In this episode of Startups For The Rest Of Us inspired by a Patrick McKenzie tweet, Rob and Mike talk about the science of why charging more works.
Items mentioned in this episode:
- Patrick McKenzie Tweet
- Joel Spolsky ” Camels and Rubber Duckies”
- Joel Spolsky ” Price as Signal”
Mike: In this episode of Startups For The Rest Of Us, Rob and I are going to be talking about the science of why charge more works. This is Startups For The Rest Of Us episode 421.
Welcome to Startups for the Rest of Us, the podcast that helps developers, designers and entrepreneurs be awesome at building, launching, and growing software products. Whether you’ve built your first product, or you’re just thinking about it, I’m Mike.
Rob: And I’m the guy that knows the intro.
Mike: Oh, be quiet! And we’re here to share our experiences to help you avoid the same mistakes we’ve made. How are you doing this week, Rob?
Rob: I’m doing good. By my calculation, you’ve done the intro 210 times because we tend to trade off back and forth. How is it that you haven’t memorized it yet?
Mike: I was distracted. You know what, the thing is, I missed last episode. It was episode 420. Marijuana just became legal in Massachusetts. I must have been high.
Rob: That’s what we’re doing? Alright. This is going to be a good show today folks. For me, weeks are going well. MicroConf tickets are on sale inside Founder Café and then when this goes live, it will be on sale to our email launch list.
Rob: Head over to microconf.com if you are interested, get on that launch list. You may have missed the first email, but they’ll get a subsequent one I suppose if they get on the list today.
Mike: Yeah. I think that the episode that comes out today, the people who will be getting that email for MicroConf tickets are going to be previous attendees and then next Tuesday it’s going to be going out to the rest of the list.
Rob: There you go. Growth Edition sales out every year so you want to get on that email list if you’re interested in it. How about you?
Mike: Well, I received my Scotch Advent Calendar yesterday. December is looking fantastic at the moment.
Rob: It’s a family tradition isn’t it?
Mike: Well, it just started last year.
Rob: Two years? In this day and age, I think that’s a tradition.
Mike: Sure. Aside from that, just working on the MicroConf sponsorship. That’s in the works. If you’re interested in any of the MicroConf sponsorship options, drop me an email at firstname.lastname@example.org and I’ll send you over the break card and we’ll schedule a time to chat about it and see if it’s a good fit for you.
Rob: Other than that, I am continuing to push forward on TinySeed. Did you listen to the episode last week?
Mike: I have not had a chance to. I was high, remember?
Rob: Yeah, that’s right. All week. That was fun. Einar and I just talked it through, talked about what we’re up to, and why we’re up to it, and just the course we take on the funding landscape and even the landscape of what it takes to bootstrap a SaaS these days. Continuing to move it forward. There’s not so much I can talk about publicly but definitely meeting with a lot of founders and just discussing ideas, and thoughts, and stuff.
It’s a fun time. You know how it is. It’s like the early days of anything. This is literally a startup and we’re kind of bootstrapping it even though it’s weird. It’s like we don’t have any funding for Einar Vollset and I at this point. Eventually, once we raise the fund to actually back TinySeed, we’ll have a small stipend or something coming out of it. But it’s not like, “Oh, yeah. You’re doing a startup and you’re going to raise 5 or 10 million and crank it up.” It really is that, it’s the ethos of everything I’ve ever done where you’re capital-efficient, and you’re scrappy, and you’re just trying to hack your way through it. It’s fun.
I enjoy these days of it. There’s just so much creativity involved. It’s a problem that we’re looking at from a new angle and we so there aren’t overt solutions that others have tried and so we’re really trying to figure it out and to innovate on something that I think we believe needs some innovation.
Mike: You know why I think it’s so fun? It’s because you’re so early on that you haven’t actually run into any real problems yet.
Rob: That’s exactly it. It’s like any startup. It’s fun until you have to actually start writing code or you have to actually start selling to customers or supporting them in whatever. All the headaches crop up.
Mike: I do want to point out that you and I had an “argument” over whether or not it was a startup that you kept denying it and you’ve referred to it as a startup several times already.
Rob: Dang it. Right. Because I said I’d never do another startup again and then I was like, “Well, I’ll never do another SaaS app again from scratch.” and then I have all these caveats. Just never say never—that’s my advice.
Mike: I should get you a new bike so you can backpedal faster.
Rob: That’s right. That’s exactly right. What are we talking about this week?
Mike: Today’s podcast episode is inspired by a tweet that I saw on Twitter from Patrick McKenzie. The episode is titled, The Science of Why Charge More Works. Obviously, we’ll link this up in the show notes exactly where that tweet was.
Patrick has been talking about essentially, charging more for as long as I can remember. His tweet said, “Hacker News comment: I moved into a low-wage area and started freelancing. My clients likely think I’m too cheap, but I’m making double what I did before and overwhelmed with work. Suggestions?” and the second commenter said, “patio11 would tell you to charge more.” and he says, “Well, my work for today is done.”
It’s just interesting to see and I even commented on this that it’s funny how just repeating the same two words over and over could practically make you a career for the rest of your life and just say charge more, that’s your advice in almost any situation. Inevitably, in a lot of them, it’s going to work. I thought we’ve talked through a little bit about, one, why does it work? But also we talked through the science and mindset of this as well.
Rob: Yeah, talk through some specifics because you can’t always just charge more, eventually it stops working. There’s ways to charge more and do you grandfather. There’s specifics on that and that’s what we’ll talk about today.
I hear you, he’s developed the brand. He just said it so much because there are other people saying it. If you look back at MicroConf talks for example, really early on it was like Jason Cohen said it, Hiten Shah said it, I said it in two of my talks, but Patrick McKenzie has said it over and over and over and it becomes a brand and I think it’s a cool thing to have. Each of us develops our own little corners of the startup ecosystem I think.
Mike: The other comment that he had made in that tweet stream was that, “I think that Gmail folder where I keep my thank you for a salary negotiation post is in the upper seven figures in mostly $25,000 chunks, and given that salary is a vector not a scalar and compounds, that blog post has probably moved $X0 million around.” Basically, eight figures.
Rob: He’s saying eight figures.
Mike: Yup which is huge. To be able to have solid data that you can point to that has shown that you have been able to increase personal revenue for salaries for people is just amazing. But there’s also correlations between what he said in terms of charge more, not just as a person who’s employed for a company, but also in terms of raising prices for your software products.
Rob: Yeah, it’s like charge more for your skills. Charge more if you’re salaried employ by negotiating and I liked that post is really good. We should find it and link to it, but he writes a really good post about negotiation. It’s stuff that I had done intuitively, but I hadn’t put it into words in a framework like he did.
I negotiated every job I ever had. I made more money than the people around me. I was just doing it because I was like, “Well, I know that I’m valuable.” It was this internal thing of, “I know that I have chops at whatever it was” being a developer, or project manager, or a tech leader, whatever the role was. I tend to be, in these environments, a little better than the people around me.
