Author Archives: Mukund Mohan

About Mukund Mohan

My discipline will beat your intellect

Is it easier to spot winners or to weed out middlers during the selection process for a startup accelerator?

The last 10 years have seen a rebirth of startup accelerators, which has resulted in many more startups getting funded by early stage companies who are startups themselves. Startups helping other startups is a very interesting phenomenon, but that is a topic for another post.

I would segment startups into the top 10, the next 25 and the remaining 965. The top 10 take between 1% and 3% of applicants. The next 25 take between 2 to 10% and the last 965 take what they can get. Of course many startups go from one accelerator to another, with some going to 4 accelerators before their seed funding.

Over the last 3 years I have seen our accelerators accept anywhere from 3% to about 8% of applicants depending on location.

Of the over 500 applicants in the most recent cohort at Seattle, we selected 2.6% into the program and interviewed about 8%.

So the question that comes up often is how easy or hard is the selection process.

We (like most others) will read 100% of the applicants, but give a more serious look to those that are recommended by our trusted partners. Getting a introduction from partners ensures that we will not only look at the application, but also shortlist for a second review.

Typically 2-3 folks review the applicants in the first pass and if most applicants get an average of 4 out of 5, then we will interview them.

There are many many criteria our reviewers look for including market, problem and founder’s background.

What I have found is that it is much easier to reject 80% of the applicants than to pick the ones to shortlist.

Looking back at the data to understand the ones we missed, which turned out to be great early successes, in the 8 cohorts I have reviewed, we have missed between 9 and 12.

What are the 3 most mistakes people make in the application process?

1. Estimating a very small or incorrect market. Most accelerator programs are looking to fund companies that will become large. Many entrepreneurs underestimate the market size, which puts them in the “interesting” but not “viable for the accelerator”.

2. Positioning the startup in the summary, especially for consumer startups. Usually we get between 5-10 companies in the same “market” in any given cohort. For example, travel planning was pretty “hot” in 2012, service marketplaces were frequent in 2013, etc. The difference between the startups was marginal in terms of the market, but most of the companies were positioning themselves as a social network first, which by default caused us to weed them out.

3. Not explaining the background and experience of the founders in the way that explains why they are best suited to execute the opportunity. I have seen many young founders look at building an enterprise SaaS product after they found it hard to get traction for their “consumer” app. That usually means a pivot after they got very little traction, so it raises red flags.

The 5 most important questions to ask before you price your SaaS product

Over the last few weeks I had a chance to review 89 of the companies to understand their free to paid conversion and also a chance to talk to 13 companies. What I learned was that time spent on the pricing page was a key indicator of conversion and you can A/B test your pricing page for colors, position of your highest and lowest prices, number of plans showed, feature listing and your call to action. The names of your pricing plan also has a significant signalling effect on your customer’s perception of your product. I believe the future of SaaS pricing will move from pay-per-usage to pay-for-outcomes.

The most frequent question I get asked about SaaS companies is how to think about pricing for the product. Here are some constructs to think about and 7 questions to ask before you come up with a pricing model or a price for your product.

1. Understanding your customers current solution and options and their “cost per unit of activity” is the most important thing you should do first. For e.g. if you sell a Sales force automation solution, the customer might be using an Excel spreadsheet to track their sales because they dont have too many opportunities. So in their minds the “cost per unit” is zero, since they have already “paid” for Excel.

2. SaaS pricing is a marketing function not finance or operations. If the team that determines the value of your offering to the customer is another them, then it is their responsibility. The reason for this is that value of your product determines how much you can charge, not what customers are willing to pay. Value cannot be determined as a absolute, only relative. Which is why you have to compare it to their current solution.

3. At the early stages (less than 50-100 customers) optimize for more customers and quicker sales cycles not for profit. To get data and buying patterns you need enough data and a meaningful sample size. When you go beyond the early customers, it is time to optimize for LTV and CAC.

Here are the top 7 questions to ask before you come up with a pricing model for your SaaS product.

1. What are the current options for your customer?

Find out how are they solving the problem your product addresses currently and how much does it cost them to do that.

2. What are the different segments of your customers?

Find out if there are different problems your product can solve and the value associated with those problems. That would be the best indicator of

3. What is your goal from your pricing?

It is not always obvious to say that your goal is to get the “most money” or to be the most expensive product. Some companies want to be the 80% functionality at 20% of the cost option. Determine your pricing goal – profitability (after customer acquisition costs), value creation, marketshare, etc.

