How Software Pricing Partners Helps Hundreds of SaaS Founders Get Pricing Right (Interview with CEO Chris Mele)

Introduction and Background on Software Pricing Partners

Nathan Latka

00:00Hey, folks. My guest today is Chris Mele. He's a managing partner for SPP, that's softwarepricingpartners founded in 1982. They do exactly what it sounds like, help you with pricing. But he doesn't just do this as a consultant or in theory. He had his own software company before, which is where he cut his teeth on this. Chris, you ready to

Chris Mele

00:15take us to the top?

00:15>> I am. Thank you for having me.

Chris Mele's First SaaS Company: Companion Cabinet

Nathan Latka

00:17Let's talk about your first SaaS company and sort of the pricing pains you went through and realized this was a big need. What was that software company called?

Chris Mele

00:24>> It was called Companion Cabinet. So that that was not always SaaS. So that started in the late nineties, mostly on premise. And then in o eight, when Amazon just started showing its creds in the cloud is when we actually converted over the market crash of two thousand and eight and nine, and that's how we ultimately became a SaaS company. But during that journey, we hired software pricing partners. That's how I find out about them, and that's

00:48>> ultimately how I ended up here.

Nathan Latka

00:50And and companion cabinet, this was like a business management sort of ERP solution, right, for a specific niche industry?

Bootstrapping and Angel Fundraising Journey

Chris Mele

00:56>> Yeah. Was interior and exterior products in the mostly in The US and Europe.

Nathan Latka

01:01Founded, I believe, in sort of 2002. I believe you bootstrapped until you decided to raise angel Did you raise a bunch more after the angel round?

Chris Mele

01:09>> Yeah. So so well, we raised a lot a lot of angel funding money as well, so that was maybe not typical to our Charlotte market. But that,

01:19>> that time of bootstrapping, I had really long hair, Nathan. I actually could put it in my mouth, and my parents were getting worried that I was maybe not eating properly. But I went three years with no pay. I sold everything from my Ernst and Young career houseboat, everything, used that to start the business, and actually had to supplement with some commercial acting here and there to to make it work. That's wild. Okay. Stranger to generic cereal.

Three Years Without Pay and Early Sacrifices

Nathan Latka

01:45Yeah. So when you say, like, a ton of angel funding, I mean, are we talking, like, $10, $20,000,000 in angel funding or something? Okay. Yeah. And and what was that back then? I mean, was that all like convertible notes or what?

Chris Mele

01:55>> Well, actually, it was a mix. So it would it would start so remember during the so so when we first started, it was that.com bust, then we made it through the o eight market crash. And so one of the challenges in angel funding, is it's not always professional funding. So everybody kinda has a different opinion on the vehicle. So I think we use just about every vehicle, you know, preferred stock, convertible debentures. We did straight

Angel Funding Structure and Investor Dynamics

Chris Mele

02:19>> rounds. We did full rounds. We did partial rounds. And as we progressed through the the market crash, the rounds would become more rapid and sort of more or smaller, I guess, and then they would sort of expand again as we got out of the market crash. And so that effect, and what I often tell everybody is careful when you start raising money because it can really become your full time job. I mean, it was really was

02:47>> probably about 15 or so folks in total. You had large investors, small investors, some that had some professional background, some that didn't, but that formed the basic of the angel group, and the way in which we finally attracted that. So remember three years, no money, and I'm asking questions like, well, where does the money come from? And at that point, I had gotten ahold of a sales coach at the Center for Entrepreneurial Services here in Charlotte.

03:13>> We hired them. He would later climb through every single one of my sales calls for the next five years, recording them all, tagging them, telling me all of the wonderful mistakes that I made. And in that process of doing that, his comment was, look, just spend all your time selling. Once you sell, I promise the investors will be lined up, and we were lucky enough to have that happen.

