In this week's teardown we take a look at the battle between transactional email providers Postmark and SendGrid, and dive into how important value propositions are and how expansion revenue and enterprise pricing can lead to a win.Read More
Is commoditization in Klaviyo's pricing future?
Patrick Campbell Apr 22 2021
This week we are talking about Boston's own Klaviyo, which has taken the ecommerce market by storm. Klaviyo rose by providing e-commerce email and SMS products. It sounds basic, but here's what's amazing about it: they have built themselves into this ecosystem in such a way where you can set up workflows on SMS and email, throw a little social in there, and basically ensure that you are making money while you sleep—even if you're an ecommerce business that often focuses on one-time purchases.
They took one thing—tracking revenue with email—and blew it up to build a rocket ship.
I know there's a lot of people who object, like, "Hey, is their platform at risk because they build on top of Shopify, big commerce, Magento, and all of these other products?" Yes, and no. They're doing some really brilliant things with their pricing in particular, while making a couple of mistakes that are limiting further optimization. We're going to walk through all of these lessons and package them up into a nice case study you can use to improve your own monetization strategy.
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Pricing field notes
The world of customer data and messaging living side-by-side has spawned rapid success for Klaviyo. And with more than 50,000 businesses of all sizes using Klaviyo, they've been balancing between the markets beautifully until now. But are their features enough for the hardcore user, or will they have to push their pricing towards commoditization?
Below are some valuable takeaways you can implement in your own business.
- Price from a cosmetic perspective
Klaviyo's fees are very linear. As you add more contacts, it very smoothly goes up and to the right. It's a nice smooth line. And it's really important that you keep this cosmetically appealing line in terms of pricing. It helps things make sense for your business and your clients, and it's not arbitrary. It's perfectly clear how your pricing is calculated and your customer base knows what to expect.
Price localization is keyLocalization is the practice of adjusting prices to local markets. And Klaviyo has a huge opportunity to look at regional willingness to pay and optimize their pricing around those regions, especially as competition grows. This is a quick win for Klaviyo to implement, and it's the right time to do it. Market-based localization (measured willingness to pay in each region) results in double the growth rates of non-localized pricing. If 20% of your base is outside of your home region, these are factors you need to consider.
- Know when not to differentiate
Understand where the feature and relative preference of your different features are, in order to understand what you can differentiate and not. Klaviyo doesn't differentiate their core features and shouldn't, as it works well with their all-inclusive pricing. But they will need to find add-ons and enterprise tiers to be properly optimized for their customer base, in order to increase their growth rates. Expansion revenue is key.
Ecommerce has made it so we can buy anything and everything online. From Pokemon cards of our youth to industrial manufacturing equipment for printing metal. We think it’s just shipping and logistics that brings that success, but in reality it’s the connectivity we all have with one another and the ability to reach any audience in any niche at any time. One of the core products arming the rebels who are reaching these niches is Boston-based Klaviyo.
Founded by Andrew Bialecki and Ed Hallen in 2012, Klaviyo is an email marketing product built from the ground up for ecommerce businesses. Andrew and Ed had worked together at Applied Predictive Technologies where they built big data-driven marketing solutions, but they realized these tools while great for the time, weren’t that smart for personalization and didn’t measure the most important thing in marketing—the revenue. All because they didn’t store any customer data.
Klaviyo set out to solve these problems by offering up an email marketing solution that monitors real-time customer data to automate personalized communication. Their platform enables “owned marketing,” which is a channel where you can control the entire experience by inputting whatever data you need into the Klaviyo product and having effective APIs and plugins to send whatever you need.
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This world of customer data and messaging living side by side has spawned rampant success, with tens of thousands of customers and whole percentage points of black friday sales attributed to companies using Klaviyo.
With success comes competition though—much of the risk Klaviyo faces comes from an extremely fragmented market. There are over 400 different email marketing providers and Klaviyo is on the high end from a pricing perspective. You’re even seeing companies like Shopify and Mailchimp add Klaviyo features to their stack. Other critics also point out that while there are millions of stores in the world of ecommerce, many of them aren’t going to need tools as sophisticated as Klaviyo’s and others are going to want more full stack solutions like Demandware’s.
Time will tell, but the question remains—how has Klaviyo been so successful and is the market valuing them enough to keep that success going? Will their pricing push towards commoditization, especially as email becomes ubiquitous throughout most of the products we use? Are their features enough for the hardcore users?
The mission metric
The mission metric is one of those things that more companies are going to need to use. We've talked about it a little bit with Shopify, but here's a quick recap. An effective mission metric means that you are focused—in terms of your efforts, product, pricing model, etc.—around your actual customer's mission. Sometimes, you can charge beautifully on that. You can actually charge, “pay for performance,” like our Retain product that lowers churn. Other times, you have to find a proxy for it—whether that's contacts, emails, or something else.
What Klaviyo does really well is center everything around the return on investment and the strength and efficiency of customer relationships. They don't even have to talk about it in all of their copy. It's clear not only on their homepage, but throughout their entire pricing strategy in which they consider, "What is the actual ROI of this email? How do we make sure you get higher lifetime value, repeat purchase rates, et cetera, out of these ecommerce interactions that you're having?" It's about more than just getting that next Facebook ad and getting that next individual to come through.