Salary negotiation is something that you should do if you have not. And then when you become a contractor then you’ll learn you can just ratchet that rate up especially once you have referrals coming in. When you launch any type of product or service then you’ll learn to do the same thing. It’s all in line with the same idea of it’s not even charging what you’re worth. No, really figure out how to maximize this and charge based on the value that you or your product provides.
Mike: Yeah and that leads to a blogpost that I recalled reading years and years ago, it’s more than a decade ago from Joel Spolsky. We’ll link this up in the show notes as well, but it’s called, “Camels and Rubber Duckies”. In this blogpost, he essentially talks a little bit about economic theory and how to identify pricing for a product and how do you maximize revenue.
Of course, it has a bunch of different charge and as matrix there says, “If you charge this you’re going to make X amount of money and if you charge this other thing over here you’re going to make Y amount of money. It’s that more or less and are you more profitable as a result.” It’s like, “Well, it depends on whether or not you are able to sell just as many as you where before if you’re charging more.” If you charge more and you’re selling more then, if the math works out, yes, you’ll make more money. But at some point you’re going to raise the prices and the number of units that you sell starts dropping as a result and at some point further than that you’re going to start making less money. Where is that point? How do you figure that out?
One of the interesting pieces of Patrick’s charge more philosophy is just the fact that it forces you into situations where you are price testing. You’re checking to see if charging that higher amount of money is going to make you more or if you’re not going to get as many sales.
Rob: Here’s the thing, there are multiple stages of startups. We’ve talk about this over and over. There’s super early days and then there’s right before product market fit, and there’s after product market fit, and then there’s the growth stage. In each of those, you have to approach things differently, your thought process is a little different. In the very, very early days literally, your first 5 or 10 customers, I don’t know that you want to charge more but you should charge something.
I’ve seen startup founders be like, “Yeah, I’m going to comp the first 10 early access users just as thanks for whatever and they get lifetime account.” And I’m like, “That is a terrible idea.” Because those ten people are the people that are most eager to use your product and they’re going to get value from it. Why should they get that for free? Maybe give them a discount, maybe. Maybe. Maybe not.
As you’re getting to product market fit, you should be trying to push that price up. Once you’ve hit it, then that’s where you go every six months or every year your product is getting better. It’s SaaS app, I’m going to assume or something that you’re developing. People are using on-going that you’re developing features for, and it’s becoming more valuable to them, so they should pay more. Unless, the only time you can’t necessarily do that all the time is if you have a bunch of competitors and you’re kind of commoditized or they’re implementing these features that have similar rate to what you are, and you don’t have enough differentiation to basically be able to raise prices for that. Someone’s saying, “Well, I can just switch over here.” Switching customer involve then.
As you scale up, you’ll see these companies once you do become, you’ll look at HubSpot or Salesforce, someone who goes beyond that, their pricing just gets crazy where it’s crazy from our little B to SMB perspective when we typically think, “Yeah, we’ll charge someone $50 or $100 a month.” And they’re charging $5,000, $10,000, $20,000 a month that depending on plans.
All that to say, I like this as a sentiment. I think most people, especially early stages, especially beginners, they just don’t charge enough. I think we’re going to talk about a little perspective here of how to do this or how to increase prices without just making that your default because at a certain point—as you’ve said from Camel’s and Rubber Duckies—it’s a losing proposition.
Mike: I think one of the reasons why see larger companies like HubSpot charging so much more and in amounts that founders of smaller companies look at and say that’s just a ridiculous and absurd amount of money to charge, we’re a little disconnected from large companies purchasing decisions. Me, personally, I’ve worked at an extremely large company that’s 25,000 employees—that was almost 20 years ago at this point—and I was not in any way shape or form involved with any purchasing decision ever at the company.
By the time I’ve moved on, I’ve never really worked for what I would say a large company or been in this position where I’m involved in those purchasing decisions. I don’t have the experience or the mindset of how those decisions are made, and I think that contributes to why we don’t necessarily understand it as well.
If you try to put that in perspective, how big is the company and how much money do they make on an annual basis? If you’re a one-person or two-person company, you’re probably making less than $500,000 a year. If you are a 300-person company or 500-person company, you’re making a heck of a lot more than that, probably talking $50 million or $100 million a year.
For them to spend a couple of $1000 a month is not that big a deal, to you it is because that’s a huge chunk of your budget. To them, it’s a really super tiny percentage and they, for the most part, just don’t care.
Rob: That’s right. Especially if you’re going up market into companies of any kind of size, they’re not price comparing nearly as much as we think they are because they’re not consumers and they’re not anywhere closer. Further you move up the chain from consumers, the less price comparison that goes on, the more I don’t know–it’s like politics in getting this person on board and convincing this whole team to do things and there’s just so many other factors in it. Their price is one but there’s many others. But when you’re working with consumers, price tends to be the highest factors. A lot of price sensitivity selling that.
I met with someone who’s selling software to PC gamers and it’s like, “Ouch.” If someone comes in offering that is $1 less than yours, you’re going to lose people. They will go to the pain of switching to save a dollar or two a month. It’s just a totally different ball game when you’re dealing that.
Mike: I think that the mistake a lot of people make is when you say consumer I would almost lump in like freelancers and companies with less than two or three employees. I know that’s not a direct comparison because if you’re selling consumer products versus business products there, is a very big difference between the actual person who’s purchasing it. But in terms of mindset, those very small business owners have a very close mindset to the consumer. It’s not about what they do, it’s about how they approach their buying decisions.
Rob: I would agree with that. I was talking with Einar the other day and I have the mental classifications for business type or customer type and obviously B2C is one a lot of us think of. Literally, it’s Verizon or if you’re selling software, FTP software to the masses, and then I was like, “You know, there’s this B to Prosumer which is kind of hobbyist.” Let’s say you’re selling to photographers who do it on the side or most or not full time, but it’s this hobby they do on the weekend and they most to it to pay for their gear. They charge people so that they can afford more gear because there’s not so much money in it. It’s a B to Prosumer.
Then there’s B to A. It’s B to Aspirational folks. Frankly, it’s the smart passive in [00:15:08] or it’s folks who aspire to be something. People negatively used the term ‘wannapreneur’ which I feel like it’s a negative thing to say about someone, but it’s folks who want to be entrepreneurs. They’re really aspiring so they are willing to spend some money, but the churn is really high, and they definitely are consumer, but their behavior is different than someone buying a cellphone or cable service because they are trying to invest in a business. I actually think the behaviors of those three are different.
I like what you’re saying, there’s this B to VSB—very small business—which is basically the one that one- or two- or three-person company. They’re still going to have price sensitivity, but I don’t think as much as a consumer. Then there’s B to probably just regular small business and then B to Enterprise. There’s a mid-market in there so you can go all types of categories in there but each of those going to have their own pros and cons in terms of price sensitivity as well as churn, sale cycle, all that stuff.
