Atlassian Co-CEO Scott Farquhar on smart pricing and compassionate philanthropy

On a chilly December evening in 2015, Atlassian co-founders Scott Farquhar and Mike Cannon-Brookes were sitting at a hole-in-the-wall pizza joint in New York City. After an exhausting weeks-long roadshow without much sleep or respite from the frenzy of taking their company public, they could finally let out a sigh of relief. They were enjoying a slice and a root beer when they were hit with a realization—collectively, they were worth over a billion dollars.

From humble beginnings—Scott recalls being a penniless student who banks wouldn’t trust with even a paltry loan—they had built a world-changing cloud company. Today, at roughly $50 billion in market capitalization, they're not only the pride of Australian tech, but one of the flag-bearers for cloud and developer platforms globally. Millions of users rely on Atlassian every day for improving software development, project management, and code quality.

Scott Farquhar, the co-CEO of Atlassian, joined us on the Cloud Giants podcast to reflect on a remarkable career—and impart wisdom for fellow founders looking to make it big. He discusses the merits of frustrating-seeming limitations, the power of aggressive pricing, hiring for long-term ROI, and Pledge 1%—the accomplishment he believes eclipses anything else he’s achieved in his career.

CEO lessons from Scott Farquhar

• Consider freemium and aggressively low pricing; once you’ve secured the mindshare of users who won’t be using a competitor’s product, you’ll have an advantage to upsell free users to paid products.
• Often investment in R&D has a higher long-term ROI.
• Corporate philanthropy has a net-positive social and business impact.

Necessity is the mother of invention—so embrace your limitations and obstacles

In the face of numerous limitations in the early days, Scott may have accidentally invented the freemium business model. He started with a few core beliefs—that the future lay in online global businesses and that a friction-free sales process was the way to get there—and the rest unfolded naturally from there.

“The thing that we believed that was different from our parents was that the world was going to be flat—you'd be able to reach customers anywhere. It was going to happen online,” says Scott. But without the budget to hire a global sales force, he was forced to consider methods for reaching prospects and convincing them to hand over a credit card. In the early 2000s, few companies had product information on their websites—websites acted more like digital business cards. Enterprise software education happened in person— a salesperson would show up at a prospect’s office with a printed brochure. But Scott turned this model on its head, displaying robust product information online, accessible to anyone who wanted to independently self-educate.

The business model that Atlassian still relies on today unfolded with a couple more limiting factors. After all, constraint breeds creativity. “If we wanted to sell online in every time zone of the world, it needed to be self-service. If it's self-service, the product needs to be easy to download and evaluate and install. If it needs to be all those things, then we needed to have a very reasonable price because we didn't have a salesperson to convince you to hand over six figures.” So Scott decided to offer a free version of the product, with an upsell at a very reasonable rate. Knowing that most could spend on a credit card for $5,000 without having to go to their boss for approval, he set a limit of $5,000 for the smallest tier of Atlassian products.

The fundamentally different distribution strategy he pioneered was massively disruptive in his day, but today it's become one of technology’s most popular sales motions. Leading enterprise SaaS companies like Slack and Eventbrite all take a similar model—get started for free and upgrade over time. So if you’re a founder facing similarly frustrating limitations, don’t despair. You may just invent the latest maneuver in future tech’s playbook.

Lowball pricing strategies are worth it for long term growth

In competitive enterprise markets, a foot in the door may be worth more than cash in the bank. Scott advises founders to consider aggressively low pricing, since it means you’ve secured the mindshare of users who won’t be using a competitor’s product, and you have infinite time to upsell free users to paid products.

“Today’s highest grossing Phone games are now free-to-play, but feature in-store upgrades or in-app upgrades. They get started for free, then once you have their attention, you have a monopoly on whatever that person needs to buy,” he says.

Scott developed this practice a decade ago when he tested his hunch with a campaign. “Most people think you can't experiment with pricing, but because it was a campaign, we got away with it.” He launched a program offering subscriptions for five users for only $5. He ran the campaign for five days only, and the money went to charity. It was overwhelmingly successful—he ended up raising $100,000 for charity in $5 chunks within five days.

“I remember chatting with one of our competitors at the time at an industry conference. They were 100% convinced that we had made that pricing change to screw them over,” recalls Scott. While it was not his intention, greater market share was certainly a benefit. This experience fundamentally reshaped how Atlassian does business today. “We think a lot about pricing and how to be aggressive with it.” Today Atlassian offers free trials to nearly every one of their products.

Engineering headcount is a better long-term investment than sales and marketing headcount

Atlassian has been operating successfully for nearly two decades. Scott attributes much of the company’s longevity to long-term thinking in the early stages of building the business. He’s always invested more heavily in engineering than marketing or sales.

“In the early days, 100% of our company was engineers. And that's very different from other companies,” says Scott. “If you have a salesperson, you pay that money to that salesperson this year and they get you revenue, but you have to keep paying the salesperson to keep getting the revenue.”

“However, if I build a stellar product,” he continues, “even if all the R&D people left, the product would still keep on being great and attracting more customers. So the investment in R&D is a much more long-term ROI.”

The social importance of corporate philanthropy eclipses business benefits

In addition to his massive achievements as a tech founder, Scott has also been a pioneer of a new wave of corporate philanthropy. Not only has donated a significant amount of his wealth to worthy causes, he’s also helped create an organization that makes it easy for other companies to follow suit. He co-founded Pledge 1% in 2014 with Salesforce CEO and founder Marc Benioff. The organization provides templates and support to companies in exchange for a commitment to donate 1% of their time, product, and equity to various non-profit causes.

“We sort of had the view that you shouldn't have to wait until you're gray and retired to give back to the world,” says Scott. While seeking justice and giving resources to support disadvantaged groups is paramount for Scott, he’s also been delighted to find that the program benefits his employees greatly. Thanks to the program, working at Atlassian gives them one of the greatest gifts you can give a person—a sense of purpose.

“Work plays much more of a prominent role in people's lives than ever before, as institutions like church and community groups have declined,” says Scott. “But people still have a philanthropic bent in them. It just doesn’t have an outlet.” He believes that businesses can help people channel their desire to do good—and that this can be an attractive way to recruit top talent. “When I ask employees why they joined Atlassian, our foundation of philanthropy is always one of the top reasons.”

Scott is delighted to see the resounding impacts of his efforts in the larger tech community. “It's really struck a nerve with the latent impulse people had because we've had over 10,000 companies sign up to pledge 1%,” he says.

Companies who are part of the program have collectively contributed billions of dollars flowing to great causes. Ultimately, Scott’s deepest wish is for his philanthropy to be core to the legacy he leaves behind. “I hope Pledge 1% gets so large one day that Atlassian is the footnote in my story,” he says.