The art and science of pricing | Madhavan Ramanujam (Monetizing Innovation, Simon-Kucher)

[00:00] when we talk about pricing, many people quickly gravitate to like, [00:03] dollar figures. That's just a price point. That's a dollar figure. [00:07] But when we think about price, we think about it as a measure. Like, you know, liter is a measure of volume, price is a measure of value. [00:13] And when you think of it this way, [00:15] It really stands for, do people actually want your product and would they actually buy it? [00:20] And that is the whole willingness to pay conversation. [00:22] And entrepreneurs and companies need to do this much earlier so that they can understand [00:27] Are they on the right track? [00:57] is, Madhavan was by far the most mentioned. In this episode, we get deep into all manner of pricing strategy, especially focusing on five lessons for product teams on thinking about pricing. Enough talking, let's get into it. I bring you Madhavan, Ramanujam, after a short word from our wonderful sponsors. [01:16] This episode is brought to you by Lemon.io. You've achieved product market fit. You're able to activate, engage, and retain your customers. But you don't have the engineers that you need to move as fast as you want to. Because it's hard to find great engineers quickly, especially if you're trying to protect your burden rate. Meet Lemon.io. Lemon.io will quickly match you with skilled senior developers who are all vetted, results-oriented, and ready to help you grow. And all that at competitive rates.

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[03:16] at it they are hiring check out mixpanel.com to learn more [03:24] madavan welcome to the podcast thanks sonny pleasure to be here i am really excited to be chatting you're kind of known as the smartest maybe most experienced person on pricing strategy in the world you're literally [03:36] wrote the book on pricing strategy that everyone seems to read and share and talk about. [03:41] And so I'm really honored to have you on this podcast. [03:44] Thanks for the nice words. I'm excited to be here. [03:47] help folks fully grasp the level of experience that you have around pricing and pricing strategy. [03:53] Could you just kind of talk about how many companies you worked with, maybe name some companies you can share? [03:58] maybe how many people bought the book, anything that you can share by just [04:01] the level of experience you have in pricing. [04:04] Sure. So I work as a senior partner. [04:07] in a consulting company called Simon Kutcher. [04:10] So we are the world's largest pricing strategy consulting firm. We have about 2,000 employees worldwide in Australia. [04:16] you know, 43 offices. So I work in our Bay Area offices and I've been here for the [04:21] last 15 years. So I work primarily with [04:24] tech companies here in the Bay Area, so that software, internet, marketplace companies, etc. [04:29] So I worked with over 250 companies, more than 20 unicorns. [04:33] on everything to do with pricing, monetization. [04:36] profitable growth and these kind of topics. [04:39] So companies such as [04:41] Uber, Asana, DoorDash, [04:44] many LinkedIn, many come to mind.

[04:47] I think you asked about the book Monetizing Innovation that I wrote a number of copies, etc. I mean, [04:52] Look, when we first launched the book, I used to track some of these copies, sales and everything else. And I quickly realized that a book is only good if it actually creates impact. [05:01] And that's also why we wrote the book, [05:03] So the way I measure impact for monetizing innovation is literally there's probably [05:08] You know, someone reaching out on a daily basis saying, hey, I read the book. [05:12] we could make some impact around pricing monetization in our companies. And to me, that's real impact and that's what keeps me [05:20] kind of going because when we wrote [05:22] We wrote the book. We didn't want to write any marketing, no fluffy crap. We wanted to write something that was more actionable and to see that people find it actionable and can use it Monday morning to actually make changes. [05:34] I think that's real impact. But of course, the book has done well. It is in [05:38] and still in top 10 categories, in many categories in Amazon, for instance. [05:42] It's been six years since we wrote the book. [05:45] Haha. [05:45] Wow, need a second edition soon. [05:48] That's incredible for a software tech oriented person. [05:53] book where they often get really out of date really quickly. Like I was just reading it, and it's amazing how many things still are very true. [05:58] The topic is one that is relevant in even years to come. So I think [06:05] Hopefully it's robust that way. And you talked about the company Simon Kutcher. I'll just add that [06:10] Any smart product leader, growth person that I talk to, they're always talking about how they've worked with you to figure out their pricing strategy. It's like the company that everyone goes to work with.

[06:20] The company, I like that. Maybe we should rebrand ourselves as the company. The company. [06:25] Let's do it. Let's talk about rebranding next. [06:28] How did you get into pricing and pricing strategy? How did you first get into the world? [06:33] kind of focus your career around it. [06:36] I actually happened to stumble in it. I mean, it's classic fashion. I was at Stanford graduate school, both graduate school of business and the engineering school. And. [06:44] We had a lot of startup discussions thinking of creating startups, very classic. [06:50] And I was this guy who was actually in charge of coming up with the [06:53] pricing monetization strategy in our teams when we were actually pitching to VCs and [06:59] And I remember going in, [07:01] pitching our ideas and you know and the vc asked me like how do you know you'll actually make money on this innovation and [07:06] And I pulled up a spreadsheet. I showed him all the assumptions and I said, this is how I'm going to do it. [07:11] And I still remember this. He said, you've labeled them correct. Those are assumptions. How do you truly know? [07:15] And I was like, I actually don't. I just made stuff up. [07:18] And within that same week, I got a call from the then managing partner of Simon Kutcher, Matt Johnson, [07:27] And he said, "Hey, we are the Versailles pricing and growth strategy consulting firm. You want to come join us? We're looking for Sanford grads." And I was like, [07:34] Whoa, I didn't even know you existed. [07:36] I joined because I actually wanted to get to [07:39] understand the science behind [07:42] Pricing, not just the art. [07:45] And that's kind of what I've been focusing on [07:47] you know, in the last 15 years and [07:49] Also, my education in Stanford was in quantitative marketing.

[07:53] So many of those, let's say, [07:55] theoretical models I could bring back into a practical industry relevant sense. So it's been a great journey. [08:02] When I think about books that people find most useful and sustain or books that are based on people's [08:08] real experience doing a thing for like a decade. [08:10] And your book is a great example of that. [08:12] What made you decide to actually write a book? Because I know how hard that is from my wife's experience. [08:18] Yeah, I think it probably started with some kind of mini frustration because we used to get calls from companies saying, hey, [08:25] We need a pricing strategy. We need a price plan. [08:29] They would have invested years probably making the innovation. Then we would ask them, "How long do we have?" [08:35] We need it like yesterday. [08:37] uh right i mean so it was like uh time and again we witnessed this uh [08:41] spray and pray approach and then [08:43] We used to ask this simple question, like, how do you truly know that people will actually pay for your innovation? [08:49] When you built it, did you do any studies? Did you actually understand whether there's a product market pricing fit? And usually the answer was no. [08:56] And then it had to change. I mean, when we benchmarked, 72% of innovations actually fail. [09:01] from a monetization or [09:03] in a commercial perspective simply because entrepreneurs or companies did not do the check earlier on. [09:09] Had they done it, they could have probably pivoted the product. [09:13] build things in a different way and [09:15] build something that was more meaningful. So we wrote Monetizing Innovation because increasingly, [09:20] We were working with companies more early stage in helping them design the right innovations that

[09:26] customers need and what are they willing to pay for, as opposed to just building a product and slapping on a price. [09:32] Crossing that chasm between hoping that you would monetize, knowing that you truly will, [09:39] That was the motivation for writing Monetizing Innovation. [09:43] Awesome. We're going to dive into a lot of these things that you've shared in the book and things you've learned. [09:47] One more context setting question before we get into it all. [09:51] Which part of the org do you believe pricing strategies should sit in? Is it product, sales, finance, marketing, something else? [09:58] Pricing by discipline is like a... [10:00] Cross-functional discipline. I mean, you can't talk pricing in isolation of product, finance, sales, etc. I mean, there's always touch points. [10:07] So it's extremely cross-functional. [10:10] Back in the day, probably a decade ago, I used to say pricing needs to sit in finance because my view was [10:16] You know, finance would be the counterbalance to sales, especially if you have like, you know, sales coming up with pricing in a B2B situation. I mean, you can set all the pricing you want. It's a human having a human conversation. So how do you put checks and balance in some of that? And my view was, you know, pricing should sit in finance and it has to report on. [10:33] ultimately to the CFO. [10:35] Over the last decade, I've been actually advocating that this should sit in the product side [10:40] and there was also the genesis of monetizing innovation because [10:44] If we truly believe that we need to build products that are simply products that customers need, they love, they value, they're willing to pay for, [10:52] It is a product function because you need to be able to design the product around this kind of information, around what customers need, what they value and what they're willing to pay for, in short, around the price.

