written by
Liudmila Kurbatskaya
How PandaDoc Experiments with Monetization
The actual life of your product begins when customers start paying for it. It may sound like Captain Obvious, but every product’s monetization strategy consists of what your customers are paying for, and how much they’re paying for it — even if it isn’t being tracked. If you invest in feature development but don’t update your monetization strategy, it’s time to think of all the opportunities you’re missing. Here’s a detailed look at several crucial learnings about monetization that we’ve gathered through research and experimentation at PandaDoc.
What is monetization?
A monetization strategy is based on a pricing model and how it’s implemented within a product. A monetization strategy covers the following:
- What customers pay for (from plans, licenses, and add-ons, to volume components and models, trial versus freemium model logic, user limits, and more)
- Upgrade and downgrade flows (plan and license upgrade/downgrade logic, cancellation flows, and more)
- How customers make purchases (paywalls and payment methods)
- How subscriptions and payments are managed (subscription management system, integration with payment processors)
The main monetization metrics are MRR (monthly recurring revenue, which includes both new business and expansion), new paid users, ARPA (average revenue per account), net-dollar retention, and churn rate. PandaDoc’s Growth Monetization team works to improve all these metrics through product changes.
Monetization growth may be a relatively new focus topic at PandaDoc, but we’ve been experimenting with plans and price points for quite some time. With the setup of our Growth track, we initiated a systematic approach to monetization by launching dozens of tests and initiatives — many of which we've learned from.
The connection between prices and revenue/customer growth
Do price increases lead to revenue growth? And do lower prices lead to customer-base growth? The answers to these questions may surprise you.
One piece of frequently heard advice is: Increase the price of your product. And it makes sense. As a product evolves, the hope is that as a customer gets more and more value from it, they’ll be happy to pay more. While price changes are less frequent for products focused on SMB (small-to-medium businesses), it’s very common for a company to grant a vendor the right to raise prices — a typical percentage is the current inflation rate. However, a price increase doesn’t directly lead to revenue growth. If you increase prices by 5% and expect the same amount in new revenue growth, this is unlikely to happen.
In fact, a price change can be received differently by various customer segments and have long-term effects. In one experiment, we increased the price by $4 (16%), which resulted in a short-term 5% increase in ARPA, but also a 15% conversion drop in one segment. Six months later, LTV (lifetime value) remained at the same level as before the test, but conversion failed to recover.
We also introduced a price decrease by reducing our lowest-priced plan by $3 (18%). Our hypothesis behind this move was that it would help increase our conversion rate driving our new-customer figures. However, our MRR from this product dropped by 16% in the ensuing months, while the conversion rate did not change significantly. The biggest change was that the share of accounts using this plan increased within our new business, replacing more expensive plans.
As we investigated the causes of these results, one hypothesis that emerged was low price elasticity — the way a customer’s purchase quantity can shift once a price changes. For example, in our second case, the price decrease did not result in a quantity increase, and it is typical for products with low price elasticity.
Our third example had positive results: we discontinued the lowest-priced plan and created a new feature set, complete with a new price based on customer research (using Van Westendorp's Price Sensitivity Model).
A pair of key takeaways:
- Price changes should accompany a package revision. For example, if you decrease a price, make sure the product’s value is still a good match for customers by removing certain features or units (such as API calls or documents).
- Be prepared for a very challenging analysis of your test results — at least for subscriptions. When evaluating an experiment’s performance, it's important to consider a full set of metrics (including conversion rate, ARPA, churn, and resulting MRR). Remember, long-term results can sometimes look very different from short-term results.
Why pricing flexibility doesn’t result in revenue growth
As indicated above, a pricing model consists of what exactly you’re charging for, and also how much you’re charging. Now, what if you have different customer segments and want to create various pricing structures and more upsell opportunities? (Think of this as “a la carte” pricing to bring in more customers.) Potential buyer enticements could be seats, add-ons, volume, and services.
This may seem like a sound plan, but it often doesn’t work out this way — especially within the SMB market, where self-service purchases are more common. In fact, this approach can often result in confusing pricing and tricky choices for customers, painful onboarding for customer-facing teams, and expensive maintenance from product and billing perspectives.
At PandaDoc, we began with subscription plans and services, then later added more products and items. Now we have over 100 items available for self- and sales-assisted purchase, as well as a robust — though hardly inexpensive — billing system to support all these product types.
As for the impact on revenue, each secondary product generates about 0.1-0.5% of revenue — good for cumulative growth, but this needs to be compared to investments to launch and maintain.
Two key takeaways here:
- If several pricing options demonstrate a similar impact, always opt for the simpler one
- When launching a new product or pricing model, consider the complexity you’re adding to your system and your customer’s selection process
Why monetization requires strong communication and processes
Any pricing-related decision will impact team members and customers alike. The larger the company, the more difficult it is to make pricing changes. Because of this, it’s important to establish the process of how these decisions are made and implemented — and the main thing to keep in mind throughout is communication.
At PandaDoc, we have a Pricing Committee that includes representatives from our Product, Finance, Sales, and customer-facing teams. Each month, we discuss everything related to monetization, from new purchase flows and packaging proposals for new products/features, to price changes and feature deprecation.
Following each meeting, we share our meeting notes broadly so all team leads can take necessary action. At this point, product managers and other project owners start working with enablement teams to prepare and run training sessions. At the same time, we implement changes within our sales tools (Salesforce CRM and PandaDoc for contracts and proposals) and subscription management tool (Recurly). We typically budget one to two weeks for this process, although we can spend up to six months on preparation and implementation of more significant changes.
We also run A/B tests on monetization hypotheses covering purchase flows, paywalls, and upsells. To manage these A/B tests, we’ve created a simple experiment calendar (in Coda) to ensure we don’t run tests on the same audience. When evaluating results, we use a universal dashboard that calculates key metrics (conversion, number of accounts, cumulative MRR per group); for further analysis, we collaborate with our analytics team.
Two final recommendations:
- Set up regular meetings with stakeholders (ideally up to five managers) to discuss all changes and initiatives, and keep records of all items that have been discussed
- Make sure you have an analytics toolset in place, as you’ll need to examine many different aspects of your project.
illustrated by
Tasha Levytska
edited by
Katerina Stepanouskaya
photos and pictures by
PandaDoc and public sources
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