The Future of Pricing: AI, Customer Value, and Outcome-Based Models with Marcos Rivera, Founder and CEO of Pricing I/O

Speaker A: Usage base has to be a little bit more thought through in terms of what type of usage are we looking at? Are we looking at inputs, are we looking at outputs? What are we really thinking through? And so I'll give you another one. Tax or not tax. A uh, finance invoice process. They switch from user to a uh, process. You buy the invoice. You're now listening to Monetize the art of pricing.

Speaker B: Hello and welcome to this episode of Monetize. Today I have along with me Markus, who has primarily been a product leader, uh, a VC and a pricing expert now who runs his own company pricing IO. Excited to kind of talk to you about pricing from different lengths across the spectrum of a career that you've had. Markus, welcome. How are you doing?

Speaker A: I'm doing great Abhishek. Thanks for having me on the show man. I'm looking forward to it.

Speaker B: Amazing. So I think just as we started out with an infection, markets jumping right in. Like my first question I always thought was like, hey, you've kind of had a very varied career. Maybe you want to talk about it very quick. Highlights as well, but also in perspective of how has your view on pricing changed? When you look at it from a product leader, from a VC and eventually now to being a pricing expert or a pricing leader, how has that changed? And how did you even kind of like get into this? How did that career bring you to this path?

Speaker A: Great question. Because it wasn't on purpose, Abhishek. Right. I started really as a product manager in tech. My first assignment was to try to get something from on prem into the cloud. And a lot of it was in just trying to make good technology for good people so they can get value. That's really what my job was. But what was happening was I noticed that pricing and packaging was really something, an afterthought. And when it came down to solving how much do I charge for this really great thing that I spent two quarters and a bunch of scrum team time and trying to get my releases right. It's out the door, customers are liking it. But how do I charge for this thing? Couldn't find any real answers anywhere. So I did my own digging and research and realized like, oh, there's uh, this is actually a thing like how to sit down and think through value and how to capture that from your customer base in order to grow your business. So I started experimenting with pricing and packaging first on my small products. Uh, these are really low ACV, kind of low revenue things. And then I started applying it to bigger products. And so as I started moving up the product management M ranks to director and senior director vp, kind of move up the ladder, I started tackling bigger, more complex products and started pricing them. And as I started gaining momentum, I was like, oh, there's actually a methodology in how you approach it. And that's where I started really exercising that skill. So doing all that, I got tapped on my shoulder by very large investment firm called Vista. From a private investment perspective, is a pretty popular company, right? So I was there and I joined as their head of pricing and packaging. So I ran pricing and packaging, but I also did product management best practices as well. So guess what I saw? I saw building value and capturing value and how disconnected they were all the way in many different companies. Small, large, fast growing, stable. And so I'm like, we need to fix all this. And that's where I started going deeper into, uh, pricing. And then after leaving Vista, started on my own. And it is just a black box that a lot of companies struggle with. And we're happy to shine some light on it.

Speaker B: Awesome. So you make an interesting point. So you were a product manager who kind of like took up pricing. And more often than not, uh, that's what I see. Like, pricing is a side job for a product manager. So is that a proactive thing that you specifically did? Like, do you think pricing is a product manager's job? Is that something that consciously do? Or do you see more and more specialist pricing managers, if I may call them, coming up, or they need to kind of become that, and that is the distinction line between these two? And how would you say these two need to work together? If they are two separate roles? Or are they just. Should they just be one?

Speaker A: I'll give you my very honest answer because I've changed my answer over the years. So when I was in product, I thought, who else should do pricing now? Now that I started getting the hang of it, I see what's coming out on the roadmap. I know how the value is changing. I'm like, why wouldn't I be the one to decide how this thing gets charged? And so it was a very natural extension. I'm already talking to customers, I'm already looking at competitors, right? I'm already doing all this stuff. So for me, a very natural way to continue adding an impact as a product manager. However, when I joined Vista and I was seeing it across the spectrum, there are some product management teams out there that just are not ready, man. Like, in some cases, you got some really strong Solid product management groups out there. Then you have others that really just ushering requirements back and forth. They're not really digging into the customer, they're not really understanding what's going on, the market dynamics. They're just taking an enhancement request and delivering it to the dev team to code it out. And maybe some are even writing specs. I mean, whatever, right? Or acceptance criteria.

Speaker B: Fine.

