"We're like, that little bit of advice I got from that one generic podcast is going to be awesome," says Patrick. We read a lot of books. We get inspired at conferences. And we spend a lot of time on social media. But often, we miss the fundamentals – the core principles that really make a difference. "You can't best practice your way to success," he says.
Patrick is co-founder and CEO of ProfitWell (formerly Price Intelligently), which provides the essential toolkit for subscription companies to reduce churn and grow their revenue end-to-end. He's one of the world's leading experts on SaaS pricing and subscription revenue models, and at Turing Fest 2018 he shared a data-backed deep dive into how to distinguish between best practice BS and the fundamental wisdom of which you should actually take note...
Some say funding is necessary for growth. Others say VC funding is essentially a deal with the devil. "Looking at the data, both of these folks are right and both of these folks are wrong," says Patrick. "Fundamentally, what we found is that funding really messes with your unit economics."
For one thing, customer acquisition costs (CAC) are typically 25-25% higher for those with funding than without:
"Funded companies have the cash to accelerate and acquire a ton of customers," says Patrick. "But it's not necessarily helping the other unit economics out there" – like churn, which funded companies typically have more of.
"They're relying on that funding as a crutch in a lot of places to make sure they can actually build their business," says Patrick.
Funding does help with growth, but for a specific time and place: from $0 to 10 million ARR. After that, a funded company will benefit less from funding. Companies that reach $10m ARR without funding are also in an extremely good position to compete with funded companies from this mark.
"Not focusing on competition is actually hurting you in some places," warns Patrick. The main place is your marketing: according to ProfitWell's data, companies with a competitive marketing strategy (like comparison pages and bidding against competitors with ads) tended to have 15-20% lower customer accession costs than those with no competitive strategy.
But from a product perspective, focusing on the competition actually does hurt: competitor-focused product teams tend to have a lower NPS:
From a marketing and acquisition perspective, you need to understand your competitors, but from a product perspective you have to have blinders on. Competitors aren't going to help you build the right product.
ProfitWell data suggests companies that prioritise work-life balance grow at almost half the rate of those that are all-in. "This is a little terrifying," says Patrick. The hard work seems to pay off, but there are a tonne of variables to consider – and a lot that haven't been thoroughly researched, including the impact of founder wellbeing on sustainable growth.
"When you're between the $1m - $10m range and trying to grow in those early stages, having just one product is an advantage," says Patrick. "But when you cross the $10m threshold, all of a sudden that's reversed. Multi-product companies are the ones seeing those growth rates."
"Features equal growth was definitely true for the last 10-15 years," admits Patrick, "but after studying a tonne of people, we've found that the relative value of features is declining quite significantly."
Patrick suggests we focus on value metrics instead of differentiation via features:
If you're feature-differentiated, your expansion revenue (money coming from your existing user base) is actually much lower than those folks using a function value metric (such as cost per user) versus folks using an outcome value metric (cost per dollar I save you, or 100 dollars I bring you). More companies are using these to get over the feature trap.
Most of us make 10 or fewer non-sales, customer research calls per month. That includes Fortune 500 companies. "People say they're doing A/B or multivariate testing instead," says Patrick, "but we're not actually doing that either. This makes it easy to fall into the trap of building the wrong product."
If you have something high value with high willingness to pay, it's a differentiable feature. If you have something low value with high willingness to pay, it's an add-on. Something that's high value with low willingness to pay is a core feature. "And then there's my favourite quadrant — trash," says Patrick.
"We went to about 1300 product leaders and asked them to place their last end-features on a quadrant," he explains. "They were super confident about what they'd built."
Next, the research team asked 1200 consumers what they actually thought. The results were a little different...
Quantitative. That's what's scary, right? You're not talking to your customers, you're not doing experiments, you're just looking at a support ticket and finding a pet little project and building that thing, then wondering why no one's using it. This tends to kill a lot of businesses from a product perspective.
There's so much more competition in the market, it's harder and harder to acquire customers, and all of a sudden features are declining in value. The folks who are actually doing the research are able to figure out where that value is and build that future.
"Discounts are pretty terrible for your unit economics," says Patrick. "As the discount goes up, the churn rate goes up as well."
The customers receiving those really big discounts just weren't ready for prime time. They weren't ready to actually be a customer, but they were enticed by that discount. A month or two in, these are the folks who haven't really used the product and all of a sudden are like, we're out.
"While tech has been in its infancy, brand has been known as a very retail or B2C phenomenon," says Patrick. "Brand is actually really important across the board."
In a study of 5000 consumers, ProfitWell found that people who have a very positive impression of a brand are willing to pay 25-30% more than what they're actually paying. For those with a negative view, it's about 15-30% lower than the actual list price.
"It's getting harder and harder to acquire customers, and now we're in a world where stuff like brand is starting to matter," says Patrick.
"A lot of people think acquisition is everything," says Patrick. "When we asked about 1,500 execs to choose one growth lever that was most important to them, 70% chose acquisition over monetisation and retention."
When you look at ProfitWell's data, the value of these levers is completely inverted from where we actually value them. If you improve your acquisition by 1% (conversion rate or net new leads), you can now expect to see a 2% boost in your bottom line, explains Patrick.
With that same 1% improvement in your monetisation or retention, all of a sudden we're looking at a world with 4-8x the impact. I'm not saying you don't need to acquire customers, but most of us aren't taking those other two growth levers that seriously.
The bottom line, as Patrick sees it:
The big thing here – and what I really encourage you to think about in your business – is that the fundamentals are so much more important than every little growth tactic you see within your industry. The fundamentals are what will make sure you're compounding that growth over time.
I'm not the first one to bring some of this stuff up. The old playbook is easy – it's easy to listen to a podcast or run a little marketing tactic – but remember that those tactics weren't what got folks like Marc Benioff to success.
A lot of you aren't going to focus on any of this, and that breaks my heart, because a lot of you have so much potential within the world of tech and online commerce that you don't need any growth tactic or lightning in a bottle... you can just focus on those fundamentals to actually succeed.