Building less shitty pricing

Pricing is hard, damn hard. Early stage founders pour a lot of energy into pricing, and for good reason. Charge too much and nobody will want to pay, too little and people may not trust your product.

To build our pricing model (which comes out in a few months), we tried something new. We asked ourselves:

• What are the things we need to solve for to make our customers fall in love with us?
• What would a great product pricing strategy look like?
• And what would be the most fair for both us, and our customers?

We also spent a lot of time making sure we understood the things we were actually selling, and that our pricing matched what our customers actually hire our product to do.

On top of this we were very deliberate about not trying to build a pricing strategy that would last forever. No pricing model ever will and we’re bound to get things wrong. So instead we thought about: what is the pricing model we need to get us through the next 6-12 months? Any more than this is impossible to forecast anyway.

You sell a product, but that isn’t the improvement in someone’s life that they are paying you for. People don’t buy your product – they buy the magic that it creates. We realised that in order to market and price our product, we needed a deep understanding of where that value lies as the basis for our pricing strategy.

For Kinde, people don’t buy auth, user management and billing. They buy privacy, stability, reliability, trust, and belief in a company trying to create a world with more founders (which actually means lower prices not higher).

Our pricing, and everything we do, needs to reflect this bigger belief – because that’s what the fair value exchange hinges on.

This view of the world affects everything we do and the fundamental underlying approaches of Kinde.

A great example is privacy. We deeply believe in customer privacy being at the heart of our company and our product and do everything we can to safeguard that privacy; never allowing any kind of third-party cookies on our website and never selling our customers’ data in any way.

Security is another interesting one. A lot of players in the authentication space charge extra for things like Single Sign On and Multi-Factor Authentication. We believe that these technologies are fundamental tenets of security and not something we should ever charge more for. Our customers’ security is more important than charging that bit extra, so we don’t.

The way you charge depends on the type of business you are trying to build and the business model that you have. A pricing model is really just a reflection of the way your business chooses to operate and its environment.

At a very high level, there are really only two types of business models.

The first is the older one; selling services. Consultancies are the classic example here. The challenge with selling services, or time, is that you can only sell one person’s time once. This doesn’t scale very well and so to do it effectively you need to charge a lot for those services. If you want to be really successful you need to do it at massive scale, which means huge corporations of people all over the world. It’s a shitty model.

Most traditional businesses, and this is really true of a lot of early tech businesses, are still essentially just selling people’s time. High-end hardware manufacturers look like they’re selling products, but the reality is they’re selling the time it takes somebody to put a server together and the time it takes somebody to sell that server to you and get it set up. They are fundamentally just service businesses in disguise. Businesses like this have to be huge because they don’t get any real benefits of scale. At their hearts they are still just selling people and their time.

The alternative model is much more interesting. It’s what you hear get described as Product Led Growth (PLG), but we at Kinde like to call High Volume, Low Cost (HVLC). This has been the dream of product builders forever, but it’s only really with the advent of software that it has been a reality. The beauty of HVLC is that you get to sell the same product an unlimited number of times, as long as you have a market big enough.

The ultimate examples of HVLC are Facebook and Instagram. They have immense pools of people (or market size) i.e. incredible volume, and dirt cheap pricing i.e. the cost of an advert. So they get the ultimate version of HVLC. For SaaS examples you can look at companies like Atlassian and Shopify who have managed to create products and services that can maximize market size by reducing the product cost as much as possible. They are removing the people cost and targeting the broadest market they can find.

The other really interesting benefit of HVLC in software, is that not only can you sell a product really cheaply because you can sell it an infinite number of times, you also sell the same product every single month, to the same person. Suddenly something that looked really cheap, starts to actually be a little more like High Volume, High Cost, once you fold enough time into the equation.

This, incidentally, is also the reason why the VC industry really sprung up around tech unlike no other industry. The economics are just special in tech.

Kinde builds software to help early stage founders get to market quickly, easily and cheaply. And so to do this we have to both reduce the cost of the product, and gain as much market share as possible. In fact these two things are really the same thing. You can only reduce the cost if the audience is big enough. Fortunately, Kinde has an immense market to play in, so there’s plenty of room to grow with really cheap pricing.