Speaker A: Those folks, I realized, don't really have the purview they need to run with pricing and packaging. Now they're called product managers. But in the end they weren't really the type of product manager that should lead. And so that's where my tongue changed. And I thought, well, look, the person who's closest to value should own pricing. So that could be product marketing, that could be product management other places. And that person should drive pricing and packaging. And then as I move on in my career and I've seen ownership, I will tell you right now that ownership in sales is probably the worst thing you can do. The incentives just are not right. They need to optimize for the deal, they need to optimize for the transaction, for their quota and commission. They're not optimizing for the company and how they capture value. So very, very averse. Incentives do not give it to sales. But I saw it pretty successful in customer success, even under rev ops. I've seen it in finance, other places like that. So I said, okay, so you can be successful in pricing. These other roles so softened my stance a bit. But however, when I look across all the companies we've worked with, I think hundreds of them, I start noticing which ones are really on top of it. It's the product leaders again. So I sort of bounced back. I went from product. Yep, they definitely have to own it to. Oh, hang on. No, not really. They don't really have to own it to. Others can own it, but product seems to own it best. That's how I've changed my view over time.

Speaker B: So do you do. Does that extend into having maybe like product people becoming specialist pricing folks? So I see it companies of scale that are pricing managers or like who are, uh, whose job is primarily just to do pricing, maybe it's subset. But do you see that becoming more normal or do you estimate that in the future as well this is going to be a part of the product managers? J.D. if I might put it that way, yeah.

Speaker A: So I've seen different types of product managers. Some that come from a technical background, some come from a sales background. They come from all different backgrounds. Product people do, uh, sometimes you never really, it's never a straight line in the product management. So one of the things that I've noticed is that the ones that have very good instincts around what people want, so the psychology piece, they're really good around a spreadsheet. They understand numbers and how it works. And the product managers with that type of blend of background and skillset tend to gravitate more into pricing and they can sort of move up. So I had a friend of mine, his name was Gary, and Gary was a director of product at a pretty large successful SaaS company. They were doing about 80 million at the time. They're well above that now in the hundreds and hundreds of millions. But the idea, um, is he was tapped as, hey Gary, we need you to lead pricing and packaging. So this is during my time at Vista and they were one of our companies and he, he stepped in from a product manager role into this pricing leader role and he did a phenomenal job. So he was able to dig right into the roadmap. What's changing? What have we not monetized yet? What resonates with customers? This is the hard part. How do you tier this up? Like, how do you make sure you don't like starve a package by not putting the right features in it or how do you avoid putting too much? Those are the things that Gary was really good at and you had a really nice cross functional skill set. So what I mean by that is product managers already are working with sales and engineering and training and marketing and all these different groups. So they naturally know how to work across different stakeholders. So Gary already was able to sell a lot of pricing and packaging changes to all the groups because of that experience. So I point to Gary as a poster child, like a fantastic example of product taking on and moving up as a pricing leader.

Speaker B: So let's say you're a pricing leader. Let's take two examples over here. So you obviously worked across smaller products and larger products and looking in from the outside at Vista and then now obviously with pricing. So if I was a product manager or a pricing manager at a company that's, let's say, try $25 million SaaS company, we haven't really thought about pricing too deeply. I come in and now my remit is, okay, we need to start thinking about pricing a little more. We want to increase our arpu. We want to kind of like get these metrics getting better. So that's one scenario here. And the other scenario is you are, uh, probably a much larger company like A company that's come in to be invested and now they're like, hey, can we kind of like we relook how it's being priced here at a 200 million revenue or 300 million phone number revenue. Let's take these two scenarios and can we go deeper into a step by step, what would you do? How would you do it? Right, so maybe one over here. If I was the person, what should I go to? Where does it start? Who within the company should I work with? Who externally should I talk to? How would I do it in practicality?

Speaker A: Yeah, so let's start with the small one first. So this one here, there's typically the product manager, sometimes wearing multiple hats, but in most cases, let's just say they're delivering on the product. When it comes to pricing and packaging in these early days, a lot of it has to do with your product market fit and are you even selling to the right base. So at this stage of the game, it's not about getting your pricing perfect. And um, frankly there's very few perfect models out there, to be honest with you.

Speaker B: Right.

