B2B – Fuel, A McKinsey Company https://get.fuelbymckinsey.com Wed, 29 Jan 2020 20:31:19 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.2 Does Your CLTV to CAC Ratio Stand Up? Does It Matter? – Infographic https://get.fuelbymckinsey.com/article/does-your-cltv-to-cac-ratio-stand-up-does-it-matter-infographic/ https://get.fuelbymckinsey.com/article/does-your-cltv-to-cac-ratio-stand-up-does-it-matter-infographic/#respond Sun, 01 Dec 2019 16:58:42 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Talking about LTV/CAC without clarifying which method you're using is a dangerous game.

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Blockchain Stalls, Synthetic Fraud, and AI Helping Humanity https://get.fuelbymckinsey.com/article/blockchain-stalls-synthetic-fraud-and-ai-helping-humanity/ https://get.fuelbymckinsey.com/article/blockchain-stalls-synthetic-fraud-and-ai-helping-humanity/#respond Thu, 24 Jan 2019 19:53:22 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Do You Even Blockchain? Blockchain buzz continues to drive intense interest in experimentation. But that fervor has cooled off significantly. Axios reported an 80% drop in the use of “blockchain” on corporate earnings calls in 2018. And a recent McKinsey article outlines “Blockchain’s Occam Problem.” The authors state that blockchain has failed to advance out of its […]

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Do You Even Blockchain?

Blockchain buzz continues to drive intense interest in experimentation. But that fervor has cooled off significantly. Axios reported an 80% drop in the use of “blockchain” on corporate earnings calls in 2018. And a recent McKinsey article outlines “Blockchain’s Occam Problem.” The authors state that blockchain has failed to advance out of its early “pioneering stage” and the key to finding real value in blockchain is applying it when it’s the simplest solution available.

From the article:

“There is a clear sense that blockchain is a potential game-changer. However, there are also emerging doubtsA particular concern, given the amount of money and time spent, is that little of substance has been achieved. Of the many use cases, a large number are still at the idea stage, while others are in development but with no output. The bottom line is that despite billions of dollars of investment, and nearly as many headlines, evidence for a practical scalable use for blockchain is thin on the ground.”

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Machine Learning vs Synthetic Fraud

One of Fuel’s most popular articles last year was about the emerging $20 billion dollar ID verification-as-a-service market. The need for innovation in biometric ID verification remains important. A recent McKinsey article states that “synthetic ID fraud” is now the fastest-growing form of financial crime in the USA. 

From the article: “Synthetic IDs are created by applying for credit using a combination of real and fake, or sometimes entirely fake, information. The application is typically rejected because the credit bureau cannot match the name in its records. However, the act of applying for credit automatically creates a credit file at the bureau in the name of the synthetic ID, so the fraudster can now set up accounts in this name and begin to build credit.”

The authors propose an approach that incorporates machine learning to uncover critical third-party data to verify if the info given matches that of a real person.

How AI Can Help Humanity

The World Economic Forum has a short write-up of McKinsey Global Institute research on how AI can help humanity. The 160 social-impact use cases are framed across the 17 UN sustainable development goals – aimed at helping hundreds of millions of people.

Among the examples highlighted in the research:

The MGI research concludes: “What we found is that AI could make a powerful contribution to resolving many types of societal challenges, but it is not a silver bullet – at least not yet. While AI’s reach is broad, development bottlenecks and application risks must be overcome before the benefits can be realized on a global scale.”

Please “Join Fuel” (above) and follow us on LinkedIn and Twitter for more insights.

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Product Managers: In Demand and … Undervalued? https://get.fuelbymckinsey.com/article/product-managers-in-demand-and-undervalued/ https://get.fuelbymckinsey.com/article/product-managers-in-demand-and-undervalued/#respond Mon, 07 Jan 2019 19:53:41 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Product managers play an increasingly central role within any software startup. Research led by Chandra Gnanasambandam, Martin Harrysson, Shivam Srivastava, and Vaish Srivathsan on the McKinsey Product Management Index shows PMs are deeply involved in almost all aspects of product success. The same research shows that despite PMs being a top priority for software CEOs, they are often neglected when […]

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Product managers play an increasingly central role within any software startup. Research led by Chandra GnanasambandamMartin Harrysson, Shivam Srivastava, and Vaish Srivathsan on the McKinsey Product Management Index shows PMs are deeply involved in almost all aspects of product success.

The same research shows that despite PMs being a top priority for software CEOs, they are often neglected when it comes to talent management. “The Product Management Talent Dilemma” explores this paradox between the rising importance of PMs and the under-investment in resources and systems dedicated to finding and developing high-performing ones. The authors outline four specific levers software companies can use to correct this imbalance and formalize a system for recruitment and growth:

  1. Articulate a leadership development model for product managers
  2. Enable ways for PMs to have continuous growth and learning opportunities
  3. Design an end-to-end learning journey for PMs
  4. Make hiring a strategic priority. Top senior PMs report spending up to 5% of their time on recruiting

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The full article contains further insights from the McKinsey Product Management Index and, among other things, covers the five core capabilities and enabling structures that develop top-tier PMs.

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Startup Pricing Pitfalls: A how-to series on avoiding common pricing mistakes https://get.fuelbymckinsey.com/article/some-common-pricing-mistakes/ https://get.fuelbymckinsey.com/article/some-common-pricing-mistakes/#respond Wed, 05 Sep 2018 19:05:37 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ A couple of weeks ago, we met with the CEO of a startup (let’s call him Barry) who was looking to transform his pricing strategy. At Fuel, we are big believers in the idea that to produce a great solution you must have a holistic understanding of the problem. So, we ran Fuel’s Pricing Quick Diagnostic in […]

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A couple of weeks ago, we met with the CEO of a startup (let’s call him Barry) who was looking to transform his pricing strategy. At Fuel, we are big believers in the idea that to produce a great solution you must have a holistic understanding of the problem. So, we ran Fuel’s Pricing Quick Diagnostic in advance of the meeting, and informed Barry that we would take him through the results in the session. This is familiar territory for us – nothing new here. But what did stick out for us was what Barry said immediately after sitting down.

“So, tell me. How bad is it?  Is this the worst pricing you’ve ever seen?”

Besides being a curious intro to a problem-solving session, Barry’s line nicely illustrates the way executives often think about pricing problems. They tend to assume they have unique and insurmountable problems. That they have dug themselves into an inescapable ditch through flawed pricing practices. Nobody could possibly be doing this as badly!“Regardless of the specific industry or situation, startup executives continuously fall into the same traps.”

Regardless of the specific industry or situation, startup executives continuously fall into the same traps.

The reality is quite different. Having run the Pricing Quick Diagnostic for countless startups at various stages of growth, what strikes us is how frequently the same pricing problems pop up in markedly different companies. Regardless of the specific industry or situation, startup executives continuously fall into the same traps.

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The good news here is that for pervasive problems there are tried-and-true solutions. Our hope is that by shedding light on these all-too-common pitfalls, executives will have the strategies they need to take steps to diagnose their problems, craft a solution, and begin harnessing the growth acceleration that strategic pricing will bring.

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In a series of upcoming posts for Fuel, we will unpack the four most frequently encountered pitfalls and how to address them. These are:

  • Value-agnostic Packaging – without careful design, packages will likely not address customer needs and willingness-to-pay — leading to unexpected customer choices
  • Undifferentiated price metrics – the metric accepted by your industry and peers is not always the right metric for you
  • Off-target value communication – startups frequently talk about what customers should care about, not what they do care about
  • “Wild West” discounting – in order to be effective, sales reps need some degree of flexibility, but too much can result in indiscipline and prevalent value leakage

For each pitfall we explain what the problem is, how to know when you have the problem, and practical advice on what you can do about it. In the meantime, if you have any questions on pricing and packaging, please feel free to contact James Wilton, Fuel’s Pricing Lead, directly at james_wilton@mckinsey.com and follow Fuel on LinkedIn and Twitter for more pricing insights.

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Fuel’s Reading List – The 2018 Summer Edition https://get.fuelbymckinsey.com/article/fuels-reading-list-the-2018-summer-edition/ https://get.fuelbymckinsey.com/article/fuels-reading-list-the-2018-summer-edition/#respond Fri, 17 Aug 2018 19:06:56 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ As we head into the tail end of summer in the northern hemisphere, the Fuel team wanted to share a few of the books that have inspired us over the past few months. Some are well-known in the startup world like Bad Blood (a finalist for the Financial Times and McKinsey Business Book of the Year Award). Others are instant classics […]

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As we head into the tail end of summer in the northern hemisphere, the Fuel team wanted to share a few of the books that have inspired us over the past few months. Some are well-known in the startup world like Bad Blood (a finalist for the Financial Times and McKinsey Business Book of the Year Award). Others are instant classics like John Doerr’s Measure What Matters.

So, in no particular order, they are:

Gisa Springer – UK Lead

Startup – A Novel (Doree Shafrir) – It actually came out last year, but I’ve only just gotten around to reading it. It’s a pretty acerbic take on startup culture – including its enshrined pillars of grand ideas, big money and sexism at the workplace. Set in NYC and written by an ex-BuzzFeed editor, it offers glimpses in what start-ups aspire to be, and what they, sadly, can turn into. Bonus points to the author for explaining the particularities of Twitter, Snapchat and Slack along the way. Very entertaining – and somewhat scary – read!

Ken Fenyo – Consumer Markets Lead

Shoe Dog (Phil Knight) – This autobiography covers the growth of the company from its early startup days to its launch as a public company.  This is a fun and fascinating read and a great reminder how hard it can be to create a startup.  Knight started Nike (originally Blue Ribbon Sports) to pursue the Crazy Idea that people would want a better running shoe.  For most of the first 20 years as a company, Nike lived at the edge of bankruptcy – the company was bootstrapped and plowed every penny it made back into acquiring or manufacturing more shoes to sell.   The company survived in this pre-VC world based on tenacity, passion, a great team, and not a small amount of luck.  Good reminder for startups that perseverance is perhaps the most important skill to master to build a successful company.

The Wright Brothers (David McCullough) – The Wright brothers were fantastic engineers who married creativity and a methodical attention to detail.  Starting first with kites, then moving onto gliders, until finally creating the first powered airplane.  Similar to many startups today, the Wright brothers took a test and learn approach to innovation – they were constantly tweaking their designs, testing them, and then revising every element of their plane to make it fly better and longer.   As with many great ideas (and great companies) it took Wilbur and Orville years and many, many demos to prove the value of their invention and prevent copycats from stealing their designs.“Let employees determine how they can also contribute to OKRs and adopt more frequent conversations with recognition and feedback.”

Let employees determine how they can also contribute to OKRs and adopt more frequent conversations with recognition and feedback.

Judy Wade – Global Lead

Measure What Matters (John Doerr) – In the past two weeks a startup CEO and one of the most creative minds in their profession both mentioned they were reading this book.  While many of us are now familiar with the OKR (Objective Key Results) approach, reading the book was a good reminder that there should always be two types of objectives – committed objectives where the goal is to achieve 100% of the objective, and stretch objectives, where the goal is to potentially fail as much as achieve them.

There were good examples of how companies celebrate failure, although I think companies can do even more – especially in startup environments where failure and pivoting have to be part of the DNA.   At Second Life where I worked for a time, if an engineer screwed up, they had to wear Shrek Ears for the day.  Wearing these wasn’t to make a mockery of you.  If you were wearing the Shrek Ears you got extra love (and Second Life had a love machine but that’s another story) and support. You were celebrated for taking a risk.

The second element I enjoyed was ensuring the OKR process is both top down (3-5 company goals) and bottom up, meaning team members should have some flexibility to determine how they can achieve these OKRs. One example is Google’s famous 20% free time for engineers to figure out how they can achieve Google’s objectives.

Finally, I liked the concept of moving from annual performance reviews to CFRs (Conversations with feedback and recognition).   The concept of moving to more frequent conversations where you provide both feedback and recognition is even more important in the often stress-filled, higher risk environment that is a startup.

I recommend this book for a company adopting or tinkering with their OKRs. Especially if you can include stretch objectives and support failure. Let employees determine how they can also contribute to OKRs and adopt more frequent conversations with recognition and feedback.

Richard Acton-Maher – Product Manager

Bad Blood: Secrets and Lies in a Silicon Valley Startup (John Carreyrou) – Like many of us, I was glued to the Theranos story as it developed. After the book came out, it was recommended to me by at least five friends or colleagues within weeks. Anyone who’s ever been involved in a startup has heard advice like these a million times: “be aspirational”, “fake it ‘til you make it”, “have a big vision”, “sell ahead of where your product is today”. What intrigued me by this story is that, at the headline level, what Theranos was doing sounded no worse than simply taking this common startup advice. Now I know the reality was much worse. This book is an up-close and cautionary tale of how innocent and virtuous aspirations can gradually cross the line into outright lies and deception. Reading it felt very familiar, as if I were sitting around a table sharing startup war stories with old colleagues. This was a big part of the reason I couldn’t put it down.

Jesus Bolivar – Platform Product Manager

Sapiens: A Brief History of Humankind (Yuval Noah Harari) – This book’s main argument is that homo sapiens came to dominate the world because it is the only animal that can cooperate flexibly in large numbers. The author argues that the ability of humans to cooperate in large numbers arises from its unique capacity to believe in things existing purely in the imagination, such as gods, nations, money and human rights. The book claims that all large-scale human cooperation systems – including religions, political structures, trade networks and legal institutions – owe their emergence to our distinctive cognitive capacity for fiction. Most interesting quotes:

“You could never convince a monkey to give you a banana by promising him limitless bananas after death in monkey heaven.”

“Large numbers of strangers can cooperate successfully by believing in common myths. Any large-scale human cooperation – whether a modern state, a medieval church, an ancient city or an archaic tribe – is rooted in common myths that exist only in people’s collective imagination.”

Greg Tapper – Go to Market Senior Expert

Shoe Dog (Phil Knight)  – I picked this up because Bill Gates said it was possibly his favorite autobiography. We all know how the story ends of course—Knight builds one of the greatest brands we know today and virtually 99% of us have interacted with. The bigger attraction is the storytelling itself. I especially liked the beginning, the middle, and the end. Rumor has it that Knight sat in on creative writing classes with undergrads at Stanford. They must have been great classes because the writing is philosophical, human, and authentic. There’s youthful meanderings, love, money, success and failure, world travels, Eastern philosophy, heartbreak and tragedy. This isn’t a story about building a mega-corp, though businesspeople and entrepreneurs alike will appreciate that. It’s the story of an extraordinary person who built and extraordinary company and has lived a meaningful life.

Marshall Maher – Manager, Content Marketing

High Growth Handbook (Elad Gil) – This book has been getting a lot of well-deserved buzz since it published recently – and Gil is a well-known entity having worked with some of the most successful unicorns around. It’s a series of interviews and insights with some of the legends of the startup scene. It covers the fundamentals of what founders need to know and in order of growth stage. But one thing I really liked was the idea of creating a manual for coworkers on how to deal with you. It sounds weird but read it – it makes a lot of sense and it gets very specific (“I love FYI emails but only if you put FYI in the subject, so I know it’s FYI…”). There are a ton of insights around product market fit, scaling, culture, org, etc. Short and impactful – it should be on every founder’s list.

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Don’t Get Blindsided Integrating a SaaS Company https://get.fuelbymckinsey.com/article/dont-get-blindsided-integrating-a-saas-company/ https://get.fuelbymckinsey.com/article/dont-get-blindsided-integrating-a-saas-company/#respond Tue, 14 Aug 2018 19:04:51 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Programmatic mergers and acquisitions (M&A) are a critical element of startup growth, as shown in McKinsey’s previous work “grow fast or die slow.” Most top performing SaaS companies need to extend growth by bulking up their product portfolio, bookings growth, market share, TAM, or talent and technology stack. Shareholder return-based studies suggest that programmatic M&A leads […]

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Programmatic mergers and acquisitions (M&A) are a critical element of startup growth, as shown in McKinsey’s previous work “grow fast or die slow.” Most top performing SaaS companies need to extend growth by bulking up their product portfolio, bookings growth, market share, TAM, or talent and technology stack. Shareholder return-based studies suggest that programmatic M&A leads to above average outcomes versus other M&A approaches.

Some SaaS companies have built strong M&A capabilities in this arena to become successful programmatic acquirers. If you look deeper at what top performing companies believe really separates the lowest and highest performers in M&A value capture, it is their ability to do “integration planning and execution,” as noted by the largest delta in the graphic below:

Global M&A Capability Building Survey, 2015. The online survey garnered 1,841 responses from C-level and senior executives.

Contemplating their first major acquisition can be a very stressful experience for a SaaS company CFO and/or CEO. Aside from whether it is the right target, or whether to proceed now versus later, or if the price is right – a big driver of success hinges on how well integration planning and execution is done. Yet many SaaS companies have no M&A team in place, so they are left scrambling to estimate the budget for integration efforts and activities, which can be hard to predict and plan for, much less having the capabilities and capacity to get the integration done.

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At Fuel, we find a common concern among SaaS companies is how much to budget for post-merger integration costs after that first big acquisition. These costs represent the one-time, non-recurring costs that companies will spend to rationally blend products, sales processes, operations, marketing efforts, brand, people, cultures, systems, and tools.  These are not the one-time transaction costs for the deal that sell-side investment bankers, M&A lawyers, and financial due diligence accountants earn.  These are the expenses borne both by internal employees and 3rd party consultants.

In order to better understand these costs, the Fuel team conducted an analysis on buy-side M&A deals in the SaaS industry. We reviewed 24 deals where the data was publicly available to calculate the implied one-time, non-recurring acquisition integration costs as a function of (1) acquired headcount and (2) purchase price paid.

Our analysis estimates that public SaaS companies will spend between:

  • “Per capita”basis: ~$18 to 33k per acquired FTE in one-time, non-recurring acquisition integration costs
  • “Deal value” basis: ~1.5 to 2.1% of the purchase price on one-time, non-recurring integration costs

For example: If a SaaS company is acquiring a startup with 70 full-time employees, our model estimates it would likely pay between $1.3 and $2.3 million in one-time, non-recurring costs to integrate the company on a “per capita” basis. On a deal value basis, a $300m acquisition implies a SaaS acquirer will spend between $4.5 and $6.4m for one-time, non-recurring integration costs.“Having a clearer idea of the true costs of integration should give SaaS leaders the sense of what value needs to be captured from a deal. ”

Having a clearer idea of the true cost ccs of integration should give SaaS leaders the sense of what value needs to be captured from a deal.

The $3-4m difference between ‘per capita’ and ‘deal value’ costs is because we used SaaS historical deal data to approximate the actual costs, so these estimates are via a calibration method. True costs will vary based on other factors: the negotiated purchase price, or if you have a full-time M&A integration team in house (where these costs are already baked into your recurring operating expenses). See the table below for an idea of the ranges within the companies we analyzed:

Source: Fuel, A McKinsey Company analysis of public data from 24 buy-side M&A deals in the SaaS industry between 01/2014 and 05/2018

Effective M&A integration can be challenging. It is wise for SaaS CFOs to budget on the higher-end of this spectrum for their first acquisition. Mistakes will be made. Hidden costs will emerge. But once muscle memory is developed from a few acquisitions and some scale, you can and should move down to the lower end of the integration cost spectrum.

Having a better understanding of the expected costs of integration, based on publicly disclosed, historical cost from past acquisitions in SaaS, will give C-level leaders the confidence to set aside adequate budget to ensure the proper resources are in place to achieve successful integration and to capture their fair share of benefits and value creation inherent in the acquisition.

Email Junaid or Oleg if you have any questions or want to discuss this article further. And follow Fuel on Twitter and LinkedIn for more SaaS insights.

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The Hidden Competitive Advantage of Pricing https://get.fuelbymckinsey.com/article/the-hidden-competitive-advantage-of-pricing/ https://get.fuelbymckinsey.com/article/the-hidden-competitive-advantage-of-pricing/#respond Tue, 29 May 2018 19:16:13 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Running a growth-stage company is hard. Founders and CEOs face constant demands from their investors and pressure to grow fast or die slow. In the midst of building and managing a sales force, figuring out marketing channels, and scaling up product and operations, pricing is often relegated to the list of to-dos with an indefinite […]

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Running a growth-stage company is hard. Founders and CEOs face constant demands from their investors and pressure to grow fast or die slow. In the midst of building and managing a sales force, figuring out marketing channels, and scaling up product and operations, pricing is often relegated to the list of to-dos with an indefinite deadline.

So, how do companies establish their pricing strategies?  In our experience, it goes something like this: early in the business the CEO needs to set a price. She has little or no data from which to extrapolate, so she takes an educated guess. The product begins to sell! The price is tweaked a little bit if the product evolves significantly, or if the product offerings are expanded.  For the most part, however, it stays the same.  More fundamental changes are considered briefly, but are dismissed due to concerns for messing up and seeing revenue decline or churn increase.  In short, that initial guess becomes an unmovable anchor point.  Does this sound like the way you set your pricing?

Companies worry too much that changing their strategic pricing architecture and tactical policies risk leaving significant value on the table. Getting pricing right should be a key part of any startup’s strategy, and should be considered early in the growth trajectory.“For those companies with the foresight to undertake pricing transformations early in their growth trajectory, it will be a consistent source of competitive advantage.”

For those companies with the foresight to undertake pricing transformations early in their growth trajectory, it will be a consistent source of competitive advantage.

Growth through pricing

Our research and experience shows that startups that tackle pricing issues strategically and tactically see a 10-15 percentage point increase in their revenue growth rate within 12 months of implementation. Those pricing changes can result in higher average customer value (ACV), decreased churn, and the ability to reach new customer segments with better-tailored offerings. And this result holds across a range of industries and business models.

So, why are the potential gains so great for startups in particular?  Startups are exceptional at creating new sources of value for their customers, but they are far less effective at capturing that value. Pricing optimization allows them to reverse that “value leakage,” and they can do so across each of three key levers:

Increase ‘perceived value:’ Customers pay for the value that they perceive in a product, not for the value that is actually there. The relationship between the two is determined by how well a company communicates to its customers the value it delivers. Startups always know they are adding value, but often don’t understand which parts of their value proposition resonate with different customer segments – often resulting in an undifferentiated offering to the middle of the market. Startups can increase customers’ willingness to pay by tailoring their price and product positioning to the specific segments they serve.

Set price to willingness-to-pay: What customers are willing to pay for the value they receive is highly variable across any customer base. This is especially true for startups, which frequently serve customers across industries and sizes. But when startups pursue diverse customers with the same go-to-market motion, they often have little understanding of what different customer segments need and might be willing to pay. Even if they did possess this understanding, pricing to willingness-to-pay requires a system to effectively differentiate pricing based on that willingness-to-pay. Common challenges include:

  • Linking packages to value: How can you package features in a way that leaves customers with low willingness-to-pay satisfied with a truncated offering, but ensures that those with high willingness-to-pay will always upgrade?
  • Linking pricing architecture to value: How can you charge different prices to different customers for the same product in a way that will be perceived as fair? This is about linking your pricing units to customer value. Companies frequently default to metrics like seats and licenses. These metrics are fine so long as the value of the product truly increases with the number of users. But where it doesn’t, usage-based metrics like GB of storage or hours of usage may work better. Some companies are also experimenting with success-based pricing.  Here, they price with metrics based on customers’ revenue or profit so that the price scales in lockstep with the value delivered.
  • Setting price levels to willingness to pay: How do you know what a customer is willing to pay? And if you do know, how can you use that information to optimize market share, revenue or profit? Figuring out the answers to these questions requires not only customer interviews and surveys but a working knowledge of the sophisticated quantitative methodologies used to get customers to reveal their true preferences.

Get the price you deserve: Even if startups have a good system for determining the list price, that system can be undermined during the course of the sales cycle. Companies often willingly bend on price in order to meet logo or volume targets, or they grow so fast that a rigorous approach to discounting is discarded. In either circumstance, there is value to systematizing and rationalizing discounts. For example, you should determine up front what levels of discounting are justified by the value derived from new customers justifies discounting, and you should align reps’ incentives with price to discourage excessive discounting.

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Overcoming barriers to pricing success

Given the demonstrated potential impact of pricing optimization, why don’t more startups proactively take the necessary steps?  Several common internal barriers often prevent companies from pricing effectively.

First, there is usually a significant knowledge gap that must be overcome. In contrast to sales, marketing or product development, startups usually don’t have personnel with expertise or experience in changing pricing models, and therefore don’t have the robust quantitative approaches that give real insight into value perception, customer preferences or willingness to pay. Bringing in pricing expertise, from outside the company if necessary, is critical to establishing a more robust pricing function and making sure that pricing changes increase revenue rather than cause churn or declines in ACV.

Risk aversion is another understandable barrier to price optimization. Changing the price, particularly for existing customers, is perceived to be a dramatic and risky move that many companies are afraid to make. That fear arises less from any risk inherent to changing price and more from the same lack of understanding described above. Targeted market research using proven approaches can mitigate the perceived risk of price changes.

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Finally, growth-stage companies have limited management bandwidth, and often see pricing changes as a secondary priority. This arises in part because of the common misconception that revenue growth is more easily driven by volume than by price, leading management to focus on customer acquisition over pricing optimization. It is amplified by a perception that pricing is always a long-term profitability play rather than a short-term revenue accelerator. But as we’ve shown in this article, there are significant gains to be made from getting pricing right.

Pricing optimization is not an overnight growth lever for startups. But for those companies with the foresight to undertake pricing transformations early in their growth trajectory, it will be a consistent source of competitive advantage, and an undeniable growth accelerator.

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Pricing: The Secret Weapon You Haven’t Thought About https://get.fuelbymckinsey.com/article/pricing-the-secret-weapon-you-havent-thought-about/ https://get.fuelbymckinsey.com/article/pricing-the-secret-weapon-you-havent-thought-about/#respond Fri, 27 Apr 2018 19:17:50 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ In our experience, there are several barriers to pre-IPO companies optimizing their pricing, and one of the most prevalent is the lack of firm evidence that pricing is not already optimized.  The reason?  Successful startups typically exhibit huge growth rates, and nothing hides opportunity better than success.  Even if you suspect your pricing isn’t perfect, […]

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In our experience, there are several barriers to pre-IPO companies optimizing their pricing, and one of the most prevalent is the lack of firm evidence that pricing is not already optimized.  The reason?  Successful startups typically exhibit huge growth rates, and nothing hides opportunity better than success.  Even if you suspect your pricing isn’t perfect, how would you know? And if your results are great anyway, why should you even care?

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The truth is that a detailed look at customer level sales data can often expose not only whether you have a pricing issue, but also what kind of pricing issue you have.  The trick is knowing what to look for – what analyses to run and how to interpret the results.  And you should care, because we have shown that improving your strategic and tactical pricing execution typically adds an extra 10-15 percentage points of revenue growth to even rapidly growing pre-IPO companies.  Capturing this opportunity requires you to first know there is an opportunity to capture, but many startups do not have the time or experience necessary to run the necessary diagnostics.

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To help the startup community capture value through pricing, we at Fuel by McKinsey are offering pre-IPO companies an opportunity to get a Pricing Quick Diagnostic for free for a limited time period.  If you provide us with 2 years of monthly sanitized customer-level revenue data1, we will provide you with 3 key charts that will help identify opportunities for you to inflect your business with pricing improvements.  You’ll also receive a guide to interpreting your results.

As an example, we recently conducted a similar analysis for a SaaS company growing at >130% per year.  We determined that the company’s packaging scheme was preventing upsells, and that the company was ineffectively monetizing different customer segments.  Having realized these shortcomings, the company has pledged to address these issues and capture the value they are missing.

Learn more about our Pricing Quick Diagnostic here or Register Now.

Questions? Email us at fuelpricingqd@mckinsey.com.  We look forward to meeting you and identifying your pricing opportunity.

The post Pricing: The Secret Weapon You Haven’t Thought About appeared first on Fuel, A McKinsey Company.

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Channel Partnerships: Proceed With Caution https://get.fuelbymckinsey.com/article/channel-partnerships-proceed-with-caution/ https://get.fuelbymckinsey.com/article/channel-partnerships-proceed-with-caution/#respond Fri, 23 Mar 2018 19:22:37 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Conventional wisdom holds that channel partnerships can be a cost-effective way for SaaS companies to expand their reach and acquire more customers. But these relationships may come with significant costs—channel partners may not have the right incentives to push your product and they are difficult to monitor. Our analysis shows that SaaS companies considering channel […]

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Conventional wisdom holds that channel partnerships can be a cost-effective way for SaaS companies to expand their reach and acquire more customers. But these relationships may come with significant costs—channel partners may not have the right incentives to push your product and they are difficult to monitor. Our analysis shows that SaaS companies considering channel partnerships should proceed with caution. They are useful when companies need to grow beyond their internal capabilities, but in the long run they are not the best use of precious sales and marketing dollars.

In our post entitled “Want to Accelerate Value Creation?” we explained why we think growth efficiency—the net new ARR each dollar of sales and marketing generates—is an important and useful metric for SaaS companies. We’ve used that metric—along with detailed sales and marketing data from nearly 200 companies in our SaaSRadar database—to test several common SaaS sales and marketing practices. (See, for example, our post on “land and expand.”)

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As the chart above shows, channel partnerships are a mixed bag. We found that companies in our database that relied heavily upon channel partnerships to acquire new customers generally grew less efficiently. SaaS companies that did no marketing through channel partners had a 1.70 growth efficiency score, on average, while companies that relied on partners for 10% or more of their new customer acquisition only had a 0.71 growth efficiency or lower. Looking at new logo growth, however, yields a different picture. The companies in our survey that grew their new customers the fastest over a 12-month period were those who acquired 1-5% of those customers through channel partnerships. And with more channel partnerships, the data in our survey becomes a little noisy. This suggests that channel partnerships can be useful to achieve certain key growth objectives in the lifecycle of a company, but that they shouldn’t be relied upon too heavily at all times.

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Land vs. Expand: Finding the Right Balance for Your Salesforce https://get.fuelbymckinsey.com/article/land-vs-expand-finding-the-right-balance-for-your-salesforce/ https://get.fuelbymckinsey.com/article/land-vs-expand-finding-the-right-balance-for-your-salesforce/#respond Fri, 02 Mar 2018 20:24:01 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ We all know that landing any new customer is something to celebrate, particularly because you can then “land and expand,” using sales and marketing resources to grow revenue from that same customer. But how much precious salesforce time should go to cross- and up-selling existing customers, versus new logo acquisition? We answered that question using SaaS […]

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We all know that landing any new customer is something to celebrate, particularly because you can then land and expand, using sales and marketing resources to grow revenue from that same customer. But how much precious salesforce time should go to cross- and up-selling existing customers, versus new logo acquisition? We answered that question using SaaS Radar, Fuel By McKinsey’s proprietary database of nearly 200 SaaS companies. Our analysis suggests that companies need to take a Goldilocks approach—not too little, but not too much. Companies that devote about 10-25% of their sales resources to farming instead of hunting do best.  If you devote more than that, the upside is less than it would be from devoting those resources to new customer acquisition, and the opposite is true if you invest less than 10%.

Source: Fuel By McKinsey SaaSRadar.

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In our post “Want to Accelerate Value Creation?” we described our approach to determining how efficiently a SaaS company is growing—we measure how much net new ARR each dollar of sales and marketing generates. Using that metric, we determined that if more than 25% of your customers are upsold in a quarter your growth efficiency is over 1.6. If less than 10% of your customers generate new revenue for you in a quarter your growth efficiency is less than 1; this means you are not generating sufficient new ARR to cover your sales and marketing expenses.  At the same time however, since upselling distracts from new customer acquisition, it is important to find the right balance. Your growth efficiency is at its optimal level when you invest between 10-25% of your existing sales resources on upselling and cross selling, as seen in the chart above.  This doesn’t mean you shouldn’t invest in customer success, but your salesforce should be spending the majority of its time on new logo acquisition.

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