Picking the Perfect Pricing Model that Fits Your App and More with HackerOne's CEO Marten Mickos

Good morning. How many of you have a perfect pricing model for your company? Any lack of self confidence here? My name is Martin Mikos. I am CEO of HackerOne. HackerOne is the company you turn to when you really want to get hacked, because the best way to avoid getting hacked is to try to get hacked. And if you can get hacked by criminals or by nice guys, pick the nice guys, which we represent. But I'm here today to talk about pricing because I don't know why they asked me to talk about pricing. Maybe because I've made all the pricing mistakes anybody can make in their career. I've been involved in pricing of games and mobile phones, open source software which we gave away for free, and other things. So I'm absolutely no expert on pricing, but I've made a lot of mistakes and that's what I'm here to share with you today in 30 minutes. And because none of you has a perfect pricing model, you certainly need to be here and learn how to price your offering correctly. Because if you don't, you're screwed. There is no successful SaaS company that doesn't have good pricing. Like, it's completely impossible for you to succeed by whatever metric you have if your pricing isn't more or less right. And I know because I've tried. So what is a perfect pricing model? Like, these are things I've learned from my colleagues. I've been listening to them when they talk about it. One is, in today's world, we must make it easy to make the first purchase. And many times we don't. And making it easy is requires many different things. Pricing is one. Because everybody in this world has too many things on their mind. So you need to remove any hurdle for customers to sign up. So you must make it easy. I'm not saying you have to make it inexpensive. I'm saying you must make it easy to make the first purchase. Maybe you make it easy by making it so expensive that it flies by on a different radar or something. But you must make it easy. And good pricing will scale while you sleep. Like your customers will come back and say, hey, I helped myself to some more, I decided to upgrade, I decided to do more. And when it happens without your everyday interaction, it's much better. Sure, you can call them and say, hey customer, wouldn't you like to upgrade? Shouldn't you go for the enterprise version? But when you do that, it doesn't scale as well and you spend a lot of time talking to customers, which can be good. It's good to have a Close connection to a customer. But if it can scale on its own, it's even better. And then like with all sales, the problem is not you, the seller selling to you, the customer. The problem is always for the seller to expand to his or her boss and for the buyer to explain it to the economic buyer. Because every purchase has an economic buyer in the background who is not excited about the product, who doesn't care about the vendor, who doesn't have a personal relationship necessarily. So your pricing should be such that when it's taken to the economic buyer, it will go through attacker one. It meant we had to increase our pricing. So when I joined the company, we sold on a commission base where we say, okay customer, if you pay $1,000 in bounties to this hacker, we will take $2,200 as commission was a beautiful model, very economical, effective. Economic buyers didn't like was not predictable. When we said you will pay only for what you use, the economic buyer said sure, but what do I put in my budget? And we said, we don't know. If it's a lot of money, it's good news. If it's a little money, it's good news. Economic buyers don't like that. So an economic buyer will usually say just give me one number which holds and we'll agree on that and that's fine. So we increased our pricing and started selling subscriptions for much higher amounts. And. And the customer is much happier because they can predict every year what it will cost. And ideal pricing is also one which is painful for competitors to match. Not many will remember, but when AWS launched their cloud service, there were cloud services around. For instance, Sun Microsystems had one. But AWS came out with something that cost a ton of 10th of what they had back then. That's a pricing model that was impossible for sun to even consider. And now the rest is history. And everybody is practically everybody's running on the AWS cloud. Some running on Microsoft and Google and a few others. But with pricing that became difficult for competitors to follow. They had the whole market open for themselves. And many times when you make it painful for competitors to match, it is because you take a long term view and you compromise on some short term benefit because you know that in the long run you will win. But an existing player may not be ready to compromise all of that. They have much more to lose. So if you can do that, then your pricing is in pretty good shape. Here's an example on the slide. Zoom's pricing. Everybody loves Zoom. I love Zoom. Best video conferencing you could find. And it's so wonderful. You sign up and it's free. Whoa. And then if you are a small team, you pay $15 per month per license. And if you're a small business, you pay $20 per month per license. And then if you're a large enterprise, it's the same. Why did they do this? Why wouldn't the enterprise license be more expensive than the small business? And if they are the same price, why are they presented as two separate SKUs here? I must admit, I don't know. I haven't asked Zoom, but I'm thinking that maybe it says contacts sales on enterprise. So maybe when you click that, you'll have to agree on a much bigger pre purchase. You have to commit to some volumes and then maybe they start from a higher unit price, but you get a discount and discount ends up at this. I don't know. I think it is confusing to me looking at it, but at the same time I know how fantastically well they are doing. So they have a good reason for setting their price like this, but it's a very common model to start with something irresistible like a free offering. And then it looks like it's not too bad. It's just $15 per month per license. But in