The BLUF (Bottom Line Up Front)

• Clay simplified their packaging by removing a tier. This is almost always a good idea for some very silly reasons.

• Clay globally lowered their prices by 10% to employ a penetration strategy. This is almost always a bad idea for some very good reasons.

Full Disclosure: We are tiny angel investors in Clay and we have helped them with pricing in the past. We did not work with them on this latest pricing change.

Clay and their¹ pricing - part 3

Last week we covered the second major part of Clay’s new pricing - the decision to pass their costs on to their customers. This week we’re diving into the last 2 things that Clay changed, their packaging and their strategy. This one will feel funny to most of our readers because changing packaging feels like a huge change, but it rarely has a large impact on the bottom line; on the other hand, changing strategy feels minor but can seriously hurt (or in rare occasions help) the bottom line.

Let’s dive in.

Clay’s New Packaging

First off, what do we mean when we say “packaging”?

Packaging is the discipline concerning the broad framework of how different components can be bought by a customer. When we summarize “packaging” for our clients, we often use the hypothetical question of “how many product tiers should you have?” It’s not the only question, but it’s a big one.

Other questions might include:

• How many customers should be in each tier?

• How modular / a la carte should your tiers be?

• Should your packages be nested or not?²

We teach that packaging runs on a spectrum from “Buffet” to “Dim Sum”, and the choice of where you are on the spectrum involves a series of tradeoffs and matching your packaging to the broader market structure.

At some point, I will do a series on packaging, but for now, here’s the spectrum.

So what did Clay do?

Well in short, they moved from a 5-Tiered Model (Good - Better - Best - Bester - Bestest) to a 4-Tiered Model, which is really free + 3 tiers.

Do we at Crescendo recommend this? Yes, almost always.

There are few things that I have seen work more times than simplifying your packaging and removing a tier. I don’t know why, but every time some fancy pricing person comes in and wants to add a feature tier between middle and high, you end up cannibalizing your revenue.

Theoretically, more tiers should equal more choice. More choice & more flexibility should mean a better fit with your market and more dollars per customer.

In reality, you end up getting the Paradox of Choice³ where conversion rates actually decrease when customers are presented with more options.

How to test if removing a tier is right for you?

This is actually one of the easier things to A/B test in pricing land. Because you are hiding, rather than adding, you can simply remove an option on the checkout flow to see if the distribution, conversion rate, and conversion time go up. We did this at Evernote back in 2017 and it worked like a charm. For what it’s worth, adding a tier is much more difficult to test, so I would rely on more typical methods (surveys, data) to determine if you need an extra tier.

Clay’s Monetization Strategy

Whenever you make a big pricing and packaging change, you should ask yourself if you also need to raise or lower prices, and I can tell you that the answer is almost never “lower”.

Why?

Because almost everyone is chronically underpriced - partly because of inflation, which keeps marching along, whether you adjust your prices or not. It’s also because people tend to over estimate their customers’ price sensitivity. Lastly, you aren’t going to change your packaging and price model that often (hopefully less than once every other year), so even if you want to “keep prices the same” that equates to next year’s inflation adjusted prices.

When we evaluate different price models, we use a metric called “Fit Ratio”, which is the ratio of total dollars moving up and down in the existing model vs the new one, relative to the projected revenue if everyone were to accept the new price. That’s a complicated metric, and we’ll do a post on that later, but imagine the following two examples:

1. Two customers both get a 10% price increase. Total revenue goes up 10% and the total dollars moving around is 10%. Fit Ratio = 1.0x

2. One customer gets a 20% price increase and the other gets a 10% price decrease under the new model. Assuming both customers are the same size, total revenue goes up 10%, but total dollars moving around is 30% (+20% and -10%). Fit ratio = 3.0x

Fit Ratio will never be lower than 1.0x. We like to see it less than 3.0x. Negative is very bad.

So why is a negative fit ratio so bad? Because it means there is positive risk, with negative reward. Imagine the worst case scenario - every customer that we raise prices on churns and every customer that we lower prices on simply cannibalizes their revenue. And in exchange for that risk, we are projecting…lower revenue? Now you see the problem.

So, when Clay’s management says something like this, we get very worried:

What has to be true for Clay to be right?

