What we have learned about pricing
Of all of the strategic decisions in a startup, pricing is one of the most interesting and elusive to master. We've made so many mistakes, and learned so much over the years that we thought it would be interesting to describe how we think about pricing for Remotely.
Pricing is the mechanism by which your company will capture part of the value you've created for your customers. And the ability to capture a lot or very little of the value you create will depend on your competitive pricing pressures. So in the spectrum of how important this decision is for your company, pricing is pretty high up there.
How much value are you creating?
To start things off, we recommend thinking about this question first: how much value are you creating for your customers?
Not being able to quantify how much value you create can lead to a lot of trouble. If your service doesn't lead to an easily quantifiable/measurable increase of revenue or decrease of costs for your customer, your ability to win new customers will be impaired. In our experience, the more you need to convince someone of the value you say you create, the longer it is going to take to win a customer and the harder it will be to find sales reps capable of selling it.
With Remotely there are six sources of value we're able to deliver to customers, some easy to quantify and others very difficult to quantity. We’ve broadly categorized these into reducing capital expenditure and executing better:
Less Capital Expenditure
Savings via more competitive salaries: very easy to quantify. Every year, clients pay less for an equally senior software engineer than they would within main tech hubs.
Savings via lower recruiter fees: very easy to quantify. Lower software engineer salaries mean lower recruiting fees (as it is a 10-30% success fee).
Savings via lower overhead costs: very easy to quantify. Office space, benefits, perks are cheaper outside the main tech hubs. So employing outside tech hubs lead to cheaper fixed and variable costs for the company.
Savings via less employee churn: hard to quantify, but easy to understand. US-based opportunities are hard to find outside the US. As a result, these markets are less competitive (local competition struggles to match offerings both in engineering challenge and economic terms). As a result, employees tend to stay longer. How much longer? Hard to demonstrate, but lower churn leads to fewer replacement hires, fewer recruiting fees, and higher productivity.
Reduced time and effort to hire top talent: very hard to quantify. We provide pre-vetted, pre-screened candidates (always-on recruiting) that meet clients needs, so the time to hire is much shorter and the process less labor-intensive for our customers. This frees up their time to focus on building great product and culture.
Avoidance of mistakes: very hard to quantify. There are so many lessons we learned after building a tech hub in LatAm from NYC. This know-how of having done it before is transferred to our customers, so they can avoid making these mistakes with their companies.
Ongoing support: very hard to quantify. Nurturing and managing a engineering culture from abroad is hard, specially if there are cultural and economical idiosyncrasies that are different from your own. It is very hard to put value on the cautionary tales that experience has equipped us other than it could serve as a life insurance for your team. As with many things in life, cheap solutions may turn out to be very expensive.
At Remotely, we pack all the "easier to quantify" sources of value into an "easy to understand" calculator (only for premium subscribers) that shows Remotely can generate 2-3x all-in savings per employee over the span of 5 years, unlocking meaningful amounts of capital. Founders care because less capital, and better execution translate into more business ownership (less dilution, less capital raised) and higher chances of success.
How often do you deliver this value?
This is the fundamental question that you need to figure out: how often do you create value for your customers? The frequency in which customers pay ought to mimic the value delivery of your business.
Subscription models, specially software subscription models (SaaS) tend to have monthly or annual contracts that lead companies to build up their revenue as they stack up revenue streams per customer. These businesses can be easy to predict and evaluate, which leads to better valuation multiples and investor demand. As such, in recent years, we've seen entrepreneurs shoe-horn subscription models onto businesses and customer behaviors that don't fit well with the subscription, putting the benefit of the company ahead of what makes sense for the customer. For example, advertising companies tried hard to create stable revenue streams despite their underlying activities and value creation being seasonal or sporadic bursts through campaigns.
If you want to charge a monthly fee, your value delivery should be monthly. If you deliver all the value upfront, focus on finding a pricing model that aligns.
What are the existing pricing models in your space?
It can be hard to quantify the value of your product or service, but if there is an incumbent, generally accepted way of pricing for your services you can use that accepted standard as a basis for the perceived value you can deliver. In our industry, putting a dollar value to the work a recruiter does (access to a network of candidates, managing the process, convincing candidates) is hard. However, recruiters tend to charge between 10 and 30% of the base salary as a one-off success fee. Why? I don't know, but it's a generally accepted standard of value in the industry.