Mike: I think you can debate all day about exactly where the different levels are whether it’s five employees or ten employees or whatever, but the reality is, as you move from the general consumer upmarket you traverse through that spectrum of purchasers, price sensitivity is a lot less. Going back to the Camel’s and Rubber Duckies trying to optimize your revenue is about doing price testing to see where the different breaking points are.
The simple explanation for charge more is, you increase prices, you’ve measured the total revenue and you repeat doing that until revenue starts to climb. Then you find out why it declined and try to solve that particular problem because it could be that you got your revenue to a certain point and then you try to charge more, and you come to find out that, “Oh! There’s a credit card limit for a maximum purchase on a monthly basis from a single vendor.” Maybe it’s $500 or $1000. Joel talks about in his blogpost, but they’re not just allowed to purchase something that costs more than that without a signature and maybe that’s why your revenue decline. It may not necessarily be directly because your price bar them from, but it could be something ancillary to that. You just have to figure out, why is that? Are you not provided the value? Or is there some other external factor. Once you’ve find out those, see if you can try to solve the problem and if you can raise prices and charge more.
Rob: Again, the mistakes some founders make is people will cancel especially in the early days. You’re trying to find product market fit. I’m trying to get people to use it. People are cancelling saying, “Ah! It’s not worth the money.” That’s not to say it’s too expensive. What they’re saying is you haven’t built something that they actually want to use. If you built something killer that they really need in their day-to-day or really change their workflow, it would be worth that money plus more. This is something I talk about—it’s aspirational pricing.
In the early days of Drip, Drip was very simple. It was before it was really an ESP, and automation, and all that stuff and people are cancelling saying, “Yeah, it’s just not worth the money or I can switch to Mailchimp and this and that.” I said, “Okay! It was $49 a month.” I said, “How can we make this into a product that people don’t say that about? That they say, “Oh! It’s totally worth $49 a month.” and that’s is the thread that I kept pulling to get us to product market fit is, “I don’t want to lower my prices because I don’t want another app that starts at $10 or $20 a month because the churn is high.” It’s so hard to find enough customers to make something worthwhile.
This is one of the big things when I looked at starting Drip, I had these lists of things I wanted with my next idea, it was after HitTail. My next app I want it to be $99 a month was the initial aspiration, but I want it to be in $49 by the time we launch. That was the most important one to be honest. I just wanted to move up market because I wanted to build an app that didn’t have the struggles and tap out because if your lowest plan is $10 a month it’s hard. People are moving up often to the higher plans. It’s hard to grow a SaaS app to the levels that I think a lot of us want to get to, the mid-six and seven figure levels.
Mike: The other blogpost that struck me has been highly relevant to this was also another one from Joel Spolsky that he wrote about a year later in 2005, it’s called, Price as a Signal. In this post, he basically talks about how the price that you put on something sends a signal to people about what the quality of it. Low price in relation to other things that are on the market that do the same type of thing, says that it’s a low quality. If it’s a much higher price, it signals that it’s a higher quality and it’s a better product, that does not necessarily mean it’s true. It’s simply the perception that you are putting forth as to why the pricing would be that way. Because there’s going to be some justification for the pricing and to the buyer, they don’t really have any of the inside knowledge so their natural assumption is, “Oh! Well, it must be better.”
They would really have to dig in and try your product and almost do a side-by-side comparison against other products. Not every customers’ going to have that kind of time on their hands. Some of them just need to make a decision and move on and they’re like, “I just want a better product so I’m just going to pay the higher price point for it.” That’s especially true when you get into the higher pricing tiers where those people are less price sensitive and they’re like, “I don’t care what the price is. We just need something. We need it to work, we need it to be good, so we’ll just buy the highest price thing we can find or something that’s reasonably high priced.” You don’t want to spend $50,000 a month when you can spend $5000, but if the pricing is listed on the website and its $300 a month, and you find something else that’s $900 a month, what are going to do? If you don’t care about price, you’d probably go with $900 a month because you’ve got the funds to spare. It’s probably not your money anyway and you need something to work. You don’t want to go to your boss and say, “Hey, this didn’t work because we went with the $300 product.”
Rob: Yup. I think it’s good. I think price signaling is definitely a real thing that folks should consider and being the premium offering. It’s an interesting marketing play; an interesting positioning play. I think WP Engine did this really well in the early days. They just said, “We’re going to be the expensive solution but we’re going to deliver on it.” You have to deliver on that.
Mike: The interesting about what you just said was that I think the price could send the opposite signal as well. If you price too low, it can tell people that your product is not just any good. You can look at a bunch of different industries for that. But I think one that pops-out of my head is the App Store. You look on there and there’s tons and tons of apps that are either free or for 0.99 cents. I personally look at them and say, “Well, if it’s 0.99 cents, how great can it be at this point?” because there’s a lot of things that charge more than 0.99 cents. There was kind of a standard thing to charge and now, it’s not. There’s a bunch of apps that I pay $10 for.
Rob: I still buy apps. I think the App Store is kind of a… How do you say?
Mike: Crap factory?
Rob: It is a crap factory. No. I was going to say it’s not a true market because Apple has artificially incentivized having cheaper apps. You know this thing, you want your complement to be free. Whatever product you have, if your complement is free then you become very valuable. Or you want your complement to be commoditized and as low priced as possible.
You think about Microsoft with Windows, what is their complement? What is the thing you need to use in order to use Microsoft Windows? Well, you need hardware, you need a box to run it on, and it was great for them that there wasn’t just one other provider. There was HP and there was Dell and there’s all these other providers now. It was like, “That’s the way to be.” And if you are a hardware maker, what you want is to have a specific hardware that no one else can use and you want basically the operating system to be commoditized. Your complement is free.
That’s where Apple with its App Store, what is the complement to an iPhone or an iPad? Well, the software component is obviously the operating system which they control, and then there’s apps. They want apps to be as cheap as possible because they want there to be a bazillion of them and they want to have the big ecosystem that everyone comes to. It’s same thing that Amazon has done with Kindles, with Kindles and Kindle books. They artificially depressed the pricing and they’ve had lawsuits about this where there’s class action lawsuits.
If you sell a Kindle book, I think you know, you can make it between 0.99 cents and is it $9.99 and they give you 70% of that. But if you make it $10 or $10.01 then they keep 70% of that. You only get 30% so in order to get the same amount, you have to jack your price up to whatever the math on that is—$30 or $25 bucks or something and it pissed people off because traditionally books have been, when they’re hardback, they’re $25 or $30, then soft cover $15 or $20. Amazon basically came in and said’ “Nope, we want the complement of the Kindle which is the content, which are the books, we want them to be inexpensive.” It’s not something I’m saying in theory, we see this happening.