4. What is your cost of customer acquisition?

For most parts, your cost of development tends to be fixed (if you hire 3 people, you have to pay their salaries regardless of how many features the ship), but the cost of customer acquisition tends to be a variable. So if your costs dont take CAC into account, you will have a model that wont be profitable.

5. What is your sales model?

Linking Sales and Pricing for SaaS

Linking Sales and Pricing for SaaS

I usually use the price and complexity of sales / marketing on two axes to understand the sales strategy for a SaaS company.

If you are a company with a lower price point and low complexity of sales, you will have to rely on customers to try and buy (freemium) the product on their own and work on obtaining customers at a low cost.

If you are a very complex product or have a complex sales process and your product costs a lot, you will have to hire a field sales team to help you sell.

If however, your product is priced high and your complexity is low then you will build an inside (phone) sales team.

If you have a high complexity product and sales model and low price, your company will die.

Use this model to determine where you want to be and price the product appropriately.

From “Pay per usage” to “Pay for Performance” – pricing transitions for #startups

Over the last few weeks I had a chance to review 89 of the companies to understand their free to paid conversion and also a chance to talk to 13 companies. What I learned was that time spent on the pricing page was a key indicator of conversion and you can A/B test your pricing page for colors, position of your highest and lowest prices, number of plans showed, feature listing and your call to action. The names of your pricing plan also has a significant signalling effect on your customer’s perception of your product.

I wanted to showcase today the biggest transition pricing plan pages will have over the next decade.

The move primarily affects B2B companies, but is being driven by consumer Internet companies currently such as Uber with their surge pricing.

There are 3 steps towards the maturity of the pricing model that I foresee.

The first step is the transition from perpetual pricing or “pay unfront” pricing to subscription billing or “pay as you go“.

The second step is the transition from subscription billing and “pay as you go” models to utility billing or “pay for usage“.

The third step is the transition from utility billing or “pay for usage” to outcome billing or “pay for performance“.

Why was perpetual pricing or “pay upfront” popular?

Perpetual pricing was easy to understand, for most accounting and finance teams.

Paying for software and amortizing it over a period of time was easy to register on the financial records. The initial assumption was most of this software was going to be in “perpetuity” or forever. It was over 20 years from 1980 to 2000 that most folks realized this was not true. Software changed constantly, had to be upgraded and the 20% annual maintenance did not pay for the new versions.

Why did we transition to pay as you go?

When finance and accounting teams realized that only a fraction of the software that was purchased, is going to be used, and much of it was “shelfware“, they were loathe to pay for “things that were not being used”.

So, they decided to move from a CapEx (Capital Expenditure) to an OpEx (Operating expenditure) mode. This transition moved the costs of software from the balance sheet to the income statement.

The second problem was the high cost. Perpetual pricing assumes a 4 year fee for the software would be paid “upfront” and so the cost of that software was pretty high. Which meant, most smaller and mid-sized customers were unable to afford it.

Finally, once the sale was done, there was no “skin in the game” for the software provider. The success or lack of the deployment or usage of the software was upto the customer. Obtaining value from the software was also something the customer was on the hook for, not the provider.

Why is there going to be a transition to pay for performance?

While the problems of lack of usage, high upfront cost, and the “skin in the game” can be solved by Software as a Service (SaaS) models, which ensures payment to the software partner once the software is being used and only for the amount it is being used, the problem of “obtaining value from the software” still exists.

The problems with SaaS pricing (usage) are 3 fold:

1. Inability to predict the “constant amount” each month since it is be based on usage, instead of a fixed amount each month.

2. The need to focus on “success” instead of “best effort” for customers. Instead of the provider saying “this is what we will provide” the provider and consumer jointly will have to agree on the “desired outcomes” and the share of value they will each obtain from the transaction.

3. The need for providers to capture more of the “value” associated with the pricing instead of the “cost plus profit” model.

Which is why the next transition will be towards subscription billing or variable pricing not on usage but on “outcomes“.

What are outcomes?

Here is an example that most folks can relate to:

Imagine if you had to go from location A to B for a meeting by 6 pm. You are late and leave at 530, and expect it to take you 45 minutes to get there, but you’d really like to get there by 6 pm. You are willing to “pay extra” to get there on time.

Instead of charging you for the distance, which is what the taxi charges you, the cab instead charges you more for the “desired outcome“, being there on time. That means, for someone who left at 5 pm the cost would be less than for you, even though both of you went the same distance.

Here is another example.

