Happy Thursday,
As Q2 comes to a close, many of you will be coming up for air over the long weekend so I wanted to share three of my favorite reads over the past three months; all of which pair nicely with a lazy Sunday and a couch.
One Book: The Ferryman
One Article: The Coward’s Conviction
One Tweet: The Laser Printer Rebellion
On the pricing front, out of 16 pricing conversations since June 15th, I was asked about…
Buyer Personas ⇒ 3 times
Moving Downmarket ⇒ 2 times
Moving Upmarket ⇒ 4 times
Changing Value Metrics ⇒ 6 times
Usage Pricing ⇒ 2 times
Packaging ⇒ 11 times
Multi-Product Bundling ⇒ 4 times
Aside from the above, I’m hearing more questions revolving around platform plays - e.g. “we’ve built several point solutions and now want to merge them in a cohesive platform - what’s the best way to price such that we’re not leaving money on the table?”. This question seems to be coming from two points of interest: one is the desire to limit friction in the buying process while boosting the value of each product individually, and the other is moving upmarket. It overlaps with the breakdown I shared two weeks ago on product bundling but also probably deserves its own article. More to come on this I’m sure.
Today we’re going to switch things up a bit and talk about a 40-year-old behemoth responsible not only for the best samplers in the game but one of the most successful subscription businesses on planet Earth.
You likely know Costco as the retail utopia where you can, in one moment, sift through a plethora of peanut butter jars by the gallon and in the next, evaluate new home furnishing.
But what may not be totally obvious to the nascent Costco consumer (like me), is Costco runs one of the most dominant subscription businesses ever.
Last year Costco generated a whopping $4.2B in subscription revenue across primarily two memberships: Gold Star and Executive, both of which saw retention rates of 90% and 87% respectively. And they failed to beat out only two retailers in total revenue: Walmart and Amazon.
This year they turn 40. Books can and will be written about the Costco business model but what I’m interested in exploring today is what the SaaS world can learn from four decades of Costco subscriptions.
Let’s dive in.
Money follows brand.
Here’s a fun fact: the average employee at Costco makes $22 an hour, and 42% of them stay will stay employed by Costco for more than a decade.
They take good care of their employees. And take better care of their customers — at times, to the detriment of their shareholders.
Costco’s current CEO has publically recalled an interaction with the company’s founder, Jim Sinegal, during which he brought up the idea of raising the price of hot dogs (a fan favorite). Sinegal responded by saying,
If you raise the effing hot dog, I will kill you. Figure it out.
In fourteen words, Sinegal intimated the following: our prices are our brand. And there is nothing more important than brand.
If we dig into some of the data, not only is Sinegal correct, but there’s a hidden irony in his principles.
When we look at willingness to pay for subscription products across a wide spectrum of industries & buyers, brand affinity correlates directly with willingness to pay.
The takeaway here is less “you need to build a market-leading brand over 40 years in your vertical” (though it’d be nice if you did), but rather, negative brand perception can hurt you from a willingness to pay standpoint.
With acquisition costs and competition increasing for most of us, it may be easy to discount the less-tangible return of protecting brand. However, it can swing willingness to pay by up to 60%.
Virality is a catalyst for growth.
If you have passionate Costco people in your life, one of your primary jobs is to shift conversations away from Costco and remind them that, yes, you’ve heard about the credit card benefits, and yes, you’re aware of the travel program, you’re just a bit too busy to sign up for everything today.
But why does Costco seem to have so many customer advocates where other retailers don’t?
There are a few answers.
First, Costco has a killer referral program.
For each “refer a friend” activation, both sides receive cash discounts on orders. This kind of approach isn’t rocket science or a revolutionary “growth hack”, but still Costco uses it masterfully.
recently unpacked his thoughts on leveraging referral programs in B2B SaaS and the approach is eerily similar.Second, they buck the status quo.
In a saturated and commoditized market, how does one differentiate themselves? They shape their buyer's perspectives rather than competing on the same features.
In Costco’s case, they do things like vow to never exceed 14% margins on goods, offer free returns on all products, and at any given time have 5+ product samples (free trials?) in all of their stores. They’ve effectively shaped the optimal retail buyer journey to transcend how people think it ought to look.
And guess what? The best software companies do this too.
Slack transcended email, Zoom transcended phone calls, Zendesk transcended customer service, etc, etc.
Sometimes shifting the framing of your value proposition can have an outsized impact on buyer behavior.
Here’s an excerpt from a study we ran a few years ago highlighting this idea:
We tested a fake CRM product amongst different groups of sales leadership with decision making authority on sales teams with less than 10 sales people. When asking these same buyers about the same product, but leading with different messaging we saw varying willingness to pay. Note how focusing on sales efficiency and organizing the chaos won out handedly against propositions like accelerate your growth and see inside your whole team.
Third, they evoke social curiosity.
Whether you still wear the Kirkland sweatpants your aunt gave you in 2010 or occasionally catch glimpses of the Costco-branded credit card, it’s hard to not cross paths with the Costco brand in some capacity in real life. But rarely via billboards or TV ads; they, instead, ingratiate themselves in your everyday life.
This is where they beat the other “behemoths” in retail. They tap into the art of virality.
And when we look at the most successful Product-Led Growth companies, they’re prolific in the same skill.
Typeform brilliantly tapped into this phenomenon by including their famous “powered by Typeform” message after each completed form. And their organic sign-ups dramatically increased when they included links like this to all form respondents:
Other folks like Slack, Testgorilla, Zoom and Paddle also lean into the compounding returns of viral product growth.
Add-ons separate the good from the great.
A few months ago, I unpacked what I believe to be the top 10 SaaS pricing pitfalls. Coming in 2nd place was the welterweight underdog: Add-ons.
It’s a lever too many SaaS companies are missing the mark on.
Costco, however, is not.
Aside from your annual Costco membership, as a customer, you’ll have your pick at just about anything you’d like within the Costco umbrella of SKUs: Travel, Gas, Pharmacy, Optical, Auto, Mortgage Services, Home Insurance — seriously, the list is comically long.
These add-ons make up for over $1b in annual revenue for Costco.
Costco learned an early lesson that many in SaaS haven’t:
Not all of your buyers need all of your features. In fact, by giving away some features in bundles, you could be jeopardizing both retention and expansionary revenue.
It’s critical that you understand which should be sold separately from the rest.
Here’s a reminder of a good way to think about packaging; the x-axis represents the relative value of features and the y-axis represents willingness to pay:
Your core features will fall in the bottom right quadrant indicating high aggregate preference and low willingness to pay; meaning, you just have to give those features away up front.
Value-driving features fall in the top right, for which they will elicit high preference and willingness to pay. So, these often should be sold in middle subscription tiers.
Add-ons are those features that have low aggregate preference, meaning most of your audience does not need them. However, those that need them, are willing to pay for them. Sometimes, a lot!
And we don’t talk about the bottom left quadrant (read: trash-land).
Add-ons can be the key to unlocking 20-30% more growth. And they’re one of the easiest tweaks you can make to your packaging strategy.
I’m fascinated by Costco for a number of reasons but notably because they’ve seemed to master the art of subscription monetization almost as effectively as forcing me to double my weekly grocery budget.
They’ve built an empire by having a deep focus on their customers while leveraging strong fundamentals related to brand, virality, and up-sells.
See you in 2 weeks back with our regular pricing breakdowns!
-Evan