your company you have many months and many licenses, so it actually adds up to good business for them. So customers look for, always look for convenience and predictability of cost. Whatever they tell you, there are of course exceptions to everything. But even when they say quality is all we care about, they will often perceive it in a form of convenience. They want you to make life easier for them. They have a job that needs to get done and if you can get it done for them, they're ready to pay money for it. And the more you can bring convenience to them, the more you can charge. And they do want to know that they have a feeling of being in control of the cost, that they can predict the cost. I'm not saying it shouldn't grow, I'm saying they can predict where it will go. They can make their own models. Here's another example of a super successful company, Databricks, five years ago, zero in revenues. Today it's one of the fastest growing companies in Silicon Valley. And I just said that customers want convenience and I didn't say so, but intended to say that they need simplicity. And here you have an example of a vendor who started by taking a step of complexity in order to achieve simplicity. They have something called DBUs. What are they would you like to buy 10 DBUs from me? Like what are they? They are databricks units. So they invented a metric of their own that they define that they charged for. And then it's easy. Then you say, okay, the Jobs Lite compute for in standard edition is just 7 cents per DBU. That's pretty cool. So simple, okay, I have 7 cents. I can buy one DBU in the standard edition for Job Light's Compute. And if I'm a really advanced user, I may go all the way down to the all purpose compute in the Enterprise edition. And I pay 10x for the same unit. To me that's very impressive. Like the act of getting a customer to agree to a metric that the vendor has defined a DBU and then have a pricing elasticity. Pricing elasticity. What happened here? People in the background, could you get the slides back? And then they, they have pricing elasticity that goes from $0.07 to $0.65 per DBU. So pretty advanced. And of course it works because they sell to a very technical, technical audience. But then when you look at their numbers and their growth, it's just astonishing how they keep growing because they built something that will grow on its own. It will grow while you sleep because you're sitting there using their product and realize, okay, we need a few more, few million more of these units now because we are launching a new product or a new project and it keeps growing. But a lot of work goes into pricing like this to set it clear, because of course every competitor will be looking at this, it's a public price list and show how they are cheaper, less expensive, more effective, whatever. So when you publish a pricing like this, you are subjecting it to competitive analysis by others. So it's not like you could just dream up these numbers. You have to be able to justify them to a customer who will come back and say, but this other Vendor charges just 53 cents per unit. But anyhow, when NRR is high, you know your pricing is working. NRR stands for net revenue retention. Meaning if you spend a dollar today, what will you spend in the next period with the same vendor on average? So when you spend spend money on your mobile phone bill, you hope it will stay flat most months, a little bit go up when you travel or something, but you try to keep it manageable. But look at this Snowflake, another very, very successful company, they have an NRR of 169%. So on average, if you become their customer and you pay them $100 in one period, in one year, the next year you will pay them 169. You're adding $69 in the next year on average, across the whole company. Unbelievable. What kind of business is this that has so much demand that customers just come in and say, I need more, more, more, more. And they keep growing at 169%, which means that if they sign up, no new customers, their revenues is growing 69% next year. That's pretty amazing, too. And it has to do with pricing that it's set such that it's very attractive for customers to come on board. It's strategic. You go to your CFO and say, oh, cfo, this strategic project we have, it's going to be a little bit more expensive. And the CFO will say, okay, I don't care, as long as we get it done on time and we can launch our product and our ML is working or whatever. So very impressive pricing that they. That must be behind this. Here it is. They don't have DBUs, they have credits. Again, what's a credit? Who defines what's a credit? They define the vendor, defines the credit. And here the elasticity isn't that large. The cheapest1 is $2 per credit. The most expensive one, twice that price. DataBricks had a 10x elasticity. Somehow, of course, I'm comparing apples to oranges, so don't. This is not a scientific study. But think about the psychology of pricing, the mechanism. Here you come in and say, okay, $2 per credit, I need a few thousand of them. It's good. But then as you start using more, more people using it, you start using storage, and suddenly it grows into a significant purchase. And we saw it on the previous slide, 169% net revenue retention. So they. In my world, this is the ideal pricing model because it works so beautiful. And it's not like we hear everybody complaining about their price. I'm sure customers complain about price, but not that much. And then, by the way, if customers complain about price, that doesn't mean the price is too high. It is too high. When they abandon you. If they complain and they don't abandon you, in a weird way, they're confirming that your pricing is pretty good. Our role as vendors is not to please our customers, but to serve them. And if they choose to stay with us and pay our high prices, it means that they believe in the value or that we made it impossible to migrate away, which is a different topic. I was involved in this when I was CEO of MySQL and we competed against Oracle Everybody hated Oracle for their pricing. And I always said, if you hate them for the pricing, come over to us. Run on MySQL, all your problems will be