Startup Pricing 101: How To Price Your Early-Stage Startup Product, with Rami Essaid of Finmark

Welcome everybody, welcome, welcome. Another Founder Institute global event this Wednesday, July 13th, 2022. We're gonna have a big house, so I'm gonna let y'all file in. While y'all are doing that, if you've been to an FI event before and you've seen me, Martín EIR with Founder Institute, go ahead and tell me where you're coming from. We got people from all around the world, we are a global community. And I want to see what parts of the world you're coming from. Maybe you'll surprise me with some of the cities. I already see some familiar names, so it's good to have y'all. It's good to have y'all. Netherlands, Singapore, good morning, good afternoon, good evening. Vancouver, Las Vegas, San Jose, Boulder, Hopkins, New Mexico. Oh, y'all are doing it right. We're already crushing almost 200 attendees now. So again, I'm going to give it a little bit of time before we bring them around because I want you all to get the amazing experience and some great content we have today talking about pricing, talking about all the things you need to do to really figure out your market and what your customer is really gonna be able to provide as you build your enduring company. But before I dive into that, before we bring Rami up, as I mentioned, I serve as EIR for our headquarters. We're based in Palo Alto. I'm coming to you live from Austin, Texas. It's very hot here. Y'all in Texas. If it's summer for y'all too, I feel for you. But I hope wherever you— where we find you, you're safe, well, and are looking at building something amazing. What's going on in Chicago, Albuquerque, Zimbabwe, Lebanon?

Wow.

Iraq. What's going on? We got some really great representation out of the Middle East for this event too. But again, I could just dive in all day and see all of you amazing people. Hope to connect with y'all at some point. In person here in Texas. But again, as I mentioned, Founder Institute, we are a global accelerator. We help founders, may probably many like you in this audience right now, turn an idea into a company in as little as 4 months. We're a very rigorous program. We built, we take you through the building blocks from early validation, customer discovery, revenue modeling, branding, and then really start to help you build your pitch up just to see if this is something that you really should pursue for the next 5, 10 years of your life plus. To really build out. We're helping you kind of figure this out very quickly. If it doesn't work out, that's okay, but at least you get that knowledge faster than if you're doing it by yourself while connecting with a big global community of mentors, advisors, inevitably investors that will be your first checks in to the program. So, um, I work on all of our Texas chapters. I also serve as our executive director for the Texas programs. We're in the middle of our program right now. If you're one of our founders, grads, or current enrolled in the audience, please give a shout out, connect with everybody else. But if you want to learn more about Founder Institute, we are in the middle of recruitment for our fall and winter programs. So head on over to fi.co and see if there's a city near you. We're starting to head back into some in-person sessions. We actually just did an in-person session, the first one in like nearly 3 years here in Texas yesterday. So we're going to be starting to do that. But dude, we got a founder in the current program coming from Austin. I knew I'd find one of y'all in here. So we're sitting at about 255 people. I gave you all the spiel for FI. Learn more, head on over to our website. You'll get the emails following this event. Let's bring up Rami. Uh, Rami, we've done a couple events together already. He has some amazing content, always brings a great crowd. Rami, how you doing, bud? Where are you at, my friend?

I am doing well, doing well, thanks. How are you?

Doing good, man. I know, I know, we were talking before we went live. I know you're, you're not from the standard studio, but I like it. It's great. I know you're busy right now, so thank you for taking some time outside of the home office to give our founders, our current enrolled founders, our grads, all these amazing people in the audience, some really great content today. We're now sitting at almost 300, well over 250 attendees here. So I think we're starting to hit that plateau, but I'm now gonna go disappear into the ether. So you take it from here, my friend. I'll be back later to help with QA, 'cause I know we're gonna have a ton of that. Definitely, audience, use that QA tool. That QA tool is your friend, and we will try to answer as many questions once Rami's finished with his presentation to give you better insight as to where he's coming from. So Rami, floor is yours. Take it away, my friend.