One of the interesting exercises we did at Remotely was to look at how other players or business models in the staffing industry worked:
Traditional recruiters: one-off fee. They help you find a developer and charge you 10-30% of the base salary as a fee. Some recruiters have an ongoing retainer you pay to keep them looking for you. A core challenge with this model is misalignment with customers interests: quality to value is relatively unimportant to the recruiter (the higher the salary, the more they make), and high turnover keeps them in business. The high up-front expense can be a cashflow challenge for many startups as well, leading fewer startups engaging recruiters.
Freelance marketplaces: % of the contract. Unlike recruiting, freelance marketplaces behave differently, and docharge for the life of the contract (not a one-off introduction/matching reward). This means that if you employ a contractor for a long period of time, you will continue to pay the marketplace through the duration of the relationship, despite the value received having been limited to the introduction (in theory). These marketplaces tend to be de-incentivized from providing pricing transparency. The more opaque the marketplace is about how much the supply is getting, the more they tend to take off the GMV.
Job-boards: monthly recurring fee. Very much like renting an advertising spot, job boards tend to rent "inventory" on a monthly basis for as long as you are looking for someone. If you stop looking, you stop paying.
Dev shop: per project budget, where budget is based on project needs assessment. Talent needs are generally marked-up 100-150% to cover for idle capacity and management. Three main conflict of interest arise: (1) dev-shop is building for a delivery within a time-frame and a budget, not to build long-lasting product or iterating product to gain knowledge. talent is assigned to you, and have little control on picking and rewarding people what you believe is fair.
It is quite surprising to us that freelancer marketplaces are able to charge a % of the job (because it has an end) but full-employment traditionally has not. In fact, freelancer marketplaces are able to charge way more than employee recruiting firms. A freelance marketplace will be able to charge 30-60% of the total amount of the job, while the recruiter will get 10-30% of the base salary of the first year.
In fact, freelance marketplaces (and development agencies) charge significant markups on the rates. The customer has very little influence, if any, on increasing what the developer takes home. Furthermore, in the case of agencies, the customer has little influence on career progression (directly impacting the sense of ownership that’s particularly critical in the startup phase).
Can your pricing help create a moat?
Pricing can be an opportunity to create a moat. In some cases, you might be able to leverage economies of scale to price low, deterring new market entrants. On the opposite end of the spectrum, high prices might help create a perception of exclusivity, building or reinforcing the strength of a brand. These are fundamentally different types of moats, but both are moats nonetheless.
You can see the “economies of scale” approach with software: selling an additional copy of software is "free", and high up-front costs can be “shared” across a large customer base (making the per-customer cost low). This allows individual copies to be offered at a much lower price if you have a large captive customer base. Competitors with smaller audiences cannot profitably create products at similar prices.
If the market is large enough, one can drop the price a lot and capture very little of the value created and still have a massively large company. A good example of that are platforms (shopify, stripe, iPhone) that blanket the world with enabling technology at a very low cost and enable other businesses and activities to happen on top of it orders of magnitude larger.
These moat-building pricing strategies can be really powerful if they fit your business.
At this point, Remotely doesn’t have scale to benefit from economies of scale -- and the luxury angle doesn’t fit who we are. Our pricing model doesn’t currently focus on trying to build or reinforce a moat. But this is something we keep in the back of our minds.
A pricing that made sense to our customers
When we decided to design our pricing, we opted for a structure that was:
Startup friendly: no lump sums of cash to be disbursed upfront. A small(er) monthly fee instead.
Transparent: no fee on the payment to the developer. What you pay them goes 100% to them.
Adapts to the value: our fee "partially churns" automatically as time goes by, as the customer earns the loyalty of the developer, but we're incentivized in finding great great fits because we get paid for the long run.
Zero Risk: we structured the agreement so they do not pay anything if they do not make a hire that way we prove the value and if we do not deliver we can part way. (this has not happened yet)
Flexible / with an exit strategy: allows the startup to take the entire Remotely developer team inside their legal structure at any point in time. If they get acquired they can say to the acquirer that they have the same relationship that they have with their local employees. The same applies when they are raising money from VC's they can say their team is an in-house team that just happens to be in another geo.
We also work beyond the hiring of the candidate by setting our customers for success in building a presence outside the US. Without trying to be exhaustive in the list of the tasks we do: we manage the legal/payment flow: we have the agreements, IRS forms, invoices, IP transfers so you hit the ground running. We automate payments and provide added benefits (like private insurance) to the developers that work for Remotely. Finally, we serve as a local, trusted partner to solve for any procurement need (laptops and other IT needs).