The Data Behind Staying Away from Freemium and Focusing on Premium with Payhawk Founder + VPM

Hello, can you hear me well? Oh, good, perfect. So thank you for coming today. My name is Christo Buricev. I'm co-founder and CEO of Payhawk, a company we founded 4 years ago. And Desiree Schiott is our VP Marketing based out of Berlin. So first of all, what we do, we are a spend management platform and we help companies automate their spend and expenses across 32 countries. So we issue debit and credit cards and allow companies to also do bill payments and reimbursements to employees in about 32 countries today. Today we're launching in the US. So this is our first day on the US soil. Thank you. So why did we decide to give this talk? First of all, when we started the company 4 years ago, we were entering a market category that was already forming. There were already a lot of VC money on the market. And there were already established competitors that had actually an idea of how they're going to do the pricing. And the whole market category is really merging 3 other market categories: spend management that are coming from expenses, so just regular travel, you have company cards, and then you have bill payments. And then to make things even more complicated for us, we decided to target companies in 30 countries that are multinational and fast-growing, and that really made a big challenge for us on how we go about pricing. And that's why we decided to spend a lot of time doing a lot of iteration on our pricing, and we are happy to share some of the key learnings with you today. So, the first thing is the single most important business decision in evaluating a business is pricing power. So, Warren Buffett is talking a lot about if you are able to increase your prices by 10% without your company customers complaining, you have an amazing business. If you are very nervous touching your prices with existing competitors, you are in a very, very bad business. So, today we are going to go through several things. First of all, our journey on the pricing and what we went through to nail our pricing strategy and how to decide between the freemium and the premium. Then we're going to talk about the most common pitfalls that we were very carefully trying to avoid from other companies in the space that we have seen before. Then we're going to talk about the willingness to pay, quite important concept for us, especially merging 3 market categories. You know, are you more like an expense management tool? Are you more like a neobank? Are you more, more like a procurement software? Then we're going to talk about the right structure and then the trade-offs we had to make between freemium and premium. So, first on the journey, the most important thing for us was, you know, what kind of company we want to be. You know, you are what you eat in that space. So, whatever you charge for customers, that is what you're going to become. And there were some companies that were going with the freemium model. They were mostly focused on making money from fees on the cards. And other companies were getting and trying to make money from the SaaS. And this kind of a trade-off was quite important. And then the second thing that we put into the equation was what kind of customers we want to serve. At the end of the day, is our DNA optimized to serve companies that are just starting their business, or are we more suitable to be serving companies that are within the enterprise space? And the final thing that we decided to take into account is really a triangle called a trade-off on pricing. So in the triangle you have at the top acquisition strategy, monetization, and retention. And when you're putting together your strategy, you have to pretty much decide is your pricing strategy for being aggressive, bit scaling, and going for acquisition? Is it more about monetization and making the most of the existing— of the market? Or is it about retention of the existing customers? And this kind of a strategy was very important. We did something very unconventional. If you go to startups, they usually go with freemium, all you can eat, just get the product and we're going to figure out the pricing later. Unfortunately, very few companies are able to recover from this kind of start, initial freemium customer base, and that becomes kind of a— literally a drug that it is really hard to get out because you see the growth, you see the pace, and then you're concerned, what if I charge customers? Drift today, they had a great presentation. And this is something that they really debated at the beginning of their journey as well. So what we did very differently is that instead of going on freemium, we decided to focus on monetization. We decided that we don't care that much about the number of customers. We focus on making the most of a few customers and making sure we really understand how to make money into this space. And that was the key part. And then when we got to the stage to be very strong about how we price, after we actually did 25 different iterations on our pricing, then we decided to do a blitzscaling strategy. And we said, OK, now we're going to do a cashback for our customers that are spending on our platform. We're charging them SaaS. And we're giving them 1.5% unlimited cashback up to the amount of their subscription, which means we are now sponsoring the SaaS part. And they can actually just go and use the product. And the more they use the product, the less they pay, which is very good alignment. And this was very different from what everybody else was doing in the market, going from freemium into the premium. So before we started though, we want to share a little bit of the pitfalls that we have seen before companies doing in the space. So we will go through Desi, who is going to explain a little bit more about the most common pitfalls in pricing.