When it comes to software, you also don’t have to only chose a single pricing model. Enterprise customers want the personal service and support, and are typically willing to pay more for it. So you get to combine models. HVLC for the majority of your customers. Service for your high end ones. Software is amazing.

When we started thinking about our pricing strategy we realized we needed a set of guides for how to think about pricing. Instead of rushing in and just putting a bunch of numbers together, we looked at what we cared about, and what would be most fair. And out of that came a set of principles that we use to weigh up every pricing decision:

• Provide a fair value exchange for both our customers and our business (equitable)
• Be free (or close to) for early stage businesses who need it most. Reduce in unit cost for businesses who are spending the most - the economics should improve with scale (representative)
• Scale with the growth of our customers and their use (equitable) Be focused on our long term growth (and that of our customers) rather than short term gain (long term)
• Work for different types (B2B, B2C, B2B2C) and scales (founder, startup, scale-up) of business without too much change (scalable)
• Represent our High Volume, Low Cost model ie low touch and infinitely scalable for business who don’t need enterprise support (low touch)
• Be easy to understand by everyone - simple and non-technical. This doesn’t mean that having different prices for different offerings or part of our product is a problem (simple)
• Be easy to forecast (predictable and transparent)
• Follow a logical set of rules (systematic)
• Be possible to extract the data needed to bill (model-able)
• Represent our business and what we do. The ‘unit’ should represent the value we provide and the things our average customers will also bill on eg we wouldn’t bill on team size because this doesn’t represent our value (dogfoodable)
• Not be built around edge cases but major cases (what most people use most of the time)
• Not try to cover Enterprise needs - we will have an enterprise plan for this (for everyone)

Also, remember, that you’re building for the long term. Creating a business is about helping your customers succeed in the short and long terms and growing with them as they do it. There’s no point making a lot of money from them in the short term but not having customers in 6 months time. Play the long term. Invest in your customers and their success.

The trouble with discounts, is that they make it unfair on every one of your customers who doesn’t get a discount. Remember our principle of a fair exchange of value? While you make some customers happy, you invariably disadvantage the rest. You also end up pricing for the post-discount customers – which means that customers who don’t know to ask for a discount may end up feeling like they’re getting a raw deal. Discounts also push you towards a world where you need service and support people – because somebody has to hand out the discounts – which moves you further away from HVLC.

For Kinde this feels like everything we don’t want to be. And so for us, discounts are a no-go as a standard assumption in our pricing model. Don’t get me wrong – we will still give some customers discounts – but these are more attached to incentivisation and virality; things like discount-attached referral programs are a great way to incentivize customer growth. But these are always a true discount, not a reduction of a pre-inflated price.

If you really want to understand your pricing model, go deep on others’. Look at your competitors and try to understand why they do the things they do. Try to understand how they make money - and how they don’t. Understand why your competitors do the things they do.

We spent a lot of time looking at the key players in authentication and feature flagging to try to understand why so many of them were moving more upmarket. We built out hundreds of scenarios to understand why they would do that and risk alienating early stage founders, and modelled them against our own forecasts. And what we learned really helped us to understand their behaviour (there isn’t enough money in subscriptions alone – so they have to move upmarket), but also understand how our business was different (we also sell billing so we can fill the gap there while keeping our pricing super competitive).

Also, look at other businesses which are similar to yours but not in your space. Public companies are particularly fascinating, especially ones with similar models to your own. You can literally go and look at their shareholder updates and understand how they make money. Where their revenue is growing and how their businesses are evolving over time. This is a magical thing to be able to do because it gives you really deep insight into how, and why, they price their products and behave as companies.

Expect your pricing to change. It should.

As you learn more about your business and your customers, as your product offering evolves, so too should your pricing. Think of it more like a hypothesis that you are trying to prove at any one time. You have a theory and you want to validate whether it is true or false. Once you’ve proven that hypothesis, start thinking about the next one.

Figure out what you want to learn, and evolve your pricing to align to this. This will teach you both about your pricing strategy, but also about your product, your market, and your customers.

Cha-ching!