Jay Myers: Welcome to this week’s episode of ‘Own Your Commerce’; I’ve been trying to track down our guest today for a few weeks maybe a little over a month, I’m not sure but I finally got him here. It’s Patrick Campbell, he’s the CEO of ProfitWell; a lot of you may have heard of his company, it’s been growing quite well lately and we’ve done a little bit of work with similar clients. We’ve been on webinars together in the past and this guy knows his stuff when it comes to pricing, churn, LTV and I would say pretty much everything that matters when it comes to building a sustainably profitable company. Patrick, I think this is your quote, I don’t know if you call it a quote or a stat; one of your eBooks it said, “Growth is more revenue, not more customers.”
You made a statement that out of a whole bunch of companies you studied, out of every 10 blog posts, seven were focused on the acquisition, two were focused on retention and only one was focused on pricing. Today that’s that one, we’re here to talk about pricing LTV, churn; so welcome to the show, and thanks for being here.
Patrick Campbell: Yeah, I’m excited to be here. I think if I added anything to that it would be something along the lines of like “growth is about relationships.” The beauty of the subscription model but I would argue most of our businesses is that the relationship is baked right into how you make money. If you have a great relationship, you acquire the customer, you monetize them, you retain them, and they keep spending money with you into the long term so that’s what it’s all about.
Jay Myers: That’s great, I love that, I want to dive into some of that right away; quickly for people listening, can you give us a little bit about what is ProfitWell, who are you and why did you build that company?
Patrick Campbell: We’re all about what’s called ‘subscription revenue automation’. You plug in your billing system and your subscription management system and then we do a bunch of fun things. We give you free metrics, we have the most accurate subscription financial metrics on the market and we give that away for free and it’s used depending on how you measure it; about 20% of the entire subscription market which is cool. On top of that, the way we make money is we have a couple of different products that automate either retention so we’re good at recovering failed payments.
We are good at helping upgrade people to longer-term contracts and then we have some products that focus on pricing which is a big topic for today. That was our first product; getting into the world of pricing. The blog posts you referenced were a couple of years old so I’m glad you did your research and dug that out. Do you know which one it’s from? We do a lot of content and we try to publish a lot of data and studies because it’s just more interesting and it’s also where we can provide strength. Yeah, that one’s from something along the lines; we studied ten thousand-three hundred and eighty-two, I don’t know how exactly give or take blog posts on growth. Here’s what we found and that was the stat that you gave.
Jay Myers: Well it was a great post; I didn’t just read it before today. I remember reading that a couple of years ago when you published it. It made its rounds around our office at Bold; just prior today, I remembered reading it so I searched and pulled it back up. This might have been before it was ProfitWell, it was Price Intelligently. Is that still a product?
Patrick Campbell: The offer is now everything under the ProfitWell umbrella. It’s all profitable, we still have the brand called Price Intelligently but it’s by ProfitWell essentially.
Jay Myers: I understand, why did you want to build this company, like what was your motivation to do this?
Patrick Campbell: Well, to be honest, it was pure hubris. When I started my career I worked in US Intelligence in DC, I worked at Google, so these giant entities and I was an econ analyst. I decided that a large company just wasn’t what I wanted and I always had that. I’m from the Midwest so I’m from Wisconsin, which is why your Canadian accent might bring out my Wisconsin accent here
Jay Myers: And blend right in.
Patrick Campbell: Absolutely, I always had that mindset of working hard and caring a lot about your work and I always told myself, “This is an unfair interpretation.”
I always felt I care more than my boss, I thought, “why isn’t my boss moving as fast as I am? Why aren’t they getting out of the way so that we can accomplish whatever this goal is?” It’s hubris because I was a punk kid who’s ambitious but didn’t realize that some things take time or some things are bigger than what you think it is. I ended up working for another company actually, a D2C brand called Gemvara and they did customizable jewelry like the Blue Nile. I was really enamored by the startup world and kind of building a business and I wasn’t enamored with the culture there starting to see a theme and so I jumped out.
I was in my mid-20s and it was one of those things where I thought thankfully I didn’t have any big debts or liabilities. I can’t say the same for a lot of my peers because of what’s happened in the US education system but I was thankfully in that position and I said I’m cheating myself by not trying. I never wanted to be in business, I never wanted to be an entrepreneur but I started the company and seven years later we’re cranking and building something great at least in my opinion.
Jay Myers: Well there’s a mythical folklore out there that you have been around companies, going public and not even properly understanding their MRR and their data around their customers is this true?
Patrick Campbell: That’s funny you brought that up; I get invited to a lot of boardrooms and I’m not on the board but I at least get invited to talk because of the work that we do on the pricing side and also the amount of data that we’re seeing. I’ve probably been in more SAS and subscription board rooms than most people as an observer just because we’re kind of that analyst side of the house. What’s kind of funny is that’s where the idea for the product of the metric came; our core free product that we have is we were helping a company that was about to IPO at their pricing. They had a CFO that had taken two of their companies public, this was his third and he was calculating both MRR, monthly recurring revenue and churn completely incorrectly.
Sometimes there are different definitions people have, even by his definition they were being calculated incorrectly. We thought we had this multi-billion dollar idea of “oh we’re going to sell this analytics product” which is the famous last words for any entrepreneur because analytics was just a terrible market to be in. Yeah, that’s what started the rolling down of that process eventually.