gone. Many did, many didn't. Business people are afraid of abandoning even a product they hate that's overpriced. So the psychology of pricing is deeper than just rational thinking. If you're wondering about pricing and how to set it, and should you do freemium or not, a way to think about it is lifetime value of the customer. And this is something we learn from the gaming industry, where that's all they do. And I think whenever you would like to see into the future, go and talk to your friends who are in the gaming industry. They are creating the future for us. They've invented all the platforms we use now for our virtual events. They've invented pricing. They are driving nft. They're doing all these modern things that our future civilization will need. And when they think about pricing, it's all ltv. You come in and you start playing. And they learn quickly what kind of player you are. Are you one who will spend money? Yes. No, a lot of money, little money? Are you very competitive? Are you very social? Are you hanging in there all the time or coming only sporadically? They will figure that out very quickly. And in a game, if you're not spending money, they start showing ads to you to get at least some money back for you being there in their game. And then when they identify the whales, the ones who are spending a ton or a ton of a ton, they start giving them special access, special treatments, special badges, special everything. A little bit like in Vegas, when you spend a lot of money, suddenly the drinks are free. And the gaming industry do this because they look at the lifetime value of the customer and they know it up front. And they say, we don't care. We can take the money now, we can take it later, but before you leave, we will have received our money from you. So that's how they price. This is what justifies freemium models. This is what justifies discounts and everything, because you can see that the lifetime value is so high. I'll give you an example. There's a wonderful startup in Vietnam called. I forget what the startup is called, but they have developed a game called Axie Infinity. How many have played Axie Infinity? Okay, you have no. You don't have your pricing models in shape and you don't play games. I'm profiling you. So AX Infinity Unity is a crazy game. It has transacted over $2 billion of value in NFTs, non fungible tokens. And they have been around as a game for just half a year or something. It's going crazy, it's nuts. And when you play the game, for some reason you get an urge to plant some Green Shrub in your game, in your environment, and you are ready to pay $68 for it for Green Shrub in a game that will go away in a moment. Talk about brilliant pricing. Like, what is it that makes you push the button to make a bid on green shrub number 695? It's just unbelievable. And they've transacted 2 billion, which is more than the revenue in all these companies together, because you don't have perfect pricing models yet. So we must learn from those who are in the frontier and testing out new things. They are learning things that we didn't know. I haven't played the game either, but I'm aware of it. And I think it's a wonderful example of the new distributed world where people, people from all over the world have sort of gathered in Vietnam to build a gaming company and here they go and are transacting so much in crypto. So what they learn in the gaming world and elsewhere in open source as well, that some people will spend time to save money, others will spend money to save time. It's that simple. And many times we grow up as the ones spending a lot of time. We sit there tinkering with the software, installing it ourselves, managing without support. And at some point we get to a level of establishment in society, in our economy, to say, ah, I don't have time anymore, I'll pay for this, because I would rather my time is more valuable than my money. But in the beginning of your life, and for some people, always money is more valuable than time. And this influences customer behavior, especially with software where we have a lot of users who will never spend money for your software. But they might be your best audience, the most demanding, the ones who teach you how the software should evolve, the ones who find the vulnerabilities and the bugs like they can be very valuable to you, but they give you no money, but they give you a lot of time. And then you have the others who come in and say, I don't care about all that. Can I just pay you to get rid of the problem? Can I just pay you? And you will install it, you will manage it, you will support it, you will upgrade it, you will take care of all the problems. Can I just pay it to go away? And people are like this and organizations are like this. And in every buying instance, the company, the buyer will decide whether it's going to spend time or money to make this happen. So when you can use that in your pricing, you can find a pricing that suits both groups because you may not want to say no to one of them. You need both. But they have completely different behavior with pricing. And we saw that in open Source software with MySQL that most people never paid anything. Like we had 15 million users who paid us nothing, and then we had 12,000 customers who paid us money. But the users benefited from the fact that we had paying customers and could develop the product. The paying customers benefited from the fact that there was a user community who wrote handbooks, blogs, tests, tools, anything you needed around it. So it became a synergy between the two groups because we set the pricing right. So as for pricing models, which one should you pick? It's very context sensitive and situational, so I cannot make a recommendation to any of you. But here are some models that I've listed and I make a note there that those are not mutually exclusive. You can mix and match some of these together. But many of us sell subscription fees or fixed fees for a month or a year. And the benefit to the customer is that it's very predictable. We tell you what it costs and that's what it will cost. The disadvantage for a customer may be that they may pay for things they are not using. We