Nathan Latka

03:34Oh, what's going on there, YouTube? Good to see you guys. Now imagine this. You love watching these interviews with SaaS founders, but imagine if we took all of the valuation data out from over 2,807 interviews I've done manually. Saves you a lot of time. Well, we've done this, we've built it into the beautiful interface inside of Founderpath. Check this out. I'll show you how you can access this in a second. But you log in, you connect

03:57your Stripe account, you see your valuation real time, you can see what changed over the past eighty eight days and even set goals for valuation this year. Now the secret evaluation is there's many different ways to value a SaaS business. So the reason you're gonna see three or four different valuations inside of your Founderpath dashboard, this is all free by the way, is because depending on who's doing the buying of your SaaS company, you're gonna get

04:21a different valuation. A VC is gonna pay a different valuation, Private equity firm is different. If you're gonna do a minority sale, that's different. And if you sell the whole business, that's a different valuation. You can see all those when I hover over here. Right? So the teal is what a VC would pay. Yellow is what private equity and red is if you sold the whole thing outright. Now what's cool about this is this is not

04:43built off random data. Again, you guys hear these interviews on YouTube. All these datas are built from real time valuation data points founder share with us on the show. So traction 1,200,000 seed round 3.7 raise. They sold 22% of their business. Go in here and filter by the event. Maybe you only wanna see companies that have sold the whole business. Well, here are a bunch that have been acquired the valuation and the multiple. Maybe you're going

05:09out right now and you're raising your seed round. We'll go in here and look at all this recent seed deals that went down, what they raised, what valuation they raised at and what percent that they sold. There's never been a larger dataset of SaaS valuations than what you can get now inside of Founderpath. And we're thrilled to bring it to you. All right. We're gonna go back to the YouTube video here in a second. But if

05:31you wanna check this tool out, if you wanna jump in and sign up, you can check it out for free to get your valuation at this link. This link, founderpath.com/products/valuations. Or if you go to founderpath.com and hover over products, click on get your valuation here, and go ahead and sign up to give it a whirl. Again, all that valuation data live right inside the platform. I hope to see you there. Alright. Let's jump back into the

05:57interview. So some I don't wanna get into the weeds about every single angel check, but sum all this up, your capital story up for us. At Companion Cabinet between 2002 and 2013, how much total capital did you raise? About $15,000,000, 1.5 or 5?

Chris Mele

06:10>> 15.

Nathan Latka

06:101.5.

Chris Mele

06:11>> 1.5. 15.

Nathan Latka

06:12And what did that mean for you in terms of dilution? How much did you own when all was said and done personally?

Chris Mele

06:17>> Probably around 25%.

Nathan Latka

06:19Okay. So would you do anything different now today? You work with a lot of SaaS founders now today.

Lessons on Raising Capital and Timing

Chris Mele

06:24>> Yeah. I mean, I think a lot of people chase the capital a little too early. I mean, I think if you can get the early access program underway, notice I didn't say beta, with software, and you can get a range of deals, and you can kind of uncover early on, is this a 10, 100, 1,000, 10,000, a $100,000 kind of transaction? And then remember, we were going through a deployment shift there. So we were taking $500,000

Operating Agreement and Founder Control

Chris Mele

06:49>> of software and kinda converting it over into a cloud model. That's why we sought out software pricing partners to understand what the pricing would look like. Would I do it again? Yeah. So we had a really magic, ingredient in our operating agreement. And so, if you raise capital when you need it, it doesn't it turns out that you're not gonna get a really good deal. If you have a large sales backlog and an exciting story, which

07:14>> we had, then we could kinda set the terms in our operating agreement. And one of the terms that I learned from a lawyer friend of mine here in Charlotte was this idea of the required holders. And the required holders in the operating agreement was written in with my name on it. And so every investor and member manager position, regardless of dilution, require my name. And I think in an LLC, it affords you a lot of flexibility.

07:45>> So because You

Nathan Latka

07:46are an LLC, not a C corp.

Chris Mele

07:47>> That's right. And so because we were able to dissect units from ownership and control, I mean, there's economic interest and then there's sort of governance decision making investor and member manager decisions. We were able to divest the two. Now I don't know if you could do that in today's market, but in the angel network space, we were able to do that, and we had a track record that everybody we were telling people no. People were kinda

08:13>> coming back and saying, want in. Our rounds were oversubscribed, and we were kinda saying, look, here's kind of the terms of the deal, and we we got what we asked for for that story. And that raising up the capital at that point where you get the sales and you've you've wrung out the sales and marketing risk on the business model, that's a little bit different of a story because that story says, I'm just coming in for

08:35>> the operationalizing of the business and the fun ride. And so that term would work to our advantage later because I think some of the folks probably assumed that it just worked a standard way with the percentage and who gets what vote, but it turned out that we got all the vote on everything.

Nathan Latka

08:51Understood. And, Chris, we're talking about pricing, obviously. What was the average customer paying Companion Cabinet for your software at the time?

Chris Mele

08:57>> It was probably about say an average transaction was probably two fifty to three hundred grand on prem. And then in the cloud, yeah, in the cloud, it would have converted over a three year horizon for the equivalent of, you know, call it $75 k a year or something like that.

Nathan Latka

09:11And at the company's peak, how many customers were you working with?

Chris Mele

09:17>> So this would have been it was probably about 60 to 70 SMB mid market, and then we were, strategic advisers and had a customer with Lowe's and some of the bigger pro build and home building supply companies.

Companion Cabinet Revenue and Customer Count

Nathan Latka

09:30So $300,000 ACV times 60 customers. I think that's, what, an $18,000,000 run rate. Is that about right revenue wise?

Chris Mele

09:37>> No. Well, not quite. And I I can't go into the details of that, but remember there's a mix. Right? So SMB, mid market, those are global averages applied to you know, transaction sizes are different in SMB that they are in mid market, and then you can have, you know, multimillion dollar deals in enterprise. Course.

Nathan Latka

09:56But my question was what was the average customer paying? And you said 300,000. So you remember using a higher you may be using, like, your enterprise average, not your total customer average.

Chris Mele

10:04>> Well, so this might be a little pricing, little side. So you you you we take outliers, like your enterprise deals who who buy in very large quantities, and we stick them on the side, and the averages that we look at are probably for 80% of the core of the business. But we had a few wild cards on the side that gave us good really large chunks of revenue.

Nathan Latka

10:24Okay. So you were you you're saying you were north of 18,000,000 revenue, not less?

Chris Mele

10:28>> No. We were closer to about 10.

Nathan Latka

10:30Oh, 10. Okay. Got it. Fair enough. And then let's close that story out before talking purely about the new business and pricing.

10:35What did you do

10:36with the business in 2013?

Chris Mele

10:38>> What did I do with the business as in my exit story?

Nathan Latka

10:42Yeah. You left. Yeah.

Chris Mele

10:43>> Yeah. So well, my exit story was a lot of fun, so I got a wife out of it. Ended up being our VP of marketing. So, when you exit, it turns out you can take more than cash with you. Go figure. But it was mutual. So, the company was actually taken back private. The infrastructure that we built

Nathan Latka

11:02Oh, you were trading publicly?

Chris Mele

11:04>> No. No. No. No. No. When I say taken back private, I mean, my partner, my cofounder wanted to own the business ultimately as a lifestyle, so it was taken back during the market crash in a private scenario that he now owns that business and takes it forward under a new name that he rebranded under.

Nathan Latka

11:22Well, most people, when they say take private, I mean it was public and someone took it private. He was just buying your shares basically. He bought it from you.

Chris Mele

11:28>> Bought up, yeah, the investors and me. That's right.

Nathan Latka

11:31Okay. Alright. So you move on. Now you referenced a couple times that you reached out to software pricing partners when you're building companion, but I thought you were the founder of this thing. Help me get my head around that.

Chris Mele

11:40>> Yeah. So I I was a founder, and my friend from Ernst and Young, he and I founded the business. And the thing with software is you spend all your time building a great product. Back then, you could kind of build it, and they would come. And then later, Agile came around, and then we would do MVPs and things like that for new features and new modules. But,

How Pricing Became a Core Business Focus

Chris Mele

11:59>> you know, you you don't really talk a lot about pricing. You just sort of, like, build the product, start selling it, and eventually somebody starts to scratch their head and say, hey. You know, we probably need some standard list prices and modules, how are we gonna package this? And are we going to count users? Are we going to count the number of purchase orders? That was a model that we piloted for a while. We take a