There are exactly 3 scenarios where Clay’s global price decrease is value accretive:

1. Customer willingness-to-pay has dropped and Clay must lower its prices to compensate for that

2. Clay is employing a “penetration strategy” - sacrificing revenue for some other strategic externality

3. Management is lying…

#3 could be true - it wouldn’t be the first time I’ve seen it. But I have no reason to believe they are lying and also that story is so much less fun.

#1 is almost certainly false. Clay has improved their product over the last 2 years. While they have seen increased competition, they are still a market leader. Plus, AI budgets have only gone up in the last few years. Highly unlikely.

Which leaves us with #2 - a penetration strategy. In fact, management itself hints at this strategic move.

We at Crescendo teach that there are only 3 good reasons to deliberately undercharge a customer, choosing to sacrifice revenue for a strategic reason.

1. Economies of Scale: If by simply having more customers, you can lower your own costs, you might consider a penetration strategy. An example of this would be aggregating demand (for AI tokens) and then being able to negotiate lower rates with a supplier.

2. Network Effects: More customers —> higher willingness-to-pay for the marginal customer. This is most often referenced with social networks but it applies to many data products too, especially when customers contribute their own data to the product. Marketplaces are another good example.

3. High Switching Costs: If customers naturally grow (quickly) as they use your product, AND it is difficult to switch, you may want to consider undercharging now, to capitalize on those customers later. Any tech product that gives promotions to YC backed companies is employing this strategy.

So which one is Clay doing?

Not #1. They say that any cost advantage they would get would now be passed on to customers under their new pricing. Lower data costs —> lower prices not more profit.

Not #3. I’m sure Clay is somewhat sticky, but as a GTM tool, it simply doesn’t have the same system of record dynamics as an ERP or CRM⁴

Maybe #2. Clay wants to “grow their ecosystem” - aka the classic marketplace rationale for undercharging customers. But that begs the question? Is Clay a marketplace?

Not. Any. More.

They said so themselves. The buying and selling of data and AI is commoditized. Clay is a “GTM Platform”. And unless you have an “app ecosystem” (which Clay does not have) there are no network effects in SaaS.

To put it bluntly, of all of the decisions Clay made in their new pricing, this is the most dangerous and in our opinion, least likely to succeed.

Should you do a penetration strategy and lower prices to “grow your ecosystem”?

Probably not.

Unless you are a marketplace (e.g. Uber entering a new market or Truth Social needing followers), a huge aggregator of demand (e.g. Robinhood sucking up every day trader), or a sticky product for a growing customers (e.g. AWS for startups), you should charge the revenue maximizing price.

Don’t believe me? Do the math. If you decide to decrease your prices 10% to drive more volume, how many more customers do you have to get to break even?

Spoiler alert - it’s more than 10%.⁵

“Landing the plane” of Clay’s new pricing

Over the past few weeks we’ve dissected Clay’s new pricing. Here’s our summary of what they did, and our grade as to whether or not it was necessary and/or a good idea.

Clay introduced a new price metric - “actions”

• Is it “communicable”, i.e. easier to understand than data credits? No.

• Is it uncorrelated from their existing price metric? No.

• Is it independently predictive of willingness-to-pay? We don’t know, but probably not.

Clay now sells their data and AI “at cost”, passing it on to customers

• Did Clay want/need to shift their value proposition? Yes!

• Does Clay want to pressure their suppliers? We don’t know, but probably yes!

• Does Clay want to create channel power? Probably not.

Clay simplified their packaging and lowered prices globally

• Is 4 tiers better than 5? Probably yes.

• Will lower prices drive more revenue than higher prices? Almost certainly not.

Clay is a great product. And it is evolving its value proposition. A shift in price metric was warranted, but we wouldn’t have chosen “actions”. The packaging decision was long overdue.

And, we strongly oppose a 10% revenue cut for the hope of “growing the ecosystem”.

But I can’t summarize our take on Clay’s pricing better than the founders, who summarized our advice as…

Get in touch

Crescendo works with medium-sized software companies to improve their pricing, packaging, and promotion strategies. If you’d like to book a quick consult, reach out at info@crescendo.partners or schedule time via the button below.