253: A Subscription Economy, with Patrick Campbell
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Whether it’s a gym membership, food box subscription, subscription software, or a media subscription, the subscription economy is here and is taking over.
There is no one besides Patrick Campbell, Co-Founder and CEO of ProfitWell, that can discuss subscriptions as eloquently as he does. Patrick joins us this week to dig deep into what a subscription-based price model looks like. The beauty of the subscription model is for the first time in history, we now have a revenue model where how we make money is baked directly into the relationship with the customer. How to price a subscription model is focused on two major pillars of growth, how it’s priced and the cost per customer as well as retaining those customers.
Patrick Campbell is the Co-Founder and CEO of ProfitWell, the industry-standard software for helping companies like Atlassian, Autodesk, Meetup, and Lyft with their monetization (through Price Intelligently) and retention strategies. ProfitWell also provides a turnkey solution that powers the subscription financial metrics for over eight thousand subscription companies (it’s free and plugs right into your billing system). Prior to ProfitWell Patrick led Strategic Initiatives for Boston based Gemvara and was an Economist at Google and the US Intelligence community.
George: It’s another edition of the Conquer Local podcast. And joining us this week, it’s Patrick Campbell, the CEO and co-founder of ProfitWell. ProfitWell is an organization that analyzes the subscription model and they work with companies all throughout SaaS software on their pricing and their subscription model. And when it comes to pricing, I don’t know of anybody that knows more about pricing models than Patrick Campbell. So we’re happy to have him here. It’s all coming up next.
George: It’s the latest edition of the Conquer Local podcast. And joining me on the line, CEO and co-founder of ProfitWell, Patrick Campbell. Good day, Patrick.
Patrick: Yeah, it’s awesome to be here. Thanks for having me.
George: Well, we were excited to get you on the podcast, I know that you’ve been working with numerous individuals in our organizations. They’re saying good things about you and your company. And let’s kind of set the stage, you give us a little bit of background on ProfitWell and a little bit of background on you.
Patrick: Yeah, absolutely. So my personal background is in econometrics and math. I grew up in basically the boonies of Wisconsin. I like to joke, it’s Southern Canada. I know you guys have some southern roots or some Canadian roots there, excuse me. But yeah, and then I went to school in Illinois after growing up on a farm and basically studied math and economics and then ended up working in the Intelligence Community in DC. And then worked at Google and both places basically I was doing a bunch of different things around value modeling.
Patrick: So just taking a bunch of data and then finding either some sort of output. So when I worked at NSA, I was finding a bad guy or a girl, when I worked at Google finding money and then basically wanted to jump into doing my own thing. And so about seven years ago, ended up founding ProfitWell and we focused essentially on the hard parts of subscription growth where we have a free subscription financial metrics product so you can plug it into your billing system and then we give you all of your reporting but also show you what’s wrong and what’s right in your business. And then we sell you products to fix what’s wrong around retention and pricing and things like that. So that’s the rambly 60-second version there.
George: Listen, I want to really dig into subscriptions because the subscription economy is here and we are subscribing to things on a daily basis. I’ve got a bunch of them, I look at it every month, comes to my credit card, there’s my subscriptions and this is a phenomenon that’s not going away. In fact, we’re doubling down as a society on this business model. So I don’t think there’s too many people know as much about subscription space as you. So would you like to give us a little background on your feelings around the subscription economy?
Patrick: Yeah. I think the reason we’re in this position at this point is because we basically are serving about 20% of the entire subscription market. So meaning 20% of the market’s using one or more of our products. So we just have a lot of really interesting details around what’s happening in subscriptions. But to me, the beauty of the subscription model is that for the first time in history, we now have a revenue model where how we make money is baked directly into the relationship with the customer. So 100 years ago you were relying on maybe one, maybe two stores in your city. And then 50 years ago was kind of like the stores were hoping that you would come back because there were a dozen stores in your city and they wanted to increase that loyalty.
Patrick: Now there’s no worry, it’s baked into how you make money. So if you’re having a bad month or really not giving that customer that much value, they’re going to leave you. And that means there’s going to be some things where people are starting to kind of forget their subscriptions and things like that. And thankfully their banking apps are helping with that. But overall it’s one of those things where I think it’s just kind of beautiful how it creates that equilibrium, that symbiotic relationship between the customer as well as the actual company.