Jay Myers: I guess you would know right?
Patrick Campbell: Yeah we did our price testing and we were so excited and then all of a sudden the pricing research came back and we were like “oh no” like no one’s willing to pay for analytics even if they’re large companies. This is why most of those companies go upmarket because they need big sales teams; they need to sell for a very high price because it’s hard to play the volume game. Some people have done it but the subscription space; not sure if you know this but even including subscription e-commerce, subscription media, and subscription software, it’s only about 150 000 companies. We’re not talking about the e-commerce space where there are millions of different leads, not all of them are created equal but we’re talking about a smaller market from a logo perspective. The revenue on those logos is astronomical and that’s why we’re still in the space that we’re in but yeah, that’s what led us to this thesis around subscription revenue automation.
Jay Myers: Crazy, I had about six questions that come from there but I’m trying to… the first one I want to touch on is, churn I could understand. So this company going public, churn sometimes is a little bit like… MRR to me seems like such a straightforward thing to understand but with churn, you can get different definitions. You can talk to five different companies about how they define it and it’s different. What’s your definition of the proper way to… let’s keep this within the realm of subscription commerce I guess to calculate churn.
Patrick Campbell: Before we get there, MRR isn’t as straightforward as you would think.
Jay Myers: Okay. Maybe a step back.
Patrick Campbell: Yeah the reason for it is and this is what we thought we’re like “oh this should be easy right and everyone needs this, so that’s the billion-dollar idea.” Here’s the problem, it’s that when you look at, let’s say any payment system subscription management system; just any subscription company. You’re getting a lot of data in and anytime there is an upgrade, you have to make some decisions around prorating; do you prorate, do you not, when does that MRR count? You got time zones, you have currencies if you’re an international company and then you multiply this by multiple different edge cases times 10 000 customers or even a thousand customers. Understanding what your MRR is difficult and that’s what made building the metrics product so frustrating.
We started building on top of stripe and it took a lot of work to handle the…now we have over 1500 edge cases that we’re handling for stripe alone. It took a long time to get to accuracy but what we discovered is that if it’s not accurate people don’t care and people aren’t willing to buy the product. What’s fascinating about that is that’s the frustration with analytics products; it’s hard to do analytics right but people still don’t appreciate it because they’re just like “oh this is just graphs.” This is why we move to revenue automation because people care about their revenue right? Long story short, I think it’s one of those things that if you’re a basic business, you got a hundred customers then it’s easy.
But if you’re a business of any size and you’re starting to think about “hey I got to make this decision,” if I end up being five percent off in my metrics, that could be multiple full-time employees. If not, a whole division at the right size where it’s like “oh no, we don’t have the right number of people” and it turns out we could have spent that money but our numbers were off. So yeah, that’s what gets sorry… to go on my….
Jay Myers: No fair enough and I get to those things that a company is going public like if they’re in multiple geographies and multiple currencies, fair enough. I can see the complexity of calculating it and how that could be an issue.
Patrick Campbell: Yeah no worries and then in terms of churn, the most basic definition is revenue that canceled or lapsed, went delinquent, turned, and canceled out over a period over the total revenue up for renewal over that period. You can do it, so on a monthly basis, it’s like how many customers are we at the beginning of the month? It’s the BOM or beginning of the month, number and then that’s under the number of folks who cancel during that period essentially. That’s the most basic definition there’s…I don’t know we cataloged this at one point, we cataloged different ways to calculate churn. I think that if you’re not about to go public or you’re not like over 100 million in revenue, you should just use the most basic definition. Then as you get over that, you start to want to qualify your churn a little bit because if I’m Blue Apron right?
You should not be looking at my churn the way that you look at Zoom, the SAS Company. This is was what always frustrating for me when you’re seeing the reporting when Blue Apron went public and they’re like “oh, well the churn, the churn,” it’s like these are way different things. We know Blue Apron or most box of the month clubs; they’re going to have massive churn in that first month. That’s going to happen because they’re so good at acquiring leads and customers that not everyone’s going to be perfect but that’s their strength. They’re putting a lot of stuff through that funnel from a brand perspective and then a lot of those folks are coming back later. I don’t know what Blue Apron officially does at this point but to me for Blue Apron, you should start looking at churn starting the second month or third month and then measuring the drop off from there.
As you’ll notice with a lot of subscription food companies, at least what we found in our data is, that’s when things are pretty stable because you found those classic customers or those customers who are going to stick around for a long time. That’s what it gets into when you want to make it a little more complicated is, you want to measure something that’s going to be useful for you; sometimes the most basic measure isn’t good enough.
Jay Myers: Well there are a few things that come into play there and we are a SAS company and we look at; there’s a trial, there’s what we call drop off which is before a customer activates and then activation is when they start paying. Basically, what you’re saying is for like Blue Apron, those customers even though they’ve maybe paid the first month, they aren’t an activated customer. Yes, they paid but there’s almost like a second activation where they’ve had it for a month, they like the food and they pay a second month. Wherewith software, you can make that decision a lot sooner like with Zoom. I can use it three times, decide yeah this is a good platform for video conferencing, I’m going to use it, I don’t need to pay for it, try it.
Patrick Campbell: So that’s why I think that first month drop off is going to be so high where you’re right it’s different metrics.