[11:02] If you look at monetizing innovation, [11:04] The subtitle of the book is How [11:06] smart companies design their products around the price. If you take that viewpoint, [11:11] then pricing needs to sit in the product function or the founder product and [11:16] and sort of report on to this. This is my [11:18] Strong held belief, one that probably won't change, no. [11:22] Awesome. That's a great segue to kind of the meat of our conversation. [11:27] So most of the listeners of this podcast are product builders and people that grow product, product managers, founders. [11:33] people that work on cross-functional product teams, [11:36] And I was reading your book and I picked five topics that I thought would be especially useful. [11:41] to product leaders to kind of dig into. [11:44] And the first is the willingness to pay conversations. [11:48] which I know is kind of foundational to the way that you think about it. [11:51] pricing strategy and the advice that you share with [11:54] people have had to think about pricing. [11:56] Can you just talk about just like what is willingness to pay as a concept? [12:00] And then when should founders focus on these conversations to figure out the willingness to pay? [12:05] Yeah, absolutely. So I think. [12:07] Look, most of your listeners are many, you know, most product folks. [12:12] They probably understand language like product market fit, especially made famous from lead startup and other. [12:18] kind of literature, which is awesome. I think that the issue is it's not just about product market fit. [12:26] It is about achieving a product market pricing fit. [12:29] For instance, if someone comes and asks me, do you like the headset that you're using for this podcast?

[12:33] I would say, I like it. Do you like it at $200? The whole conversation is different. So if you didn't put pricing as part of your product market fit validation, [12:41] you're often hearing what you want to hear. It is truly about understanding whether customers are willing to pay for your innovation. And willingness to pay is a proxy for [12:50] Do people actually value your product? [12:52] And how badly do they actually want the product? [12:56] This even comes back to like understanding what pricing really is. Right. When we talk about pricing, many people quickly gravitate to like, [13:03] dollar figures that's just a price point that's a dollar figure [13:07] But when we think about price, we think about it as a measure. Like, you know, liter is a measure of volume, price is a measure of value. And when you think of it this way, [13:16] It really stands for, do people actually want your product and would they actually buy it? [13:20] And that is the whole willingness to pay conversation. [13:23] And entrepreneurs and companies need to do this much earlier so that they can understand [13:28] Are they on the right track? Think of it this way. [13:31] If I have the same sales and marketing conversation that I would have with a customer, [13:36] 6 months before launch of the product, [13:39] Pitch the call value. [13:40] and then ask them a simple question, would you pay for this innovation? And if someone says no, [13:45] Chances are you can put all the perfume you want in the next six months. They're gonna say the same thing. [13:49] And if they do say no, the most important question to ask is why? [13:53] and you start hearing all kinds of information that you can use to design your product, [13:57] and maybe even pivot your product strategy accordingly. So it is literally the litmus test of whether people like your product.

[14:05] And so if I were to kind of summarize your main point, [14:09] The idea is have these conversations. [14:11] right as you're thinking about designing the product. [14:14] Don't try to just launch it, see how people like it, build a huge audience, and then figure out pricing your advices. Start having those conversations early. Exactly. And the folks at First Round summarized this in four words. I thought when they wrote a blog article on [14:28] on this and [14:30] They call it price before product period. [14:33] So I think that probably sucks in. But it's really that, right? Because frankly, Lenny, as an entrepreneur or a company, [14:40] You actually don't have a choice whether you'll have a pricing conversation with your customer. The only thing in your control is when you will have it. I mean, you can build the most awesome innovation you think is awesome, obsess over the engineering, the product, everything else, and then, you know, slap on a price throw in the market and hope to monetize. [14:56] or have this conversation much earlier, pitch the same sales and marketing kind of strategy. [15:02] you know, pitches and then try to understand whether people will actually pay for it and then design around this information. And you actually know that you will. So you're maximizing your chances for success. It's simply testing and learning. Everyone in your probably listener base knows test and learn. We are talking about testing and learning, pricing and willingness to pay. Why wouldn't you do that? And why would you postpone that till the very end? [15:23] Do you have any examples of products or companies where they have these conversations either [15:27] way too early, way too late, or even just like nailed it. [15:31] Here's the thing. [15:32] There's nothing like way too early for this conversation. I mean, I even tell people who are like, you know, early stage or just thinking about an idea would say, hey, go go check if someone would actually pay for this idea. And there's some high level ways to actually check for this. And of course, it's not about nailing the pricing strategy from like get go three years before a product is launched, etc. It's about understanding whether there is a willingness to pay.

[15:55] And then repeating this exercise as you go along so that you can refine [15:59] And when you're ready to launch the product, [16:01] you have a much more refined view on what is the willingness to pay. [16:04] And of course, then you're launching the product with a lot more enthusiasm because you know this is actually going to have a product market pricing fit. [16:12] So it's about iterating and learning and sort of refining. [16:15] So there's never too early [16:17] Too late, I think, is most of the companies. This is why we wrote Monetizing Innovation, like I told you. 72% of innovations fail. [16:24] and we also categorize them into why they fail. There are only four paleotypes, and I've written about that in the book, so I can [16:30] Leave that for readers to actually go and see it. [16:33] But all of those failure types happened because the conversation was difficult. [16:38] was just too late and pricing was an afterthought. [16:41] Companies that did it well, maybe... [16:43] you know, one or two examples that I can probably take just to like motivate the [16:47] concept. We talk about in the first chapter, a tale of two cars and about how Porsche actually did this. [16:55] The example is something like this, right? I mean, Porsche was really looking for [16:59] launching a new innovation, they came up with an idea, [17:02] They said, "Okay, should we launch an SUV?" [17:05] Even before a blueprint was drawn, they basically went and checked with the market. Is there a need for an SUV? Would people value it? [17:12] from Porsche, are they willing to pay for it? And to their surprise, they actually found that. [17:17] And then what they did next was more fascinating. Every single feature that actually went into the car or the benefit that people had was battle tested with customers. And no amount of like,

[17:27] convincing from product or engineering was enough. It had to be battle-tested with customers. [17:33] Things like, for instance, a big cup holder was inside because people loved it, needed an SUV, would pay for it. Things like six-speed manual transmission. [17:43] People didn't need an SUV out of the window. They literally used to bring [17:47] cars in what is called a car clinics, and they would test for this. And they would put people through prototypes before anything is even productized, anything is in the factory floor, where people would actually even drive around the Porsche and say, okay, did they like it? Would they pay for it, et cetera? And then they would fine tune everything that goes on, right? [18:08] So the innovation process is very different from the classic [18:11] you know spray and pray build something slap on a price throw it out it was really designing the product around [18:17] customer feedback around willingness to pay, [18:20] you know the outcome of the [18:22] process could also couldn't have been more different than the traditional [18:25] approach of spray and pray the [18:27] When they launched this SUV, it was called Cayenne, which we all know now. [18:32] in accounts for more than half of Porsche's profit and literally one of the best roaring successes in automotive history. I mean, this is just an [18:40] automotive example, but if I switch gears to more of a tech example or a software example for your audience, [18:46] There was this company which they think of this as a two sided marketplace. [18:51] And I'll just keep it a bit abstract, but I'll tell you the details right into said marketplace. [18:57] Think of this as they were already monetizing on the sell side.