All right, let's jump in. So I'm going to share my screen here and go into presentation mode. So my name is Rami Assad. I am co-founder and CEO of Finmark, and Finmark is financial planning software for startups. We help startups understand their runway, cash burn, and as it pertains to this webinar, their revenue forecasts. Before this, I had founded two other companies. The first one got acquihired, the second one I sold for nine figures in 2019. I am also a venture partner at an early-stage seed B2B software, seed-stage investment firm where we invest in B2B software. So I come at this as an entrepreneur first and foremost, but I also think about this as an investor. I'm an alumni in my past of a number of accelerators like Techstars and Y Combinator. Actually, I've done both. And I've taken my, you know, over a decade-long bits of experience and I try to give it back to the community. And today we're trying to talk about startup pricing, how to optimize your price, how to get it right, and what do you do if you get it wrong. Honestly, this is a byproduct of the last webinar that we did. We talked about how to forecast your revenue, how to scale up your revenue, how to go from $0 in revenue to $1 million in revenue. If you haven't watched that webinar that we did with the Founder Institute just a few months ago, definitely check it out on founderinstitute.com. But we had a lot of questions around pricing, and that was just too big of a topic to cover in that webinar. And so we decided to slice it out and talk a little bit more in depth about it today. So let's get into it. Let's get into it. OK. So pricing is an exercise that you're going to have to do no matter what type of business you're in. There's a lot of different business models, whether you're doing enterprise or selling software as a subscription, transactional businesses, even hardware. Anything that you're selling, you have to do some sort of pricing discovery and try to figure out how much are buyers willing to pay for my product. And there's a lot of different impacts if you get pricing wrong. And this is one of the biggest things that we see founders do wrong. And so here we're gonna talk a little bit about how to think about your pricing, how to go in and have the best first stab at it and how to optimize it. Now I'm going to, primarily talk about this in the lens of a software-as-a-service startup, right? That's the majority of the startups that we see. But know that this is really— the lessons here are applicable to whether you're selling hardware, whether you're selling usage-based pricing, subscription, e-commerce, anything that you're selling. A lot of these lessons are applicable there. So don't, don't feel disheartened or don't feel like this is only applicable to software-as-a-service companies if you're not that. Right? Now, the two key ways that people can price a product are either cost-based pricing or value-based pricing. Now, there's a kind of a gradient in between, and I'm going to talk about each of these, right? Cost-based pricing is when you take the price that it costs you to manufacture, produce, or deliver a product. And then add some sort of margin on top of that. So you can take, you know, a soda off the shelf, right? You might— it might take— cost them 50 cents to make it. A low-cost soda might go in and charge, you know, a 20-cent margin and then sell it for 70 cents. Similarly, right, if you're selling a software, you might say, hey, it only costs us $100 to host this, so we're gonna you know, double the price and charge $200 for our piece of software, right? The anchor there is how much in your mind is you start with the basis of how much does it cost you and build the price on up from there, right? The more margin that you create between your cost and the price that you sell it for, frankly, the bigger the incentive you have to sell it, right? The bigger your margin, the more opportunity you're able to create. So That is why a lot of people try to push you towards value-based pricing, because value-based pricing gets away from cost. It usually creates the biggest distance away from your costs and the greatest margins. And value-based pricing means that you are trying to understand how much your buyer is willing to pay for this. What is this worth to your buyer? Not how much does it cost you, not how much, you know, are your competitors charging, charging, but how much is— how big of a pain are you really solving for your buyer? Now, in between that, I mentioned that there's a gradient, right? Once you get into a competitive landscape, if you have not a lot of differentiation, one way that people differentiate one product versus another is competitive pricing, right? And so you can go back to that soda example that I gave, right? Pepsi and Coke are premium products and they have the best brand. And so when Mr. Pibb or the grocery store version of a soda wants to compete with those, they know that they can't compete on brand or quality, so they compete on price. And they look at the price of the competition, and they price themselves between their costs and the price of the competition, so somewhere in between. That's greater than cost-plus, but it's still— really compressed. The next iteration kind of go heading towards value-based is trying to survey people and understand how much are you got, how much is the broad market willing to pay for this, right? This is something that you should probably be doing upfront and early, getting an early survey before you even start building your product. You want to understand relatively how much are people thinking that a product like what you want to build might be worth. That gets you as close as possible to value-based. The reason that asking people how much they're willing to pay and surveying the market is a little bit different than value-based, because value-based allows— it takes into account pushing the price a little bit higher and not taking the market average, but instead being willing to drop some, some level of, of buyers so that you can optimize revenue. And we'll talk about that in a little bit. So there's the difference. But if you don't know how to do value-based, the best next thing is to ask people, how much is this worth to you? Now, when you look at that spectrum, I'll give you guys, you know, the best way to think about how do we create value, right? We want to go towards a value-based pricing. So how do we think about how do we— what value do we bring to our customers? Well, The best two things that you can do is either decrease the expenses of your customer or you can increase their revenue. Those are kind of the primary drivers of how you can create value. Now, you can decrease expenses by literally saving them money. If you have a product that identifies inefficient spend or reduces their infrastructure costs, very clearly you're reducing them money. The other way that you can decrease expenses is actually giving them time back in their day, right? And so if you say, hey, I'm going to reduce the number of man hours that you take to accomplish this task, then they can assign a dollar amount of value to their time and they can say, hey, you're saving me this much time. And that's a really interesting equation to think about because who you sell to then matters a lot because the value of their time matters differently, right? If you're selling to a CEO or a CFO, the value of their time is in hundreds of dollars, maybe even thousands of dollars an hour because they have a finite amount of time and their time is very, very strategic. But if you're saving time for an hourly worker, you know, at very bottom of, you know, a supply chain workforce, that time savings may be, you know, valued at $10 an hour or $15 an hour. It may not be very high, but the number of people where you might spread that time savings across might be large, right? This is where the spectrum of sales enablement tools really took off in the past 10 years, because even though salespeople aren't the highest paid people in the organization, or maybe BDRs or SDRs are the lowest paid people in the organization. But if you can make them more efficient, if you can reduce the amount of time that they have to take to accomplish each task, then they could be more productive, right? And so that time savings spread amongst hundreds of employees could add up to significant dollars. The one caveat, the one important thing that I want to call out in this category of decreasing expenses is that you don't get to realize 100% of the value that you save your clients. In fact, on average, what the, the, the rule of thumb is that for every dollar, or for every dollar of value that you want to realize, you have to save your client $5, right? So you get about 20% of that perception. Anything less than that, then it's not really worth it for the customer to take on a new tool. If you're saving them only You know, if you're saving them 50% on something, then they're not going to give you, you know, they're not going to split that cost savings because there's a cost and a risk associated with implementing your tool, your software, your product, whatever it is. On the other side of things, increasing revenue for the client increases enterprise value, and that enterprise value is usually a multiple of every dollar that you increase. And so for every dollar that you usually increase in revenue, that usually is 1 to 1 to how much they're willing to pay you. Sometimes you get