Jay Myers: The thing that I caught when you mentioned the first time, you mentioned revenue drop off and then the second time customer drop-off and where do you see the difference there and what should you measure? Is it just revenue drop-off compared to revenue added, is it customer drop-off or is it a combination?
Patrick Campbell: Yeah, I mean it’s different; it depends; like ultimately if you force me to make a decision, I care more about revenue retention than anything. Revenue retention is a function of your customers who cancel, your customers that go, delinquent, delinquent churn, and then the expansion revenue that you have. This gets to the adage of your current customers should spend more with you, their average order values should go up over time. In a SAS environment that means they’re adding add-ons, they’re upgrading to new plans in a D2C environment. That means they’re using more products, they’re on the subscription, and then they’re buying additional products every single month in a very simple way.
I think that what ends up happening is too many people get caught up in the churn number when it comes to logos; so customers, a logo is a very B2B term but it’s the number of customers. The problem there is that you can’t create new customers that number’s always going to be bad you know there’s never going to be over 100%. What I think is more important is that I want to look at the different stages of my revenue churn. So I want to look at that first or second month like we talked about then there’s another period right after that and then there’s like the long tail when people seem to be a customer for the long term. When I look at those three stages, there are different things that I would do to optimize those different stages. I might decide if I’m Blue Apron “hey, that first stage there’s nothing we can do because we’re just sending tons of maybe not so qualified leads who are signing up for this promotion so that’s not our path of best leverage.”
The second period of why people drop off between one and three months; if I improve that even marginally, all of a sudden it has big gains in that third stage. There are times when I would want to look at the customer number and that comes down to, is my product compelling no matter the tier or no matter the plan that someone signs up with? In reality, the thing I need to optimize is that revenue retention which in the early days in business; in the early days being like the first 10 years, it can be hard to figure out who is that beachhead customer that you can go out and automatically get? I think that a lot of people focus a little too much on that too early when there are so many different factors and that’s why revenue retention which compounds a lot more I think is so much more crucial.
Jay Myers: And this is why you see some companies posting these negative churn numbers where they’re opposite because their existing customers are becoming more valuable. They’re adding new customers, they’re losing customers but net revenue is increasing month over month.
Patrick Campbell: Yeah exactly, and I think negative churn because it is hard to understand; a lot of people stop using it, it’s more like net revenue retention. It’s like is your net retention over a hundred percent? For some reason, people can like if I put a dollar in at the beginning of the year; how many dollars do I expect to get at the end and hopefully that number is more than one, it’s interesting. Whatever your negative churn that’s what’s happening.
Jay Myers: So can we take a step back a little bit on the churn topic, looking at philosophically, why do customers churn? For all of our subscription customers listening right now and there’s a lot of them; they sign up, they pay and then they unsubscribe. What’s your philosophical thinking on why people churn? I feel like you have some thoughts on this.
Patrick Campbell: Yeah, it depends on how much time do we have right? I think that the big thing to keep in mind is, it all comes down to value and this is the non-helpful but the most truthful answer. At the top I described subscriptions, it’s all about relationships; when that person comes in a lot of times especially in the world of D2C; we’re only thinking about that person starting the relationship. We’re not doing nearly enough on the tail end even if you’re not a subscription, we’re not doing nearly enough, those people have already purchased something and getting them to purchase more. In the world of SAS, we think a little bit more about retention because that’s a number that our investors or advisors will ask us about. In reality, the biggest thing to keep in mind is that a relationship is more than just acquiring or starting the relationship.
It’s building that relationship and then ultimately it’s monetizing that relationship. I think the big thing that you have to think about is when that relationship is ended by the customer, they’re doing this evaluation every month or every term or maybe mid-term depending on the relationship you have with them. Where they’re looking at like “hey are we still using that thing, hey are we getting value from it?” If someone’s asking that question in finance or somewhere else, someone else needs to raise their hand and be like “yeah we’re using it and we love it” Because that person’s like “oh I’m getting value from it;” similarly on the B2C side, if I’m still getting value every single month from who gives a crap subscription for toilet paper. I’m looking at that and I’m thinking “oh that’s awesome” I can continue to use that product and ultimately I can use that product because I’m getting the value from it.
When you think from there then there’s a ton of different reasons they couldn’t get their question answered. You’d be surprised how many people churn because of that, there’s “hey I just didn’t see the value in the first month.” That’s why you should probably try to give them a second month at a discount or something to try to keep that user in the long term. There’s “I didn’t like the product,” well why didn’t you like the product, what can we improve?” “Oh you didn’t see that we had that feature, oh you didn’t see that this was the right way to cook the meal;” that’s something we can solve. If you think about it there are different categories but there are just as many paper cuts of why someone would churn. This is why looking at that particular active churn bucket, people actively canceling is so crucial to your product or your fulfillment or your growth team depending on who it is.
Now there are other pieces of churn; so the one other major piece and I’ve alluded to it before is payment failures and what’s interesting is that this is the largest single bucket. In a B2C environment, it’s probably about 40% of your churn and there’s high variance there so for some people it’s much more and for some people, it’s much less. B2B it’s probably closer to about 30%; so if you have 100 people churn, 30 to 40 of them are because of failed credit cards which I know sounds ridiculous but it’s because credit cards are mechanical devices that are subject to failure.