[19:01] And the CEO said, okay, let's go and build a product for the buy side that people will buy. So the buy side monetization product strategy. [19:10] In classic fashion, all the product folks, product managers, etc., they went off-site. [19:16] generated thousands of post-it notes, design thinking, yada yada, everything, right? [19:20] And then they said, "Okay, we can't take all of these, so many ideas to the CEO. Let's prioritize it somehow." [19:27] and they prioritize it to like 40 ideas. [19:30] and they took it to the CEO and said, "This is what we want to build." [19:34] And the CEO asks a simple question, how do you truly know you would monetize? It's the same question the VC asked me. [19:39] like back in the day and they simply didn't know. [19:43] They were just guessing. [19:44] So what happened next was they took wireframes, blueprints, they took product concepts and they started testing this with their customers. [19:54] and prospects. [19:55] So, [19:56] Stuff that they actually thought was exciting... [20:00] often was way down in the list of priorities. If they didn't do these kind of tests, they would have probably built a product around this. To give you an example, [20:09] One of the features that they were building was called or the number one feature that the internal team, [20:15] thought was awesome. They called it highlight connections from Facebook. [20:20] And everyone in the company thought that people would pay for this. It's an awesome feature. They need it. They love it. [20:25] And the thesis was something like this. If as a, [20:27] If I'm buying the product from the same seller and someone in my Facebook connection has already bought that product from the seller, that's credible information.

[20:37] in view of reviews and everything else and you know people would [20:40] find it acceptable and pay for this. When they went and tested this and pitched the idea, [20:45] They got all kinds of reactions. There was one customer group, I remember, which said, [20:50] Yeah, so you're telling me that I can't put through hundreds of reviews and make my own determination. [20:55] That's unacceptable. [20:58] It spoils the fun out of actually doing research on products. [21:03] group of customers who said, [21:05] Do you like it? Yeah, I like it. Would you pay for it? Hell no. And then there was another group which even said, I don't even want anyone in my Facebook circle to know that I'm buying this product because there was some. [21:15] let's say premiumness associated with this and [21:18] and everything else, they could not find a single [21:22] a set of customers or a segment of customers who said, I love this feature, I would pay for it. [21:27] If they hadn't done this exercise, they would have built the entire product around this and it would have been a disaster. [21:32] But because they actually did this, they could prioritize what they were building. [21:36] Literally, I mean, for your product folks, the number one lesson, and I hope this is the biggest takeaway for your audience. [21:44] You cannot prioritize a product roadmap without having a willingness to pay conversation. [21:49] I mean, if you're just prioritizing based on what you think or what you feel or technical resources, you're getting it wrong. Literally, you're getting it wrong. [21:56] You can prioritize what you're building based on what customers need, what they value and what they're willing to pay for. And you can actually do this test and say, what should you be building? The funny thing that I've actually always seen, always across these hundreds of companies that I've worked,

[22:11] 20% of what you build drives 80% of the willingness to pay. It's a classic burrito, right? [22:17] And if you don't know this, you're probably all indexing on like one or the other. [22:21] It's much better to find out what is this 20% so that you can focus on it, nail it, [22:27] and focus on all of the usability around it and make an awesome product, [22:32] As opposed to like not knowing what drives the willingness to pay and just trying to put everything out there, right? [22:37] And at the worst form, often what happens then is, [22:41] This 20% [22:43] is the easiest thing to build. [22:45] And what companies do is they will build it, they will throw it out and they'll say there's an MVP, give it for free. [22:51] And then they are trying to chase their tails building [22:54] 80% of stuff that is driving 20% of value. [22:57] So you already lost the battle. So as a product person or product, [23:02] Builder. [23:03] You need to prioritize your R&D roadmap based on willingness to pay conversations, exactly like what the two-sided marketplace did, exactly like what Porsche did. [23:12] And this is the crux of everything that we are talking about. [23:16] Amazing. What's interesting about the second example versus the first is [23:20] In the Porsche example, they started with [23:22] we want to charge this much, let's build a car that we can sell for that much. [23:26] In the second case, they had a product they were trying to build and then they figured out which things to build. It's interesting that this can come [23:34] kind of along the journey at different places. [23:36] But the main takeaway is do it early and earlier than you think. Correct. Either product ties to a price point and a willingness to pay,

[23:44] or at least use willingness to pay as an access to prioritize what you're building. Either way, you will get it right. Okay, so let's actually talk about how to have these conversations. I imagine that's what a lot of people are wondering right now. Like, yes, I'm convinced I will have these conversations. But then, you know, the classic issue with customers, you ask them what they all do, and they never actually, you can't trust their customers. [24:04] uh stories of what they'll actually do so what advice do you have for folks [24:08] when they have these conversations, what questions should they ask? What [24:11] word should they use? I know you have a few frameworks that you suggest. Sure. We can go deep into this and you can [24:17] pull me back or ask me to go deeper, whatever, it doesn't matter, right? So, [24:21] And we have written an entire chapter in the book, chapter four. It's called How to Have the Willingness to Play Conversation. If there's one chapter, just read that. [24:28] That is quite detailed and goes into how to actually do this. [24:33] Look, I mean, if you go and ask someone, [24:35] How much should I charge for this product? You're actually going to get garbage back. That's your job. I mean, no one is supposed to tell you how much to charge. [24:41] And that's the worst way to have the conversation. [24:44] There are some really interesting and nuanced ways of having the conversation where you still tease out what people are willing to pay for without, you know, directly confronting someone as to like what you should be charging. So let me go into like a few methods and. [24:56] and I can pass to see if you have any questions. [24:59] So the first one is [25:01] you know, what we say is frame the question in a more relative manner. Right. Because, you know, and sometimes I say tongue in cheek that people are absolutely meaningless, relatively, relatively super smart. [25:13] What I mean by that is if you go and ask someone, "How much should I charge?" you'll get a meaningless answer.

[25:18] But if you actually ask it in a relative way, people actually give responses that are meaningful. So like for instance, if you're a B2B SaaS company, okay? [25:25] And you're trying to see if your product actually has willingness to pay. [25:29] One way to have that conversation is to say, "Okay, hey, to your customers, do you use products like Salesforce in your install base?" [25:37] Yeah, I do use Salesforce indexed at 100 in value. [25:40] Where do you think we are in terms of like the value that we bring to your [25:44] let's say, day-to-day business operations. [25:47] That people can answer all day long. They might say 80, they might say 120, depending on whether you're more or less compared to like, let's say what a Salesforce can do, which is an established install base. [25:56] And then if you say, okay, if Salesforce was indexed at 100 in pricing, where do you think we should be? [26:00] That also people can say, "Okay, if they say 110, what they're saying is you can be more premium than that and we would still pay for it." At least you've gotten some information that is meaningful at a very basic level. [26:11] This is some relative ways of asking these questions are... [26:15] are the most basic ways of actually doing it. [26:18] Then we have questions where, [26:20] There are some methods where we actually want to understand are there some psychological thresholds or budgets when it comes to like, [26:27] willingness to pay. [26:29] So the way to do this is, let's take your product, [26:33] that you're going to launch, pitch the [26:35] value to your customers, have that exact sales and marketing conversation that you would have after you launched the product but before. [26:42] And then you ask them, what do you think is an acceptable price for this innovation? [26:45] Look, I mean, everyone would like to lowball. They will negotiate with themselves. Let them give an answer, clock it.