It's genius, because this small corner of the market was using email, just like everyone else. But Klaviyo identified their unique needs and catered to them in a way that no existing companies were.
There's a different sophistication as well. It perfectly targets these untapped audiences. SendGrid has been great for engineers, because they started more on transactional emails. MailChimp is super for small- and mid-sized business, but it's very generalized. Klaviyo came and said, "No, no, no, we're going to go after e-commerce specifically. These folks, they don't have any good tools."
External threats: Shopify and platform risk
One thing I fear for them is Shopify. Their email tool is starting to come out. I have to imagine that Shopify isn't all of Klaviyo's revenue, but it likely supplies a good portion. Even as Shopify evolves, however, they still fail to serve the mid to upper market—an audience that Klaviyo has been focused on.
That's a big enough market. There are frankly so many needs that, when people talk about platform risk derived from these programs building on top of one another, I don't feel quite as concerned. It's not that these fears are unfounded. It's just that Klaviyo has different types of platforms they can go after and the knowledge that they need to be the best in their niche. Their success depends on being the ecommerce market's best option, so if they're going to go after any other email provider, they need to make sure that they're always going to be better.
That awareness reduces platform risk. We see this with our analytics products. We approach the market with the resignation that no one is going to think about this problem as much as we are. People we integrate with will have their own analytics, but it will never go as deep as our thinking, which is the power of understanding what platform risk actually looks like.
Klaviyo's pricing page
Two things jump out right away on the pricing page. One, it's incredibly simple. Everything's included, which can be good or bad, depending on how you look at it. An absolute positive for me, though, is that they estimate the ROI you could get with Klaviyo. As a visitor, you can input data like your list size or industry and see an estimated ROI output. It helps to contextualize things in a really strong way.
Of course, this won't work for everybody, because your customer has to at least somewhat believe what you're saying. If you put this in front of a very technical buyer, you might be met with some scoffing. Like, "Oh, there's no way you can tell that." Or, "I don't know if I believe these numbers." Still, someone a little bit lower in the market may look at this and think, "Oh, interesting." At the very least, it can start a conversation and serve as a client's first step in the experience.
In that way, it reminds me a lot of the HubSpot playbook with inbound marketing. At a certain level of sophistication, marketers will likely look at HubSpot copy and think, "I don't know about this." They might find it corny. Or, going back to our Klaviyo example, they'll need to know where that ROI calculator number is coming from. Still, some marketers will take one look at it and their eyes will light up. They'll be ready to get started.
Keep in mind, this is not the first page that people are going to. First they're going to get a little bit of product marketing, perhaps some email marketing before they arrive at the pricing page. But I think it works for what I presume to be, their target customer.
In terms of the rest of their pricing page, there's one thing that I don't think I like. I get the simplicity of having all-inclusive pricing. I think it's great from an ease-of-use standpoint. It has to be nice for their sales team, and prospective customers likely appreciate the clarity. There's just not a ton of wiggle room on where people are going to land, because every plan kind of has everything. You're completely bypassing functionality, capability-driven differentiation, and not every customer can possibly have the exact same feature needs. With all-inclusive, they lose opportunities to monetize exclusive package components.
This is where an enterprise section could help. Within the mission metric focus, it's great to offer the "best of the best" to every client. Still, a unique enterprise plan could be great for higher contacts who need priority support and other gold-star features. If your email list goes to high, it's definitely a "contact us" situation. And I'm sure if I hopped on the phone with them, they'd tell me there was a more exclusive plan available, but there's no product marketing for it at all.
Adding an enterprise section would really help. Sometimes that "enterprise" terminology can scare away the SMB base, so language like "high volume" can be incredibly useful for stewarding large clients without alienating smaller ones. HubSpot did this very well, where they were more than willing to cater to some folks in the right way, to get the right information.
Let's look at the data.
Where does our data come from?
Here at ProfitWell, our Price Intelligently software combines proprietary algorithms and methodologies with a team of pricing experts who think about this stuff more than anyone else to help companies optimize their monetization strategy. We do this by going out into the market and collecting data from current and prospective customers, having the ability to collect data from everyone, from a soccer mom or dad in the middle of Kansas, all the way to a fortune 500 CIO in South Africa. We then take that data and run it through our algorithms and analyze it in every direction to determine a company's ideal customer profiles, as well as which segments value, which features and which segments are willing to pay more, all in the spirit of determining how a company can use monetization for growth.
Data and analysis
Pricing from a cosmetic perspective
Make sure your price makes sense from a cosmetic perspective. We took a look at one of Klaviyo's competitors, Drip, based out of the Twin Cities. I mapped Drip's pricing against Klaviyo's pricing and, what you'll notice here, is that Klaviyo's fees are very linear. As you add more contacts, it very smoothly goes up and to the right. Every hundred or thousand contacts, they add a certain dollar amount. It creates this nice, smooth blue line.