Speaker A: But it's about how do we continue to progress and move it so you achieve a couple things. The first thing you want to achieve is absolutely low friction. In buying, especially at that early stage, you've got to get customers in the door. And how do you do that in a way that allows you to monetize the thing that is valuable to them. Notice I said valuable to them, not just what you think is valuable. And so this all starts with, I always liked doing this old 10, 10 and 10 methodology, which works really well in early companies, works in big companies. I'll talk about it here in a sec. So it starts what I call a query and a conversation. What does that mean, a query and a conversation? So take a look if you can see what you're querying. What are your customers doing? If it's, uh, invoicing software, how many invoices are they uploading? What are the amounts? How frequently is it, Are there spikes? Look at the trend in the volume, how is it changing? Look at the variability. These customers tend to do this a lot. These customers tend to do this a lot less. And start just running some queries on your usage on volumes and just see where are the differences and note them. Then you want to then take a conversation and I pick 10, which, I mean 10 customers and also 10 non customers. Oh, wait a minute, what do you mean non customers? These are losses. These could be prospects, these could be partners. It's okay, talk to them. So when it comes to the customer side, start asking, why are you using this? Why are you not? Why do you care? What were you doing before? What are you doing in addition to this? And these are skills that product managers naturally already have, but you're just applying it to the pricing context. Not just do you like this feature? And so it's moving along that journey of why would you buy it? What is fair to charge a premium for? What do you think has to be included in everything, no matter what, if this was missing, you totally dump the product. What is it? And just questions like that, that sort of understand what really matters to them and what value means to them. Again, already in the product manager context and using that with the data query to understand, okay, this stuff, these five features or whatever, it's really important. These five seem to be important to some, but not the others. And these five are only important to these types of bigger, big, the bigger customers, whatever. Now you're getting the basis of actually packaging doesn't always have to be good, better, best could be two plans, could be a core plan with some bolt ons, whatever. But the idea is you have the context already to do that. From there you move on. You do it with your customers, you do it with non customers. Again, losses, prospects and partners. And now you have a good sense of people who use your product and what they think. But people who don't use your product and what they think, why is that important? Because when you're landing and expanding, and I'm going to be honest with you, sometimes the perception sells a lot more than the reality. So you have to know what to highlight. This is important for the next phase. I'll tell you right now, you have to know what to highlight, what customers saying they want and then what they actually use becomes the expansion part of your equation. All right, so I land and I expand. So why is this so important? Is the last 10, which is 10%, you can test it with 10% of your leads or 10% of your base. I always like to start with leads first before the base. I don't like to mess with too much until you have to. So what does that mean? You've got to get sales on board. You cannot do this in a vacuum. Product management, listen to me right now you can't do it by yourself. You got to get sales to buy in, revenue, to buy in, finance to buy in. All the key groups need to understand what happens to profitability. And the thing you have to understand is take the Data that you learned from your contextual interviews and the query. And you have to serve it up to show why this is something customers want. Okay, great. But will this sell? Now you have to show from a sales perspective all the reasons, the perception that you capture on um, why it would sell. So they can work on their pitches and their positioning and their battle cards. Okay, and then finances. Will it make us money? Okay, well you need to do your math to know. Well, look, if the price it the way we do now, we will make this much. If we price it this way, you should make more. All right, so you have to appeal to the sellability, you have to appeal to the numbers. And as a product manager, you have to literally get them on the phone on a zoom and sit down with them and walk them through this. Once you have buy in from those two groups, then you go into other groups like marketing and they'll come on board. Once sales and finance is on board, the real dirty truth is that the other teams will come on board too. So once you do that, then you can start the pilot and then test the pricing and then once it's successful, you roll it out. Now you have a reputation for knowing what you're doing as a PM in pricing. It doesn't happen overnight. You have to earn it. Especially in an early stage company where everything is high stakes, you're learning fast, you're changing fast. You have to take those very concrete steps I just gave you in order to really make an impact on pricing. That's early stage.

Speaker B: So let's just stick to all these date for a second over there. So third point well taken. So here's the. So when you are doing this process of setting up pricing, are there like some go to tools? Is it all just basic common sense in a way or has pricing evolved to a place where it's toolified a little way? Like a product manager today has like five software, the tools that any product manager is using in a given point of time. What's the equivalent for pricing? Is there something that you can go to or just good old Excel and some surveys and modeling, that's all you've got today going for them?