[26:52] Then ask them, what do you think is an expensive price? [26:55] And then, [26:56] Follow that with what do you think is a prohibitively expensive price. [27:00] And across thousands of projects that we have done, what we have come to realize is acceptable price is the price where people not only love the product, but they also love the price. [27:09] If you're in true growth mode, maybe you can put it there as a no-brainer price, no friction, etc. [27:15] The expensive price tends to be the price that is value priced, as in, [27:18] They don't love you, they don't hate you, they would pay you. [27:21] It's a neutral reaction. [27:23] prohibitively expensive tends to be the price that they'll laugh out of the room. [27:26] If you do this at scale, what you'll start seeing is that [27:29] There are some cliffs in these kind of demand curves where suddenly when you cross from, let's say, 99 to 101, [27:36] 20% or 30% might say it is expensive or it's prohibitively expensive. And that's what we look for to see if there are some psychological thresholds that if you actually cross [27:47] You know, you have a perception of being expensive. So hiding behind some of these psychological thresholds become important. [27:53] Right, the Rahul Vora from Superhuman actually read the book and [27:57] He talked about this in an A16Z podcast. He actually used this method to come up with this $30 price point for the superhuman app. And I think... [28:06] That's a quick and dirty way to actually get to [28:09] what is a willingness to pay and what's a psychological threshold. [28:13] So I think that's an interesting method that you can do Monday morning. But the key here is to... [28:17] not just ask the question, what would you pay, but have that sales and marketing conversation. Tell people where they actually might get the benefits. Basically, exactly everything you would do

[28:27] after launching the product to [28:29] Create. [28:30] awareness and showcase the benefits, do it and then ask these questions so that you're priming them to the [28:35] value that your product gets and you're not just having a, [28:39] you know, random conversation. [28:40] There are other techniques that go more and more, let's say, rigorous. For instance, purchase probability questions. So if you ask someone, [28:48] "Okay, would you buy this product?" That's a meaningless question. [28:52] At least if you ground them on a scale and say on a scale of one to five, would you buy it? One is I'm not at all interested. Five is most likely I would buy it or I would buy it for certain. And four is like most likely for instance. And three is I'm neutral. [29:06] What we have actually seen is even if people say five, [29:09] They are probably only 30% to 50% sure about whether they will buy. I mean, so you can start and if they say 4, it's like 10% to 20%. [29:18] If they say three and below, they're never going to buy it. If you do this at scale, you can start coming up with, let's say, a demand curve, and then say, "Where is the price optimal?" etc. so you can understand purchase probabilities. [29:29] And if someone says, let's say, three for a certain price point, then you can lower the price and say, okay, would they actually move their ratings to a four or five? So I think these are some simple ways to understand purchase probabilities and elasticities. [29:43] Two more, if I may, I think. [29:44] Another one is what we call most and least kind of questions. [29:50] And the thesis behind this is if you go and ask people, okay, I give them a list of 10 features, [29:55] let's say and I say rank them one to ten most people will find that exercise painful horrible

[30:01] Because there is always this messy middle where everything is gray. They all look the same, right? I mean, [30:06] There's a lot of psychological theory that people are very adept at identifying the extremes. When it gets in the between, that's when things become tougher. [30:14] So what we do is if you have a list of 10 features that we want to understand whether people have willingness to pay for when we are prioritizing the R&D roadmap for our clients. [30:22] We will take a subset of, let's say 6 or so features out of those 10. [30:26] And then you say, in this set of features, identify the most important for you and the least important. [30:31] And the most important is defined as like, you know, must have, I will pay for it. Least important is I don't need it. I won't pay for it kind of connotation. [30:39] These people can do all day long because they're just picking the two. And then we will change the set of six. [30:45] Another combination from the 10 and ask that same question. [30:49] So if you do this a few times, you will be able to, you know, prioritize the entire feature set. [30:54] in a relative fashion and truly understand what drives willingness to pay. [30:59] The last method which gets into more advanced methodology is what we call as more trade-off exercises. So here what we do is we put people through actual buying patterns or actual buying scenarios and say, "Okay, if you had this packaging and pricing, for instance, for your software product, [31:15] you know, what would you do? Which is akin to a real life question. Like, you know, you put all the features, all the price, the number of plans, et cetera. [31:21] then we would change that. [31:23] and say, "Okay, if you change the features and the price, [31:26] How would you react? Would you buy any of these products or would you say, I won't choose any of these? [31:30] These are more like shopping scenarios for your products.

[31:34] but it's realistic and it's akin to real life. [31:38] based on how they choose these products [31:40] what we are trying to reveal is the mental models and rules that people use to make decisions. So for instance, if I add certain amount of features and increase the price, people say, you know what? I'm not going to buy anything more. What that actually tells you is like, [31:52] the addition of those features, people were not willing to pay the addition in terms of price. So they would actually opt out of the lineup that you actually have for your customers. [32:01] So these kind of things, if you do these kind of exercises, you can get more precise on things like price elasticity, build some simulation models, try to understand how the market would react, etc. [32:12] and different methods are actually applicable at different stages of a product and different stages of a company. [32:18] If you're very early stage, let's say just an idea, just have the conversation. I mean, just even asking, would you pay for it is a good question. Because if someone says no, then ask why. Then you'll hear a lot of good information. If someone says yes. [32:32] Ask them, why would you pay for it? They would articulate back the value that they understood and that should be in your value messaging. Right. [32:38] So that's just a simple question. If you're somewhere in the middle, then maybe some of these, if you're in the series A or seed stage, maybe some of the purchase property questions, all of these things can actually be a quick and dirty way to at least get to an answer and a point of view. [32:52] or if you're launching a product and it's in late stage or [32:56] late stage in the product or the company life cycle and you need to get more precise [33:00] in terms of like your pricing and packaging strategy, then some of the methods are around trade-off exercises. Mostly all of these things become incredibly relevant.

[33:09] Sorry, it was a long answer, but there are so many methods. It's all summarized in chapter 4. [33:13] So just one chapter to read in the book. That was perfect. Thank you. Amazing. [33:18] You mentioned that you want to ask why a lot, and that's something you talk about in your book a [33:23] 50% of your questions should be why after they answer these questions. Is that right? Right. [33:28] That's absolutely right. Yeah. [33:30] Cool. I was tempted to ask you why, but that would have not been very relevant. [33:34] Nope, not in this question. I'll hear it out later. [33:38] Can you talk about logistically, how are you asking these questions? Is this a meeting specifically you set up with a potential customer to talk about pricing? [33:46] Does it come at the end of [33:48] here, I'm pitching you on this product, or I'm trying to get desirability user research feedback. Like, what's... [33:52] What does that meeting set up for on behalf of the customer? [33:55] It's usually either a one-on-one conversation with the customer or, [34:00] much early stage, you're a founder and you're having a conversation. [34:03] It's basically you're pitching the idea and trying to understand [34:06] Not just product market fit, but a product market pricing fit. [34:09] Let's say if you're a bit more late stage and you have a cross-functional team, this could be a conversation that the sales teams could actually be having along with the product teams. [34:17] To actually understand this, that's also what happens in companies like LinkedIn. For instance, when they launch a new innovation, [34:22] The team has to book in a [34:25] credit card or lock in a budget from a customer for pilot POCs and everything else. And if they don't, they don't necessarily go down the route of productizing it because they didn't [34:33] I mean, there was no final verdict on whether people would actually pay for these kind of innovations, right? [34:38] That's kind of how I see it. So it depends. If it's early stage, more like founder-led early conversations. If it's more late stage than a cross-functional conversation. But usually it's

[34:48] It's a one-on-one with the company. It could be multiple decision-makers. Increasingly in B2B SaaS, for instance, it's not just one person deciding on a software budget, it's like a team. [35:00] So it's usually done with the team having that kind of conversation. [35:03] It can also be done in terms of focus groups where you bring in [35:07] a set of customers and then you sort of mediate and moderate [35:11] you know, answers and trying to get to like, what is the right thing to do? [35:14] And often we also do a quantitative version of this where we are doing more tests and learn through either A/B testing or most importantly through control surveys that we would actually have. [35:25] invite participants to actually participate and then they would give their opinions on these various concepts that we're actually testing. And then we try to understand what is the willingness to pay in the market based on those kind of responses. [35:37] from a basic qualitative [35:39] one-on-one validation all the way to more quantitative testing using [35:44] other instruments. [35:45] So this is usually a part of a larger customer development product market fit discussion. Like here's a product we're thinking, here's like classic user research, [35:53] Is our ability discussion? And at the end, you kind of talk about willingness to pay stuff. [35:58] Yeah, exactly. I mean, I would think of it as... [36:01] I wouldn't say necessarily user research. It's a bit before that. I mean, user research probably gets more into usability and how people actually use it. [36:09] This is a one step before conversation where you're trying to understand [36:13] you know, testing and learning whether people buy into your idea, do they see the value, is there an ROI?