If the desired outcome from a startup joining an accelerator is to A) Get a follow on round of funding and B) get some early customers instead of paying (a percentage of your startup, not an actual amount) a fixed %, startups will transition to paying for those outcomes or not paying at all. Or associating a variable payment based on the level of achievement of that outcome.

I believe the biggest transition that pricing pages will have to reflect over the next decade will be the move from “usage based pricing” to “outcome based pricing”.

How to name your SaaS pricing plans? A primer from 89 examples

There are over 7500 SaaS companies according to angel List. Over the last few weeks I had a chance to review 89 of the companies to understand their free to paid conversion and also a chance to talk to 13 companies. What I learned was that time spent on the pricing page was a key indicator of conversion and you can A/B test your pricing page for colors, position of your highest and lowest prices, number of plans showed, feature listing and your call to action.

I did notice that of the 89 companies, 82 of them gave their pricing plans “names”. Each plan had a name so their customers could associate the name with the plan. Most (over 80%) used standard and conventional names but it was interesting to see the spread. Here is the data from 89 companies and 251 plans.

Names of SaaS Pricing Plans

Names of SaaS Pricing Plans

The most important points you want to take away are the following:

1. Even though SMB and SOHO (Small Office, Home Office) users are the first few to sign up for a SaaS service, 3 of the top 5 names were named Enterprise and Business and Large. I would imagine this has to do more with the inside out naming (the plan is large or enterprise, not the company buying it).

2. The plans named “Small or equivalent” were largely in the bottom quartile of the distribution. Even though over 70% of companies had 3 plans, only 35% of them named the smallest plan as “Startup”, “Starter” or “Lite”. The most common starting plan was named “Standard”.

3. Of the 20% of companies that used “custom” names like Boutique, Tyrannosaurs, or Garden named all their plans uniquely. The surprising element of the companies that used custom names was that most of them had images to convey the “size” of the plan.

There were some other surprising things I learned as well in my discussions.

1. In naming plans, understanding the end customer’s billing and invoicing was key. Most customers got an email invoice (a few sent PDF invoices) and they would either file them or expense those invoices (if < $50) or would send the invoices to an accounting team.

Ensuring that the “accounting” team did not ask any questions was the consistent mention among 3 of the startups with custom names for plans.

2. Naming the plans to support your payment gateway is also critical. Getting too cute with names means the payment gateway will support a higher refund request that were marginal.

3. Many of the companies had to setup standard names so their marketing and product management teams could do better analytics and research on the backend, consistent with their reporting. Surprisingly, if the names were “standard” the companies found it easier to have a conversation to understand conversion rates, pricing options and changes with their finance teams, design teams and other outsourced companies as well.

Top 5 things you should A/B test (except for price) on your pricing page

When I looked at 89 SaaS companies to determine their conversion from freemium to paid options for their customers, I also had a chance to talk to 13 folks about their approaches to continually optimizing their pricing pages for good conversion. Time spent on the page was the most important criteria associated with freemium conversions.

Why keep A/B testing if you have the industry leading conversion rates though? Three reasons:

1. Customers change, their preferences changes, or their perception of value changes.

2. You bring out new features or new product offerings.

3. The market or competition changes.

What I did hear clearly from all the 13 folks is that they tested price changes a lot less frequently than other changes they made on their product page. So what are the top 3 things that marketers changed? It all boiled down to a clear understanding of their customer and their (better) understanding of their own product (or features).

1. Position of the lowest and highest prices: Some folks like the usual left to right increasing price format and others like the opposite.

Right to Left

Left to Right

What is the difference? Not so much on the desktop in terms of conversions, but when viewed on the mobile phone with top to bottom view, most people tend to understand the value a lot better and tend to go for “any plan, even the cheapest”, than not sign up at all.

2. Same colors for all plans versus different colors showing the different plans available with the premium plans having “premium colors associated with them”.

Same Colors

Different Colors3. Total number of plans shown – over 70% of the companies have 3 plans, the second most popular is 2 plans followed by 5 plans. One plan or four pricing plans are rare.

3 Plans

5 Plans

4. Listing all the features on your pricing plan versus a list of features with check boxes to indicate which plans support which features.

Listing features

Check box for feature comparison5. Using one Call to action (CTA) button (what should the customer do) versus providing options for the call to action associated with each plan.

One CTA All Plans

 

Multiple CTA for Plans

 

 

Time spent on pricing page is the #1 early indicator of your SaaS freemium conversion rate

When I looked at 89 companies to learn how to convert freemium customers to paid, I also reached out to 13 of them to understand what drives the conversion.

Any early indicator to better conversion from viewing the pricing page to signing up for a plan was time spent on the pricing page.