Speaker A: Yeah, Excel is the second best answer to any problem. So you could do in Excel. But I don't think if a product manager has a good. First of all, I mentioned early usage based parts, so can you actually pull what's happening? And again, I'm not talking about what button they're clicking on and where they are on the screen. Like that's a Different level of depth. I just want to know how much they're doing something and what they're doing. And that could be a, a simple query. You could use Looker, you can use Pendo, you can use Gainsight and all those things can get you some information based on that. The other thing is when you look at sales information and non customers opportunities, a simple extract from your CRM. So a HubSpot or Salesforce, you should be able to get a very simple data dump of what you sold and wins and losses to kind of see what's going on. And those things are pretty simple. There are tools out there for win loss. There's like things like Clue and other things out there which are fine, they help. But nothing beats just sending out an email saying can I talk to you? Get some of your time and using some webinar or web conferencing to get them. But the point here is oftentimes the tools are usually on the periphery. The real thinking happens with the product manager sitting her butt or his butt in the chair and figuring out like what does this mean? So tool for that. But to get the data. Absolutely. Looker, gain sight and do all those other things I think have been very useful. The other thing that's been emerging are usage based pricing tools that are a bit friendlier and uh, just general billing tools that are a bit friendlier. So now you can see what happens when we changed the metric from this to that or what happens when we change the plan. There's even middleware that allows you to decouple it from the code so that way you can institute different limits. And that extract is becoming more and more important because now you can see results a lot faster when it comes to pricing. The ideas are great, but you got to kind of see what really happens in real life in order to understand what works. So between those two data points, you can merge them. Yeah, you can put them in Excel, you can put them in whatever. But the idea here is those tools and I think they're proliferating more and more. I'd say five years from now, Abshek, we'll probably add even more tools that we can use.

Speaker B: I think so too. Awesome. Yes. So that's like for a company now that said, uh, let's say 20, $25 million. Right. Like a midsize company. That's great. This is how you do it. Okay, so let's now go to much larger company. You come in, it's more people, more process, more teams. How do you handle that?

Speaker A: Yeah, people Always ask me, hey Mark, was this easier or harder to do pricing in bigger companies? I think it's a little bit of both and I'll tell you why. And so when it comes to resources, bigger companies have a lot more resources. They'll have more tools, they'll have more of that tech stack that I mentioned a minute ago and you have a little bit of revenue Runway to experiment and things like that. Especially the well run companies who understand the value of experimenting. The problem though is that now you've gotten too big to lose. So what ends up happening is the stakes are higher. So people get a little bit worried about changing the pricing model dramatically. So you as a product manager may have to take baby steps in order to get there. And we can still apply the same 10, 10 and 10, right, the 10 customer, the 10 non customers at 10%, that's, that's okay. But what changes in the larger company is the stakeholder management gets harder. When you in a smaller company you get sales and finance on, you're good, keep running. But now you have head uh, of strategy and you have head of revenue and you have head of growth and you have all these other folks that are out there and by the way, they have their own kingdoms that they have to keep managing as well. So now you have to do twice, maybe three times the work to get all the stakeholders on board. The best way to do this as a product manager is to try to institute a pricing council or pricing committee. That's usually the best way to go. You can do it individually, one on ones, but the pricing committee already sets the right channel, the right context to have the meeting and just being able to bring your recommendations and ideas in that institution is going to be a lot easier. But let's just say for the sake of argument, you don't even have a pricing committee and you could start that. So as a product manager, the data is available, the stakeholders are harder and then what ends up happening is you're able to change the pricing and packaging, but you have to show the company that you are not going to introduce a lot of noise and churn and issues with reducing sales momentum. It's very, very important because at those levels, 100, 200 million, you're already scaling and anything that torpedoes scale, it's very bad at that stage. You're also likely funded by an investor or you are going through different rounds. You might even think an ipo. So there's a lot of company or entity dynamics that are happening that you have to be aware of and so when I talk about the pricing benefit, remember in uh, the earlier company, it's like, hey, can I sell more, is it profitable? That is taking up even more. So in a large company, can I sell more, is it profitable? And does it create the right entity dynamics? What I mean by that is, does it improve my overall enterprise value? So does it introduce more recurring revenue? Does it introduce higher LTV per customer or customer cohort? So now you really have to dig in at the cohort level. So for product managers at that space, you got to be patient and bite this off one chunk at a time. The stakeholder management, I would say go through a pricing committee and if you don't have one, set it up. And you have to ultimately draw a line from your pricing recommendations to enterprise value. How is this going to make the enterprise more value? Those are the key things in the larger company. You start to make the change, you'll get a little bit of latitude, don't expect that much, but you'll start to, uh, over time, if you keep getting wins, you'll get the ability to do more. So bigger company is again more smaller measured steps than say the, on the smaller side company.

