Richard Valtr, Founder of Mews, shares his philosophy for success based pricing, built on top and bottom line win-win.
By Stephen Millard, Operating Partner at Notion Capital and Richard Valtr, the Founder of Mews.
Many of us focus on the minutiae of pricing levels and packaging, comparing ourselves to our competitors or accepted wisdom, and starting with the costs we bear rather than the success we create. Just as the best founders obsess with the problem first and the product second, so too the best founders focus on success first and price second.
Richard’s success based pricing model explores four interrelating topics:
Too few leadership teams ask themselves: “How much success are we delivering?” says Richard. "I'm a big believer in the fact that if you can align with the interests of the party that you're serving, then that's the best way to go".
Think of these topics as a simple mental model to frame your decisions across the organisation.
SaaS has validated the wisdom of always thinking win-win. While traditional software sales was predicated on a largely one sided transaction - I win, you lose - SaaS relies upon long term value and relationships. “The starting point for everything we do at Mews,” Richard explains, “is to take a long term view of value creation and alignment. If we want a long term relationship with a customer then surely the best strategy for us to start with is this: how do we help them grow? If we want customers to stay with us for 5 years or more then we have to align with them and be part of their success, perhaps over decades.”
Too few leadership teams ask themselves: how much value are we creating and how much value are we providing? I'm a big believer in the fact that if you can align with the interests of the party that you're serving, then that's the best way to go. Richard Valtr.
That long term alignment may be about efficiency and bottom line performance, and we will come to that shortly, but the vast majority of companies care first about top line growth.
Richard elaborates: “They have to see progress in their own business, and as a SaaS provider you need to be having conversations about this on an ongoing basis, not just once a year at the time of renewal - that’s zero sum thinking - rather every single month.” Conversations about progress, success, growth and top line revenue can't just be coming up at the time of renewal of a contract, it needs to be something that you're building on all the time.
We see this at the best companies in the Notion portfolio and in our discussions with Dan Steinman who is adamant about the importance of success led conversations throughout the year: “I like to recommend,” says Dan, “that companies consider that they should be able to ask a customer - if I asked you to renew and expand your usage of our SaaS right now what would you say?” Adam Hale, Venture Partner at Notion goes further still: “a customer renewing is no more than them saying they don’t dislike your tech enough to rip it out!”
Rather, the best companies, like Mews, align with and focus on their customers’s top line growth. Through this they eradicate any zero sum game thinking. Richard again, “If you want to be a successful SaaS company, you have to think about value from a long term perspective, and every single outcome that you're driving has to be focused on the customer and their success, measured first and foremost in terms of their growth".
Grow their addressable market
Richard goes further by focusing on not just the obvious signs of success for their clients, hotels, which is measured by their bed occupancy rates, but also in terms of how they can grow their total addressable market. “Hotels are largely measured by their ability to sell rooms,” Richard explains, “so they are selling a product that is probably only used 8 out of every 24 hours. So we need to ask ourselves, how can we help our hotels to monetise the value of the other 16 hours? That’s what I mean by growing the TAM. What other services could they offer and how can we help?
This then becomes a true partnership whereby we are 100% aligned around our customers' growth.
Don't discourage or punish your customers from consuming more and more
The mistake that a lot of companies make is punishing the customers for wanting more of their product by basically slapping on a ridiculous fee every single time they want to try something new. Make it easy for your customers to start and scale. “We have definitely been guilty of this,” says Richard. “It’s as if we wanted to put people off from consuming more or trying something new. I don’t know what we were thinking! We’d go ‘okay, well, we've thought about a strategy and this is new thing that we've developed, therefore, you're going to have to jump to this level of usage, in order to actually try it’, and for most customers, that's going to be prohibitive.”
The answer. Watch out for pricing and packaging creep that discourages adoption!
Common characteristics of the best pricers
One thing all the best pricers have in common is that they have cultures of customer discovery. They're thinking about the value in the mindset of the customer, they're evolving their pricing and packaging regularly and they are localising pricing to different segments and international markets. This is something I think that we need to be really conscious of:
“The biggest challenge lies in our customer’s success,” says Richard, “not customer success as a function, but the very essence of success as measured by our customers' performance.”
Ask yourself, does our product have the trappings of becoming a competitive advantage for your customers? This is really something to obsess over in the product. For Mews, the number one question is, “could this decision on this product drive an outcome where our hotels could be 30% over the index of the market?” In this example, not only are Mews customers' revenues higher but their revenue multiple, thereby increasing their market cap.
“A great way to think about this is this,” says Richard, “you're not in the business of customer success. You’re not in the business of making customers happy. You're in the business of making customers successful.” That is a really important distinction for a lot of companies to make because sometimes having an unhappy customer might be acceptable. What matters is how successful they are and the fact that you are their competitive advantage.
2. Help your customers do more with less
Top line is all about making your customers successful, measured in revenue growth. But at the other end of the spectrum, customers also want and need to do more with less, to become operationally excellent and efficient, and ultimately to generate more contribution to the bottom line.
Richard provides an example from the hotel industry: “post pandemic hotels are having to adapt to two major trends. Firstly, people are travelling less so occupancy rates are lower and therefore they have to operate with fewer staff, but still offer their unique experience. But if that wasn’t bad enough, the pandemic also changed the way people work. We’ve all experienced more freedom and flexibility with work from home / work from anywhere. Now that doesn’t work for most hotel staff, who are hotel-based, plus the hours can be long and antisocial. So even when hotels need fewer staff, many are struggling to find the people they need.”