Thanks, Christoph. Yes, so I will continue with the most common pitfalls of pricing. So I started looking at a study by Simon-Kucher. So Simon-Kucher is the leading consulting firm for pricing and monetization strategy. And so the study stated that about 75% of new product launches fail entirely due to a poor pricing strategy and due to customers not being willing to pay for the product in the end. And then I was looking at the book Monetizing Innovation, and the author was looking at those companies that launched product and those failed, and was trying to understand the reasons. So he was analyzing the reasons for the products that failed, and then could see recurring patterns and clustered them into 4 main pitfalls. Actually, when we developed our pricing strategy, we were reading this book. And this part about the monetization failures, failures helped us the most because this helped us to avoid all failures we could do in pricing in advance. And so those 4 main pitfalls are feature shocks, minivations, hidden gems, and undeads. So let's start with the feature shock. So a feature shock happens if companies cram too many features in one solution. So the product becomes kind of over-engineered. And so assuming that customers don't know what they want, or developing a product before really thinking about the positioning, creates a solution that does not resonate with the customer, and therefore is perceived as being overpriced by the customer. So in the end, the customer will not be willing to pay for a product with loads of features that they are actually not demanding. So one example for this is Amazon Fire Phone. It was launched as a feature-packed product, I think with 4 cameras, 3D technology, facial recognition, and so that in the end it was hard to explain to the customer what really stands out and what really the features that are relevant for the customers are. So the product failed because customers were not willing to to pay for it. They thought it would be overpriced. So in the end, it is much more important that you create a solution that is really targeted to your customer segment and don't try to build a product that fits all solution. So the next pitfall are the minivations. So the term minivations refers to companies that price their product too low. So this often happens if product developers underestimate the value that the product really brings to customers. So they're in the end charging too less, and the customer would actually be willing to pay more for the product, and this will obviously leave, yeah, well, big profits on the table. So one example is Playmobil. You probably know the children's toys company, and so in 2003 they launched a new product. It was Noah's Ark playset, and actually only 2 months after the launch it was completely sold out. You could still buy the product on eBay for actually 33% more of the price than the original price tag. So not only did they miss out on huge revenues, but also did they even allow customers to make money off their product because of the wrong pricing strategy. Another example is Audi's SUV, the Q7, and it was launched in 2006, actually at a time where gas prices have increased and the overall demand for large cars and especially SUVs has decreased. So they brought the car to market for a price of €55,000, And then actually the demand for the car was about 50% higher than the projections. And so they did some analysis and they realized that if they would have launched the car for 40— 58,000, they would have generated an additional revenue of $210 million, which they now just left on the table. So the next pitfall are the hidden gems. So hidden gems are winning blockbuster products that were never probably introduced to the market. Most of the time the reason is that it's not in the company's core business, or companies are afraid that it might cannibalize their existing business. One really classic example here is Kodak. Back in, I think, 1970, in 1973, they had the digital, the technology ready for digital photography. However, they did not launch it because they were afraid that they will cannibalize their analog printing business. And by the way, for the hidden gems, so they often happen when there are some kinds of inflection points. So for example, a company goes from offline to online, or hardware company pivots to software or vice versa. Usually at those times there's some— it's those inflection points, they're hidden gems, they just need to be uncovered. And then we come to the last pitfall of monetization, which are the undeads. So these are products you should have actually never launched in the market because they kind of come back to you and haunt you. Undeads Undeads are products that are in fact, let's say, the wrong answer to a right question, or the right answer to a question that was never asked. So basically this means that customers were never really demanding this product. One example here is Google Glass. It was launched and it was a failure. And the problem with undeads are that it distracts the whole business, and in the end it's a really negative impact on your brand image.