for every dollar that you increase in revenue, they're willing to pay you a multiple of that in terms of value or perceived value. Right. And so how can you increase revenue? You might be able to increase the number of paying customers that they have, or you can increase, improve the customer retention. Right? The revenue is a byproduct of how long the customer stays satisfied, right? And so if you make that customer happier in some way, you make them stay around longer with that customer or come back and repeat business, then the lifetime value of that customer goes up, which means that in the long run, the customer sees increased revenue from each customer. Or you might be able to increase the dollar value of each customer, the average revenue that they're able to charge per customer. Maybe you enhance their product with some certain features that level up the value, the perceived value of their own product to their customers. And in doing so, now they can charge more for their product, which makes them very willing to pay for your product, right? If you think about all the purpose-built software tools that are just plugins into existing apps, that is how this, this landscape has really exploded in, um, in, uh, plugin tools. For the past 10 years is because every incremental tool really adds a significant amount of value to the end user. We personally at Finmark use a ton of different tools, from collaboration tools to support tools, all in-app, because we don't want to rebuild the— we don't want to rebuild the wheelhouse. That's not our core competency, right? So we use Intercom to support our customers. We use Chord to collaborate with our customers. A number of tools that increase the value that we deliver to our customers, increasing our revenue, which makes us super happy to pay more. There's here a bunch of different value-based pricing examples. I'm not gonna cover them all in detail. Take a screenshot, or as you know, Founders Institute definitely distributes the presentation afterwards, but a lot of people still, after describing all of this, come back to me with questions. So we're including here a bunch of different examples of how you can think about value-based pricing. The key thing that often is the case with value-based pricing is that there's a common metric that quantifies value. And that is especially important if you're doing usage-based pricing. Usage-based pricing oftentimes has some metric that you're scaling up around, um, around the, the price. And that metric that you define that drives the price higher really needs to be aligned, if not exactly the same, as the value metric that customers perceive value from you, right? And so, um, a really easy example to articulate this is cloud storage, right? The value in cloud storage, that what I'm paying for, what I really care about is the space, the size of my storage that I want to store, right? And so as the storage goes up, my perceived value goes up, and therefore I'm willing to pay more. And so that's a usage-based pricing example in where I'm— well, the metric that they're measuring me by is really aligned with the value that I see. Let you guys digest that here. Now, there's a number of common mistakes that we see when people are trying to initially build out their, their pricing, right? The first is that you don't understand your value. We talked about how to come up with value-based pricing, but this is something that you need to constantly be evaluating. At the very beginning, I mentioned another webinar that we did together that talked about revenue and scaling up revenue. In that, I talked a lot about, I talked a lot about doing user interviews. And so I'm not going to repeat those messages here today. I'm going to, again, point you back to that webinar that we did a few months ago. It was called Revenue 3-Step Guide to Scaling from $0 to $1 with Founder Institute. Go back and watch that and watch the part around the user interviews that you can do right before you start building your product. And then as you build your product, that inner— those interviews, the questions that I outlined there allow you to really understand what are the pain points for the customer and how are you addressing those pain points? What have they done in the past and how are you doing it differently? All of those different questions help you really understand and hone in on the new perceived value. That you're bringing in. At the end of it, I always say, ask the customer, how much would you be willing— how much is something like this worth to you? What would you be willing to pay for this? Not that I'm going to charge you that much, but how much do you think this is worth, right? And especially when you're early on, having that frank conversation with customers that maybe are early adopters and promising them that you're going to give them a discount Whatever number they tell you, that's not going to be the number. You're gonna lock them in at a much lower number, but tell me, how much would this be worth to you? How much do you think I should charge? Giving them, helping them feel like they're getting something special will help them kind of open up a little bit to you and give you what their perceived value might be. Okay, enough on figuring out your value. The next most common mistake that I see, the third most common mistake, I see is underestimating your costs. Now, I know this is a pricing webinar and we're talking about we don't even want to worry about cost-plus pricing. That's not really— our goal isn't to price based on cost-plus. I'm not suggesting that that is. The reason that understanding your costs and really digging into understanding your costs is because having bad margins will kill your growth. Margin is the difference between how much it costs you to deliver the product versus how much you charge for the product. The more margin you have, the more free-flowing cash you can take and reinvest into the business, into sales, marketing, research and development, etc. It's expected in venture-backed businesses, especially software businesses, that you have at least 65%, 70% margins. That's kind of the average. The higher your margins, the better you are as a company. The lower your margins, the less money you have to reinvest in sales, marketing, and research and development, which means that you're at a competitive disadvantage to anybody else that has higher margins. Right? That means they automatically have more money. Even if you raise more money or you don't raise money at all, they have more capital to continue to redeploy to make their product more innovative and to reach a wider audience with their product because they have higher margins. So low margins kill businesses. Anytime you get below a 50% margin, you're going to have a hard time raising any kind of venture capital. Because venture capitalists want high-growth businesses and they're not interested in low-margin businesses because it cripples growth. If you're at lower than a 30%, 40% margin, then you're gonna actually have a hard time surviving or growing as a business, let alone fundraising. Because if you think about your business, right, aside from the cost of goods sold, right, which is what— the costs that you put into building out your company, Aside from that, you have to pay, you know, administrators, HR, accounting, finance, legal, all of those different G&A services. Those G&A services can be anywhere from 10 to 20% of your revenue, right? And so if you have 40% margins, that means 60% of your revenue goes to costs, then another 20% goes to just keeping the business going with, with different salaries and support services. That means you have 20% to invest in, in sales and marketing. That's not nearly enough to grow, to let alone maybe even support your customers and have a customer success team that renews your customers. So low margins kill businesses. And so if you don't have a good understanding of your margin upfront, then how do you know how much to price? How do you know that you've priced it high enough or that you're building a product well enough to be able to grow? Next big mistake that I see is that the price is too low, right? I understand. I've done this. I've gone from zero to one so many times, and I fall back into the same mistake every time, which is to say, I don't want to miss out on customers. I don't want to— I'm desperate to get to that first million dollars, and I want to make sure that price isn't the reason that somebody says no to me. I'm afraid. To have somebody say no to me because of price. I just want any customer to love us up front because every dollar matters at the very beginning. The thing that we forget about is a lesson that's been told for over 30 years, and this lesson is called Crossing the Chasm. If you haven't read this book, it's incredibly— it's an incredibly powerful book, and it talks about how you bring a new product to market. What this book talks about and what has been shown over and over again in terms of market studies is that when a new product comes to market, the first people that buy it are innovators, right? That the top 2% of buying a new product are innovators that just want the newest, coolest thing. And then there's early adopters that are kind of the next 13 to 20% to 14% of people. And those again are the next generation of adopters. They're not as nerdy as the innovators, but they still want kind of the cutting edge thing. In these two sections, before you