Mike: But I think that’s a little bit different just because of the ecosystem of–somebody else really kind of controls the pricing in the marketplace. You’d have to go through somebody else. I think that’s the issue versus if you are selling a SaaS app where a book from your own website, you can price it whatever you want. There’s no outside influencers to essentially anchor your pricing or artificially influence it. I would say that it feels like that’s a little different. But I agree that that’s what they do.
Rob: It is different and that’s what I was saying about the App Store. You were saying, if I see an App Store app that’s 0.99 cents, I’d think this is probably crap, and I don’t because I know that’s artificially low because of what Apple has done. If that makes sense. Yes, on the open market, you don’t typically buy FTP apps or whatever it is for 0.99 cents. Before the App Store, they were $10, $20, $30 and then the Apps Store has driven a bunch of them down. That’s what I was saying is I think you can have artificially low pricing if there’s someone manipulating it.
Mike: Yeah. What I was saying was like, that’s my inclination to feel that way, but I also objectively know that it’s not true—is really what it comes down to. Because you can recognize something and feel a certain way, and that’s how I feel when I look at those things, but I objectively know that that’s also not true.
Rob: Right. Because I have plenty of 0.99 cent apps that I use all the time that are good apps
Mike: I do think this kind of brings about the question of, “How do you go about raising your prices if you’re already, I’ll say, entrenched in some customer base where you have traffic, sources coming in, and they’re already accustomed to seeing prices in a certain range?” Let me reframe that a little bit just because I want to be very clear on what I’m trying to say here. If you’re marketing to a certain demographic of people who are anywhere of that prosumer range that we talked about to like four or five employees in the company, how do you then increase your prices such that you can do this type of testing and still be attracting the right types of people? Because at some point, if you start changing your pricing enough, you’re going to put yourself in a position where the only people who would buy it is in this different demographic, but you don’t have the incoming traffic sources from that different demographic. Do you see what I’m saying?
Rob: Yeah. That’d be the hard part if you really want to double, triple, quadruple prices or something. That would be hard. Obviously, if you’re going to incrementally go up, let’s say 20% or 30%, you can email your whole customer base and you can say, “Look, we’re going to grandfather you for a certain amount of time,” and you can email all your trial users and go on social and promote it and say, “Hey, we are about to raise prices. If you’ve been waiting on this then sign-up now.” We did that with Drip a couple of times because we raised prices every 9-12 months. Then you’d get this big influx, you’re going to suck all the air out of the room and you’d get this you’d get this big influx of new trials and hopefully the convert because then it’s like, “Hey, you’re grandfathered in for this amount of time.”
But what you’re saying is different than that. You’re saying you’re going to double prices and the traffic that’s coming isn’t even associated with that. I would almost say if I really wanted to do that, oh, man, that’s be tough. If you’re going to do that, you’re almost pivoting or you’re repositioning as something different.
Mike: Yeah, that’s what I’m saying is like, yeah, you almost have to reposition yourself. If you’re changing pricing dramatically enough that you’re going into that, it’s a 5%, 10%, 20% increase is not a big deal, but when you’re doubling or tripling, if you’re anywhere within halfway to the point where it no longer makes sense for them to buy, you can really hurt yourself.
Rob: Yup, you could. I think it has to be very calculated. You can’t just go and do that one day. You have to probably need a new positioning, you need a new marketing message, you need to justify like, “What’s your reasoning that this is now worth twice what it was last week?” I would drill into that fact like, “It’s worth that because we are now built for plumbers and they should pay a lot of money for software.” Or, “We are now the most premium. We have this feature that no one else has.” You got to drill on what is the factor that is differentiating you that allows you to do that.
Mike: But do you have to justify it? Because if presumably the new market that we’re going into is not a current traffic source and they haven’t really seen your product or pricing before, then they wouldn’t necessarily know. There’s plenty of stories out there and actually it’s what people are saying, “Oh, I doubled my prices and I doubled my profit.” And people were like, “Why don’t you double your prices again or 10X them?” I think Jason Cohen talked about that at MicroConf one day where he was like, “Oh yeah, they 10X their prices.” He’s like, “Sales did not change where we make 10X more money.” He’s like, “Do it again.” They’re like, “What?” I definitely think it’s possible to do it, it’s just a question of do you have a plan for backing off if that goes wrong?
Rob: Yeah, that makes sense. I mean, you can always roll it back. I remember Intercom did this maybe three years ago. I believe they were either doubling or quadrupling. Pricing was huge jump. People got so mad that they just [29:08] it and then just backed away from it and they said, “we’re not going to do that.” Then recently, I think aren’t they doubling prices again? I had heard they’re going up 2 or 3X. I think they’re having the same backlash but they’re so big now, I don’t know if it matters.
Mike: Or they’re just measuring the response and saying, “Well, we’re going to double the pricing but only a quarter of our customer base is going to leave so, we have less strain on our servers and we don’t need to deal with as many customers and we’re making more money.”
Rob: I think they’re grandfathering for a year. I think they may just do it and hope they don’t lose as many.
Mike: That seems like the Netflix tragedy. They’ve announced it and then they grandfathered everybody in for two years and there was an initial uproar but they’re like, “Hey, but your price isn’t going to change for two years.” And then like, “Oh, okay.” And then two years later, it silently went up, and nobody cared.
Rob: Yeah. Was it two years? I think it was a year.
Mike: It might have been one year and then they changed it to two, I don’t remember. It seemed like a while.
Rob: Here’s the thing with Netflix though that’s different than most SaaS apps we would run across is, Netflix has—whatever it is, what is it—30-40 million subscribers? I don’t know. It’s tens of millions of subscribers for sure. They add new subscriber each quarter. Let’s say, “Hey, we have 1 or 2 or 3 million new.” But if they grandfathered everyone permanently that would seriously debilitate their business. This is where that B2C comes in. You’re dealing with such a volume play and you already have such a huge customer base that raising it by that $1 a month is again, let’s say, they have 30 million customers, that’s $30 million a month that they are making. If they piss a few people off and they leave, it’s worth it to them because they already have such a huge user base. It’s worth it to them to raise it upwards.
If you’re a SaaS app and you have 1000 customers and you plan to add another 500 this year or something, you got to think about the calculus there.
Mike: Yeah, totally. When you were saying there’s a difference between Netflix and the types of business we run, I was like, “Oh, it’s what, 30 million, 40 million customers.”
Rob: Totally. That’s the difference.
Mike: That’s the difference.
Rob: Our customer numbers are a rounding error to them.
Mike: Yup, basically. On this topic, we talked a little bit about it in terms of the App Store and low pricing, but what is charge more really mean for freemium? Does that mean get rid of freemium? I think you and I are probably in agreement that, “No, that’s not what that means.” Freemium is a distribution strategy not a pricing model.
Rob: That’s right. It’s a marketing approach.