Perfecting the Subscription Model: All About Value and Relationships
George: The one thing that I’ve found is when we’re talking about these subscriptions, it’s not really like it said six-month subscription or 12-month subscription. It’s like you turn it on until you don’t find value and you cancel it. Are you seeing that as being the more prevalent model rather than locking people into a one year or a two year?
Patrick: Yeah, I think the term to me isn’t that important. I think the term helps. If you have a product that is not going to be onboarded with that customer within the first week or the first two weeks. You might need to lock that term in a little bit longer because they need to kind of see the product, they need to work with your training and work with your customer success and things like that. And it’s a little bit more of a commitment. But for most products out there, especially in the world of media or in the world of consumer, these products, it’s exactly like you said, it’s, hey, do I keep getting value? Is this something that I still want to buy and I’m going to continue to buy it? And if I don’t have that value, then I’m not going to. But if I do continue to get that value and maybe I use it for years.
Patrick: I mean my gym membership I’ve used for years, maybe it’s not as much as I’d like to have used it. But it’s one of those things where I have that relationship with that company now and I think that’s what makes it great.
George: In the old days when I started in sales, I was trained by my sales manager to go out and sell and it was radio at the time. So you got to go sell 300 spots to the customer and then try to convince them to run those spots and you bill them equally over 12 months. And I remember always getting the phone call or getting yelled at in early November of the year-long deal that, “Oh we got to burn a bunch of spots.” So that wasn’t really a subscription model at that time. It was just really spreading out the payments over 12 months.
George: True subscription models is all about delivering that value. Now how do I decide how to price it? You’ve analyzed over 14,000 different subscription models with your organization, but what do you find is the best way to price that model and how much rigor do you need to put behind it to find the right price?
Patrick: Yeah. So I think this is a really, really important topic and not to wax poetic on it too much. But I think that businesses just in general, we focus so much on acquiring customers but we don’t focus enough on these other two major pillars of growth, which are how you price and what the money per customer that you bring in as well as retaining those customers. And we don’t focus on it as much because we’re so focused on that initial energy rush of getting the customer in the door when in reality it’s one of those things where you want to keep that customer around for a long time and you want to make sure that you’re exchanging that value for that customer. And so when it comes to pricing, the best way to think about pricing is that your price is the exchange rate on the value that you’re providing.
Patrick: So what I’m providing a gym membership or subscription software, subscription media, whatever it is, that price, because we don’t trade anymore and barter anymore. We have this currency for money. We’re basically saying it’s worth $10 a month, $15 a month, whatever it is. And to answer how you should price it, it’s a very, very long answer, but I think it’s one of those things, there’s a couple of things that you should kind of keep in mind.
Patrick: One, you have to focus on those customers that you’re selling to. You have to understand those customers on a very, very deep level because the worst thing you can do is kind of average out your price. Meaning if we’re selling a mass-market media product, we’re probably going to have a fairly low price because we’re trying to get as many people as possible.
Patrick: But if we’re doing a premium like the New Yorker or some sort of very, very nice premium magazine, we’re probably not going for everyone. We just want to go for the people who are actually willing to pay. So our price might be 3 to 4X that particular low-end product. So that’s a really, really big thing. And there’s a lot of research you can do by talking to your customers and talking to your prospects to try to figure out where their willingness to pay is. And more than happy to go deep there. But the other thing that’s really, really important when it comes to subscriptions is how you charge. Doing just a straight-up flat rate, X dollars per month for everything probably isn’t the best idea. It’s a good idea for a lot of products but not for most products.
Patrick: Really what you want to be doing is charging based on some sort of unit of value. So whether that’s per 100 visits, whether it’s per six pieces of content, whether it’s per 1000 widgets or what’s it, or whatever you’re doing. What’s really beautiful about the world of subscriptions is we can now with technology measure the actual value that the customer’s getting and then we can charge based on a proxy of that value, which is really, really good for them because they only end up paying for the value that they’re getting. They’re also really, really good for businesses because they’re paying for what they get and then they’re expanding based on their usage and based on the value that they’re getting.