[36:19] and frankly, what needs are you actually solving in the market? These people can articulate all day long. [36:26] What is their jobs to be done or what is their needs pain point? [36:30] What product to build is your job in some way as a product person? [36:33] But when you showcase the product and say, okay, this is the product that I'm building, which will actually meet this need. [36:38] You want to see if people's eyes slide up. And that's also when you need to have the willingness to pay conversation. [36:43] Because it's not just about saying, but actually meaning what you say. And that can only be bought in if you actually use willingness to pay in the conversation. Otherwise, it's a bit of an empty, self-fulfilling conversation often. [36:55] Then when you actually do this more and more, like I said, iterating or refining things, [37:02] then you can bring this into other pieces of the conversation. [37:05] and gets more smarter before you launch the product. [37:08] Do you have a rule of thumb of how many people you should talk to at least to get a pretty good sense of maybe we've gotten some... [37:15] Yeah, I get this question all the time. And I say, please talk to one person. I mean, jokes apart, because most companies are not even doing that. [37:23] But in terms of willingness to pay conversations. [37:26] But, you know, I mean, if you're, let's say, [37:29] A, B to C company, of course, you have scale in terms of reaching customers. You might have [37:33] you know, 100,000s and millions of customers, consumers. In those kind of situations, more of a quantitative validation might be easier to run. So if you get even a [37:41] 1,000, 2,000 responses that could be statistically significant and easy to do and pull off. [37:46] If you're like a B2B SaaS company and you have [37:49] you know you're focusing on let's say 20 to 30 accounts leading 80 to 90 percent of your business

[37:54] Try to talk to as many of those as possible, so like at least, uh, [37:58] you know, in the 20 to 30 kind of ballpark. And often in these conversations, after a point, you start hearing stuff repeatedly. I mean, if 20 people tell you the idea is horrible, it is horrible. You can test it all you want. Right. I mean, so when you start hearing these kind of things, then you pivot. [38:13] And then once you have your initial thought on what pricing should be, how often do you suggest folks iterate on their pricing? [38:21] strategy. Yeah. [38:22] Usually we say at least every six months pass and think whether you should revisit it. [38:27] Within 12 to 18 months, probably there is time to revisit, especially given market dynamics in most industry verticals that people are in today. [38:36] And also there are some pivot points where it will make sense to think about this, like you're introducing a new plan or you're introducing some new features, all of those kind of moments in time. [38:46] from a product journey standpoint. [38:48] would necessitate having this conversation. [38:51] Got it. Final question on this topic, which we've spent, I think, half an hour on, which is awesome because it's probably the most important to start with. But there's going to be a. [38:58] Deep episode. What's the first thing that a founder or PM should do to go down the route of willingness to pay if they were to start something on Monday? [39:06] First of all, start educating yourself that there is science on this topic. It's not just an art. [39:11] Get confidence that people have done this before, not only just startups, but like companies like Porsche. [39:16] And then read Chapter 4 and do it. [39:19] Okay, topic two. [39:21] which I know is really a big deal to you and a core part of the way you think about it in addition to willingness to pay and its segmentation.

[39:29] Thinking about how to segment your customers and product. [39:32] So can you just talk about broadly why is this so important to think about, segmentation, when you're thinking about pricing? [39:37] Look, segmentation is a topic, again, just like product market fit is a well understood term for many of your listeners. [39:44] Like when we go and ask companies, you know, do you have a segmentation strategy? Roughly about 60% would say, yeah, we have it. [39:50] And then when we check it, probably 10% of them actually have a meaningful segmentation strategy. [39:55] What I mean by this is, [39:57] Most people think of segmentation as a demographic or persona exercise or [40:02] How do I position this product to different personas and things? [40:06] and they get it horribly wrong i mean tongue and cheek i'll give you this example if you think about [40:10] a person who is 70 plus years old, lives in a castle incredibly wealthy in the United Kingdom, [40:16] You'll probably think about Charles, but that also fits Ozzy Osbourne. [40:19] And I would probably measure that both of them have dramatically different tastes. [40:23] need different things, value things differently, and are willing to pay for things differently. [40:28] If you just base things on persona, you often get it wrong. [40:31] Segmentation needs to be based on what customers need, what they value, and what are they willing to pay for. And how do you productize package to different segments? [40:39] So the key lesson that I want your listeners to take away is, [40:45] You need to be able to productize the segments. [40:48] If you're trying to build a product and try to position it to different segments, you already lost the battle. [40:53] because segmentation comes down to needs and understanding needs. [40:57] and building products based on those needs and willingness to pay, so that you can treat your customers differently.

[41:03] Because if you build the same product and want to treat everyone similarly and say you have a segmentation strategy, you actually don't have it. [41:10] Right. I mean, take a simple example. You know, if you think about the water that we drink in a fountain, it's free. [41:16] In a bottle, it's $2. You put gas in it, it's $2.50. Throw it in a minibar, it's $5. It's the same damn water. [41:23] But it's packaged productized differently because people have different needs. I mean, I'm price conscious. I want it in a fountain. I want it to carry it around. I probably take it in a bottle. I like the taste. I take gas in it. [41:34] or I'm just simply ultimately lazy and I would pay the $5 till I get it out of the minibar and not go down the hotel lobby and get it for free. [41:41] because that's my need. If you don't understand these kinds of needs, you will never be able to productize to those needs. So you will just build one product and try to position it to the different [41:51] needs-based segments and you won't get it right for anyone. And we've worked with all kinds of industry verticals. We have not found a single... [42:00] vertical where our customer, where their clients' needs are homogenous. It is heterogeneous whether you want to accept it or not. [42:08] If you accept it, then you would start getting into the heart of segmentation and say, where is that heterogeneity? [42:15] How do the needs differ in the market? How does the willingness to pay differ in the market? And what can I productize to different needs and willingness to pay segments? So productizing to segments as opposed to building one, [42:26] and positioning it to different segments. I mean, usually when I walk into these companies, they'll say we are building a one size fits all. I would quickly collect them and say one size fits none.

[42:35] So it's a bit of that. [42:36] That's why this topic is deep because [42:38] People get the definition of segmentation wrong. [42:42] So segments are something that people hear often and I think, like you said, sort of understand. And to your point, they think they've kind of done segmentation. [42:52] But again, to your point, a lot of times they do it wrong. [42:55] You have this framework that is really interesting, this one phrase they use. [42:59] You can act differently. [43:01] to help you think about [43:02] of whether a segment makes sense and how to think about segmentation. So, [43:06] Can you just talk about what's a sign your segmentation is correct versus not, and maybe how to think about this framework? [43:11] So the three most important words in what you said is you act differently. [43:15] So you as in your product teams, your sales teams, your marketing teams, your finance teams, [43:22] Act as in come up with new products, build a business case, come up with the product marketing messages, sales strategies. [43:29] differently as in [43:30] There's no point in doing segmentation and having the same reaction or treatment to everyone. You need to be able to act differently. [43:37] So what that means is if I know what you need, what you're willing to pay for, you know, and what you value, then my conversation with you will be different than someone else who needs something else and is willing to pay something else. I productize something for Lenny and I productize something else for the others. [43:54] The key here is to understand if there is a significant [43:57] let's say total available market or size of the market where the needs are similar and they're willing to pay. As in, let's try to find all the people who would want to drink water in a fountain. Let's find the people who want to drink it in a bottle. Let's find the people who want to have gas. Would they pay for it? And then when you understand these segments, then you can say, OK, what do I build for these different segments?

[44:18] and then focus on that segment when you launch the product. [44:21] Have the marketing message for that segment and target that segment. [44:25] as opposed to just building one thing and hoping that somehow these four groups will sort themselves out into your product. [44:32] And that's the key thing. [44:33] When should early stage founders think about segmentation? Do you suggest that it's like right from the beginning, the first product should have multiple segments or does it come later? There's also an often asked question in the sense that as a startup, as an early stage founder, [44:46] Often the excuses like, "Hey, we don't have time. We're actually putting stuff out of the wall. We need to get something out there. Time is of the essence. We need to build a product." [44:56] And usually they would say, let's build just a product. [44:58] which is like every awesome thing that we are working on. [45:02] and then we come back and revisit whether we want to build other versions, etc. [45:06] and we don't have resources to even build multiple products. [45:09] Well. [45:09] That kind of logic makes sense when you don't understand the concept of segmentation. [45:14] If you truly understand the concept of segmentation, you would say, you know what, as a first conversation, when you're having that willingness to pay conversation, [45:20] Based on your idea, [45:22] you'd say, "Who's actually willing to pay for this innovation?" [45:25] You know, what do they need? [45:26] How many of them are there? [45:28] Can we productize to this first compared to the others? Then you start prioritizing not only your R&D roadmap, but you're resourcing to say, [45:35] Which segment should I start with? [45:37] And then what segments would I actually add? [45:40] and then your value messaging would be tailored to that segment. People will understand the benefits. They will say, [45:45] your product will be launched and people will get it and they would actually go for it.

[45:50] So having done this exercise early will tell you how many segments are there, [45:56] what is the size of these segments, [45:58] how to prioritize them, [46:00] which one to pick first and which product to build first for that segment, and then productize to the other segments later. [46:07] If you're lazy and sloppy, you'll build a product, you'll slap on a price, you'll throw it in the market and say, I will attract everyone. You'll attract no one. [46:14] Amazing. [46:15] So basically, understand the segments right from the beginning. [46:19] Don't necessarily launch products for every segment. Exactly. That's totally acceptable because, I mean, it's not like everyone has resourcing to launch five products, five segments, everything else. Complexity. I mean, and plus, you don't probably want to be too complex when you're launching a product. But focus on the right segment and launch it for that first. [46:38] Today's episode is brought to you by Miro. Creating a product, especially one that your users can't live without, is damn hard. [46:49] ideas, get feedback, and being able to iterate quickly. That's where Miro comes in. Miro is an online visual whiteboard that's designed specifically for teams like yours. I actually use Miro to come up with a plan for this very ad. With Miro, you can build out your product strategy by brainstorming with sticky notes, comments, live reactions, voting tools, even a timer to keep your team on track. You can also bring your whole distributed team together [47:19] Thank you.

[47:49] Are there any examples? You shared this water example, which I love, that's really clear. By the way, you forgot to mention Liquid Death, which I think is like $8 water in a can that just looks really cool. [47:59] Yeah, keep getting these tweets from Peter. Yes, I mean, uh, [48:03] I love the product, actually. It's like water packaged as a [48:07] An $8 product, so it's great. [48:10] I mean, that's a segment of customers that love that. Oh, I love that. The VC wants you to include that as an example as you talk about water. Exactly. We'll do from next time. Liquid Death 8 bucks. Yeah. Any other examples is kind of the premise of my question. I would probably start with like a few [48:26] obvious and famous example so that you just remember the point in some way and then we can drill down you know further if needed [48:34] But if you look at, for instance, Apple, right? [48:36] Let's assume the conversation on Apple was something like this. Hey, we need to just build one product, one iPhone, because we need to maximize our market share and we will throw it out and slap on a price and hope to get the market. [48:50] They wouldn't be the most profitable company in the planet today. [48:53] What did they actually do? There is an iPhone for $299, $399, $[redacted address] to $1499. [48:59] They have built products to different segments. I remember walking into the [49:03] Apple Store when iPhone X was launched, [49:06] I didn't want to part with, you know, $1,000. [49:08] I was checking the phone out and I looked at the features. I really didn't want the retina features and all these kind of benefits. [49:17] And then I saw that there was a phone without that.

[49:19] for $7.99 and I picked the 8S and I walked out. I belong to that segment. I was not belonging to the iPhone X. But there's a product that has been productized for different needs segments. [49:31] And if you look deeply, Apple is not just priced their iPhones, they're productized to different price points and willingness to pay. [49:39] and that's where it gets actually fascinating. I think that's a great example of understanding differentiation. [49:44] And then sort of... [49:46] product ties to different needs. I think that's a good example. [49:51] Another one that comes to mind, you know, where we worked with, [49:54] This was in the pre-IPO days. [49:57] you know even bright which is a [49:59] B2B, a SaaS company, they used to have a one-to-one [50:02] one product that was actually servicing all of their customers, [50:06] And then we went through an exercise of understanding who are their customer segments and how do we productize [50:11] to different segment needs. [50:13] And if you look at what they have today, they have like three plans. [50:16] and because the segments behind this, [50:19] And if you look at the plans, like there are plans like for instance, the NP level plan has [50:23] as something like you can only launch an event with like one ticket type, like a general admission. [50:29] Right, okay. [50:30] And then if you take the middle plan, it has unlimited entry types. So you can have a general admission, a VIP admission, whatever, when you're actually having events. [50:38] It actually makes sense because if you're, let's say, hosting, [50:41] your local wine club meetup, whatever event, you probably just need the general admission and that's it. But if you actually are a bit more professional and you needed multiple event types and you're having an event of that nature,

[50:55] then there's another product that actually appeals. But because of doing this, the one that has only one event type, that product is cheaper than the other one. [51:02] So there's an essential product and there's a professional product and they have enterprise product. [51:06] So this comes down to truly understanding what customers need, what they value, and what they're willing to pay for, and how can we productize towards that. [51:14] Right? [51:14] Maybe another example that is obvious and in front of us when we use our apps, like Uber is a great example of also segmentation, right? [51:22] because you have different car types. I mean, if they just had one car type, then okay, then that's a very different company, very different strategy. There's an Uber Black. [51:31] UberX, we used to even have the Uber pool pre-pandemic. I don't know if it's back now. [51:35] I think it's back. It's back? Great. [51:37] And, you know, they also launched this thing called Comfort, which is a bit between Black and Uber X in terms of both price and also the types of cars. [51:46] but it comes with certain features. Like for instance, you can say, you know, quite preferred, [51:50] on a comforter or a black and that's literally why i take one of these because [51:55] I'm probably working on my Uber ride over and I like to just have the quiet and just work on things. And I'm willing to pay for that. And I belong in a different segment. [52:05] But of course, if I'm using [52:07] Let's say, [52:08] Uber for my everyday commute sometime, maybe I do pool. I mean, so depending on even my point in time or depending on my situation, I might actually belong to different segments. And understanding this and then productizing towards that becomes key. So the topic that we have been focused with many companies nowadays is not just doing a static view or segmentation, but truly understanding dynamic segmentation and how to offer product and services around

[52:37] the fact that people switch segments. So like if I'm ordering on a Friday night on a food delivery platform, maybe I'm thinking pizza. Tuesday afternoon during my office time, maybe I'm thinking of like a different type of cuisine. So if I know all of these things, healthy choices, when can I productize what, then you actually start getting into dynamic views of segmentation and the technology around us actually allows us to take a very dynamic view at segments and that's [53:07] There are multiple steps. [53:09] First, do the segmentation right. That's the basic. [53:13] getting at a static view. [53:14] Maybe if it's relevant, even a dynamic view of this is the next frontier. [53:19] What you shared just now reminded me of another really interesting framework in your book. [53:23] around pricing strategy and you talk a lot about just like how important it is one to just write down your strategy and why you think this is the right strategy. [53:30] But specifically, you have these kind of concepts of, [53:32] either want to be maximizing, you want to be penetrating, or you want to be skimming. [53:37] And I thought this would be a good time to chat a little bit about that. Can you just talk about what these three strategies are? [53:42] Sure. When we talk about pricing strategies, we hear... [53:46] many buzzwords and it's it's irrelevant i mean so when we take a step back and look at it there's literally only three types of pricing strategies [53:53] And if you know this, then you can follow one of these in [53:56] Build Breakthrough Success products. [53:58] The first one is skimming strategy, which is like your Apple iPhone. They launch at a particular price. The next generation is probably at a higher price, but the previous generation actually goes down. So they launch at a higher price and then they start lowering the price. So they're skimming the market.