may say the annual subscription is $1,200, no matter what you use, and it's easy and convenient. But you may, as a customer be paying for things you're not using. So then maybe you do consumption pricing. Say no, it's completely flexible. It's based on what you do. Then the customer benefit is paying only for what they use. But the disadvantage, it can be difficult to predict. And the economic buyer in the background may say, no, I don't want that. Couldn't you just set a fixed price so that we know, so that we can predict it, we can budget it? Most companies have tiered pricing. And what I showed you was this good, better, best. You always need good, better, best. You need three tiers. You can have four. Don't have more than that. It's human psychology. Some people will always choose the cheapest. Some people will always choose the most expensive. Most people will choose the one in the middle. So the purpose of the edge cases is to frame the pricing. You may sometimes need to have an enterprise version that nobody is buying, buying. But it gives an idea to the Customer of what the price could be. So in terms of psychology, you may need to show a very big number so that the customer can go to their own boss and say, boss, I bought the product, but I didn't buy the most expensive version. And then the boss will say, good job, this was excellent purchase. So there's a lot of psychology in how this works. Of course you need to justify it with real stuff, but with the amount of stimuli we get every day, we have so much to think about that we can't analyze everything down to the pure, rational, logical conclusion. Sometimes we just make a quick decision. There's all in one pricing and component pricing, which sort of is similar to subscription versus consumption pricing, whether how you, what kind of granularity you allow. And sometimes I compare to a country club where you're a member of the country club and you get access to all the services whether you use it or not. You pay a high hefty annual fee. Maybe you pay extra for using the golf course or something, but many of them have high prices that would include most of it to make it predictable on both sides. And then freemium, of course means it starts free and then there's a premium. That's where the word freemium comes from, which is very common in the gaming world, in open source software and other software products where the cost of distribution is so low that you can give away a free version and it doesn't cost you as a vendor too much. But if you go for a freemium, you must go all in. You can't sit there thinking, okay, we'll give away this for free, but let's hope not many will take it. No, you need to hope that everybody will take it. Like, if you do a freemium, you have to go all in and believe in it and hope that as many as possible will download it or use it, and then you can manage their customer journey from there. Because you are thinking about lifetime value. And from freemium to the lifetime value is a customer journey that you need to manage and build for them. Many of us work in startups and it's important to know that pricing that worked early on may not work when you grow. Like you may think you had a great start of your company, two, three years, huge growth, and suddenly something is not right. It's possible that the pricing model you picked doesn't lend itself to a wider audience, doesn't lend itself to the established markets you're now going after. So you must have the readiness to change your pricing model mid flight. That's really hard. You call customers, say, hey customer, we know you love us and we love you, but we have a new pricing model coming. They don't like it. Sometimes you have to grandfather in and say, okay, everybody who's on board, you. You can live on the old pricing for the next two years and all new customers will use the new pricing. But these are difficult transitions for a startup as it grows to pick a pricing that really can deliver the value that it needs to deliver. Then platitude towards the end here, the best pricing makes both the buyer and the seller successful. It sounds like a platitude because it sort of is, but it also is what works. Why are there companies that year in, year out perform well? It is because the pricing works. It provides enough of revenue stream for the vendor to keep developing and winning and investing and whatever they need to do. But also the customers are sitting there saying, yeah, I actually like this. I'm still ready to be a reference. I'll speak highly of it. I'll call my friends and tell them to use Zoom or Asana or Gainsight or whatever. I'm using Slack because I'm so happy with the value and I don't mind paying the price. And I know that the price is going up, but it still is worth every cent and every dollar. So when that happens, you get into a positive spin where you get a lot of goodwill in the market because people will happily speak favorably of you as a vendor. And this applies both in B2C and B2B worlds. Because people gossip a lot, people chat a lot about vendors. So whatever you say on your website is just one part of the truth. Most of the truth is happening in other places. It's other people having opinions on you. And if they keep saying that your product is crap and the pricing is high, then at some point you. You lose customers. So you really need to look for something that works. But you don't have to worry about customers complaining about price. Customers complaining about price is a good sign. Why would they complain if they didn't love your product? Like, if they hate your product and your pricing, they'll go elsewhere. So you won't even hear them. So a customer complaining about price, don't ignore it, but also don't see it as. As imminent doom. It may be a very earnest, honest, sincere signal to you from a committed customer. So with that, I'll stop here and wish you amazing pricing success. Better than I have in my career. Although I guess I would say I've learned a trick now and pricing has worked out very well for the past few companies I've been running, but. But it is still. There's nobody who's expert at pricing and there's a little bit of luck involved.