Mike: Right. You’re not going to be able to sell at a zero which is technically a loss if you’re using server resources and be able to make it up on volume. It’s just not going to happen. But if you’re relying on converting people and using that as a way to attract attention to your app in order to acquire those people, that’s a totally different thing.
Rob: Yep, I would agree with that. By the way, the title of this episode is, The “Science” of Why “Charge More” Works. Science is in air quotes because it’s not true. It’s scientific but there’s a lot of data to back up the observations that we’ve made on this episode. Patrick Mackenzie has been saying it for six or seven years. First time I ever heard him say that was on MicroConf stage.
Mike: I think that’s the first time I had met him in person.
Rob: Yeah, 2011.
Mike: Well, special thanks to Patrick Mackenzie for speaking at MicroConf for all these years and also attending and for being part of the community. Also, thanks for the inspiration for this episode.
Rob: I think that wraps us up for the day. If you have a question for us, call our voicemail at 888-801-9690 or email us at email@example.com. Our theme music is an excerpt from We’re Outta Control by MoOt, it’s used under Creative Commons. Subscribe to us in iTunes by searching for Startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening. We’ll see you next time.
Episode 413 | How Lucidchart Grew to 13 Million Users with Freemium
In this episode of Startups For The Rest Of Us, Rob and Mike talk about how Lucidchart grew to 13 million users with freemium. They point out effective ways to use freemium, viral loops, horizontal markets, and how you could incorporate some of these things in your bootstrapped startup.
Items mentioned in this episode:
Rob: In this episode of Startups For The Rest Of Us, Mike and I talk about how Lucidchart grew to 13 million users using the freemium model. This is Startups For The Rest Of Us 413.
Welcome to Startups For The Rest Of Us. The podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products whether you’ve built your first product or you’re just thinking about it. I’m Rob.
Mike: And I’m Mike.
Rob: We’re here to share our experiences to help you avoid the same mistakes we’ve made. To where this week, sir?
Mike: Did you happen to see the announcement that FogBugz/Manuscript was being acquired by DevFactory?
Rob: I got an email out of the blue and was completely shocked by that. I shouldn’t be, right? Fog Creek, for those who don’t know, was founded by Joel Spolsky and Mike Pryor back in, I believe, it was 2000 or 2001. Joel was probably the first blogger I ever read. He had so many insights about how to start software company and how to project-manage and all that stuff that I was really enthralled by him. And then he launched FogBugz but then they went into Stack Overflow and Trello and all this other stuff. I was always like, “This is crazy. They’ve had a lot of successes.”
Mike: They also had a CityDesk which was their blogging tool, I don’t think that it ever really went anywhere. I think they got it to version 2.
Rob: Content management. It was a website content management territory, but it was desktop, right as the switch to SaaS was happening.
Mike: I think it was before WordPress came out or just about the same time. But it was published through the website, so everything was all straight HTML. I think they had an internal beta version that Joel was still using for a while, it was like version 3-A or something like that that just never got out there publicly. I find it interesting that they decided to sell that business to an outside company just because the way that they’ve kind of run the business, it’s odd.
Rob: Yeah, it’s definitely unexpected. I don’t know what else I expected though. I mean, it’s freaking 17 years later–these things don’t last forever. I remember when Joel stepped down as CEO of Fog Creek, I was like, “Oh my gosh!” but it’s like, “Well, of course, he’s going to do Stack Overflow.” I believe Mike Pryor stepped up at that point and then Mike Pryor went up to be CEO of Trello once that took off. They really used it as an incubator–Fog Creek itself. It’s no surprise that they had the third CEO and it’s running Fog Creek. I don’t even know who’s running FogBugz.
I don’t even know if Fog Creek still owns anything else. Do they or is the company just going to shut down? Because they sold Trello, Stack Overflow is its own entity at this point, they haven’t used Fog Creek developers for years. Probably 10 years at this point. Manuscript is the only thing I know that they still had.
Mike: No, they still have Glitch.
Rob: What is that?
Mike: I don’t even know because they’ve been working on it for three, four years at this point, and I still don’t understand what it actually is, which it seems like it’s some sort of a programming framework without the programming. I don’t really understand it, to be perfectly honest. It doesn’t make a lot of sense to me. I don’t know, I don’t know what to tell you about that.
Rob: I just googled Fog Creek Glitch and it says, “Fog Creek is renaming itself to Glitch. We’ve been thrilled to see the community embrace Glitch as the home for creating and discovering the coolest stuff on the web.” It sounds like Reddit. I’m confused at this point. I just haven’t followed this story. Fog Creek has been basically, a B2B software company–or at least Manuscript, Trello was, and then Stack Overflow was obviously VC-funded. Stack Overflow, I was going to say social network, but it’s more like a question and answer platform.
Yeah, it’s a trip man. I have mad respect for what Mike Pryor and Joel have built. You and I have both met them in person at BOS. I’ve had multiple conversations with them. These are smart, ethical-driven software developers who have done a lot I think for both the people that they’ve hired, but also in sharing their knowledge and building the tools. I have nothing but respect for these guys. The amount of success they’ve had, when you say, “Yeah, the same people that started Stack Overflow also started Trello and started this other seven or eight-figure company called FogBugz.” that’s a lot to do in a career.
Mike: I wonder if part of the reason they spun that off was because of the way that they want to run the business and the way that they want to treat the developers because I think early on, they had talked a lot about how they wanted to treat everybody—who’s working within the company—with respect and make sure that they participated in the successes of the business.
I remember some blog articles or some discussions on one of the podcasts that they had at one point talk about Stack Overflow, but because Stack Overflow and Trello were both born out of Fog Creek, at some point, they had to split the business. How do you compensate the people who were originally in Fog Creek and were excited and maybe helped out a little bit, but didn’t necessarily go with that team? There was also a question of like somebody had an idea for, I think it was co-pilot at the time, and it ended-up come in like a $1 million line of business for them, ARR. It’s just like, how do you compensate that person for the ideas and stuff that they’ve brought in?
At this point, FogBugz has been running for years, and there’s probably not a huge number of things that they’re going to add to it, I mean they could integrate it with other business processes and things like that, but there’s not a lot of other stuff they could do with it. It’s really just kind of the cash cow for them, but how do you translate that into a financial or monetary success for the people who are currently in the business and may have been there for anywhere up to 10 or 15 years at this point? It’s a private company, so I don’t think they hand out equity. I don’t know.
Rob: I think they did profit sharing, was my recollection. They did hand out dividends because like you just said, it was a pretty profitable company.
Mike: Got it.
Rob: On my end, I just got an email this morning that said, “Stripe is now valued at $20 billion.”
Mike: Oh, is that all?
Rob: Oh, man. Their last round was at $9 billion. I don’t normally follow these funding and valuation stories, but since we basically have had dinner with both the Collison brothers and been on stage with them at MicroConf, I kind of have a vested interest in keeping up with what they’re doing. Bravo to them. I have nothing but respect for those guys.