In that sense, a lot of times you do have some percentage of people where that’s just their excuse to give up on the subscription but about eight out of ten of those folks they’re able to get them back. They’re able to be a subscriber again but they didn’t even know that their credit card failed and so what I typically recommend to folks is to understand the makeup of your churn. Then make sure you’re collecting data on the active churn so you can fix those things and realize it’s not like “boom, in one quarter we’re going to solve this thing.” It’s something that’s a game of inches or centimeters up there in Canada in order to…
Jay Myers: And the rest of the world.
Patrick Campbell: Get those folks back.
Jay Myers: No I was going to say and the rest of the world.
Patrick Campbell: I think it’s us and one other country, I think it’s a small country in the Caribbean so yeah it makes sense but yeah that’s the thing; that’s why people churn as they don’t see the value and not seeing value can be so many intentional and unintentional things.
Jay Myers: Are there any early warning signs that… so obviously when someone churns, that’s a sign that they don’t see the value but how can stores prevent that? A how could they see it coming? Or B, what are some creative ways you see some of your customers making sure that value is perceived because I think it’s a perception. There might be the value there but the customer has to perceive it.
Patrick Campbell: Yeah and I think that not to use like a way overused metaphor but it comes down to like think of how you would start a relationship with another human. Not necessarily romantic or anything because that’s the overused metaphor but just like a friendship or something like that or like a business contact. There are a bunch of different things that you would do right? You’d greet the person, say “hey I would love some feedback on this blog post I wrote” and you seem to be an expert on it. You’d do a whole host of these things and then when we get into business all of a sudden we’re like “oh” like we become these sterile human beings that don’t have any emotions. I know that’s not necessarily the case with a lot of stores because there’s a lot of branding done but you got to treat your customers as that relationship that you’re building.
So asking for feedback and if you ask it sincerely it seems so simple but it’s like “oh you’re going to ask for my feedback and then you’re going to listen and maybe respond to it.” Those are the support tickets that support teams love to deal with because ultimately those are the ones that aren’t just like “hey where’s my package, can I get a refund?” These types of things; even then like making sure that you’re training your supports team to understand like “hey why, oh you want to cancel, why or you want a refund why?”
Then making sure that they empathize and there are so many opportunities to save it because they might be like “oh I got the wrong color” and it’s like some support teams they’re just like “cool, refunded.” When they should be like “oh what color did you want?” Then send that out and send a note like those handwritten notes, everyone’s using them but they work, that’s a reason. You have to look at some of these tactics and think about “okay, how am I going to build this relationship” and then if there’s something that’s overused “how am I going to build that relationship in a way that breaks the mold?” There are a lot of tactics and I don’t know if you want me to go deep on that but I think that’s the biggest thing and that is making sure that you’re building that relationship.
Jay Myers: That’s so good, I see it like you set the table and this is the way to play on your relationship analogy. It’s like if you’re going on a date, you make the table, you put the entire cutlery out, and you do everything to woo the customer in. You make it all nice, you have dinner, they eat with you but then you never talk to them after and you don’t nurture that relationship and you don’t build it at all. It’s like why go to all that work.
Patrick Campbell: Yes what are you doing?
Jay Myers: That is what a lot of stores do and then they wonder why their retention is so bad. I don’t think it’s overused and I don’t think it’s bad to say because it’s a true thing about doing it, you’re doing business with people you’re not doing it with a hit on your site right so and now more than ever that’s true. There is something I think about a lot and I’d love to hear what your thoughts on this are, I think there’s a ratio of some sort of the value that the customer has to perceive to what they’re paying. I don’t know what it is but this is my theory, you can poke holes in it but if you’re subscribing to let’s say shampoo and its 20 bucks a month or something.
Then after a couple of months, I don’t know why you wouldn’t see value in it anymore but you decide you don’t see value in it anymore and you cancel your shampoo subscription. Or maybe it’s stacked up for a couple of months because you were away and so you go and you cancel it but that’s a one-to-one value ratio. You’re paying 20 dollars, you’re getting a 20 dollars bottle of shampoo but I’ve seen stores do such creative I call it value stacking where they partner with a company where every month because they’re a subscriber, they get a 20% discount at these three other brands. They get access to special discounts on their site; they get access to content on their blog about hairstyling or whatever it is.
It’s like this four or five to one ratio; they’re getting a hundred dollars worth of value which doesn’t cost the store a hundred dollars. They find creative ways to deliver that value and then so when you’re going to think about canceling it, it’s like “why would I ever cancel this 20 dollars bottle of shampoo?” “That means I’m gonna miss out on my…” and maybe every second month, I get a free offer for a half off of some other product but I have to be a subscriber to get that. So my theory is there is some sweet spot of value ratio and if a store can hit that, I think that they would really help churn not eliminate it but anyways that’s my theory.
Patrick Campbell: Yeah your theory, you’re right. I think the thing you got to think about is and you kind of alluded to this with value stacking it’s sometimes more things can increase value. Other times the higher quality can increase value and then there’s like you got to think about everything that goes into to willingness to pay. Everyone thinks it’s just the price and it’s like well what is the reflection of a price? Your price is the exchange rate on the value that you’re providing, so you’re saying it’s this much value, and here’s the price. Now if I’m a consumer and I feel like I’m getting a deal and this is where discounts can sometimes come into play. If I’m a discount brand or something like that I might be saying “oh this thing is normally worth a hundred dollars and you’re giving it to me fifty?”
