slack is doing it exactly this way. Prompt them to use it for one team; if they like it, you can make a sale to the company’s CTO or CIO.
Alternatively, you probably need different case studies for different client use cases. Or you may offer them the full version with a discount, for a couple of months, so they can try it, simulating free trial or freemium access. Additionally, helping with migration from their existing solution to your product will simplify their decision. Everything about selling products is about making it easy to change and lowering the entry barrier.
In general, freemium for SMBs creates no barrier at all. You should find ways to lower the entry barrier for enterprise, too. For example, they usually don’t want to make big decisions. It’s scary; we are humans and we want to take small, safe steps. So, if you can minimize this fear or unblock them, or make this decision easy to revert, they are more likely to go for it. And that will help you with enterprise sales. So, explore, using case studies, demos, coaching and training sessions. Enterprise companies are very sensitive — they have a lot of processes and requirements that you should fit into, so they want to make sure everything is going to be fine — that’s why it’s so slow.
Q3. Suppose you’ve chosen a path and you’ve already focused on a specific business model. How do you make a transition to a new — hypothetically better — business model without alienating the clients you already have? What is the best way to go? Do you have any experience or examples to share with us, as to how you approach this change?
Well, that’s a difficult one. A few years ago Uber went through a business model change.. At the beginning, they were charging you for the ride minutes and the distance you traveled, as well as surge pricing during rush hours. It was very difficult for customers to understand how the price was formed . Now they have a new model where you see the price, in advance; and that’s it. This was a much simpler model to understand — you get a price and, you either take it, or not. And it will not change during the ride, if you change the route or traffic conditions change. So, customers adopted it very quickly.
But not all changes will be as smooth as it was for Uber. You are probably either going to lose some customers or you’re going to lose some revenue while you are running it as an experiment.
Pick a specific market or a specific audience and offer them a new model, which may be subscription-based or transaction-based or simply a different pricing formula; and test how they adopt it. You need to answer questions such as:
- What’s your conversion rate?
- How much do you spend on customer acquisition?
- How much does the sales process cost you?
- What are the customer retention and satisfaction rates?
If your new model is performing better, then you make the switch. Or if it doesn’t, you can still invest a bit more into improving it; if the numbers are close.
Ιt’s a big decision
All in all, it’s a big decision to change a pricing model, so try to make it as simple as possible for your customers. Try to accommodate them; give them, for example, a discount or offer something for free. Make their transition to the new system easier in how it’s going to work for them. You need to convince them to do what is better for you, while you make the transition smoother.
That’s it, then, for value-based monetization strategies!
SaaS is hard to do, in and of itself. But, every venture should have its shot at success. Value-based monetization strategies are essential to that direction, inasmuch as they define the way you approach your market or specific customer profiles. And, the right way to do it is through validation of their needs, characteristics and familiarity with your technology. Then, all you have to do is find a way to make their decision making process as easy as possible, while minding the viability of your business and monetization model.
Daniil frequently shares his knowledge online! You can follow his webinars, request a talk or a workshop for your company, or join his educational courses about product management, including value-based monetization strategies.
You can learn more about these opportunities at his website Product Universe.
Thank you Daniil!