[54:13] And connotation of these kind of products is also it's a premium product. [54:17] Price is a signal of quality, etc. [54:20] If you take penetration, that's probably made famous by Amazon. [54:24] And Amazon, you know, I mean, they're probably operating at, [54:27] much thinner margins, but they're playing the volume game. [54:30] Much more harder game to play because you need to have all of your costs and order, supply chain, everything else, and you're fine tuning towards the volume game. [54:38] Often I see entrepreneurs who say, let's just price low to gain growth. That's a fallacy. [54:44] I mean, if you don't have a business model that actually supports this compared to Amazon, then... [54:48] You probably shouldn't be in a penetration strategy. [54:51] And even in a company like Amazon and AWS has a very different strategy compared to their e-commerce marketplace. Right. I mean, so within even business units, you can actually have different. [55:00] pricing strategies. And the third one is just maximization, which is you're neither on these two extremes, but a bit in between. And you're saying, okay, what can I, [55:07] maximize in the next couple of years. [55:09] I mean, in my opinion, at least, [55:11] Microsoft would probably belong in that kind of category. And if I look at [55:15] Apple, Microsoft, Amazon. [55:17] Companies that reached trillion valuations in our lifetime, probably the only three in some way, shape or form. [55:23] They have dramatically different pricing strategies. [55:25] The point is not about just picking one, but it's about executing the one that you actually pick. And that's also what we write about in the book. [55:33] How to pick one. Not just pick one. But how to. [55:36] Build your products around this, execute it, live and breathe it. [55:40] business model strategy, which leads to your pricing strategy.

[55:44] Amazing. I just want to say I love how deep we're getting into all these topics. This is amazing. [55:48] One final question on this topic, and then we'll get to the next, and the rest will be quicker. We're spending a lot of time on each, which I love. [55:56] You talk a lot about the importance of packaging and bundling and how that alone can help you win a segment versus even the price of the segment. [56:04] Can you talk about how to think about the importance of that? [56:06] The way to unlock your segmentation is to think about [56:09] bundling and packaging [56:10] as in you're configuring your product, [56:13] based on what customers need, what they value and what they're willing to pay for. Either you put a bunch of benefits that people like and call it packaging and put that out, or you're taking multiple products and calling it bundling and putting that out. So, [56:24] It's a question of, that's the way you unlock segments, your productizing. It's like the iPhone X versus the iPhone 8S, different products, different features, different packages, etc., right? [56:36] The way the quick framework to think about [56:38] packaging bundling, you know, we call it the leaders, fillers and killers exercise of framework. [56:43] So if you think about the classic, let's say bundle, like a Big Mac or a Happy Meal, [56:49] I mean, the Big Mac is the [56:51] need a product that's in the Happy Meal. That's what people go for in a [56:55] And then they go to McDonald's. [56:56] When you look at french fries and coke, those are the fillers. You can put a burger along with french fries and coke, call it a happy meal. [57:03] and you know most people who wouldn't have bought a french fry or cook but if you just say for a dollar or two more [57:08] you know, you can actually get this, they would say, let's get the happy meal. So you're actually bundling it in such a way that, [57:13] with

[57:14] you know, marginal increase in price, you're also able to sell multiple products, right? [57:20] which they wouldn't have if you didn't have it. [57:22] The killer is the one where if you put it in the product, it just kills the bundle for everyone. [57:27] So like, for instance, if you put coffee along with French fries and a Coke and a burger, that's just going to kill the bundle. No one needs a double dose of caffeine when they're having a burger. [57:37] But there are people like me, Lenny, who love to have coffee with their burgers. [57:41] So these are great candidates for selling them as add-ons. [57:44] I would pay for the add-on because I actually won the coffee. I would take the burger stand alone and I would take the coffee stand alone. [57:52] And that's why it's actually listed separately in the menus. [57:55] If you bundle it, [57:57] What happens is it just depreciates the willingness to pay across the entire customer base to the point where no one actually wants it. [58:04] So you need to find... [58:05] pockets of customers who want it and then maybe only sell it to them. So the rule of thumb that I usually say is, [58:11] You know, if, [58:11] 10 to 20% of your customers want something and they really want it badly. That's usually an add-on. That's not something that goes into a package unless you have an advanced package just for them kind of thing. [58:22] And if more than 50% of people want something, that's a leader product. [58:26] So if you understand all these leaders, killers and killers, [58:28] then you can configure your product in such a way that you're productizing the segments and you'll unlock. [58:34] maximum value. [58:36] Your example reminds me, I just went to In-N-Out yesterday. [58:39] and how I don't think they've changed their model ever. [58:43] Somehow it just works. They nailed it. It

[58:45] somehow works. I think In-N-Out has, that's a story for another day. I think it works for a different reason. Some people, yeah. All right. And then the other thought I had while you're talking is understanding who the leaders are and the fillers and the killers, [58:57] comes from these willingness to pay conversations. I imagine the stuff that people stack rank [59:01] at the top is most likely going to be your leaders. [59:04] Yes, exactly. So when you do those most and least kind of questions and you stack rank them, [59:10] The must-haves will pay or must-have table stakes would be the lead-up. [59:15] products or leader features or benefits. [59:17] you know, the ones that are nice to have and might consider paying or nice to have, [59:23] Those kind of features are probably the fillers. [59:25] and they don't need other killers. [59:27] Awesome. Don't need or will not pay. Got it. Interesting. When I saw you write about killers, I always thought it was like things that it needs to have that would kill the deal if they don't, but that makes a lot more sense that it kills the deal if it includes it. Interesting. Includes it. Exactly. Maybe we should change the language in the next. [59:42] sequence monetizing innovation but don't change anything [59:45] All right, good. [59:47] All right, third topic. [59:48] around your pricing model. [59:50] This is something that you talk a lot about that people think too much about how much to charge. [59:55] and not enough about how to actually charge the pricing model. [59:59] So can you just talk about maybe what that is and why people maybe don't think about it as much as they should? [1:00:04] We usually say how you charge is way more important than how much you charge. [1:00:08] Take a quick example and bring the point home and then we can talk about why this is actually essential. [1:00:14] So like taking a non-SaaS or software example, if you think about Michelin, which is like a tire company,

[1:00:21] probably one of the most price sensitive, let's say, markets. Because I mean, think about it, you actually go into a tire store, [1:00:27] You see all of these things look similar. [1:00:30] But they're somehow priced differently. How are you supposed to make a decision? I mean, it's very hard. [1:00:34] When you need to understand what you're paying for. [1:00:36] They came up with this new tire which was supposed to last 20% longer. It was a true innovation in the industry. [1:00:41] And these were tires that were used for moving trucks from point A to point B, right? [1:00:47] And when they thought about it, they said, OK, if we go and ask for a 20 percent premium, there's no chance they would get it because it's a price sensitive market. Right. [1:00:55] If they don't ask it, the tires are going to overrun and they're going to cannibalize 20% of their business. [1:01:00] So what they actually did was they changed their pricing model or monetization model [1:01:04] And they said, okay, we are going to charge based on the number of miles that a person would drive. [1:01:09] The truckers actually loved this model, right? Not just because it was pay-as-you-go and [1:01:14] They could pay when they actually use the tires and how and everything else. That was the obvious reason. [1:01:19] But now they could also invoice their end customers and say, okay, my... [1:01:23] You know, journey was 798 kilometers or miles, and that's the amount of tire costs, and they could pass it through because it became a variable cost. [1:01:31] People love this kind of model. [1:01:33] Of course, the tires lasted long, Michelin recoup, but more people jumped into the Michelin bandwagon because [1:01:40] Now they could actually buy a tireless on a pay-as-you-go basis. [1:01:44] Now, if a tire could be actually, I mean the age old model for tires is on a per tire basis. [1:01:50] If a tire could actually be sold on a pay-as-you-go,