Drip, on the other hand, has a tendency to jump in price very suddenly. This is problematic. If we're looking at purely competitive-based pricing, we see that Klaviyo is actually much more affordable on the lower end. At around 10,000 emails, Drip becomes less expensive. As the list of contacts grows, however, Drip jumps again and Klaviyo is once again the better option.
I don't know if Klaviyo did this on purpose. I don't know if Drip is their main competitor. But if you compare these two cosmetically, it's really hard to get on board with Drip. You look at this and you realize, "Okay, Drip. You're more expensive on the high end, and kind of more expensive on the low end, too?" It doesn't really make sense unless you're perfectly in the middle—and that's quite a small market to target.
I know most clients aren't comparing and contrasting to this extent. Still, I think it's really important that you keep this cosmetically appealing line in terms of pricing. It helps things make sense for your business and your clients, and it's not so arbitrary. With a linear relationship, it's perfectly clear how your pricing is calculated and your customer base knows what to expect.
Price localization for large, fragmented markets is key
Price localization is when you change price points in different regions for the exact same product. It makes sense because there's a different willingness to pay across different regions. We can see that in our data, with some intuitive outcomes. On one end, we see India and China with lower willingness to pay. The other side of things frequently features the Nordics. They're willing to pay for their technology—they really like the good stuff.
This data is independent of those cultural assumptions and exchange rates, though. This is the actual, clean comparison of what's happening around the world relative to the United States. As things get more competitive for Klaviyo, it's essential that they realize people are willing to pay different prices in different regions. This is impacted by standard of living, margins, all types of things.
This is a quick win for Klaviyo to implement, and it's the right time to do it. If 20% of your base is outside of your home region, these are factors you need to consider. I can't imagine that Klaviyo isn't operating with at least 20% outside of the U.S., given the reach of Shopify, big commerce, Magento, etc.
For you and your business, it's time to look into localization if you've reached that 20% mark.
You're about to see something called a value matrix. We collected data from the group comparing feature preferences and plotted those on the horizontal axis, more valued features on the right, less valued on the left. We then collected willingness to pay for the overall product and plotted that based on their number-one feature preference on the y-axis. Analyzing data in this manner allows us to determine which features are differentiable add-ons, core, or commoditized for each segment.
Know when not to differentiate
This is me setting you up with your all-inclusive feature plan. Here's the thing with Klaviyo: it's more of a hub play, because there's no single feature that differentiates more than others.
In this case, what you'll notice is that none of the features—either differentiable or add-ons—break that +/- 20% mark. Normally when you see that, it's an indication that there's not one feature that you can pull out to build a premium tier. It also could be an indication that you forgot about some potential features. SMS marketing isn't on here, but would make a lot of sense. It's a different channel, and not every single ecommerce brand is doing that... although they likely will be soon.
It's one of those things you have to think about— there probably are enterprise features that they should be pulling out. We didn't test a lot of those here, but all of the features that they currently have are not in a place where they can differentiate.
This is good and bad, and leads to my biggest suggestion for Klaviyo here. First—great job not differentiating. You have a ton of different customers and prospects who likely appreciate the simplicity of your all-inclusive pricing. In order to maintain your growth rates, however, you have to start hunting for those add-ons, those key to an enterprise plan. Eventually, this current growth rate is going to begin slowing, and add-ons will be crucial to fill the gap. SMS is a great play for right now, but you'll need some other ideas on top of it to become the billion-dollar company you want to be.
At the end of the day, expansion revenue is key. When we look at this chart, the current simplicity is clear, with all of the features hovering around the median. There are lots of features that you can use to defend the core, but you're eventually going to need to find new ways to monetize. You've grabbed all of these users that presumably love you and are willing to buy from you. This doesn't go against the mission metric—it makes them higher retention, more loyal, and gives them a higher lifetime value.
- Make sure your price makes sense from a cosmetic perspective. We saw this by comparing Drip with Klaviyo. At the most basic level, there needs to be an understanding that as contacts go up, price goes up. Klaviyo's doing this perfectly fine; I don't think customers would take issue with it. They might have some trouble contextualizing how much is an actual contact, but that's a whole other thing to get into.
- Price localization is key. Klaviyo has a huge opportunity to look at regional willingness to pay and optimize their pricing around those regions. This is something they should do tomorrow.
- Know when not to differentiate. Understand where the feature and relative preference of your different features are, in order to understand what you can differentiate and not. Klaviyo's core features shouldn't be differentiated, and are well suited for their all-inclusive pricing. In order to get better growth rates, however, they are going to have to find add-ons and properly optimize those enterprise tiers for their customer base.
Who's up next?
Next week we'll be discussing a small, tiny little company called Amazon. We'll talk about an entrant, potentially, into the ecommerce market, but mainly focus on Amazon in the context of Prime. It's a great case study to understand how a membership product and a subscription can do really well within a business, especially if you're not necessarily a subscription SaaS company..
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If you want help with this type of pricing research for your company, feel free to email me at email@example.com or firstname.lastname@example.org, and we'll make sure you get hooked up with the right people to make sure you're focused getting your monetization right.
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By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.