Speaker B: Would it be fair to say that in bigger companies what you're saying is that smaller steps, that is more palatable to slightly larger set of people within the company. So you mentioned the pricing committee. So who should be in a pricing company? I mean, who definitely should be in a pricing company? Who will be good? If they are, then the pricing committee as well.

Speaker A: I think you hit it on the head because the risk profile in those larger companies are so much greater. You have to take smaller steps. But if you do push through the pricing committee, here's who typically would sit on there. By the way, I don't recommend a 50% price committee. You want to keep it lean and mean. You don't need everybody in there but the typical groups. I'd say the big six that I normally see the most, number one sales, they have to be in there. That's where they have their voice and they're your number one customer internally. If you think about it, they also has to be in their product. Of course, they're the ones driving the value. They need to be there. You also have marketing and they're the ones positioning and communicating the value and getting really deep behind the buyer and in the general landscape that you're operating in. But then if you have customer, uh, success or being able to ensure the customer is successful over time, grow them. And that's another key One there and then the last few is going to be around. If you have either a rev ops or sales ops or finance, what some kind of type of OPS that has the measures, the metrics, the numbers it can see sort of the thread in different operational groups. And then lastly, not every company has this, but if you have a professional services arm and you have a lot of onboarding, implementation, things like that, I actually think professional services should be on there too. If you don't, then I would say customer support, understanding why they call you and what they're upset about. And those types are also important input into the value. So that's my key. Six. Yeah. Could it fluctuate to seven or eight? Whatever, that's fine. But keeping that group almost Jeff Bezos one pizza size I think is important. You don't want to have a group too large. And I'll give you the biggest mistake people make with pricing committee meetings is they turn it into a deal review meeting. Pricing committee is not about deal reviews. It's not about, hey, should we make an exception and discount this 22%? Should we make this exception? Should we make that? That's a separate meeting, deal desk, it's more frequent. It's usually the cfo, sales somebody, right? You get in there, the CEO and they're negotiating. Are, uh, the deal merits worth this exception? But in the pricing committee, you should be able to see in the past couple months, wow, we actually made the 20 exceptions. Fifteen of them were discounts. Or out of the 20 exceptions, 10 of them were on packaging. Maybe we should change our packaging. So it's the ultimate summary that goes into the pricing committee. But don't let it turn into a transactional deal review meeting.

Speaker B: That is a good call. And yeah, it does happen without you even realizing sometimes that this kind of goes in a direction. So you know you mentioned about usage based pricing as well, right? Like, and you said there are tools today. Like, I mean, that's a field obviously very close to my heart. That's where we built our company as well. But I have my views on like why it's kind of come up. But I would love to get your thought on. It's not like it's a novel concept. I mean, usage based pricing is been there in some form or the other forever. It's very commonsensical in some way. But why do you think in the last few years it's really caught on in the B2B SaaS world? What do you feel is the inflection point where, okay, wait, people are moving from simple subscription, which has been there for a large part of a decade or more, to usage based pricing or just hybrid or different kind of pricing models.