George: Well, so the challenge that we’re speaking about there is if we go horizontal and we’re trying to sell something to every business, it doesn’t matter how big or small they are or where they’re located or what vertical they’re in. We may be leaving opportunity on the table because there are certain verticals that need more solutions and those subscriptions shouldn’t be one for all. It should be more based upon what value am I able to deliver to that particular customer?
Patrick: Yeah, 100%. I think that’s the essence of that subscription. It’s not just a straight-up subscription. It’s not just like, “Hey, here’s everything for this price.” It’s understanding the customer, understanding what tier, what package they should be in, understanding what their consumption should look like for a given amount. All of these different things to basically make sure that you’re getting as close to that value that the customer is actually getting and charging along that access because those are the most successful subscription companies out there.
Hunter/Farmer Sales Reps Bring Different Skill Sets to the Table
George: The organizations that I’ve found have been very effective, have this hunter farmer mentality, so you’ve got a team of hunters that are acquiring new business, but then those existing customers where it’s a different revenue motion where you spoke about earlier, we’re doing the expand. It’s a different person, it’s a different demeanor. It’s a different process to be able to take that retained customer and to move them up the stack and to add to it. Are you seeing that as well?
Patrick: Yeah, 100%. And if you have this value metric, it makes it a hell of a lot easier. Right? Because if that person just starts using that product more and more, you don’t even have to have a different type of sales or customer success person to go after that person. But it makes that customer success person or even that salesperson’s job initially extremely easy because it’s just like, hey, if they’re using more if they like the product, all of a sudden those contracts are going to expand. And if those contracts expand those sales folks or those customer success folks end up making more money. But I think the other thing you got to think about is you’re exactly right. You do need to treat these as two different motions because that initial salesperson is basically working to get them over the initial hump. And then that other person is basically working to basically keep them retained and keep them expanding in their usage. And so that’s a very, very different relationship and a very, very different goal even though they’re so closely tied together.
George: And it is rare to find people that can do both. It is a different skill set.
Patrick: Plenty of people who think they can do both though, which is kind of the funny part.
George: It is scary sometimes. So when it comes to compensation in the organizations that you’re working with, how important is the compensation plans to make sure that the subscription programs are sold and retained properly?
Patrick: Yeah, I think sales comp is one of the most underutilized levers when it comes to sales folks in most like subscription organizations. Because if you think about it, like we were kind of talking about the number one thing you got to think about is not just that initial sale, but it’s also that retention, right? So at the very bare minimum, and there’s a bunch of different reasons why you would do this and not do this, but I think at a bare minimum, having some sort of clawback, like a six month clawback or having some sort of like, hey, if that user ends up leaving or if that user ends up expanding within the first three months, you get part of that cut as that net new salesperson. But I think there’s a lot of other things too, the really traditional thing for customer success teams and saying traditional and customer success is a bit hard because customer success has been around forever.
Patrick: But it’s also one of those things where every customer success organization is defined differently. But the one we see very commonly is just their comps based on 105% of retention, meaning they got to keep everyone in their book of business around and then they have to expand it by 5%, whereas on that net new side making sure that they’re comped basically on the term or that subscription. And also there’s those clawbacks is super important and I think that if you’re seeing something bad happening in your sales, either net new or in the retention side, the first thing that you should be doing is probably looking at that comp. So when we saw this in our own business, what we started to do is when we were transitioning actually to subscriptions for one of our products, it was moving from a one-time purchase to a subscription purchase.
Patrick: We actually basically took every one-time purchase that was still coming in, I think we put a 0.5 decelerator on it. So basically if they sold a contract for 100,000 it was only worth 50,000 in their quota. And then if they sold a subscription, I think it was 1.25 whereas basically an accelerator on all of those and instantly overnight, basically salespeople want to get compensated and instantly they started selling subscription. And so yeah, it’s a really, really powerful tool that most teams are under-utilizing.
George: Well I’ve been doing an enormous amount of research around comp plans and going into blogs and I’ve got all sorts of friends that I’m talking to that I’ve made because I knew that they understood comp plans. My background is media comp plan and I find that SaaS software is different. And it’s interesting what you just said there that I’ve heard of organizations that have one-time fees where they actually recognize the revenue over 12 months just so they don’t have those cliffs and they keep it from being lumpy. Have you heard of that as well?
Patrick: Yeah, I’m not an accountant so I don’t know if that’s exactly gap, but yeah, I think it’s one of those things where depending on how the sale is and how it’s recognized, it really kind of depends on how you collect the cash, how you’re going to recognize the cash and ultimately how you’re going to book the cash. Right? So if I’m going to book it where that salesperson is kind of a hybrid between net new and they have to kind of keep that lead around or that company around to paying for that 12 months, then maybe I’m going to break it out over 12.
Patrick: But I might also if it’s a year contract I might give them the whole booking but then basically have it as a six to nine months cliff on that where if they churn within the six to nine months, they lose that ability or they lose part of that ability. And then I’m going to make sure that my retention side is comped appropriately as well. So yeah, it just kind of depends. I think that cash flow is so important when you get to a certain size that recognizing is one of those things that can kind of help you kind of keep the business moving.
Pricing Is Never Finished
George: I find that one of the questions that we get asked the most, whether it is a single proprietor that start up an agency, maybe they work for a media company and they started their own gig or it’s somebody that’s new in the space or it’s a media company that’s transitioning is how should I price? How do I put this whole thing together? And it really there isn’t a science where there’s just a silver bullet. It’s actually you have to test and you have to be paying attention to it. Are you seeing that across the organizations you work with that are successful?
Patrick: Yeah, I think it’s less testing because I think the problem with a lot of testing is that most of us kind of convince ourselves that testing is the right thing, when in reality we don’t necessarily have enough traffic or enough at-bats to truly do a price test. So it’s not necessarily like a test. Now what you do typically is you’ll run research. So that’s what we recommend is your research, what’s going on? Because you also don’t want to AB test your pricing even if you have the traffic in certain situations because of PR issues. And so what we recommend doing is if you have the traffic in a short sales cycle, meaning your sales cycle is less than a week and you have the traffic, do as much testing, like AB testing, multivariate testing as you can.
Patrick: If you have a longer sales cycle or you don’t have enough traffic, do a lot of your research upfront. So this means going collecting data and actually applying some algorithms to it. That can be super basic or you can make it super complicated if you want to. But based on that data, it essentially hedges the decision or hedges the risk for you. And then once you’ve hedged that risk, what it allows you to do is basically make an informed decision or have some sort of a rollout where you can sit there and qualitatively and quantitatively look at the numbers that come afterwards and say, “Okay, is this working? Is this not?” And I think that’s a really big thing you got to think about pricing.
Patrick: It’s never finished. It’s something that it’s never going to be perfect. And that’s kind of the point because it’s that exchange rate and the value that you’re providing, essentially what’s happening is as that value is being provided, your exchange rate is going to change because you add more features, your brand gets better. There’s so many different things that end up happening to basically make that value go up and therefore your price should go up.
George: How much attention should we be paying to the people trying to eat our lunch to the competitors? How much analysis do we need to do on their pricing model?
Patrick: Yeah, so I recommend doing very little actually because you’re assuming that your competitor has done their homework. All data that we have indicates that no one is doing their research. So your competitor is certainly not doing their research. And also what’s really interesting is your competitors, you’re assuming that you’re selling the exact same product to the exact same type of customer. So you end up getting in this weird loop that you’re chasing uninformed data and also data that isn’t congruent to you.
Patrick: And so what we recommend doing is doing some of this value-based research, actually collecting data, talking to your customers, and then doing some research on your competitors. Just to put that in context, meaning if we find out from the value-based data that the price is $150 or that’s the willingness to pay, but at our costs are $200 and our competitors are at $80. It doesn’t mean we automatically just go to $80, we need to kind of figure out what is that delta, what’s going on there? And how do we fix our costs? Or how do we change the product to overcome those costs? Right?
Patrick: And so that’s what’s really important. You don’t want to go chasing the wrong type of data. Now, I will say that if you’re in an extremely competitive market, meaning you’re in a market that’s every single deal you’re hearing, “Hey we’re going to choose between you and this other competitor.” Every deal, then you need to take your competitors a lot more seriously. But when it comes to pricing you should be focused on that customer more than anyone.
George: And if they are coming up over and over and over again, maybe asking a couple of customers that you haven’t been able to win deals from to say what’s the value that you’re finding from that solution or that product and get do the Intel that way. And then you can maybe put a service layer over top of it that increases that value. So you might be able to win some of those deals. So pay a little bit of attention to the competitors but not too much.