Mike: That’s an insane number but both of them are super, super smart guys. You stand near them and you just feel dumber.
Rob: Totally. When I’m around them, yeah, I feel dumber, but I feel my IQ points, I gain maybe 5 or 10 just in speaking to them. “Oh, you taught me a new word and a new concept today.”
Mike: “…that I thought I knew for 10 years, but you clearly know it better than me.”
Rob: Yeah, exactly.
Mike: Good for them. I think a lot of our audience probably still uses Stripe.
Rob: Still, what do you mean? Still uses. I wouldn’t go anywhere else, it’s insane to think of going back to the days of Authorize.net and PayPal web payments pro. I guess there’s Braintree now, right?
Mike: That’s what I was going to say. I hear that on a “higher-end” people are migrating to Braintree and, I don’t know if any other options actually other than Stripe and Braintree. But I don’t know anything about Braintree. It’s just interesting to see the ark that they’ve taken over the past, what, eight years or so? It’s just crazy how much they’ve grown and the things that they do are quite honestly, for the entrepreneurial community, they have enabled the vast majority of us to be able to do what we do. Without Stripe, most of the businesses that are out there just would not exist.
Rob: Or it’d be lot harder to get them off the ground. I remember trying to get an Authorize.net account and it just took weeks of literally sending stuff on paper and faxing it back and forth. This was only maybe six years ago, seven years–it wasn’t that long, and I’m not talking 2005. It was just insane to me that a) how are we not doing this online or at least e-signing things? But I literally was just printing out this 30-page document. It was such a nightmare. I’m glad Stripe came on the scene.
Mike: I’ve spent a fair amount of time over the past couple of weeks rebuilding and migrating some of my infrastructure in order to cut costs. I’ve doubled the number of servers. I’ve gone from two servers to four and I’ve reduced the costs of them by out 75% which is odd. I have everything hosted on Azure and they have these things called burstable virtual machines. Basically, if they are running below a certain threshold in terms of process or usage, then you pay basically, a discounted rate for it and you are gaining credits at that point. If you are using more than that percentage then you’re basically burning into your credits
I think they had maxed out the CPU with that but basically, I just paid less for this machine or these machines because I’m not using them all day every day. It’s like there are certain times a day where I need more processing power and rest of the time I just don’t need it. It’s nice to be able to have moved over to those types of servers and save a fair chunk of change. But I needed to split up my infrastructure anyway because I didn’t like having everything on just two servers.
Rob: That makes sense. It’s nice to put a few more bucks in your pocket.
Mike: Yeah. I pushed off on that division for probably about a year or so. It was kind of time to do it.
Rob: Anything else?
Mike: The last thing is, this is totally random but there’s a website that I stumbled across when I was trying to do calculations for my Dungeons and Dragons game, to kind of optimize my character. If you’re into figuring out probabilities on different dice rolls, you can head over to anydice.com. It will basically allow you to write functions that will essentially simulate what the dice rolls are, and then it will show you the percentages and distributions, and you can see crafts and stuff like that of exactly what those distributions look like.
You can say how many attacks or if you have advantage or disadvantage on different attacks or damage rolls or things like that then it will show you what those numbers look like and what’s your average rolls would be.
It’s pretty cool. You can probably spend a whole ton of time on it, but they do have some documentation there and some ready-built functions you just pull, and copy paste into the editor.
Rob: I see what you did there, Mike. Do you realize you started that segment off, you said, “This is totally random.” But any dice stuck. You can’t […] by me, man. Really bad puns. Alright. Cool.
Let’s dive into what we’re talking about today. It’s an article on a blog of freshworks.com. They have a sales CRM , it’s that section or that category of the blog, but the article is titled, “How Lucidchart Grew to 13 million Users on a land-and-expand Strategy.” I want to talk a little bit about the virality and the freemium part of it. It’s an interesting interview with, I believe, is the SVP of Sales and Customer Success of Lucidchart.
If you haven’t heard of Lucidchart, it is a Software as a Service with a freemium model, they have 13 million users and it is like Visio–it is how I think of it. It’s a diagram solution where you can create diagrams and share them and then collaborate on them. Is that an accurate description, Mike? You said you’ve used it.
Mike: Yeah. That’s probably pretty accurate. I think Visio seems like they started out much more for data modelling within a programming environment. But Vision also has a lot of different icons and stuff that you can put in there for like network map layouts and office maps layouts and stuff like that. You can use it for other things like org charts and stuff like that, but I think originally, it seemed like it started out as part of the MSDN suite, you get a few sign-ups for that, and it was primarily a programming tool.
Rob: Right. And it expanded into other things. Lucidchart, looks like it was started around 2010, 2011 and they raised $1 million in funding which you would need if you’re going to do freemium model, and then three years later they raised $5 million, and then two years after that—in 2016—they raised $36 million. I can imagine they probably hit a hockey stick moment where the user growth justified raising–because you raise that much money, you want to have really high valuation, so you don’t give away most of your company.
They said that 96% of Fortune 500 companies use it. They have customers at Google, Amazon, Cisco, and Intel, and they receive around 500,000 sign-ups every month. It’s a free tool, right? It’s free, no credit card, if I recall. That’s still a big number though. A nice horizontal market that these guys are in. They’ve obviously achieved success–13 million users is a ton of people; it’s a ton of people to support, it’s a ton of people just to have your software running.
I wish that they’d told us how many paying users or how many paying accounts because that’s really what I’m interested in. I’m interested to know if they are even profitable on revenue, above the amount of just sheer volume because they must have hundreds of employees, and I would like to know that. But all that said, what I want to talk about today is really the freemium and the viral one and they have some stuff about sales as well.
Mike: I’m sure their competitors would love to know how much money they’re making too.
Rob: Yeah, totally. I know. It’ll come out at some point. They’ll wind up talking about it.
Mike: Alright. Why don’t we dive right in then?
Rob: Sure. The first question for Dan Cook, which is the SVP of Sales, the interviewer asks him, “It runs on a freemium model, how do you pitch the product, and how do you scale it to an enterprise model?” His response is, “The freemium gives them an advantage because they have this—this is where the land-and-expand comes in within a company—they get employees within a company using the product and then they share it with other people in the company to collaborate and then they set-up accounts, so there’s a freemium plus virality there. The reason they sign-up for it is a) it’s free and b) because it’s a good tool.
In the early days it was good enough. It was not a great tool but as it developed, I bet these days, it is best in class or is becoming then. He said that, basically, they can have 15 or 20 paid or free users of Lucidchart within a company. Then they leverage that fact to say, “Alright, IT department, here’s a value proposition for you.” This is a similar model to other tools. Slack, I’ve heard them talk about this a lot. That one small development team within a huge org would start using it and of course, you have to invite other people for it to have any value. Once you have 10, 20, 30 users, IT Departments and frankly, CTOs and CIOs want to have control of that kind of stuff. It’s an interesting dual use of that freemium plus virality.
