20 July 2020

Startup Flight #11: Why we stopped selling monthly subscriptions

Hi there! My name is Charlotte and I’m Co-Founder & CEO of Equalture (a hiring software that leverages gamification to debias hiring for SMBs) and living in the most beautiful city in the world: Rotterdam. Being an entrepreneur for 4 years now and building my second company together with my twin sister, I get a lot of questions from other founders and people thinking about starting their own company.

Since I believe that every single founder experience can be helpful to other founders, I decided to translate these frequently asked questions into a blog series: Startup Flight.

In this eleventh blog: What happened when we started selling monthly subscriptions and why we stopped selling monthly subscriptions this month.

The SaaS dream vs. reality

When we started Equalture a few years ago, we were those typical dreaming-of-the-real-SaaS-company kind of founders. And for us, a real SaaS company was characterised by two things:

  1. Eventually, everything should be automated. From buying the product on the website up to product onboarding without any human help. 
  2. Subscriptions periods should be both yearly and monthly.

I do believe that this can and should work for lots of SaaS companies. I use a lot of tools myself (I think I am honestly slightly addicted to tools..), including ones like for instance Calendly, costing me €10 p/month. For these kinds of subscription models, requiring at least ten thousands of users in order to secure a solid MRR (Monthly Recurring Revenue), automation is key. 

What I also do believe is that, for Calendly, it makes perfectly sense to offer monthly subscriptions as well. Because for these fully automated SaaS businesses, the CAC (Customer Acquisition Costs) is low enough. 

What I learnt along the way, however, is that my definition of a SaaS company wasn’t the right one. Because it’s not about automating everything and ensuring an optimised, non-human workflow from begin to end in order to be able to let customers subscribe monthly. A SaaS company is about leveraging software in order to improve your customers’ workflows and processes. And being able to automate this from begin to end is therefore just a type of SaaS company. 

My different types of SaaS companies

And please note: This is something that I came up with myself in order to classify SaaS companies, so no scientific research involved. 😉

So like I mentioned, when I started this company, I knew just one type of SaaS company: The one that is fully automated from begin to end (so from buying the product up to completing the product onboarding), allowing them to offer monthly subscriptions. 

Now that I have some experience in this industry and also have the honour to mainly work with tech scaleups here at Equalture (since that’s our Ideal Customer Profile), I came to the conclusion that there are actually three types of SaaS companies, based on their (i) level of automation and (ii) subscription model:

As you can see, I categorise my own company as a SaaS Type C company. Why? Well, because of two things:

  1. We are not fully automated. This means that an actual person from our Sales team is always involved in the process of buying our tool, where an actual person from our CS team is always involved in the product onboarding process. 
  2. We change a current process. This means that, when customers buy our tool, they do not improve an existing process. We actually challenge and change their process. Because (in our case) where our customer would normally just post a job opening when having a hiring need, now they start assessing their team and their hiring needs through gamification first. And where they normally evaluate candidate based on for instance a resume (which is quite gut-driven), now they evaluate candidates based on the Candidate Matching Profiles and Scores that we provide them with (which is highly data-driven). And that’s really something different from a tool like Hubspot, which we for instance bought after using Pipedrive, another CRM tool, because Hubspot offers some more in-dept functionalities. They did not change our sales process, however— it just helped us gain better insights and keep things well structured.

The impact of these types of SaaS companies on subscriptions

I called these three types of SaaS companies A, B and C for a reason — namely because the level of difficulty ranges significantly. Here’s why:

SaaS Type A

These are the characteristics of SaaS Type A companies:

  • Low ARPU (Average Revenue Per User);
  • Large number of customers;
  • Easy product onboarding (no process changes required + no human interaction);
  • Product value is experienced right away;
  • Easy to sell (short sales cycle).

For these tools it’s all about being plug and play, so after I bought Calendly, I could use it right away (or well, after 2 mins, since I needed to integrate it with my Google Calendar first). And that also means that I experience the value of the product already after 2 mins as well.

SaaS Type B

These are the characteristics of SaaS Type B companies:

  • Medium/high ARPU (Average Revenue Per User);
  • Medium/large number of customers;
  • Medium product onboarding (just a few process changes required + human interaction only from a customer support-perspective);
  • Product value is experienced within one month;
  • Medium easy to sell (medium sales cycle).

For these tools it’s all about providing a smooth onboarding that proves how this tool improves your process. So after we bought Hubspot, it was quite easy for us to finish our setup. And if we needed help, we could contact Hubspot through the live-chat. It took us a few days to complete the onboarding, but after these few days, we could experience the value of the product right away. 

SaaS Type C

These are the characteristics of SaaS Type C companies:

  • High/medium ARPU (Average Revenue Per User);
  • Medium number of customers;
  • Intensive product onboarding (Process changes required + regularly human interaction only from a customer success-perspective);
  • Experiencing the product value takes longer than one month;
  • Hard easy to sell (longer sales cycle).

And this also applies to Equalture. Our sales process takes a couple of weeks and requires at least 2 to 3 touch points with a company. Besides, our sales strategy is very much focused on challenging the prospect’s current process — which is one of the most difficult sales strategies.

Once the customer is on board, it takes often longer than a month before they can experience the value of our product, and customers spend at least a few hours over a period of a few weeks to the onboarding. To provide you with an example:

Scaleups buy our product because they want to build the best possible teams. So we should basically guarantee that they make the best possible hiring decisions. In order to do so, we start by analysing their current teams. So our product onboarding follows a fixed number of steps:

  1. We create all teams of the customer in our platform;
  2. We assess all team members of the customer in our platform (through neuroscience games);
  3. We translate team results into hiring needs;
  4. We create job matching profiles in our platform;
  5. We let candidates apply through our platform;
  6. We provide customers with a Candidate Matching Profile for each new candidate in our platform.

And ultimately, this intensive product onboarding leads to the best possible hiring decision, hopefully within one to two months. The value of our product, however, isn’t something you won’t experience once you hired your first new team member. You will experience this after a few months, because you need at least two months to experience whether your new hire is indeed a good hire.

So we change your process. We change your vision on team building. You need to spend at least a few hours over the time span of a few weeks on the onboarding. And it takes longer than a month to experience the actual value of our product. 

That’s exactly why monthly subscriptions don’t work for our tool. 

So here’s what happened when we started selling monthly subscriptions

It might seem like I know a lot about SaaS businesses at this point, but 6 months ago I was still finding out how SaaS actually works. Or to be more precisely: How it could work. 

I was living in the assumption that, although we have all the characteristics of a Type C company, we could actually sell our product just like the type A and B companies do. So we built a pricing page that allowed you to purchase the product on the website right away, and we started offering monthly subscription to make it more accessible for companies to buy our product.

Reality, however, proved that this was maybe one of the most stupid commercial decisions that we had ever made. Because people won’t easily buy our product on the website right away, since they are aware of the process changes and therefore would like to be informed about these changes first. And they won’t be head over heels after the first month, simply because our promise to build great teams couldn’t be proved at this point already. 

The consequence: Customers with longer contracts walked through the product onboarding easily, were extremely happy and renewed their contract after six months or one year. Customers with a monthly contract, in contrast to that, often didn’t walk through the product onboarding correctly, were less happy and more often chose to churn after two or three months (which makes totally sense, since hiring quality can be assessed after a minimum of two to three months after hiring someone).

So that’s why we stopped selling monthly subscriptions. And guess what: Customers are way more happy now, have a much better onboarding and experience the actual ROI of our product without a doubt.

My advice to other founders: Don’t be afraid to ask for a longer commitment. You know more than anyone else in the world that your product is worth it.

Cheers, Charlotte