Patrick: Yeah, and I think that that’s a really good point. In the world of sales, we get so caught up in getting the deal done that we don’t like take a second to step back and really try to figure out the why. And so if they’re bringing up a competitor, the first thing I want to ask is, well what do you see is valuable in them compared to us? What’s interesting? Just ask that question because then you know the objection that you’re coming up against but you also understand where you guys might be weaker compared to that competitor, right? Or us in this particular scenario are weaker compared to that competitor.
Patrick: And so that’s a really, really powerful thing to do and don’t be afraid to talk to your customers about this. One of my prospects about this. One of the favorite things I like to do is when someone’s like, “Oh, what’s the price?” And for one of our products, the budget and costs are a little bit different depending on the customer and a bunch of different factors. I’ll ask like, “Oh, well that’s really interesting. What point would you think this is way too expensive that you’re not going to return my call?” And then they might fiddle around a little bit, but then they’ll give me some sort of answer. I’ll be like, “Okay, cool. What price is this like a really good deal that you’d sign the deal today?”
Patrick: And they’ll fiddle around a bit and give an answer. And then I know as a salesperson, how far off am I from these people? Or is this something where we’re within range? And then I know where I have to battle against or I know where the objections are or at least know where the price sensitivity is. And that’s where it’s so powerful not to shy away from price as a salesperson and just kind of take it head-on. Especially in the context of competitors.
George: Well, I find that some rookie salespeople are afraid to talk about price or about the fact that there’s going to be some sort of commercial terms in this arrangement. And I kind of put them then in the bucket of professional visitor at that point because the reason that the prospect is speaking to you is they’ve seen some sort of value in speaking to your organization. So why not bring up price early in the conversation? Is that what you’re saying? Like don’t be afraid to do that?
Patrick: No, totally. I mean, the thing is, is we all realize that things cost money and that’s the biggest… We all buy things every single day or at least every single week if we’re a little thriftier. And I think one of the things you got to think about is in that context is don’t make it this taboo thing. Make it something like, “Well yeah, of course, we’re providing value here, blah, blah, blah.” I want to talk about price to make sure we’re on the same page and that’s going to make your sales process so much more powerful because you just come off super professional and you come off like you’re not screwing around with that prospect who might be screwing around with you because they think that what you’re offering is a 10th of the price of what it actually is going to be. Or maybe they think the price is a lot more and you can kind of figure out how to then fill that up if that makes sense.
George: We’ve been speaking to a gentleman who probably knows more about subscription-based pricing than anybody in the space. Patrick Campbell, the CEO and co-founder of ProfitWell. Patrick, if people want to learn more about your company and what you do, how do they find out about you?
Patrick: Yeah, so I’m at firstname.lastname@example.org or I’m just Patrick Campbell on LinkedIn and I’m more than happy to help.
George: We appreciate your time today in the Conquer Local podcast. Patrick, have a great day. Thanks for joining us.
Patrick: Thanks, you as well.
George: So an interesting thing we heard Patrick say, pricing is never done. It is a constant living, breathing animal and we need to be analyzing it. He is digging deep into the data and then applying that information to find the best price models. We talked a little bit about how compensation ties into all this. We found out that most people don’t do this right, that it is a constantly evolving kind of thing.
George: Patrick has worked with a number of organizations over his years, seven years founding ProfitWell and we really should take some of his learnings to heart. You can learn more by going to their website and we’ve really enjoyed working with ProfitWell over the last few months and we’ve learned a lot working with this organization and that you can learn even more by becoming a follower of ProfitWell and Mr. Patrick Campbell. So thanks for joining us this week on the Conquer Local podcast.
George: We have the Conquer Local community, which is continuing to expand at breakneck speeds. We’d love to have you as a part of that at conquerlocal.slack.com. And as always, we’re on LinkedIn too. Plus we’ve got our website. You can come by the website to see past episodes and we’d love to have you join us as a subscriber, whether it’s on Spotify or on iTunes or on SoundCloud or Google Play, or the various other channels where you can find the Conquer Local podcast. We look forward to seeing you right back here next week as we continue to conquer local. My name is George Leith. I’ll see you when I see you.