“Oh, I feel like I’m cheating the system in a good way or I feel like I’m getting something” The other thing is if I buy something this is going to make me sound like a little bit foofy so like Midwesterner and me is like I don’t want to give this example but one of the nicest things I own is a Neem’s lounge chair. So Neem’s lounge chair is well designed, I was like I want to buy a nice piece of furniture, everything else is IKEA; that’s the one thing I got in the house, and its thousands of dollars. It has this design element, it has this cultural element, it has this sophistication to it; so all of a sudden it’s not about the money, it’s just about like “oh I’m going to get this cool thing.” I have this inflated sense of self because I own this Neem’s lounge chair even though I’m sometimes embarrassed by how much I spent on a chair.
Jay Myers: And that’s part of the value too right?
Patrick Campbell: Exactly and so that’s what I’m trying to get at, there are all these things; there’s the thing that you’re selling and then there’s everything around it. Now if you increase the number of things that increase the value; if you increase the quality that increases the value. But if there’s the brand and the culture and the word of mouth and the referrals and all these other things, all of a sudden value goes up. That’s why I personally think we’re going to live in a world at some point where the price for referred traffic, like an actual referral from another human being.
The price for that particular product should be higher than the price that someone found me through SEO. I think that that’s the future because that perception is so different and we should take advantage as operators of that perception and everyone’s still happy. This is why I’m not a big fan of huge discounts on the front of the website unless you are a discount brand and that’s what you’re known for because I think you just diminish the value from the people.
There are some people that look at a discount and think “oh that must not be good.” You know if it’s 50% off, it must not be good right? It’s that value matrix and the easiest thing to do here to round out this point is rather than doing some of these tactics we’re talking about it’s just have something for each of the profiles you’re selling to. The basic utility person who just wants the straight-up, whatever you’re selling, the shampoo, then you got the premium version. The person who wants to get the add-ons or maybe the fully organic or the fully natural or whatever it ends up being and then you got the luxury line for those hardcore folks. A lot of people only start with the utility part or maybe the premium part and there are plenty of people that are willing to pay a heck of a lot more if you just offered them something that was higher quality or was a bigger bundle.
I think that’s how you have to think about it and then some of those other value drivers, they’re hard to hone in on but that just means that they’re important.
Jay Myers: Interestingly, you mentioned the customer referral because specifically for subscriptions, I think it is the number one and it depends on not every brand’s the same. The number one driver of subscription signups is a referral from a friend. Because more than anything with a subscription, I feel like you’re subscribing to the company or the brand if I buy a product one time. I’ve bought products where I’ve searched online, I’ve searched in Google I can’t remember what it was but I think it was a camping stole. Anyways I bought it and then a couple of weeks later didn’t come and for the life of me, I couldn’t remember the company I bought it from.
I was on the site, I bought it and I was trying to search my email to find a tracking number and I couldn’t remember the company I bought it from. I was not buying from that brand at all but I can’t imagine ever subscribing to a company and that happening because you’re buying into the brand. It’s so much more a referral from friends that I’m sure some signups come through SEO but friend referrals are the number one so that’s even more relevant to your point.
Patrick Campbell: Yeah totally.
Jay Myers: I want to ask a little bit about pricing, I can’t remember where I heard you talking about this; it might have been on a webinar or some other podcast. I know you have a lot of thoughts around pricing models and freemium annual billing, usage billing and we can speak to all different specs. It doesn’t have to be e-commerce subscriptions although I feel like e-commerce subscriptions are right before a bit of change like the standard subscribe and save model, everyone does that and it works fine. Correct me if I’m wrong, you like the freemium model; I think I’ve heard you talk about this before but what are your thoughts around this?
Patrick Campbell: Yeah I used to be against freemium and it’s like a religious topic especially in the world of retail or e-commerce because you’re sitting there like “why would I give something away for free right?” In some cases like Blue Apron and some like [inaudible 00:30:25] and some of the other subscription food folks, they tried giving away free food and I think there were some legal issues with that. Even then it just didn’t work and the thing that I would encourage you to think about as an e-commerce brand is what you’re trying to do with a freemium model? Then I’ll get into some ways that e-commerce brands can take advantage of this because you’re trying to lower the activation energy of a prospect. A prospective customer to starting to engage and get washed over with your brand and the reason for this is that customer acquisition costs no matter the channel are up across the board.
If you look at most D2C brands you know you’re using the big few; Facebook, Instagram Snapchat. Maybe you have some long tails some other places like Tic Toc [inaudible 00:31:15] lucrative at some point. What’s fascinating about it is that these four or five channels they’ve been around for a while and we haven’t had major new ones except for Tic Toc in a long time. Now there’s just everyone and their brother and sister have a D2C brand or a new product or the dropshipping world that’s a little more nefarious down on the bottom end. The thing is how do you stand out? Well, I think Glossier did a brilliant job without even thinking about they were doing this more for feedback. They were just like “hey we want to create the right products” but inadvertently what they did with freebie or with the community was essentially create almost like a freemium plan.