Mike: Yeah, I’ve seen that at a much, much smaller scale in Bluetick where somebody will sign-up for Bluetick and one of the earlier objections I’ve heard from somebody was like, “Oh, well. I wanted to sign-up for it but then I would have had to go to my boss and get his credit card.” That freemium model, even just the 14-day trial that I had or that I added in after talking to that customer, it allows them to sign-up for it without having to go to their boss and justify like, “Hey, I need the corporate credit card and it’s going to cost this much money.” Because in the enterprise environment, they’re probably going to not only have to go to their boss, but then their boss is going to have to justify it to somebody else.
Nobody really knows if it’s going to work. If they just start using it, in a freemium model, they can just use it and if it doesn’t work out for them, they just shut it down or just abandon it. If it does then as more people start using it then it becomes more visible. As a result of its success, then Lucidchart can go in and ask them for money for an enterprise license or a small group license within a department or something like that. But it is interesting to see that they seem to have intentionally done that or chosen that strategy.
Rob: Right. I want to point out some things that Lucidchart has or had that listeners to this podcast may not have, and if you don’t have all these things in place, it’s going to be difficult, if not impossible to pull off this strategy that they did–this freemium strategy.
Mike: Do you want to start with the $36 million or…?
Rob: That’s what I was going to say. Funding–that’s the first one. It wasn’t $36 million originally. For the first three years it was $1 million. That’s actually not that much money for three years. You can hire a few people but it’s not like you’re going to hire 20 employees and not bleed that out. But yes, funding was one advantage they had; $1 million in funding. Another $5 million three years later. The fact that they are a very horizontal market much like Trello and Dropbox and Slack, those are three other tools that have used the same approach–this freemium plus viral component.
If you’re in a horizontal market and you can raise enough funding or self-fund this thing to the point where you can provide the service to all the free users, it really can be this fascinating approach. The other thing is they have virality, not every tool has that. I think of a tool like Drip or even a proposal software, invoicing software, there’s a little bit of virality and that you can have a Powered By or a Sent From or a Sent With. But true, deep virality like Trello where–I mean, I use some Trello boards for that other people but there’s a lot of collaboration that goes on there. Slack is all about being viral. You have to invite other people to get any value.
Lucidchart does not need, need, need. You’d have another person to get value, but I would say, that’s probably a big reason that people would use it because it’s so easy to get you charts and collaborate. Of course, Dropbox has it’s all other things. Having virality plus that freemium I think is a big thing that people overlook. Because having freemium on its own without funding, being horizontal, and virality is not all it’s cracked up to be.
Mike: I think this is also a tool that because of what you’re using it for, you’re using it to help communicate, that helps it too. That kind of sets it apart from a lot of other tools. Trello, to some extent, just by inviting people, you get to have them take a look at what it is that you’re working on. But with Lucidchart, you can print those things out, you can embed them into Word document, or even just take screenshots, but by being able to invite people and say, “Hey, this is the process, or this is the workflow that I’m looking at. What do you think? Is this going to work for our team?” That right there—because it’s embedded in the communications—that just inherently makes it even more viral.
Because if people look at the tool and they like it and they want to use it because it’s a lot easier to use than something like Visio, it gives it those additional advantages. It gives people the “aha” moment that they need in order to say, “Yeah. I want to use this too.”
Rob: Another question that he asks this VP of Sales, which I thought was kind of cool, I don’t know, I hadn’t thought that much about it, but he says, “Let’s talk about your value proposition. How does it work when you’re convincing a company to buy the enterprise version? What to the teams and what does the enterprise get out of it? Why don’t they just keep using their individual accounts?” I like that because a) you’re asking why should they upgrade or why should they consolidate? He says, basically, the value to the end-user is that it’s all consolidated and it’s much easier to share among their co-workers. You don’t have to convert diagrams into other formats to be compatible. If everybody starts using it in your company then you don’t have to be like, “Oh, you’re using Visio? I’m using Lucidchart. Let’s convert to this format.” and blah blah blah.
Then to the IT department, the first one is consolidated billing, so there’s only one bill and you know you can negotiate that and manage it. It’s just easier to do it. Also, for training, a lot of big companies especially provide training for their tools. If you have just everybody using one tool, it’s easier. Then secure logins which is fine but the one that really gets them is document retention which is where someone leaves the company, as someone is running that company or running that IT department, you want to have access to everything they did while they were there because you might need to reference that later. If they take individual accounts away with them then you’ll never get that stuff back. It’s not even someone stealing it or taking it away, it kind of goes away. They forget about it or you just don’t have access to it.
That was a big one working at Leadpages and Drip is seeing people leave and being like, “Oh, yeah. There was that one thing that he shared with me and now I don’t have access to it.” It could be kind of a pain. It’s interesting to think—if you’re going to try to pull this off—about what the value prop is that you have to offer for people to upgrade.
Mike: The other interesting piece there that’s in that enterprise group subscription there is the idea that, it’s not just if somebody leaves the company, but what happens if you have to fire somebody. You want to be able to have like this master key that says, “Okay, we’re going to lock you out of everything before we follow through with letting this person go.” and then still have access to all that stuff. There’s that side of it to consider too. I think one and two-person businesses don’t tend to think about that because they just don’t experience it. But the larger companies that they are advertising to or agencies or other small businesses 50-100 people, those companies do think about that and it is important to them.
It’s good to understand that that is a value proposition that you can leverage as a marketing point to those larger companies and say, “Look, this is why you should upgrade or this is why you should buy higher-priced tier because we are including this for your account versus a freelancer account which doesn’t really have any of that stuff and oh, we have a 25 people have 25 different freelancer accounts.” Yeah, it’s not ideal because they get 25 different bills but at the same time, that master key is kind of what people are looking for.
Rob: And then he asked him a question about their outbound sales process. He says, “Yeah, we have 80 sales people and their core play is they basically target companies that already have some form of adoption.” You likely would, I’m guessing, you’re going to use some type of data augmentation tool, like a full contact, to augment you customer data to know who they work for or just look at the email address, look at the domain, the .com on the end of their email, and do a Group By and see how many people are using it. As simple as that.
If you get 20 people inside Disney or Target or BestBuy or something, it’s like they reach out and say, “Hey, you have 20 people that have signed-up for accounts. Do you want to aggregate that?” It’s an interesting thing. I’ve heard, I believe, it was either Slack or Trello also talk about this as an approach. It’s like warm outbound. It’s an interesting approach.
Mike: You just hope that their CEO or their CTO isn’t so totally paranoid that he says no outside tools that are based in the cloud and shuts them all down.
Rob: Yeah, it could happen, I supposed.
Mike: I think that’s a lot less common today than I think it was 5 or 10 years ago. But I have run into those people who say that kind of stuff and there’s usually exceptions for that. They can’t possibly have everything self-hosted. It is just not realistic.