Speaker A: I think that's a great call out because it is kind of positioned as this big revolutionary new thing that's been around forever, right? We've known it, we've seen it in all different contexts, from our cell phone bills to our electric bills, to cable data to all these different things. So first let me unpack this a little bit because there's the notion of consumption and the ability to charge by that consumption. So to me, the world of software, and I'm talking B2B SaaS for a minute, you charge for two things. You charge for access to something and you charge for activity. Access and activity. That's really what it comes down to. And over the years we've charged access on the, on prem side. Back before the cloud and before everything was online, it was really on prem m. You charge for access, here's the installation or your instance of the software, and here you go, you guys manage it yourself, house it yourself, all things yourself. Now you have access to this thing, I gave you a license to it, you're good to go. We can also charge you for maintenance if you want, for updates and things like that. And that was the way it started when it moved to the cloud. Now we can actually govern access a lot differently. We can give a subscription to the software as a Service and where SaaS was born. And now you don't have to own the thing, you don't have to house it, you don't have to maintain it yourself. You don't need a big old uh, IT group. We could do all that for you and we'll just charge you for access with a user license. But then that started expanding a little more because the reality is that software helps you become more efficient, not less. Nobody wants to buy software to do something slower. So what ends up happening ultimately, and this happened to me in my early days in pricing, was we're charging for the license, but our software was driving workflow, efficiency and connecting a lot of data, helping make better decisions faster. That's probably 80% of software out there. And so what we started noticing is that at renewal licenses were going down. So hang uh on. We're doing a great job, we're delivering wonderful value, yet we're getting paid less money because they need fewer people. It's just the reality of it. So it was very painful to see that all the investment we were making in R and D, all The marketing, all the sales stuff we were doing and we were delivering wonderful outcomes and getting paid less. And so we introduced, at least in this context, it was a claims workflow, like a, uh, claims adjuster type management workflow. And so we switched the model from per agent or per claims agent to per claim. So for every claim that went through the system, we would charge them a small amount per claim. Actually they liked it even better because that's how they were managing their books and their numbers and all their ratios and things like that. So it made it easier for them to associate because when a claim agent worked on multiple claims, they had to do all the manual work to associate their time. But now it's very easy. So we switched the model. They liked it better, we liked it better because as claims volume went up, we made a lot more money. And that was the thing is because I made you more efficient in processing claims, you can process more claims, which is good for you because you can get them through the system. And it's good for us because we get paid. And that ultimate alignment is where usage based pricing to me sings the loudest in that alignment, in getting the value and using it to getting us the fair exchange of it, is where I think usage pricing is the absolute path. But here's the downside, because everyone thought, oh yeah, I should just do usage based pricing too. Everybody else is doing it. But when you jump in head first into the pool, you're not checking if there's water, you may have a rude awakening. So here's what happens. Usage based pricing, the definition of usage or consumption is where a lot of folks trip up. What does usage mean? If I were to, I use Netflix, for example, if Netflix were to charge me for every minute of viewing time, I would change my behavior, obviously I would totally change it. I be very careful about what I watch and don't leave it on and this and that. And what that does is that prevents me from really getting the full experience and the full value. So there are companies out there on the usage based bandwagon or trend that have switched the model, added a bunch of complexity, discourage usage by picking the wrong thing to charge for and shot themselves in the phone. And the way I see it, and the way I see it going is that usage base has to be a little bit more thought through in terms of what type of usage are we looking at? Are we looking at inputs, are we looking at outputs, what are we really thinking through? And so I'll give you another one. Tax or not tax, a finance Invoice process, they switch from user to, to a, uh, processing by the invoice made perfect sense but then they took it one step further and they use it processing paid invoices. So they added this extra element of qualifying the metric and that's where I think companies are starting to go is like can I qualify this metric? It's not about invoices, it's about paid invoices. It's not about gb, it's about process GB and then sort of applying the action to the metric to make it much more aligned to value, make, make much more sense of it. And that way you get a lot less friction because in the input side they're able to do whatever they want and then the outputs get metered and that's where usage based price I think has a better path. But for now I think folks are still confused about what to charge for in usage base. I seen them completely goof it up. I've seen some do a phenomenal job and that's just going to take some um, evolving in time and I think pouring gasoline on this whole thing. Abhishek is the AI revolution. And how do you figure out how to charge for AI?

Speaker B: Right, right. In a sense. So figure out a value metric and then as you say if you're able to kind of tie that or iterate and pull it more to outcomes, that's the way to go. So yeah, invoices to paid invoices say okay, so if I'm helping them get paid then that's probably I'm um, doing generating more value and maybe that's more valuable for me to charge a little higher as well. So that's great in terms of breaking it down. So I think with AI coming in the last couple of years there's been little confusion in terms of how do you go about pricing in the sense. I don't even know if people have figured it out yet and there are a few models out there. So just taking a, as an example here, right. Like if a new category comes in suddenly you see a new industry coming in and kind of taking by some. You see that every two, three years. Right. How do you start thinking of pricing for something that's new and does not have too much precedent? If there's a company, you have a company, there you go do that. There's always. But when it's starting out, right. Let's take a. For example, even any other example, you're new, you're like early to the market. How do you think about pricing that?

Speaker A: Yeah. I think early in the market, in any market really, when you think about pricing and packaging, it gets really hard to pick the right things to charge for and the right things to not charge for. And you're still learning in these early stages.

Speaker B: You also say pricing and packaging. Right? I just want to also kind of, while you talk through that, is there the distinction, like do people focus on one and not on the other? Because I always think packaging comes as an afterthought. Is that a fair observation and is there a distinction between the two? Just to add to the question, I

Speaker A: think they're highly related and sometimes times I use them interchangeably in the sense that when I say pricing with a capital P, Abhishek, I'm talking about monetizing value. So pricing, packaging, the value metrics, you charge for all those things, I say as the umbrella pricing prices or price levels are uh, the numbers you charge for right at the end of the day. But packaging, packaging to me is actually a harder thing to solve because it's influencing behavior and it forces you to know your customers and behavior very, very deeply in order to create the right packages and the wrong packages. Again, I'm just going to go good, better, best, because that's what everybody else does. Could be woefully wrong way to package. You can have way too much stuffed in there that folks never upgrade. You can have way too little that people churn because they're not getting what they want. So packaging defines the experience. And what you're really pricing for, Abhishek, is the experience, not the product. So new categories, here's the way I look at it. In new categories, there's actually two waves of learning going on. There's the market learning about what they want and then there's the provider of the value learning about what to provide and how to do it in a profitable way that could sustain a business. And so you have these two kind of learning ways happening at the same time. And so value based pricing is very difficult in that context because value is not defined yet, it's up and down. And so the way value starts to creep up in the beginning stages is what were they doing before, how were they solving this before? And oftentimes it's not a, uh, one for one product. It's I was doing a little this, I was doing a little that, maybe I wasn't doing it at all. And so trying to define what that alternative or substitute is is going to be the first thing you do in a new market landscape is understanding the old pain which again could be just void and then trying to add a little bit of context around it, meaning that your solution is faster, smarter, better than the old way of doing it, whatever that was. And again, it's typically something they were doing in house manually, not some other solution. But then beyond that is the outcome or results take a little bit more time to come to fruition. Still don't know. You probably got a few early wows and that's okay, but that's usually not enough to sustain a business model. You have to get enough of, uh, not just the value they want, but the value they want and are willing to pay for, which takes different cycles to get. So how do you price during all this stuff? So in the beginning I always like to do what I call a bit of a, I call it a challenger champion type pricing, where there's usually two packages and what you're doing is it's typically flat and easy to understand with some metrics underneath. The reason why I do flat with some metrics is because charging either if you get too deep on the user based pricing or you get too deep something else or you pick the wrong metric could accidentally kill your momentum. And in the beginning you don't want to kill momentum, you want to build it. But you still have to leave yourself some room to monetize value later as you learn. This is the thing I want to charge for. So the flat fee allows you to come up with a number that the consumer can understand pretty quickly and that you could use to measure. Okay, what are they anchoring this number against? Is it against an fte? Is it against six hours of labor? Is it against what are they measuring, what are they comparing me to? And how are they contextualizing this number? That's the first learning piece. And then the reason why you put limits is because there are certain activities that you're offering that drive value. You just don't know which ones are the ones that matter the most yet. Okay, so you put some limits, not too stringent, just some limits, and then you have another plan that is higher. Typically anywhere from depending on the TAM you're going after, it could be 50, 50% higher or even 2x higher. But then you have another number and then you have unlimited in the limits. Okay, here's what I'm doing. And so what you do is you frame and you say, you know what, because you're an early adopter and you're taking a chance and giving us feedback on our software, I'm going to give you the unlimited plan. For the price of the limited plan. So that's two things. One is they know they're getting a deal because they're paying less for something that they should be paying more. And they know that these different metrics that you added, these usage metrics, all have value, but you've made it unencumbered. You basically say, look, you can use this as much as you want, you'll pay this flat fee for predictability sake. I know I'm going to get. I feel like I'm paying less than I should, therefore I go in this champion challenger model. What's really happening is you're just trying to understand how they contextualize you, what they find valuable, generally speaking, how, uh, or which usage metric comes up on top and which ones you end up just giving away. All those things in that learning cycle has to happen and has to happen with a lot without the friction that very complex models come with. That's how I would do it in a new market. I would check. There you go, you heard it first.

Speaker B: Any, any interesting pricing models that you've noticed in AI within the same context that you behave? These guys seem to be doing an iteration that kind of like looks interesting. Or do you think it's still too early in terms of how AI is pricing?

Speaker A: Yeah, um, I'm seeing a lot more outcome based pricing with AI. Right. So with Salesforce moving a lot of agent based models as well. And it's funny because we may end up being like agents selling to agents at some point. Right. With all these agents kind of talking to each other at the same time and vendor.

Speaker B: Well, as long as it gets the work done.

Speaker A: Exactly. For me, I do enjoy seeing some resolution like pricing based on resolutions or outcomes or how many things were completed. Those are some of the early examples of like, yes, this is what I want to happen by buying the software. It happens, so I pay for it and therefore the software company gets rewarded. And that alignment is just a beautiful thing. You don't see it every day. So outcome based around again a resolution that the agent brought. I think I'm seeing some agent with volume type of pricing models come out as well. And the reason why I like those so much is because of the alignment where I worry a little bit it's going to take a little time for people to catch up because we're humans and we can only change so fast as human beings. And I think the AI and the landscape is changing a lot faster than we can, but we'll catch up eventually. And so I think you'll see a lot more outcome based in the future, next two years.

Speaker B: So one last question, like before we kind of wrap, could it maybe like just take an example of a company that you've kind of like done this pricing whichever part of a career successfully and maybe talk through how that went from where it was to eventually a success story, if I may put it that way. Right. Like of how pricing influenced that or a failure story actually. If you think that has more insights, sure. Right. As well.

Speaker A: Oh man, I can see a lot of fun ones that I've gone through. So maybe what I'll do is let me bring back the ones with Gary. Remember Gary, that director that became a product leader? So what happened? Why did he become so successful? So after he stepped in and owned crisis and packaging for the company, they had a very successful software. They did calculations and very important delivered a lot of compliance related things as well. And what happened was they were selling it pretty much all together, all in one and they kind of, kind of just discounted. The customer says yes, right. It's kind of what's going on. So you get very big variability. So what he did was he said let's break this up into packaging for this instance because of the TAM and the way their customers progressed in maturity. Notice I said maturity and outsize the when they progressed in maturity, good, better, best actually fit really well. And so they broke down the single all in one package to good, better, best. They introduced the limits. And Gary drove a lot of this across the teams. And then they had an acquisition that became a really nice bolt on because it was really related to maybe about 20, 25% of the use cases. And so it really didn't make sense to put in every plan. So they put it as an add on, a bolt on. And they got smart. They even put it as a bolt on in the middle plan, meaning you can't even buy it if you're in the entry plan. You have to upgrade to even get super smart. And so ultimately what ended up happening when they shifted the structure around, they got a lot of pushback, lot of pushback. Sales are like, hey, you're taking away my ability to close deals. And so they actually gave sales a decent amount of latitude to discount. But if you didn't discount, we gave you a nice bump in your compensation. So they gave them flexibility but an incentive not to use it, which again was really smart move. And so with all these things in play the new carrot and stick for sales and new packaging, the add ons, the limits, all Those things, they went out to market and after the first couple months they saw their discounting on, um, deals. New deals go way down, but their win rates went up. So ASP goes up, the win rates go up. How the hell do you win more at higher prices? That doesn't make any sense. But all the things came together to really solve a lot of different problems. And then as they continue to push up, another thing started happening, which is their sales cycle time went down because they were no longer jamming everybody into the same plan, which took cycles and cycles of sales conversations. They were like, hey, you belong in this middle of this entry plan. And it's like, yeah, that makes sense. That's exactly what I want. They jump in and it just reduced the number of conversations there so they able to win more deals, higher prices, faster, which I think is what everybody really wants. Go Gary.

Speaker B: Yeah, go Gary.

Speaker A: Right, so you know, you're right in

Speaker B: the sense so consciously pushing your customers to where they want to be. Right. Sometimes as a company, I feel like you with your, uh, data actually kind of know some stuff that even a customer is not thinking through deeply. Right. And not just going upwards, even sometimes going downwards. Right. Hey, you know what you are this plan, but you're probably not using this enough. So maybe it actually builds a lot of goodwill over time and ends up being a net. Net positive as well. Right. So, Akit, this is very, very nice. I really enjoyed speaking with you and talking about your experiences and I'm pretty sure we can talk about this for another 45 minutes, but maybe we should sometime in the future when we come back for an episode too. But this is lovely. Thank you so much for your time.

Speaker A: I had a lot of fun. I love talking about this stuff all day long, so I wish anytime give me a call. But thanks for having me on today.