Not in the traditional sense where those folks were a part of the process, they were able to be a part of this community, and then all of a sudden that increased not only the betterment of the product. It also increased essentially with the average order values, the lifetime value of those customers, etc. What gets fascinating is I think if I was an e-commerce brand today I would start a membership. I would have free membership and then in addition to that I would have a paid membership or just do one of them. I think the reason I like a paid membership is there are some implications from a lifetime value as well as a revenue perspective. Membership is your gateway to a free plan, now what is in your free plan?
What is in this membership? There are a lot of things but the content is the easiest thing to provide. A lot of these folks they’re already consuming your content on Instagram or whatever it is. Have some freemium content if you’re a beauty brand, have some “hey here are some beauty tips, or here are some things that you should look at or some tutorials or these types of things.” Just start getting people to engage with your brand, your email list, etc, and engage in a little bit more way or a little bit more commitment than they currently are by just looking at your content on social. There are other things that you can do for free, I think that folks like most brands but especially like Butcher Box and some of these folks like “hey if you sign up today, you get free bacon for life and these types of things.”
Those aren’t necessarily like free plans, those are more like free incentives and I would always do that over providing a discount. I would always provide something physical over a discount, it could be old inventory and I think that’s what some people don’t realize. They’re like “oh my inventory’s old I can’t give that away or I can’t sell that right now it’s cool.” Give it away, like “hey anyone who signs up gets this thing in addition to the core product.” I think that’s one of those things that not only help clear that inventory which is probably costing you money depending on how you look at it but it also increases that conversion. Because you’re increasing the value of the thing that the person is getting; so hopefully there are some good thoughts there that are helpful.
Jay Myers: Yeah because men think about a case of Butcher Box; whatever their box is if it’s 39 and they’re giving away free bacon for life with it, what’s the baking cost let’s just say four dollars hypothetically. If they had subscribed and say save ten percent, you wouldn’t even be telling me the story right now. You wouldn’t even be saying Jay Butcher Box, if you subscribe you get 10% off for life; there’s nothing to write home about there.
Patrick Campbell: Yeah totally, even if it’s the equivalent.
Jay Myers: Exactly, yeah being a little bit creative and doing something can cost the same and people will spread the word, they’ll post it on Instagram, and they’ll talk about it. But no one’s going to go raving to all their friends like “I saved five percent” and man it just says a lot so much for being a little creative. You’re right like instead of just offering discounts do something in a way that people will want to share it with their friends like “I love it, free bacon for life.” I think there was something you said there that I loved; I love to get them in and then wash them, what do you say “to wash them” in your brand?
Patrick Campbell: Wash them with your brush. I don’t know why I said that.
Jay Myers: It’s good, I love it.
Patrick Campbell: There was a big brander I can’t remember her name but this is what she said if like “oh they’re signing into something that looks like your brand, they’re receiving emails, it looks like your brand.” Provide those little touchpoints they can start to associate you with the emotion or the thing that you want them to associate with. Then it just becomes easier and easier to convert folks especially because multi-touch is a big thing. Unless you’re selling a utility it’s like “oh I heard about it on the podcast, I heard that ad and then oh I checked out the website and then like a week later I heard it again on the podcast ad, I was like “oh yeah let me go convert.” That’s how I heard about the last D2C products that I bought and I also liked the podcaster. I was like “oh I’ve never bought something like that, I’m just going to go buy it, and I’ll use their code” and all of a sudden I’m subscribed to Magic Spoon Cereal.
I get this damn cereal every month. That’s good, it’s great but it’s just one of those things that I never would have done unless like there was some branding involved with it.
Jay Myers: So then once you get them on graduating through the freemium out of the pricing, where do you stand on billing? Just by frequency, there’s a lot of data around people looking at annual billing, does it make a difference, is churn better for people doing annual billing?
Patrick Campbell: Yeah 100% typically in both B2B and D2C; you’re looking at… churn is about 30 to 35 percent better, it’s closer to 40 and almost 50 percent better than some D2C brands for an annual customer versus a monthly. If you think about it it’s because they’re committing to one purchasing decision versus twelve purchasing decisions a year. If you look at a lot of D2C brands, their average number of months is like six to seven.
Jay Myers: And this is still doing like a 20% discount because they’re paying annually or like two months free or something like that?
Patrick Campbell: Well yeah and that’s where I go back to some of the things we were just talking about is I think that’s like if you think about an e-commerce brand. Unless there’s some huge added value because you’re doing a bundle and you figured out how to get the bundle at volume and things like that, 20% could be your entire margin. I don’t think that that’s necessarily the decision for a lot of D2C brands. If you’re doing like a membership or maybe a fitness product or something like that, that’s a little bit more content-based, I can see you doing that. I think for a lot of D2C brands, this is where the bacon stuff comes into play. It’s like “hey if you sign up for the annual plan we’ll give you bacon each month.” What that does is there’s an incentive and it gives and gets depending on what you’re giving, I love using old inventory for this. I think it makes so much sense but it’s also not even trying to necessarily get them on the annual plan.