12:20>> percent of the purchase order cost. We were in ERP sales, shipping, receiving, and purchasing. And so as you play around with those different models and then you go, through a deployment model shift, you realize that the economics of the business are going to change dramatically. And at that time, we didn't understand what that would look like. We didn't understand how to think about that. And I thought it was like a study that we would do. I

12:44>> thought we'd, you know, do this, survey and some other stuff, and it ended up being really the next five years of me becoming very close with the founding team at softwarepricingpartners of understanding, hey, monetization actually intersects with product management. It's actually part of the business model. There's a way to make this dynamic. And when we're in agile and we're sort of saying, well, this is kind of what we're going to produce next month, and this is

13:06>> what the revenue implications might be, That connects directly to pricing, and we were able to kinda segue all that together. And I realized, holy cow, this is it's kinda like a missing whole piece to the business model.

Nathan Latka

13:17So, Chris, we've got about

Chris Mele

13:18>> And we didn't have that.

Nathan Latka

13:19So so so a lot a lot I wanna try to sneak in here.

13:22How many software founders are you working with today on pricing?

Chris Mele

13:26>> Well, I don't know the number, Nathan, but hundreds at least. And then we have

Nathan Latka

13:32Okay. So you're just to be clear, you're running an agency right now doing pricing for hundreds of SaaS companies at once. You must have hundreds of employees, at least a one to one ratio per customer. Right?

Software Pricing Partners Business Model Explained

Chris Mele

13:40>> Well, there's okay. So hold on a second. Some of our customers are governments, which take for example, a government has 1,400 of their fortune companies that are in there that are in our purview. We work with them in a broad variety of ways. We don't have a time and materials consultancy. We have a software product that sits under the hood. We do dynamic pricing. Our engine sticks under the hood of those software companies and becomes kind

Team Size and Competitive Privacy

Chris Mele

14:06>> of the brains behind how they generate their net prices, how they operate, how they optimize all of that. So it's not Oh, I see. It's not a It's a very different it's like kinda like a hybrid to manage services plus a product play.

Nathan Latka

14:19I see. I see. So how many I guess, a good way to answer this, how many folks are on the team today? And of those, how many are engineers?

Chris Mele

14:25>> Well, so I I appreciate the the questions, Nathan, but some of this stuff, we're just not gonna release into the marketplace. But it's a sizable

Nathan Latka

14:34Sorry, Chris. Why is that an issue? You say you're a software company, the quickest way to cut through any noise is to go, do you have engineers on your team? You obviously can't have software. You can't engineers.

Chris Mele

14:41>> Oh, I think a lot of competitors wanna know about how we do and what we do what we do. And we have a competitive intelligence team, and we understand how that information gets out, and we've chosen to keep a lot of that private. We're not interested in debuting a lot of that on the public front. We're not really gonna expose that kind of information. Sorry.

Nathan Latka

15:01Okay. Well, just your press team reached out, asked for you to come on the show. The show has done 3,000 episodes with the top founders in the world. What what do you wanna talk about if you wanna talk about the company?

Chris Mele

15:13>> Nathan, I understand that

Nathan Latka

15:17Did you listen to any episodes before you came on?

Chris Mele

15:20>> Yeah. I think this kinda went in a very different direction of what you're trying to get on the podcast, but, you know, we're not So

Nathan Latka

15:26you just to confirm, though, you you did listen to one episode before coming on?

Chris Mele

15:31>> I did not. I did not, Nathan. And so

Nathan Latka

15:34I think that's maybe why there's a big difference.

Chris Mele

15:36>> Well, there's a challenge here. Right? Because when you exit a company and pieces of the technology at Companion Cabinet were taken private, there there were agreements that were made of things that I can talk about and things that I can't. Some of that technology went deep into large lumber yards, and I hope this part isn't gonna go live, Nathan.

Nathan Latka

15:55This whole episode goes live.

Chris Mele

15:56>> Recording? Yeah.

Nathan Latka

15:57Absolutely, we can stop.

Chris Mele

15:59>> You want me to end?

Nathan Latka

15:59You want me to end?

Why Chris Declined to Share Key Metrics

Chris Mele

16:00>> Yeah. Let's let's stop and let's call Chris,

Nathan Latka

16:02thanks for taking us to the top. Appreciate it.

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