Rob: Yup. There’s a couple more questions that I think are relevant. One is, he asks him, “Lucidchart is the popular alternative to Microsoft Visio, how do you differentiate yourself?” He basically gracefully says, “We’re grateful to Vision, but it’s outdated. It’s a classic Microsoft style product, and it has a lot of innovation on it since they acquired it in 2000.” That’s that whole thing where, yeah, you can have a better funded competitor but as a startup, your secret super power is you can move fast, and you can be closer to the customer. Because I’m guessing, a lot of the developers working on Visio—assuming there are some still—they’re not nearly in close contact as someone at Lucidchart is when they’re in their customer success department having one-on-one conversations with their clients.
Mike: I think that’s partly a difference in how the product was originally engineered. There is a cloud version of Visio, I believe, so it’s enabled for people to collaborate and stuff which has always been the biggest problem with Visio documents, is that it’s like a Word document that you have to basically send it back and forth. Even if you’re using something like Dropbox, you still have the problem of having multiple people trying to work on the same thing at the same time and it just doesn’t work very well.
That’s why Google docs has kind of come around and been such a massive upstart in the past, what was it, like 10, 15 years ago when that came out. But Word had been out in the mid-90s or the early 90s. Something like Lucidchart just has a fundamentally different delivery mechanism than Visio. Visio has to make that backward compatibility so they’re not able to do the same types of things versus Lucidchart, they’re like, “We don’t care about actually running locally on the desktop.” It just doesn’t matter to them which gives them some advantages right there.
Rob: Right. It’s interesting to think like if Microsoft really cared about the market—I just don’t think it’s big enough for them to care about probably—but they should have, would have built a web-based version back in 2008 because it was totally doable. But they didn’t and so, somebody decided at some point not to do that. I know they have collaboration features now built into the Office tools. I don’t use many of the Office tools anymore, only when absolutely need to. I’m just in Google docs all the time.
Mike: I bet they sunk all the resources into the Windows Vista.
Rob: Windows Vista, yeah. That must have been it.
Mike: It must have been it.
Rob: To round it out, he ask him, “What do you think are the top three reasons for Lucidchart’s success?” He says, “Well, people need visual communication tools and there wasn’t really anything that was that great. Second is, we made it enterprise ready, so selling into that enterprise, it was not hard. They have collaborations and integrations and all that stuff and freemium–those are the three things he says. I think he leaves out the virality. I actually believe the fact that a) the market is big, I think is a good thing. They chose a large market. I have a Lucidchart account. The reason I have it is because I got invited by two separate people on two separate diagrams. I would count as one of the 30 million users.
Now, I don’t go in, I never created a Lucidchart diagram myself, but I have collaborated with other people. I think that’s an element, a fourth thing that he didn’t mention that I do think is probably a decent driver of their trial sign-ups.
Mike: I do think the other thing that really helps them is the fact that it’s surprisingly easy to be able to get in and get started with Lucidchart, create some things that are generically applicable across the business without being locked into , “Oh, I have to use this for data modelling.” It sort of does these other things well but not really. That’s the way I would describe the difference between Visio and Lucidchart.
Whereas Lucidchart doesn’t necessarily have the data tie ins to be able to, let’s say for example, a database design, but there’s lots of other ways to do that these days. That makes Vision, I’ll say, that less powerful in that respect. But you don’t need that with Lucidchart. You can just create a generic process. Instead of sketching it out on paper and saying, “Oh well, I’ve got this customer support process that’s got to do this.” Or, “I’ve got this marketing process where I’ve got this email Drip campaign over here and the sales page over there.” You can wire them up in Lucidchart and use that to document your marketing sales funnel, for example. It works really, really well for that.
The downside is, you do have to keep it up-to-date because nothing is automatic but as long as you need to document it anyway, you may as well use something like Lucidchart where you can create good documentation that shows you how everything ties together.
Rob: 500,000 sign-ups every month, Mike. What would you do with that?
Mike: I don’t know. Take it to the bank, retire?
Rob: Yeah, that’s crazy. You can just imagine the processes they must have in place in order to even be able to support that many users.
Mike: You know, I’d be interested to see what they have for a backend infrastructure because I’m just like an engineering nerd like that. Like, “How the heck do you handle that much? How many is that per minute?”
Rob: I know. One point of data is I went to Crunchbase and it says, “According to owler.com that they have 7.1 million in annual revenue.” You don’t know how accurate that is but it’s an estimate by an outside company.
Mike: And at 500,000 sign-ups a month, that’s about one every five seconds which is insane.
Rob: Yup. I know, it’s crazy. They say, let’s see, employee count is between 101 and 250–it’s about what I expect. It says, “A team of 150 plus employees.” You don’t know when that was written but I would guess, if it was even a year ago, I bet they’re at probably over 200 by now. That gives you an idea of their size. That’s the thing, they’ve raised $42 million, if they are at $7 million or $10 million in recurring revenue, that’s not a home run. They need to get bigger than that in order to return that kind of funding because the valuation was definitely north of $100 million. I mean, $120 million, $180 million, somewhere in that range, if I were to guess. At that point, you need to sell for half a billion or a billion dollars to return venture returns. To get there, you need to have $100 million in ARR. They have a long way to go to get there.
I don’t want folks to take this entire episode the wrong way, I’m not saying that we should model ourselves after Lucidchart or anything like that, I was pointing out that the way to use freemium, viral loops, thinking about horizontal markets, thinking about other way to approach problems, how could you, in your little maybe B2B bootstrap niche try and corporate some of these things?
Mike: I think the other takeaway you could have for our audience of listeners is that, even with 500,000 sign-ups a month, as you said, financially, this is probably still not a home run.
Rob: Right. If they haven’t raised $40 million, it could be alright if they’d only raise up to $6 million and could have done it, then that’s a totally different story but that’s where I like raising a lot of funding and having this big valuation. It means you have much higher expectations at that point.
Mike: Right. All it does is dilute the founder and some of the investors, earlier investors maybe, but it makes it hard to have a spectacular exit if you’ve, I’ll say, weighed down by too much investment.
Well, on that note, I think that about wraps us up. If you have a question for us, you can call it into our voicemail number at 1-888-801-9690 or you can email it to us at firstname.lastname@example.org. Our theme music is an excerpt from We’re Outta Control by MoOt used under Creative Commons. Subscribe to us in iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening. We’ll see you next time.
Episode 291 | Freemium, Asking for CC Up-front, and a Big Mistake First-time Founders Make (with Guest David Cancel)
In this episode of Startups For The Rest Of Us, Rob interviews David Cancel, of Drift, about whether or not to use freemium, innovating versus inventing, and the topic of asking for credit cards upfront. David also shares some upcoming topics that will be covered on future episodes of his podcast.
Items mentioned in this episode: