[Cofounder Update] How We Just Lost $1M + The Hardest Product Decision We’ve Ever Made

Note: This is the story of how we lost $1M right after acquiring Drip and (what feels like) the hardest business decision I’ve ever made.

About two weeks ago, Leadpages officially acquired Drip.

It’s been one of the best decisions we’ve ever made. Period.

And a number of decisions we made post acquisition have also been easy.

I’ve been a cheerleader (please don’t visualize this) as Rob and Derrick have done things like …

  • Change affiliate commissions from 15% to 30% (one of the first things we did post acquisition, and an easy decision)
  • Open two new roles to help grow their engineering team (also an easy decision)
  • Decide that Drip should integrate with—and enthusiastically support—as many Leadpages competitors as possible (definitely an easy decision)

But one of the decisions we just finalized was just painfully difficult to make.

The Story Behind The $1/Month Version of Drip

Rob just posted the news that we’ve launched a $1-per-month plan for Drip.

This is a fully fledged version of Drip that includes all the same features as the other plans.

We’re doing this because we want world class marketing automation to be available to everyone.

You probably know who the big marketing automation players are. Drip’s feature set can go head to head against any of them and win.

Most true marketing automation platforms …

  • Don’t publish their pricing
  • Force you to pay annually
  • Force you to pay $2,000 or more as a “customer success fee”
  • Charge you $200/month or more for as few as 100 contacts

Drip, on the other hand …

  • Publishes its prices
  • Doesn’t lock you into an annual contract (in the attempt to reduce churn by force)
  • Allows you to purchase directly from the website
  • Has a 21-day free trial
  • Doesn’t force you to pay a $2,000 onboarding or setup fee. (It’s pretty easy to set up Drip on your own, and if you run into any trouble, our support is incredible.)

Again, our mission is to make powerful marketing automation (previously only accessible to companies with $100,000+ marketing budgets) accessible to everyone. I think we’re well on our way to making this happen.

Click here to try Drip free for 21 days

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Why the $1 Plan Was the Most Agonizing Product/Pricing Decision I’ve Ever Been Involved with

It really comes down to math.

Let me spell it out.

  • There are roughly 450 Drip customers with less than 100 contacts
  • Up until today, these customers have paid $49/month

So …

  • 450 customers x $49/month x 12 months/year = over $264,000

But it doesn’t stop there, because …

  • Most SAAS companies are valued at a multiple of their annual revenue.
  • So, multiply that $264,000 by a standard SAAS valuation multiplier, and you have a compelling case that a large amount of the money we spent to acquire Drip just vanished.

That’s why the decision to introduce a $1 plan kept me up at night.

It made it hard to think straight during dinner conversations. It made my brain come to a halt.

The Case Against a $1/Month Plan

The case against the $1 plan is that we paid real money for Drip, based on a multiple of annual revenue.

Like I said above, if you apply that same multiple to the $264K we’re losing here by charging $1 per month (instead of $49/month) for the ~450 people on Drip with 100 contacts or less, you could say that we just set fire to a big pile of cash.

And that just seems like an irresponsible thing for us to do. As someone with bootstrapping in my DNA, this hurts.

The Case for a $1/Month Plan

But there is a case to be made for the $1 plan. A strong one.

It has to do with the incentives a plan like this creates.

If you want to know how a business will act, follow the incentives.

For example …

Drip has the best onboarding of any marketing automation platform I’ve seen—because it has a 21-day free trial. If we can’t get you engaged with the product in 21 days, we lose you as a customer.

Companies with free trials almost always have better onboarding than companies without free trials because they have to, and because the business is incentivized to do so.

Companies without free trials just aren’t as motivated to create truly spectacular onboarding.

And companies that only have annual plans are even less motivated.

And companies that sell to CMOs—even though the actual users are individual contributors on a marketing ops team—have even worse onboarding, because the buyer of the software isn’t the user.

Companies that make too much money from customers that don’t use the product don’t have the right incentives to build great products. These companies tend to overinvest in sales and marketing and underinvest in product and engineering.

Companies that only get paid when their customers get value tend to put more effort into delivering value to their customers.

All of this brings me to …

A Story of Incentives, Timing, and Mission: The 3 Reasons Why We Absolutely Had to Do a $1 Plan Right Now (and Not a Second Later)

At the end of the day, there were three reasons why we absolutely had to do this $1 plan now.

Reason #1: Incentives

Most SAAS businesses operate under the gym membership model: they make much of their money from customers who barely use the product but don’t bother to quit.

When Adobe switched from charging for shrink-wrapped software to charging for their Creative Cloud SAAS service, their stock tripled, because they could now collect a monthly fee for even light users of their software (who might have bought one version of Photoshop but never upgraded).

Gyms work in a similar way. In fact, most gyms would go out of business if every card-carrying member made a weekly visit. Their entire system depends on non-consumption.

Most software for business is similar: most SAAS startups would go out of business if they lost their non-consuming customers. These startups do truly want you to use their products. Their hearts are in the right place. But they depend on a large base of aspirational customers who don’t actually implement the new tools they’ve purchased.

With Drip, we wanted to align our incentives with the customer’s incentives as soon as humanly possible. We don’t get paid more than a dollar unless you’re actually using the product in a meaningful way. (We are assuming that if you have over 100 contacts you are getting real use out of the product, rather than buying it and letting it sit on the shelf month after month.)

This keeps us from being rewarded for attracting non-consuming customers.

Reason #2: Timing

Timing is another reason we wanted to create this $1/100 plan right now (and not a second later).

As Drip continues to rapidly grow, we will inevitably have many more customers with under 100 contacts. If we don’t change our pricing right now, we will come to depend upon and expect this revenue.

By immediately taking this revenue off the table, we can ensure that we don’t scale faster than our active customer base, or think we’re bigger than we actually are.

Businesses start making poor decisions (and grow too quickly) when a significant percentage of their revenue comes from non-consuming customers.

So the pain of doing this now is much less than the pain of doing this later. And we knew that the sooner we made this decision, the more likely we’d be to actually implement this philosophy.

Building a business on non-consuming customers is like building a business on quicksand. It’s not sustainable.

The question isn’t if customers paying $49/month (with less than 100 contacts) will churn.

The question is when.

So let’s not count our chickens before they’ve hatched.

Reason #3: Mission

A final reason we implemented the $1 plan has to do with mission. We want to make world class marketing automation accessible to everyone. We want more people to create their very first visual campaign flow with Drip than any other tool.

This is a big step in that direction.

In Conclusion …

We’d love for you to try Drip. It costs $1/month if you have less than 100 contacts. We hope you like it.

– Clay

Click here to try Drip free for 21 days

If you have LeadPages™, you don’t need to download this template – it’s already available to you inside your LeadPages account. Just log in and you’ll see how super easy it is to customize this page in seconds with no technical knowledge or skills, make it mobile responsive, integrate it with your email service provider or CRM, run A/B split tests, and publish it to Facebook, WordPress, or your own server.