really hit scale, before you have repeatability, before you've gotten to a repeatable revenue model, you should be focusing on selling to these people. Because these are the people that are willing to look over bugs or imperfections in a product. These are people that, you know, pay for the latest and greatest, and these are the people that want to be on the cutting edge, that don't scrutinize every little thing that goes wrong. Once you're selling to the early majority, the early majority wants a holistic, well-polished, well-marketed product that they can know and trust and is convenient for them to buy and use, right? When you're first building, none of that exists. None of that is true for you in your product. So why would you target that early majority? The late majority wants price competition. They want to know that they got a good price for their product. So you definitely don't want to go to those guys because those guys are shopping around and trying to juice down the price as much as possible. The innovators and early adopters are actually price insensitive. That's not how they derive value. It has nothing to do with the price. It has to do with the perceived features and the perceived value and the innovation that you're bringing to them. And so, because they're price insensitive, you shouldn't worry about some, you know, how setting your price too low. You should try to see how high you can set your price, right? There's always going to be a ceiling. In terms of how much people are willing to pay, but it should give you more confidence to say, "Let me push this price higher and higher." The best example I can give for this is Tesla. How did Tesla come to market? As an innovative new technology, innovative new company, we want to go electric. What was the first car that they produced? The Roadster, a six-figure car that only a fraction of people were willing to pay for. It had 2 seats, it had a short distance in terms of what it's willing to travel, but it was a new innovative type of car. And what they used is the profits from that to then reinvest into the company to then build a more main early majority product. And I would venture to say that we're still in the early majority segment. They want a convenient solution, they've gotten there. We're not at the late majority. Where a lot of people are price sensitive and shopping around. At least Tesla isn't. That's not how they price their product, right? And so if you think about the Tesla Roadster, he wasn't worried about— Elon, you know, wasn't worried about, you know, making sure that everybody was able to afford it. He was willing to make— he just wanted to get enough customers that bought it that then got him to that next step. And that's how you should be thinking about your early pricing and your early product as well. The number one reason I see founders make a pricing mistake is actually focusing on the wrong customer. Now, how does that— what does that have to do with pricing, you might ask? Well, pricing dictates a lot of things. Pricing dictates the type of customer you should be going after. Your price dictates the acquisition strategy that you target your customers with. Your price even dictates your addressable market. And so let me double-click into that and talk a little bit more about that in each segment here. How does price define the segment that you go after? Well, if you're thinking about building a big company, let's say we want to get to $100 million of revenue, right? How do we do that? Well, if we are only charging $100 a year for our product, then we need to have a million people use our product. Well, there's not a million enterprises out there. So de facto, you automatically, if you're priced very low, you automatically become a consumer product. Now, there are, you know, it could be $100 per year per user, right? And you might be able to spread across an entire enterprise. That's not what I'm talking about here. If each, you know, invoice is going out for less than $100 a year, then you have to reach a mass audience, a consumer audience, right? And then move on up. If we're only charging, let's say $1,000 to $10,000 a year, then we need somewhere between 10,000 and 100,000 businesses to buy our product. There's again, not 100,000 enterprises that we can saturate and be guaranteed that we're gonna go after, right? And be able to penetrate. You should assume however many number of companies exist out there in your target demographic, You should assume that you can get no more than 20% of them when you're doing this napkin math calculation, right? And so that means that you're building a small and medium-sized business product, right? To be able to get enough users to get you to be a big enough company. Well, what does that mean in terms of building a small and medium-sized business product? That means that they don't have a lot of resources to deploy the product, right? That means that they want something easy to use. You know, the way that you even go about selling the product is going to be different, and we'll talk about that in a second, right? But if you're charging $100,000 a year or more, then heck, you only need 1,000 companies or less to get to be a big enterprise, to be a big company yourself. And so there's plenty of enterprises out there, and so you can focus on an enterprise product. Now, those enterprise products, if you're going after them, if you're charging that much, then they want a certain level of feature stability, support within the product, right? So the price that you're charging creates expectations and really defines what type of customer you're going after. And so when you figure out the value of your product, make sure that you're aligned in terms of price and the segment that you're going after. Price also dictates your go-to-market motion. Now, how does that play out? Well, again, if you're charging less than a couple thousand dollars a year, right, then that means you can't afford to have a salesperson that goes after and closes each of these deals, right? Because if you're going to pay a salesperson $50,000 to $100,000 a year, right, and that means that they have to get how many customers before you even break even on the salesperson, right? If you're charging, if a salesperson is making let's say ballpark $80,000 a year all in with taxes, benefits, and everything, right? A really low-end salesperson, and you're charging $2,000 per customer, that means they have to sell 40 customers before they even break even. And you don't want to think about breaking even, you want to think about a customer that, you know, a salesperson that brings you more revenue, right? So maybe double that, 80 customers a year, that means they're selling, you know, what, 10 customers a month, right? When you take into account churn, that's a lot of transactions to expect out of one, you know, a salesperson. It has to be really fast. Self-serve is the way to go, especially as you get lower and lower in price points there. Right now, if you move up, you're charging $2,000 to $10,000 a year, then okay, we can have a salesperson, but it really does need to be a fast transaction. Transactional means that you have less than a 30-45 day sales cycle that maybe it's inbound sales. You're not doing door-to-door sales or, you know, in-person sales. You don't have a big process where you present a bunch of times to a bunch of different stakeholders. You don't have a sales engineer and a big implementation time. This is really a transactional sale. You can have a salesperson lead it, or, you know, they're taking leads or they're reaching out to people, but they're transacting quickly. That means that, you know, they can close 4, 5, 6 customers a month and make you be in the black, not in the red, in terms of their CAC payback on the individual salesperson, right? Now, as soon as you get over $25,000 a year on up, that's when you can sell into enterprises. That's when you can take your time, have a longer sales cycle, and do the normal sales motion that goes in with with the more enterprise-like solutions, right? So your go-to-market motion, how, you know, whether or not you put a salesperson on there, the complexity of the sale and the complexity of the implementation, all can be— all is governed by the, um, the price that you make, that you have, right? And so if you have a low price and a high— a really complex sales cycle or really complex implementation cycle, you're going to find yourself in the dead man zone. It's going to be very hard for you to scale, and you're going to find that, that you are just not growing fast enough or making enough money to grow fast enough as a company, and you're going to just kind of struggle in this dead man zone. So be very aware of where your price is and the type of product that you need to build and the type of go-to-market motion that you have. Now the last piece that I mentioned here is that pricing also defines your market size. This I covered a lot in the last webinar, but I'll say it again because it's really, really important to think about your addressable market, especially if you want to raise venture capital dollars. You have to be going after at least a billion-dollar market opportunity. And so the way— the best way to do a market analysis to figure out what your total addressable market is is to take the average dollars that you're going to make per year off of a customer and then multiply that by the number of potential customers, and that's