Yeah, thank you, Daisy. And in our case for Payhawk, we definitely wanted to make sure that if we prove the point that people are willing to buy our software and we figure out the monetization, then we are sure avoiding an undead product that is on the market. Then the next thing is the willingness to pay. How much people are willing to pay for our solution? And when we started building our willingness to pay, we were facing 3 different strategies that we can pursue. You know, coming from the credit cards world, we can charge per credit card. Coming from the expenses world and expense management tools, we could charge per user. Or coming from the invoice management, we can charge per invoices and data extracted. And the willingness to pay for those 3 different dimensions is different. So we used what we call the Van Westerkhoven method to identify the willingness to pay. So this is a method that is actually asking the customer 4 different questions, how much they're willing to pay for the product. And it's actually building this chart to tell you what is kind of the minimum, the optimal price where you can price your product. And this is something that we use for the 3 different dimensions. And we realize that we can actually uncover the anchor prices. Usually the problem for users is that people in the expense management world, they expect this to be by active user, which is something that is decreasing the amount of you can charge. Companies in the credit card space, they had the anchor price that usually in Europe credit cards are free of charge. So that's a really bad anchor price because you can really— it's much harder to move away from people's perception. And then for the invoice-based pricing, we were seeing very different results in markets like, let's say, Eastern Europe, where the labor is cheap and people can just go and hire somebody for €200 who can go and produce that. Or for example, in the UK where it is a lot more expensive to hire somebody to do manual stuff. So at the end, we decided to also focus on our spearhead. And at the end of the day, as I said, you are what you eat. And our focus was really on the cards. And this is what we selected. Then it was decision on picking up the right pricing structure. So, usually you have different strategies. You can focus on maximization, penetration, skimming. These are the kind of the three trade-offs I discussed before. And very often what you see in the startup world is that people go into two different directions. They either go on all-you-can-eat, so they give you everything everything that you can get from the product, or they go to the other side, which is kind of an à la carte, build it yourself kind of solutions with 25 toggles and buttons until you go to the final price point. And in the middle is where a lot of companies are actually focused on the customer journey and the value-based pricing. And this is what we identified in our case, that at the end of the day, when we are selling our spearhead, which is company cards, We designed our editions in a way where we can adopt— we can reflect the customer journey adoption. So for example, companies that are buying credit cards usually start by giving company credit cards just to the C-level executive team. Even though they're, let's say, 500-employee company, they just test it with, let's say, 10 executives, make sure these guys are happy with it, and so on. And we decided instead of fence our cards feature across the 3 different editions. In the First Edition, it is everything you can get for cards. So that is, you can grow as much as you want into the Cards Edition, no limitations. This is the best solution for you if you need cards. And then what we started seeing is that these companies that want to have more people in their system, they start— started having more users. So they said, I'm not going to have everybody in the company with credit cards, but I would like to have 200 employees to be using the tool to actually submit the expenses when they travel and we can go and reimburse them. And that's why in the second edition we introduced the ability for them to add the whole company with the ability to charge them per usage, which was the anchor price for that. And then the last step was that people were saying, "Okay, now that I have the users, I would actually want to reimburse those users." right? So we actually were selling them the ability to go and reimburse their users. And when the company was actually using the platform for company card payments and for bank transfers, they realized, well, why don't we actually run the whole account payables solution into the platform? So this is how we decide the value-based pricing and the journey in our strategy, which was very different from just going for good, better, best options and just randomly doing different features and capabilities to try to push people into the funnel. And the last thing that I wanted to mention is that freemium versus premium is all about what you optimize in the long term. What kind of company you want to build? Are you fine to be a company that is doing 20% gross profit, which is kind of on the maybe supermarkets level gross profits? If you're building a high-tech company, we said We really want to be focused on the high-growth trajectory. We definitely want to go and, you know, build our way and solution into that.