💰💰 The Money Mindset Series - Part 2

Insights

In the last issue, we explored the fundamentals of product finance, covering why it matters, key financial metrics, unit economics, and revenue models. This time, we're diving deeper—moving beyond the basics to uncover actionable pricing strategies that help you drive growth, make smarter decisions, and align product outcomes with business goals.

Pricing isn’t just a number on a checkout page—it’s one of the most powerful levers for growth. Now, we’re diving into the strategies behind pricing decisions that drive sustainable revenue.

How do companies like Netflix evolve their pricing models to stay competitive? What’s the difference between cost-based, value-based, and location-based pricing? And how do you move from a pricing model to a $100M revenue strategy?

In this issue, discover:

• ARPA - powerful metric for revenue efficiency.

• Netflix Case Study

• Pricing strategies for growth.

• The hunting model: 5 ways to earn $100M

Let’s dive in! 🚀 

🔍 Introduction to Pricing.

Pricing is one of the most powerful yet often underestimated levers in product management. It’s not just about covering costs or matching competitors—it’s about positioning your product, influencing customer perception, and driving long-term profitability. A well-crafted pricing strategy can be the difference between a struggling product and a market leader.

At its core, pricing strategy answers these key questions:

• How much is your product truly worth to customers? (Value-based pricing)

• How do you balance affordability and profitability? (Cost-based pricing)

• Should pricing adapt based on market demand or location? (Dynamic & location-based pricing)

• How do you build a sustainable revenue model? (Subscription tiers, freemium, ARPA optimization)

Companies like Netflix, Apple, and Amazon have mastered the art of pricing evolution—tweaking their models over time to maximize revenue and customer retention. In this edition, we’ll break down the frameworks, strategies, and real-world examples to help you refine your own pricing approach.

💸 Pricing Strategies for Product Growth

Understanding pricing strategies is crucial for maximizing revenue. Here’s a breakdown:

1. Value-Based Pricing:

   • Focus: What is the product worth to the customer?

   • Example: SaaS tools charging based on productivity gains (e.g., Salesforce).

   • Pro Tip: Conduct customer interviews to understand perceived value.

2. Cost-Based Pricing:

   • Focus: Cost of production + markup.

   • Example: Hardware companies (e.g., smartphones).

   • Pro Tip: Ensure margins cover overhead and future growth investments.

3. Competitor-Based Pricing:

   • Focus: Benchmarking against competitors.

   • Example: Streaming services pricing similar to rivals.

   • Pro Tip: Highlight unique features to justify pricing above competitors when needed.

4. Dynamic Pricing Models:

   • Focus: Real-time price adjustments based on demand.

   • Example: Airlines and ride-sharing apps.

   • Pro Tip: Use data analytics to forecast demand and adjust prices efficiently.

5. Location-Based Pricing:

   • Focus: Adjusting prices based on geographic markets.

   • Example: Netflix offers lower subscription fees in emerging markets compared to the U.S.

   • Pro Tip: Consider purchasing power parity and regional competition when setting prices.

As you refine your own pricing strategy, ask yourself:
✅ Are we charging based on value or cost?
✅ Is there room for upselling, cross-selling, or personalization?
✅ How does our pricing model support long-term growth?
✅ What are we hunting? (Read more below)

By taking a data-driven, customer-centric approach to pricing, you can unlock new revenue streams, improve retention, and create a sustainable business model.

Evaluating Pricing Strategy with ARPA

📊ARPA (Average Revenue Per Account)
ARPA measures the average revenue generated per customer:

• Formula: ARPA = Total Revenue / Number of Accounts

• Why It Matters: Indicates revenue efficiency, reveals growth opportunities, and helps segment customer profitability.

How ARPA Differs from ARPU (Average Revenue Per User):

• ARPA looks at revenue per account, which can include multiple users (e.g., a business team account).

• ARPU looks at revenue per individual user, making it more relevant for consumer-facing models.

How ARPA Ties Into Pricing Strategy:
ARPA isn’t a pricing strategy on its own, but it’s a critical metric to evaluate the effectiveness of your pricing strategies. Whether you're upselling premium features, cross-selling additional products, or optimizing pricing tiers, ARPA helps track how these tactics impact revenue.

How to Improve ARPA:

• Upselling: Premium plans or add-ons.

• Cross-Selling: Complementary products.

• Personalized Pricing: Tailored offers based on customer behaviour.

🚀 5 Ways to Earn $100M: The Hunting Model

Scaling revenue to $100M can be achieved through different strategies, commonly represented as a Hunting Model—where different customer segments are classified like animals based on revenue potential.

1. Flies 🦟 (10M Customers Paying $10/Year) - ARPU-Focused

   • High-volume, micro-transactions.

   • Example: Ad-supported apps, micro-SaaS (e.g., mobile games, pay-per-use APIs).

   • Impact on ARPU: Very low, but scalable with extreme volume.

2. Mice 🐭 (1M Customers Paying $100/Year) - ARPU-Focused

   • Small-ticket, recurring revenue.

   • Example: Consumer SaaS (e.g., Netflix, Spotify, Canva Pro).

   • Impact on ARPU: Low, but manageable through self-service and automation.