It’s okay to offer quarterly plans and in every six-month plans; now those aren’t going to have as big of an impact as annual plans but every little centimeter here counts in terms of reducing churn. What I will say though and this is like very much in the data, offering up something physical whether it’s some old inventory, the bacon, or a number of months off, those all work so much better than offering an equivalent percentage. The reason is that if I’m just looking at 20% off or two months off, it’s one of those things that I know what two months are, I can conceptualize two months. Twenty percent unless you’re working in data all the time, I can understand that but it takes me some extra seconds to like visualize and conceptualize that. It’s one of those things that they’ve done these studies for a long time, I think JC Penney, RIP, they did this back in like the 20s where they set up like two bins.
One was two for one and one was two for fifty percent off which is the same price. Two for one I think forty percent higher pickup rate than the two for fifty percent and we’ve seen this time and time again. I don’t have the data in front of me and I don’t remember exactly what it looked like so I don’t want to speak to it but we’ve seen this just time and time again. Be very positive in terms of the uptick of annual plans, quarterly plans, six-month plans.
Jay Myers: Well it makes sense; a percentage is one step further away from what the actual value is… there’s that calculation between where it’s… I’ve always noticed we’ve done a lot of testing on with pop-ups. You enter your email to get a five or ten percent discount, changing that to a dollar. Get five dollars off today or ten dollars off today converts drastically more than get five percent off. If your average ticket is 150, if five dollars might be less, it still converts better.
Patrick Campbell: Yep a hundred percent.
Jay Myers: How do you price ProfitWell?
Patrick Campbell: Great question, I think fairly well. So we have the free product and we give that away for free for two reasons; one, it does help with our acquisition costs based on some of the freemium stuff we talked about. I think the more important part is, we get a network effect not only for referrals but also for a network effect from the data so when we’re studying all this data, and we use it within our algorithms for our paid products. With our paid products, one of them is retained products so this is the thing you can plug into your billing system and we reduce your churn automatically. I know that sounds too good to be true but truly we call it an anti-active usage product, you don’t have to use it every day and it just reduces your churn by attacking credit cards and attacking terms and some of the things we’ve been talking about.
Jay Myers: The AAUP?
Patrick Campbell: Yeah, there you go. That’s completely pay for performance, so when you plug in the billing system, we’re able to take a three or six month average of your recovery rates, whichever one’s higher. Then based on that, what we’re able to do is essentially find out “hey, we lifted it this much.” Then if you’re an e-commerce brand, typically a CPA, if you’re a SAS brand we have some tiers based on the amount of revenue that we recover. So yeah, pay for performance is what we try to do and then on the price intelligently product because we’re a little disconnected from the implementation, we’re going to change that hopefully in the next year or so. What we do is we do have a pay-per-performance option or you can pay… We do value-based pricing which is if you’re a larger company the price is probably going to be higher than if you’re a smaller company just because the impact is higher. You can pay based on the number of sprints or the amount of research we’re doing or you can pay for performance and there’s an upside when it’s performance for us. Then there’s more predictability if it’s just paying for the research and the amount of data we’re collecting.
Jay Myers: We’re getting close to our time here and I want to do my lightning questions at the end. I’m going to ask one more question before we get into that though; for a lot of brands who are getting into subscriptions or any type of commerce and they’re looking to enter the market at a price point. We’ve had experience raising the price on something and seeing more purchases that go against what you would think but it’s happened. So my question is if you’re coming into the market and you’re not quite sure what price point you want to be at, you know you want to be either a premium or a bargain. You have a rough idea… do you recommend coming in low and inching up or coming in high and inching down or doing neither and doing something else?
Patrick Campbell: It’s a good question because I think that we didn’t study econ enough unless we studied economics at school. If you remember your high school or college economics professor, he or she showed you a demand curve and was like “oh as the price goes up, demand goes down, and so on and so forth.” I think that what you learn when you get into more advanced economics is that the reason they’re called curves is because they’re not straight lines even though that’s what they showed you. What’s interesting is in addition to that online goods especially software but even in the world of luxury goods, there’s a world whereas the price goes up demand can go up especially if you’re measuring it through retention. I think that it’s really important and this is why it’s always frustrating when people have never done any research on their price.
They anchor themselves and they think “we’re only worth five dollars a month” and it’s like have you ever tested that notion? “Well we raised our price from forty-five to fifty;” well that doesn’t mean you tested it, that just means staying within the same price point. Don’t get me wrong, an extra five dollars a month for a bunch of customers is fantastic but what if you’re supposed to be a hundred dollars, what if you’re supposed to be a thousand dollars? In reality, it’s probably that you want the hundred dollars, the thousand dollars, and the five thousand dollar option so I think that to me, you have to look at your DNA.
What I mean by that is, if you are a brand that is evoking luxury I think of supply, that Patrick a-do is doing premium razors and things like that. In that case, I always cringe a little bit when I look at the website and I finally became a customer even though I got this big beard that I can’t see on a podcast. When I look at that and I see he’s got 100 dollars and then he crosses that out and has like eighty-nine, it breaks my heart a little bit because I don’t think that’s converting more. He might get some false positives but I think he’s a luxury brand, he should act like one. If your DNA is “I’m luxury” or if your DNA is “I’m good at attracting the mass affluent,” people who have bigger budgets and more discretionary income, then you should price accordingly and then skim down.