If customers spent very little time (less than any other page) on your pricing page, then they would either not sign up or sign up for the “free plan”.

If customers spent too much time (more than any other page) then they would not sign up at all.

If customers spent time in the “middle zone” of your other pages, they conversion rate to a paid plan was most likely.

This was even if you had a free option prominently featured on your pricing page.

So how do you figure that out. I am assuming most people start out using Google analytics.

Google analytics: Time spent on pages

Google analytics: Time spent on pages

On your Google analytics page you can navigate to All pages and look at the average time spent on page. (see below).

Navigating to Time spent on page in Google Analytics

Navigating to Time spent on page in Google Analytics

So why is this the case? There are 3 major reasons I learned:

1. More time spent usually meant more options and more confusion for customers. When customers were given 3 pricing options (one of them being free) the conversions were higher, than when there were 5 pricing options. Not surprisingly even when the “free plan” was displayed “under the fold”, the conversions were the same. See below for what “Below the Fold” means.

Free plan as an option

Free plan as an option

Free plan below the fold as an option

Free plan below the fold as an option

2. More time spent on the page also indicated customers were reviewing other competitive options on other tabs. While less time meant customers had already made up their mind, so they were more likely to just “sign up and try”, it also meant the customer liked the options enough to try.

3. If the pricing option was the place where customers spent the least amount of time, than other pages, that was an indication that the customers were not ready to sign up and were “window shopping” alone. Either they did not have the pain point that your product addressed, or they were not in as much pain to even try the solution.

There were 2 exceptions that I found consistently among all the marketers I spoke with.

Not surprisingly, if the “referral source” of the customer was a search marketing campaign, and the time spent was the least, then the conversion rates were much higher than the referral sources.

If the referral source, was social and the time spent was more than other pages, then the conversion rates were much higher as well.

You can find referral source on Google analytics and correlate that to the time spent on pages.

Referral Source Google Analytics

Referral Source Google Analytics

What I learned from looking at 89 SaaS companies on how to convert freemium customers to paid

The most frequent question I get asked about a SaaS busines is pricing and sales growth. With pricing the biggest question is how to covert more free customers to paying customers.

While there is no average, I have seen companies focusing on consumers having as low as 1% conversion to a max of 10%. Companies focused on pro-sumers (professional consumers like freelancers, etc) have a slightly higher rate of conversion at 2% minimum and those that focus on SMB (Small medium business) have some of the highest at close to 5%. Finally 10% converted customers is not unheard of for companies selling to enterprises.

The time taken to convert when a customer is free to paid also varies from days to months or never.

What determines when a customer moves from premium or your paid version?

I look at 89 companies in the Microsoft Ventures accelerator programs from the 370+ alumni to understand the techniques used by companies to convince customers to pay. While not comprehensive, here are the 10 most frequently used levers that companies have used to encourage their customers to a paid version.

1. Advertising: In this version, the paid version has no ads. (e.g. WordPress hosted has am option for non ad based and advertising supported blogs).

2. Time: These companies allow for a free version for a period of time (e.g. HighRise, or Trigger.IO) – a week, 15 days, 30 days, etc. This is the most frequently used model.

3. Features: The most widely used model has basic features for free (e.g. Buffer, LaunchRock) and some premium features locked unless you pay. This is the third most used model to convert.

4.Collaboration: Individual usage is free in this version (e.g. Slack) and you will pay if you wish to collaborate with others in your team. Obviously the team usage gets your more benefit.

5. Control and Security: In this version, if the IT administrator (e.g. Yammer) wants to control the usage and wants security features (e.g. Yammer, GitHub), then you will pay for it.

6. User or seat (Fresh desk): In this type of pricing, (e.g. Freshdesk) the company provides a certain number of users free (3 agents or 2 users) and charges if you have more users.

7. Analytics and Insight: The usage of the app is free, but if you wish to obtain analytics (e.g. Feedly) or insights into your usage and data, you will have to pay.

8. Integration: In this version, if you wish to integrate the SaaS app into other enterprise apps in your company (e.g. CircleCi) or internal apps you will have to pay for that.

9. Data access: In this version, you can use the app for free, but if you wish to get your data (e.g. Capricity) out of the SaaS system you will have to pay for it.

10. Usage: In this version the more you use of the product (e.g. Dropbox, MixPanel) you will pay more. You will get a free version for 2GB, but for more than that you will pay per month. This is the second most popular conversion technique.

There are many more models that you can use, but the most frequent are a) Time bound, b) Usage based and c) Feature based.