your total addressable market. Again, if that's over $1 billion, if that simple math gets you to be over $1 billion, you're golden. If it's less than that, then you may not have a big enough market to go and build a venture-backed business, or you just might not be charging enough. Right? If you raise your price, then that increase— you don't have to have more customers, you just have to charge more, right? So do this math really early on when you're evaluating your pricing to make sure that it's aligned with what type of business and how big of a business you want to build. All right. Now, how— what do you do if you've already set your price, right? You've already got pricing out there and you need to now iterate, right? Maybe the price is too low. How do I know if my price is too low? Well, we all know kind of a supply-demand curve, right? The, the, um, the higher the price, the lower the demand, and you kind of want to find that, that best equilibrium that gives you the optimal revenue, right? If you think back to the very beginning of what I said, I— value-based pricing isn't about surveying the entire market and taking an average of what people are paying. It's about finding the exact milestone or the exact combination that gives you the optimal price, right? Instead of doing all of this, you could just do a simple table, right? You can look at your price and then look at your conversion rate, play around with price for new customers, right? I personally just went through this exercise with Finmark. We used to price our product at the initial price at $25 a month. We raised it to $50 a month with the assumption that, hey, even if we get half as many conversions, on that initial customer point, we would still be making just as much revenue. Well, turns out we only lost about 15% of the conversion rate, maybe about 8% up to 20% of the conversion rate. So on net, we're making a lot more money because we doubled our price and saw a much smaller conversion rate, right? And so here's simple math. Let's assume you have 200 leads a month, right? If at $5 a month, 20% of them convert then you're going to make $200. You're going to make $200 off of those 200 leads. But if you have 8% that convert, then you end up with 10 customers at $20, and maybe you have $320 of revenue. But the optimal price is right there in that middle, right? 12% convert at a dollar point of $15, that gives you $36. So it's not always the most that you can charge. It's not always the most number of customers that you can get. It's somewhere in between, and it's definitely not an average. You can see the average here wouldn't have actually been the optimal range. And it usually— I've simplified this down, but what I would do into 4 data points, but usually the graph doesn't look nearly as smooth where the conversion rate is linearly dropping with The way to do it is to actually increase your price gradually. And the best rule of thumb that I have for that is to just do— I call it the 5 by 20 rule, right? Continue to raise your price by 5% in periods that you can measure until about 20% of people push back, right? And so if you can measure every month and continue to push the price by 5 to 10%, You don't want to do something too drastic. I know, I know, I just said I just did a really drastic price change, but that was the initial price point, not my overall pricing, right? So there was kind of some nuances there, but you can play around with it. And when you find a place where 20% of people push back, that's a good place to start exploring and slowing down to see if this is the right new pricing tier. That we should build on. Now, that said, this is something that you should always, always be exploring. The reason that you always wanna continue to explore this is that you're continuously evolving your product. You're adding new features, you're maturing as a company, you're building more brand recognition, right? Going back to the soda example, right? If one day Harris Teeter soda got featured, you know, went viral on TikTok for some reason And everybody said, hey, this is actually the best soda that exists out there, then all of a sudden that brand is worth more and they can probably charge a higher price tier. So it's important to constantly reevaluate where our pricing is and where is the value that we bring to our customers. And the best way to do that is to understand your customer cohorts, right? If you think about your pricing your customers in just one general bucket, you're going to really miss out on an understanding of the value that, that each of your customers perceives you with. And so instead, what you want to do is really group similar priced and similar looking customers together so that you can evaluate each cohort in its own self and say, how much is this cohort worth to me? And how much am I worth to each of these cohorts? Let me jump over and show you guys what I mean in a real-life example. Here's, you know, Finmark as a tool. I'm going to jump in and show you guys how I use Finmark and how, you know, we price things out within Finmark. Let's look at the different customer segments that we've defined here. I cohort my customers into 3 different types of customers. I have my small customers, and I look at those as the self-service customers that come to us, sign up online, and, you know, are worth anywhere— used to be from $25, but now anywhere from $50 to a couple hundred dollars a month. Those look vastly different than my mid-sized customers. My mid-sized customers on average pay me thousands of dollars a month, and some pay me monthly, some pay me annually. I even cohort those a little bit differently. To understand those mid-sized customers differently. And then I have customers that come from partners, and those look vastly different because the partner is the one that's selling the product, and the partner is the one that's using the product on the behalf of those customers. So those have a different perceived value. And so when I look at the average dollar value of each of these cohorts, it's vastly different. I can do pricing analysis and pricing discovery in each of these cohorts separately because they look different, they function differently, they use the product a little bit differently, and it's important that I understand their perceived value independently of each other. Right now, I don't want you to confuse that with customer acquisition motions, right? So the way you cohort your customer is all about how they look and feel. Look, you know, you're trying to group like things together. How you acquire the customers is different, right? You know, I have customer drivers, you know, self-service signups or sales-driven signups. That is a different level of granularity or a different topic than how I cohort my customers. Now, these might have a one-to-one relationship, you know, for example, my sales-driven customer acquisition motion really focuses on my mid-sized customers, whereas my self-service motion really focuses on my small customers. But that's not always the case. You might have a marketing funnel that is indifferent of the type of customer that you bring in, right? It might attract all sorts of different customers. And so that one marketing funnel that is the driver of your customer acquisition might actually produce different customers within different customer segments, right? So don't confuse the two. Oftentimes they do have a one-to-one relationship, and so that's why it's easy to get those two things mixed up. But think about them as far as how they use your product, what type of customer they look like, and the average price that they're willing to pay, not necessarily how you acquire those customers. And the next thing about it is is to then think about how you want— the next thing that you want to— that'll drive from there is thinking about how you forecast those customers, right? And so there's a number of different ways that you can think about forecasting, a number of different engines that drive your customers. But again, it's about identifying the cohorts or the types of customers or the products that they're buying, and then applying some driver on top of that just like I showed above. We went into much better detail in the last webinar about that, and we have on finmark.com, there's another webinar that we've done that talks about how to think about growth drivers, specifically just about growth drivers and the different types of growth drivers that exist out there. So you can watch that separately from here. And then the last thing I'll leave you guys with, as part of the Founder Institute family, We absolutely love, love Founder Institute and want to work with you guys. And so we give preferential pricing and preferential treatment to Founder Institute members. In fact, one of my head of partnerships, Julian, is an alumni of Founder Institute. And you can at any point reach out to him directly, email julian@finmark.com. You can email me if you need to. Follow me on Twitter @ramiassad. And we're happy to help you guys think through how to think about your cohorts, how to think about your forecast, how to think about your revenue forecast or even your fundraising plans. We're here to help and pay it forward to the community. And so we're offering obviously a discounted offer for you guys to get up and running with Finmark. All right. Hopefully I left enough room for some Q&A. I'll get off the shared screen here and we'll jump back into it.

