158: How Noah Kagan Grew Sumo.com To An 8 Figure Company

Podcast: Download (Duration: 58:47 — 81.0MB)

Noah Kagan spent 18 months building a free product before asking anyone to pay. When he finally asked, most users said no, and his verdict is that he should have tested pricing on day one.

Pricing is the fastest lever in a software business. Sumo changed its pricing roughly seven times in two years, and each change taught them who their customer actually was.

Noah founded AppSumo and Sumo.com, which now sit under Sumo Group with about 43 people. His marketing tools help site owners grow email lists.

This episode covers how he prioritized which products to build, the pricing standard he uses, why cancellation data is more valuable than acquisition data, and how he sets company goals.

A note on timing: this is a 2017 conversation. Sumo’s products and pricing have changed since.

Key takeaways

• Test whether people will pay immediately rather than waiting 18 months to find out.
• Price so low that customers feel they are stealing from you.
• Freemium conversion at 3% to 5% is a strong result for a SaaS business.
• Build what competitors already charge for, since that proves demand exists.
• Collect a reason from every cancellation and every return, then rank and fix the solvable ones.
• Set goals that are realistically impossible, and change them fast when they are clearly unreachable.
• Kill, hide, or improve features nobody uses rather than maintaining them.
• Delegate the work you dislike and concentrate on what you are genuinely good at.

When should a SaaS business start charging?

Immediately. Noah’s clearest regret is spending 18 months growing usage before testing whether anyone would pay.

The first pricing test failed. When they finally asked existing users to pay, most declined.

Conversion landed in the normal range eventually. Three to five percent is respectable for freemium SaaS.

Early revenue tells you the truth. Usage numbers can look excellent while the willingness to pay is absent.

The free product still has a role. Noah views freemium as a marketing strategy rather than a business model, similar to a test drive.

How should you price a SaaS product?

Set the price so low that customers feel they are getting away with something. Noah’s test is whether buyers wonder how you stay in business.

Iteration is expected. Sumo changed pricing about seven times in two years, and MailChimp did something similar.

Recurring beats one-time. Subscription revenue is more predictable even when it grows more slowly.

Their early experiments failed instructively. Five dollar templates sold poorly, and almost nobody paid to remove branding.

Then they segmented by customer size. One price for small sites and another for large ones.

Finally they followed the data. They kept paid whatever features people were viewing when they clicked buy, and made everything else free.

How do you decide what to build?

Look at what competitors already charge for, since paid products prove demand. Sumo prioritized apps by researching which paid SaaS tools were most popular.

Working backward removes the guesswork. Popularity elsewhere validates the need before you build.

The list builder and share buttons won. Both were widely paid for by other services.

Prioritization compounds. Ten tasks all get done eventually, and doing the highest-leverage one first changes how much growth the rest produce.

What do you do with features nobody uses?

Hide them, kill them, or improve them. Maintaining unused features consumes engineering time that produces nothing.

Noah applies this beyond software. He removed weak blog posts and YouTube videos for the same reason.

The restaurant analogy explains it. A few bad dishes stop people returning regardless of how good the dessert was.

Classics can stay. Something that still works either remains or gets refreshed.

Why is cancellation data more useful than acquisition data?

Because customers tell you exactly what to fix when you ask. Sumo collects a reason from every cancellation and reviews them weekly.

Rank them by frequency. The most common reasons deserve attention first.

Filter for what is solvable. Sites with no budget are not a problem you can fix.

Setup difficulty turned out to be fixable. Sumo added a concierge service to install it for customers.

Onboarding was another. Improving the autoresponder helped new users learn the product.

Ask buyers too. What made them buy is as informative as why others did not.

How do you find usability problems in your own store?

Talk to customers directly, by phone or live chat. Steve found a checkout problem by answering phones on Cyber Monday.

Older customers surfaced the issue. They were setting quantity to zero rather than using the remove checkbox.

Nothing in the analytics would have shown it. Only conversation revealed the mismatch.

Passive discovery has limits. Growing a larger business requires some unglamorous direct contact.

How should you set company goals?

Aim for something realistically impossible: achievable in principle and genuinely uncertain. Noah pairs that with a single company-wide number everyone can see.

Sumo’s first year goal was a billion people seeing a site running their tools. It unified the company around one measure.

Change the goal when it is clearly wrong. A $10 million target collapsed after the first month produced $17,000.

They reset to a million. That kept the goal meaningful rather than decorative.

Long horizons prevent drift. A five year goal keeps momentum when you hit an annual target early.

Goals settle daily decisions. Choosing what to link in an autoresponder becomes obvious once the goal is clear.

How do you decide what to work on as a founder?

Identify what you love doing and hire for everything else. Noah calls this finding your sweet spot.

His own split is specific. Starting things and marketing them, rather than meetings, recruiting, or long term planning.

He stopped treating weaknesses as failures. Improving strengths beat grinding on things he disliked.

Reflection reveals the pattern. What have you worked on that did not feel like work, or woke you up early?

Stepping back can help the business. Distance let him give advice he could not give while immersed.

How does removing decisions improve your work?

It preserves willpower for decisions that matter. Noah wears three types of shirts and one style of socks deliberately.

The principle extends past clothing. Phone apps, calendar commitments, and friendships all accumulate things you do not use.

Remove first, then add back. Whatever you genuinely need returns naturally.

Time is the scarcest input. Paying to save time is worth it whenever you can afford it.

Reducing friction compounds. One acquaintance tips heavily to make every restaurant visit frictionless.

Frequently asked questions

When should a SaaS company start charging?

As early as possible. Noah waited 18 months and considers that his biggest mistake, since usage growth told him nothing about willingness to pay.

What is a good freemium conversion rate?

Three to five percent is a solid result for a freemium SaaS business. Below that, either the free tier gives away too much or the paid tier lacks value.

How do you price a software product?

Price so low that customers wonder how you stay in business. Expect to change it repeatedly, since pricing determines who your customers become.

Should you use a freemium model?

It works as a marketing strategy rather than a business model. Skipping it is fine as long as you replace it with another way to build trust before purchase.

What should you do with unused product features?

Kill them, hide them, or improve them. Maintaining features nobody uses spends engineering time that produces nothing.

How do you reduce SaaS churn?

Collect a reason from every cancellation, rank them by frequency, and fix the solvable ones. Setup difficulty and weak onboarding are usually addressable.

How do you set goals for a company?

Choose something realistically impossible and make it visible to everyone. Change it quickly when early data shows it cannot be reached.

What should a founder spend time on?

The work you genuinely enjoy and do well. Hire people who like the functions you avoid rather than forcing yourself to improve at them.