You can always provide a lower-priced product but if you’re good at attracting a huge base of people then maybe you start low. Now if all things being equal, I always like to start high because I want to see the people who truly have the propensity to buy the product and are truly into the product. Then I could skim down in the market and decide where my floor is going to be. Maybe I don’t go as low as twenty dollars but maybe I have that 150 dollar product and then I offer 100 dollar products and increases things. I think Butcher Box, I mentioned them before I think they’ve done a good job with this; I think their lowest plan is not even a hundred dollars. I think it’s one hundred and forty or one hundred and fifty bucks a month and they have like one hundred and seventy-nine or two hundred a month plan as well; their whole thing is like hormone-free, really good, and grass-fed all that kind of stuff beef.
When you have that and then you’re charging only thirty bucks or fifty bucks, there’s no way; I mean there’s probably a way but I would just continue to question the quality of that product. The thing you got to think about is that your price is a reflection of your value and your brand and I think it’s easier to start high, get those right customers and then eventually come down; it’s a lot harder to expand up.
Jay Myers: Yeah, that was my thinking thank you for verifying it; it puts your stake in the ground of where you are as a company. If Oakley or a sunglass company were to come in making their sunglasses twenty dollars, there’s no way they’d end up getting up to charging three-hundred dollars so they have to start there. Well, I’ve got a couple of quick questions for; you thank you so much for your time here. I like going to end off with our little lightning round, I can’t remember if I sent these to you out of time or not so let’s see. If you don’t have a quick answer then no worries, it’s pretty easy. The first one is what’s the biggest mistake you see e-commerce stores making?
Patrick Campbell: I already said it but you’re always going to spend half your budget, half your time, if not more on acquiring customers because that’s the name of the growth game. If you spent even a fraction of that time, or a little bit more while you’re still spending all that time on your retention or your monetization your life becomes just so much easier. Think of if you put people in and they don’t stay that doesn’t mean you’re winning, that means you’re just surviving.
Jay Myers: What’s your favorite thing about your job?
Patrick Campbell: Such a good question; I have never in the past seven and a half years been like “oh man I gotta go to work today,” I think that’s good and I think what makes that work is the people that we’ve cultivated and nurtured here at ProfitWell are all very good about getting their stuff done. They’re also just people that I love to be around and so that mixed with you know getting to do things that I love to work on just makes it amazing.
Jay Myers: Amazing, considering that you didn’t work out at so many places before or you didn’t enjoy; what’s your favorite online store, or if you can’t think of one, the last place you bought something but preferably your favorite online store.
Patrick Campbell: That’s so hard because every time I go to a store all I can do is criticize it “oh they’re all good” not that they’re bad, it’s just all I can do is like “they should do this and they should add this here, I got to introduce them to this person.
Jay Myers: I would have paid twice for this if you would have charged.
Patrick Campbell: I don’t know; I don’t like to say that even though if I think it. Yeah, so I’m going to give you a little bit of a lightning round back of the last few things that I bought. I bought a Whoop band, I don’t know if you know that company Whoop
Jay Myers: No.
Patrick Campbell: D2C I know it’s e-commerce but I feel like a subscription fitness product should probably be in D2C as well and I know some people mix those and some people don’t but it’s this band that you wear. The battery life outlasts for five days and it’s made for hardcore athletes but now all of us regulars are starting to buy it. So 30 dollars a month subscription which seems like a lot compared to just buying an Apple watch once but the app and the experience are so good. I bought Supply, I bought a razor set from them, that experience was good and the un-boxing was amazing, and then Magic Spoon. What I love about Magic Spoon is their whole shtick; the product is good which I think is amazing but they make it feel like I don’t know, I remember whenever my parents bought or let us buy that box of bad cereal.
We never had bad cereal, the worst thing we had was like Honeynut Chex or something like that which was still a treat but whenever they let us buy like cocoa puffs or something like that. It was just [crosstalk 00:48:30-00:48:33] like “oh my gosh” coco puffs or pops or whatever they’re called and it makes me feel like that. It’s like “oh this is like a little childhood” even though it’s like healthy Keto cereal so yeah those are the last three things and kind of why I like them. I know that’s not answering your question but…
Jay Myers: No that’s awesome and they are three cool subscription brands.
Patrick Campbell: Yeah, absolutely.
Jay Myers: This is kind of similar to the first one but you might have a different take on it, what’s the number one thing you think stores could be doing more of to grow sales but aren’t?
Patrick Campbell: So I’m going to go off the theme of retention; it’s your existing customers should be spending more with you. Even if they’re subscribers get them to buy more products, get them to subscribe to more products and all those different things. You already spent the money acquiring them so make them worth your while.
Jay Myers: Yeah, so good. Okay, the last one, most of our listeners are business owners, they’re entrepreneurs, you’re a business owner and an entrepreneur. Do you have any favorite quotes, advice, or words of wisdom you’ve heard over the years from a friend about being a business owner?
Patrick Campbell: Oh my gosh, there are so many things; one just popped in my head though and it’s kind of cheesy. I was on a team in college and we would talk about daring to fail gloriously. I think that a lot of us are insecure as entrepreneurs for a whole host of reasons or because there’s also just so much doubt because you’re trying to create momentum from nothing. I don’t think enough of us appreciate how hard that is and how even just getting those first sales let alone the ten-millionth sales is so hard and such an accomplishment. I think it’s just daring to fail gloriously because there’s going to be a lot of failures on the way to success and the only way to succeed is to fail because you have to learn so much that you just didn’t know so I’ll leave it that.