Rami, thank you again. Another amazing talk. This is a great follow-up to that one we did in the fall last year. That was awesome. And again, by, by, by request from the community, he kind of crafted this up. So I'm gonna show the love in the comments, y'all. I know y'all, that was a very valuable discussion. And if you did join us from that last one, uh, I'm glad for y'all's feedback so that we could create some more follow-up content. For this as well as any other talk webinar we've hosted in FI land, y'all, please head on over to our YouTube channel, Founder Institute. Just find Founder Institute on YouTube. You can find the talk that Ramya was referencing that led to this one. You'll have this one also available and a ton of other content available to you. So please check Check that out for this talk, past ones, and more. All right, and make sure you're subscribing for when we're adding some new stuff. I host one on Fridays. So let's dive into some of the questions. We got a lot, we got a lot. So let's talk, Sri Harsha has one talking about competitive versus value-based pricing. You know, as a new startup, how can you confidently price a product? With existing players? Would you increase that product pricing gradually, or would you have something tiered right off the bat?

You know, the first thing is, I would say, is to understand your differentiation against the competing products, right? Are you doing something different? Are you doing something novel, unique? Or is there— is it really hard to— for— and not just from your own view, but from the, the lens of your customer, can they really understand and can you clearly articulate why you're better? If you can articulate why you're better, then you price yourself, you know, independent of the competition, but you do kind of have to fall within that, you know, somewhat of a ballpark, right? Because at some point, if you create too much distance, too much space between you and them, then they effectively, you automatically turn them into competitive-based pricing and give them that advantage, right? But if you can't create clear differentiation, then I recommend not discounting yourself, but trying to create parity with the competition, right? And if you need to, for early adopters, right, don't change your public pricing, but for early adopters, give them a first-year discount, right? Set the expectation that I'm worth this much, but I'm giving you a discount for the first year at 50% off.