Mews’ proposition empowers customers to deliver better customer experience with fewer staff. “If we can enable that then we are truly integral to their survival. We allow them to do more with less.”
Mews has done this by adopting a product leadership approach, and by focusing on operational excellence. Asking themselves, ‘how can we help our hotels to move from 12 to 6 or perhaps even 3 employees, while improving the customer experience?’ They are striving to make their customers more operationally efficient, whilst also driving a greater reliance on the convenience of the solution.
“There was a really great article in The New York Times a couple of years ago about the tyranny of convenience,” says Richard. “I really loved what it was saying, even though it was a piece about how technology companies are technically awful, because they basically make your life more convenient, therefore you start working on yourself a hell of a lot less. I think this really applies to the B2B side and SaaS world, as you want to think about how your solution is creating a home in the business. We need to make it truly upsetting and inconvenient for a customer to lose the level of automation we offer. By going somewhere else they might have to piece together a solution with three or four applications to deliver the same level of convenience that you're getting there and that would be painful!”
3. Increase your share of wallet
This has to be focused on value delivery, not just value extraction. If we start with an assumption of 2.5% as a percentage of revenue as our ‘rule of thumb’ then to go to 5%, while also benefiting from additional revenue growth, as detailed above then companies have to work very hard to cover more and more of the customers ‘value chain.’
Richard again has some interesting philosophies here: “I think of pricing as a debit and credit model, where the debit is the SaaS fee, which is largely fixed and / or increased in increments and credit is the infinitely scalable consumption driver. The challenge is how to increase the SaaS prepayment “debit,’ while also increasing the % of the variable, without disincentivising the customer from increased adoption.”
The best way to think about the SaaS prepayment is in packaging. “An interesting way to think about this Starter / Pro / Enterprise - which is the model we use - but importantly to create a strong narrative that allows a customer to clearly understand the models and the rationale for moving from one to the next.”
Interestingly, this packaging model doesn’t necessarily mean that all the advanced features are in the upper bracket. That may be the case at first, but as features mature then they move “to the left” and after 12-18 months may have gone from enterprise to starter. But by that time you have added way more functionality to the enterprise option and perhaps incremented the price.
NB As best practice we recommend making regular changes to packaging, as your product evolves.
One the “credit” side, an obvious route is to charge a small fee on payments. A starting point might be to introduce an interchange fee on payments, which has no impact on the customer, but generates value for you as the provider. The next step is perhaps to introduce a transaction processing fee, then perhaps an issuing product or embedded FX.
The narrative for the debit and credit components is critical. Richard elaborates: “this has been a core insight for us. There is a simple narrative, but there is also a kind of graduation ceremony every single time a customer goes from one level to the next. It's important we are seen as trusted advisors, so that we only recommend the right package, so when they ‘graduate’ to the next level, that’s a big thing!”
Returning to payments transactions, then in Mews case that isn’t mandatory, but there is real value to using the integrated payment functionality. “What we try to say is, ‘you have to take payments, and if you want to do something completely outside of our system, that's fine. But, if you want to have a completely integrated solution then use our capability and you will see the rewards, because it's not just a payment system, it's really a behavioural system that will lead to greater gains in productivity and convenience for you.”
SaaS companies should always be thinking about a monetization strategy that drives faster growth and revenue expansion, and what are the S curve levers and bets that they can take. Payments now feels like a no-brainer. So how can we do more? Is there deep functionality we are missing that would add a tonne of value that we could buy?
Constant innovation is critical. Making bigger bets, but being really clear about which ones to introduce and how to do so. As companies get bigger that can get harder, but that’s what the best companies are able to do,
Richard worries about this: “It’s important to think about what are the levers that we can actually push towards hyper growth. Within us, we do have a philosophy that a company like ours should have the ambition to grow at 100% every single year. So, we must not get into the trap that later stage SaaS companies basically get, which is that it slowly starts getting down, and you basically over egg for efficiency, rather than driving innovation.“
4. How does your strategy generate greater bottom line contribution?
When it comes to unit economics, for long term success, the most important factor is surely bottom line contributions, measured by how much of every dollar of revenue hit the bottom line. Think of this as revenue efficiency.
What often happens here is that SaaS companies sacrifice service level which is definitely not the way to maintain long term relationships. The focus must be on improving your ability to service a customer even better through product and automation than through people. “What we want our customers to feel,” says Richard, “is that they have a much greater service level than they had when they had that one to one relationship with a support person.” Richard continues: “For me, that's one of the trickiest areas, because I have a belief that the best companies are not necessarily the ones that employ the most amount of people, for example we believe that a 200 bedroom hotel should go from a staffing of about 40 people to about 3-4 permanent staff positions. You still have to make sure that the guests are super satisfied, more than ever before, so you should think about creating new roles, which are more directly tied to guest experience as guest journey curators, personalised guides and memorable moments facilitators and those are hard changes to implement. The same goes for the system - if we are trying to drive these outcomes, then our service and support mindset has to also change and those are also not easy things to implement. The vision, execution and delivery all have to line up and that’s just inherently super difficult.”
While not a pricing lever, the ability to deliver excellent customer experience at scale, without armies of CS staff is certainly a value creator for the client and is another example of the win-win mentality Richard espouses.