3. Rabbits 🐇 (100,000 Customers Paying $1,000/Year) - ARPA-Focused

   • Balanced volume and revenue.

   • Example: Mid-market SaaS, prosumer tools (e.g., Notion, HubSpot).

   • Impact on ARPA: Moderate, requires structured sales and onboarding.

4. Deer 🦌 (10,000 Customers Paying $10,000/Year) - ARPA-Focused

   • High-value, mid-market deals.

   • Example: B2B SaaS, professional services (e.g. BambooHR, ).

   • Impact on ARPA: High, but requires sales teams and account management.

5. Elephants 🐘 (1,000 Customers Paying $100,000/Year) - ARPA-Focused

   • Large enterprise contracts.

   • Example: Enterprise SaaS, high-ticket consulting (e.g., Workday, Oracle, AWS enterprise deals, Salesfore).

   • Impact on ARPA: Very high, but involves long sales cycles and relationship management.

Blended Strategy: Many companies mix these approaches. For example, LinkedIn combines flies (free users with ads), mice (premium subscribers), rabbits (small business plans), and elephants (enterprise contracts).

Applying Financial Strategies in Product Decisions:

Product managers often operate at the intersection of customer needs, business strategy, and financial sustainability. Applying financial strategies in decision-making ensures that every feature built and every investment made contributes to long-term growth and profitability. Here’s how:

• Feature Prioritization

PMs must weigh customer value against financial viability when choosing what to build. Prioritization frameworks like RICE (Reach, Impact, Confidence, Effort) or MoSCoW (Must-Have, Should-Have, Could-Have, Won’t-Have) help structure decisions, but adding ROI considerations makes prioritization even sharper. Prioritize features with strong ROI potential.

📌 Example:
A PM at a SaaS company considers building an AI-powered automation tool for enterprise customers. Instead of diving in, they:
✔️ Calculate potential ARPA (Average Revenue per Account) uplift.
✔️ Run a small-scale beta to gauge demand.
✔️ Analyze whether the feature reduces churn or upsell potential before committing resources.

• Growth Optimization: Using Pricing & ARPA Insights

A strong pricing strategy is one of the biggest levers for growth. It’s not just about setting a number—it’s about maximizing value capture while ensuring product adoption. Use ARPA and pricing insights to identify growth levers.

📌 Example:
A B2B SaaS company notices that customers on mid-tier plans churn faster than enterprise customers. The PM investigates and discovers:
✔️ The mid-tier plan lacks key automation features that large teams need.
✔️ Customers downgrade or churn instead of upgrading.
✔️ Introducing a new pricing tier with automation features increases retention and boosts ARPA by 15%.

• Cross-Functional Collaboration: 

PMs don’t make financial decisions alone. Partnering with finance teams ensures the product roadmap aligns with revenue objectives, operational costs, and strategic investments.

💡 Key Strategies:

• Use financial dashboards: Track how product decisions affect profitability, churn, and expansion revenue.

• Factor in cost-to-serve: Ensure new features don’t add disproportionate costs (e.g., increased customer support burden).

📌 Example:
A PM wants to expand into a new international market, but finance raises concerns about high localization and compliance costs. Together, they:
✔️ Identify the most financially viable regions to enter first.
✔️ Adjust the product roadmap to build localization features in phases.
✔️ Monitor CAC vs. expected LTV to ensure market expansion is sustainable.

🎬 Netflix Case Study: The Evolution of Its Revenue Model

Netflix’s transformation from a DVD rental service to a global streaming powerhouse is a masterclass in revenue model evolution:

• Phase 1: Pay-Per-Rental Model (1998-1999) - Traditional rental model with late fees.

• Phase 2: Subscription Model (1999-Present) - No late fees, unlimited rentals, recurring revenue.

• Phase 3: Streaming (2007-Present) - Shift to digital, reducing distribution costs and scaling globally.

• Phase 4: Tiered Pricing (2013-Present) - Multiple plans based on features (HD, simultaneous streams).

• Phase 5: Ad-Supported Plans (2022-Present) - Monetizing price-sensitive customers with lower-cost, ad-supported subscriptions.

Key Takeaways:

• Adaptability: Revenue models should evolve with market demands.

• Global Expansion: Pricing strategies tailored to local markets.

• Revenue Diversification: Ad-supported tiers and combating account sharing to unlock new revenue streams.

Read more about the Netflix Case Study here

Closing Thoughts: Mastering Pricing as a Product Manager

Pricing isn’t just a number—it’s a strategic decision that shapes user perception, influences adoption, and ultimately determines your product’s success. As a product manager, your role isn’t just to build great features, but to ensure they create value worth paying for.

Whether you’re launching a new product, refining an existing model, or entering a new market, pricing should be an ongoing conversation—not a one-time decision.

So, what are you hunting?

✅ Take Action

Take a look at your current pricing strategy—are you leaving money on the table? If so, what small tweaks can you test to optimize value capture?

As always, I’d love to hear your thoughts. How have you approached pricing challenges in your product? Reply and let’s discuss!

Until next time—keep building, keep experimenting! 🎯

If you liked this newsletter, please share it with your friends and colleagues. 👯‍♀️