Makes a lot of sense. Makes a lot of sense. Diana, still talking about pricing strategies. How can you benchmark your value-based pricing if there aren't really products or services like yours in the market? I already have some feedback on her based on that question, but I'm gonna let you take it first.

You know, I think it's really talking to customers. That's the first benchmark that you can do is ask customers, ask people in the space and look around for similar types of products and try to understand how similar types of products are priced and the value that they bring, right? And so if you can, if you're, for example, selling a sales enablement tool in the broader category, but there's nobody doing the same thing that you're doing specifically, look at the other sales enablement tools and see how they're pricing their product. And, you know, relative to how much value that you think that they might create. At the end of the day, one of the biggest mistakes— I should have added this probably, so I'll call this the fifth big mistake that founders make— is they try to get cute or cheeky with their pricing, right? They try to create some sort of weird new pricing innovation that, hey, I'm pricing different on a different metric or a different way than anybody ever has before. If you overcomplicate that, then you've added additional friction to the buying process, right? So look around at the broader market that you're in and try to fall within the grooves there because that's how your buyer is used to buying.

Yep. Yeah. And to emphasize on that point too, Diana, um, yeah, when I hear founders, especially like first-time entrepreneurs or startup builders talking about there's nothing like us on the market, tells me a little bit that you may have need to do a little bit more research onto the market. There are other things. If it's not exactly to Ramy's point, that's maybe your secret sauce. Look around. Around you, there's going to be some overlapping products and then you can glean pricing from there. Great question, Diana. We're going to stay on that with Kyra. You know, how can you determine how much people are willing to pay? Is it by giving them options? And then more often, I guess from her perspective, you know, the number seems low in the beginning for the first-time customers versus how much cost it is to make.

Yeah, I mean, again, this is where that— where I mentioned you should constantly be doing that price discovery. Just keep pushing the price higher, right? If you have a price point now, just continue to push it higher. You know, push it higher, see what, you know, what the new customers look like. If you see no impact across new customer conversions just by pushing the price higher, then you know you definitely need to continue to push it higher. But that also should give you some confidence to then go back to your existing customers upon renewal, upon things, and actually push them higher as well. Right? If you're in enterprise pricing, there is— and you're evolving as a company, there is no reason that every year you shouldn't try, try, not to say you do, but try to push the price of your product up by 5 to 10% every year on renewals. See what they say, right? Say, hey, we've improved our product, we, you know, inflation is going up, there's, you know, our costs are going up, our support costs are going up, you love our product, we want to keep you, We just have to charge you 5% more. Continue to push that on your existing customers, but then again, for new customer acquisition, just keep pushing that bar higher and higher until you see about 20% impact to conversion rate and then slow that down.

Got it. Let's shift over to profitability. Said's got a really interesting question because you had a great slide about, you know, you gotta get your margins down, especially if you're looking to raise venture capital. Because low margins aren't going to be attractive to VC. However, Said's coming from a different perspective that he needs help with. You know, his business model is focusing on lower margins, 20-25%, but they work in high volume, so it kind of balances out when you're getting that volume. But so how do you grow in a competitive market like this where the standardization of that market and the dynamics are dictating the margins?

I mean, if you're in that space and your space has really been commoditized, then, you know, there's really nothing you can do. But know that again, it's going to be really, really hard, right? It's going to be really expensive. You better have some big ticket sales to be able to scale and grow. And so you should really focus your sales effort, your outreach efforts on high-volume, high-ticket sales to do that, right? You know, and it's not to say that it's impossible, right? If you look at Twilio's business, right, it's a sexy software company, but it's actually a telco underneath, right? Like, they have a low-margin business. They're not a high-margin company. They have less than 50% margins, and they have— their competitors have even lower margins, you know, the competitors to Twilio. But they have a really easy-to-acquire customer on the low end. It doesn't cost them a lot to acquire customers on the low end. And on the high end, when they introduced sales, they introduced sales on really big-ticket items, right? Really big-ticket purchases and enterprise deals, which helped supplement, which helped them still be able to invest in growth. Now, over the years, what they've also been trying to do is layer in higher margin services, right? When you talk about SMS sending or connecting telephone calls, that was low margin businesses. But what did they do? They bought SendGrid to create email deliverability, which is a high margin business, right? Then they bought Segment, and Segment is identity, you know, helping you track your customers' identity across your different channels. And that's again a high margin business. So one of the key things that you can take away from that example is use your low margin business as an acquisition channel or to kind of use that as the beachhead to get into customers and try to layer on some high margin features, services, add-on products that can help boost your overall blended margin.

Good point. Nice, nice notes all around. We've got about time for just one more because we've got a little bit of housekeeping. I want to make sure you get a chance chance to do any final shoutouts. Noel, talking about vertical pricing, so when is pricing based on a consumption model appropriate for SaaS products? Is it?

I mean, consumption-based pricing can always be applicable, right? If you have a— if your users are going to scale up usage, right? You know, what we found is actually usage or consumption-based pricing, now it's kind of en vogue. If you will, right? Product-led growth, usage-based pricing, those are, you know, Amazon, Twilio, and a number of other companies have shown that you can build really sticky customers that have a really high lifetime value even though they don't have a very high initial contract value, right? Based off of that consumption-based pricing. The key thing to understand is what is the metric that you're pricing things off of? right? Is that metric going to— is there going to be natural growth in that metric as they use your product more, right? Are there going to be natural ways for the product to continue to feed on itself, or for the client to continue to feed on itself and naturally grow their consumption? Or do you have to inorganically force the customer to grow their consumption, right? If they can't naturally consume more, on their own, then consumption-based pricing may not work for you because there's too much friction to grow the lifetime value or the ASP. You're better off just getting as much money upfront as you can. But if you can create that loop, the addiction to use more and more and more of your product, then yeah, by all means, use consumption-based pricing because it is very well aligned with the customer. It allows you to build a product where the more they use it, the more value they see, the more they pay you, and everybody wins.

Awesome, fantastic stuff, and I think that's just about time. Final thoughts from you, Rami? Any tips for founders that are just trying to break into starting a company right now? And then of course, how can they follow you, follow your journey? Any other things that you're sharing out in the world? How can people in the family and FI land keep in touch?

Yeah, so follow me @ramiesaid, R-A-M-I-E-S-S-A-I-D. I write for TechCrunch, I write for Forbes, and I write on our own blog, and I often do these webinars. So I try to promote everything that I do out there. I really try to help entrepreneurs, but my Twitter is probably the best way that you can keep track of what I'm talking about out there in the world. If you're just getting started as a founder, look at the resources on Founder Institute. This is my— honestly, like, not pandering here— this is my favorite place to come and talk to founders. It's such an engaged community, and you guys bring such amazing content. And even within the programs, right? I spend time mentoring different programs because of the quality of the directors that are in the different programs. So check out Founder Institute, the resources that they have. Obviously, you know that because you're here. But if you haven't already applied, if you're just thinking about getting started in a company, you know, I did this not once but twice. I, you know, for my first time and second time, I went to Techstars and then Y Combinator. There's always more that you can learn from others, and it just reduces the barrier to, you know, or increases the likelihood that you'll survive. It reduces the barrier to entry. And so if you're just thinking about getting started, Founder Institute's a great place to go, right? Get your feet wet, get in there, and then that'll help you step stone into a, you know, a Y Combinator or a seed round from there. And so I definitely, I'm a big fan of those, of your program, and for anybody that's getting started.

Thank you, Rami. Thank you, my friend. As always, looking forward to the next one. We're actually gonna be having you coming up next month for Founder X, our global conference for the FI family. If you want to learn more about how you might be able to attend, definitely look to apply to the program. If you're a grad, current or old founder, mentor, investor in the community, you should be getting some invites here. That's coming up. So we'll take you— you get back to your day, Rami. We wish you all the best, and I can't wait to see you again soon. And then for all you here in FI land still with us, I dropped our YouTube link in the chat. Please subscribe. When we go, this video, amongst every other things, you'll get an email as well from us about this event, subscribing to more. I'm gonna be hosting a few more this week. We got one on Stonks tomorrow featuring 6 of our global grads pitching from panel investors. Every Friday Friday through Founder X next month. I host a Friday show called the Global Startup Report where we also interview grads from around the world. So subscribe to our YouTube, you'll get some updates more on that. But that's enough from me today. I'll catch more of y'all in the week ahead. Wherever it is we find you, we hope you're safe, well, take care of yourself, take care of each other, build the future that we all want to see, and we'll see you next time.