[1:01:53] kind of consumption model [1:01:55] I mean, then obviously most products can actually explore this kind of route, especially in a software setting. [1:02:01] But the key lesson here is the how you charge was the most important question, was not the how much, the how much. [1:02:07] came about because of how you charge. Another SaaS example that is probably [1:02:12] Top of mind for me is B2B SaaS' segment. This was before they went [1:02:17] to Tullio. [1:02:19] They used to price based on APIs. So like, [1:02:22] the number of APIs that you actually have with segments [1:02:25] That used to dictate which plan you would be and how much you would pay for it. [1:02:29] But increasingly, they were also shifting gears towards selling to different personas within companies. [1:02:34] and what is an API is a debate. Probably a marketing person does not necessarily understand exactly what an API is. [1:02:41] The how you charge question became very critical. [1:02:44] And what they actually did was we worked with them and we, we, we, [1:02:48] kind of identify that monthly tracked users was a much better metric [1:02:53] into how customers perceive value and that was the more [1:02:56] fairer metric for customers. [1:02:58] Like, [1:02:59] If you're tracking more users in segment, you're probably willing to pay more compared if you're tracking less. So the packaging was changed to like a monthly track. [1:03:08] user instead of apis is literally [1:03:10] exactly the same Michelin per mile kind of models on a [1:03:13] B2B SaaS was number of monthly tracked users. [1:03:18] So that was a different example. So the how you charge question is, [1:03:21] Super important, way more important than how much.

[1:03:24] If you don't focus on it and just rush to one or the other, [1:03:28] Often you're suboptimizing like crazy. [1:03:30] It's interesting that both your examples are usage-based. [1:03:33] models winning and it feels like in general the usage base is kind of [1:03:37] where people were trying to go more and more. [1:03:39] Or maybe not. So maybe two questions. Do you feel like that's the future of SaaS? [1:03:44] pricing generally and roughly do you feel like that should be a default [1:03:48] way of approaching when you're building, say, a B2B SaaS company, or is it still seed-based? I would say it this way. It's like most B2B SaaS companies follow what is actually in vogue at that present point in time. If subscription is in vogue, then they say, oh, subscription is the best strategy. If usage is made famous by Snowflake and others, they would say usage, right? I mean, so I think [1:04:06] Usage is obviously [1:04:08] let's say, right now, [1:04:11] I think it comes down to really understanding based on your business situation, does subscription make sense or [1:04:18] Should you be usage or pay-as-you-go if you're a SaaS company? [1:04:21] I mean, there are different markers which actually identify this. [1:04:25] if customers demand, let's say, predictable bills, [1:04:28] or usage is very similar month over month, as in, [1:04:31] If you're subscribing for tight parts, for instance, it's not like you're going to wash more clothes one month versus the other. The usage is the same month over month. [1:04:39] When the usage is highly variable, which is changing quite a lot between month over month, and if you price based on, [1:04:45] pay as you go then your bills are also going to be dramatically different month one versus month two versus month three so you're going to have a [1:04:51] very tough conversation with your customers. [1:04:53] In all of these kind of situations, a subscription actually makes a lot more sense.

[1:04:57] Or it could also be like, [1:04:58] usage is intermittent, but the value delivered is ongoing. I mean, like LifeLock is a great example. [1:05:06] It's a product that you probably have to protect your identity theft protection. The value is ongoing. [1:05:11] The usage of the product is only episodic when your identity theft gets compromised. [1:05:15] I mean, if they say, "Okay, I'm going to price based on usage," that would be dramatically wrong pricing model, right? [1:05:20] So in those kind of cases, subscription makes sense. Or simplifying the pricing conversation is your advantage. Let's say the Spotify was a good example, right? Everyone used to listen on a per song basis, but having a subscription actually made sense. [1:05:34] It's simplified the pricing conversation, same as Netflix, all of those kind of situations. So don't just rush to something like usage. [1:05:41] just because understanding that is key. Usage makes sense when [1:05:46] People want low commit or less friction. [1:05:49] So like making it easier to buy like an AWS kind of thing, you know, you onboard people and then you grow over the product. And I think, [1:05:55] Those kind of situations make sense. Or when customers would demand transparency and fairness, [1:06:01] Please note that don't mix transparency and fairness with being predictable. Those are very different things. [1:06:08] Transparency and fairness just means that you charge for the product right. For instance, [1:06:12] If you don't use a subscription for a few months, is it fair that you're being charged for those months? That's fairness. That's nothing to do with being predictable. But if they're demanding fairness and transparency, often... [1:06:22] a usage-based pricing model could make sense. [1:06:25] Or alternatively, [1:06:26] You know, usage is intermittent and episodic.

[1:06:29] And the value delivered is also episodic and not ongoing like you. [1:06:33] For instance, book the movie theater ticket or you book the flight. [1:06:35] There's also intermittent usage, intermittent value. So the pay-as-you-go kind of makes sense. Or maybe there's even some underlying cost that scales with usage like an AWS. Pay-as-you-go can make sense or even... [1:06:47] Probably lastly, yeah. [1:06:48] If there's some most important thing for PSU goal-in-year-olds, [1:06:51] You need to have clear metrics. [1:06:53] that [1:06:54] you can actually track and identify an attribute value, and your customers would agree to that value generation, then pay-as-you-go would make sense. If you can't track what you're charging on, [1:07:04] Often it's a really bad idea. [1:07:06] And then, of course, you can also be more hybrid sometimes. And that's also a winning model. For instance, if you take HubSpot, [1:07:12] It's a hybrid model between a pay-as-equ and a subscription. [1:07:15] And it actually works well for them because there's a certain component on a fixed monthly basis. And then if you exceed those kind of quotas and limits, then you actually get into a pay-as-you-go model. So I would urge the readers not to... [1:07:26] rush into one versus the other based on what is in style at the given point in time. But give it a deep thought and say, you know, what is your business? How are your customers? How are they situated? What are you servicing? [1:07:37] and what makes sense between the two models. [1:07:40] Awesome. On the point of [1:07:42] being able to even track usage i've seen like five startup decks of startups that help companies with this because it's so complicated [1:07:49] to know what to charge. What is that? What to charge on usage-based models where they basically plug into your systems to help you figure out how much every company owns. [1:07:57] OZU. [1:07:58] Maybe a couple more questions on this topic. One is just like, what's a simple way of thinking about the options?

[1:08:03] say a B2B SaaS company, there's like [1:08:06] seed-based pricing, there's flat-based annual contract pricing, there's usage-based, [1:08:11] You can lop on freemium to make a free version of it. [1:08:14] Is that the four? What's kind of like a way to think about your options? For B2B SaaS, I think those are probably the options. I mean, your data subscription, pay-as-you-go, freemium, these kind of things. And of course, the price metric that you actually pick, [1:08:27] Like what measure are you charging on? [1:08:30] And then how do you structure the price structure that you pick is important because, for instance, are you flat for a certain amount of time and then it becomes variable? That's a structure. [1:08:39] Right. I mean, and then, or for instance, can you be two dimensional in your structure on two metrics? So like, [1:08:45] the more people actually use your product and take actions that benefit you, the better price you get. I mean, this is something we call as a value matrix, for instance, [1:08:54] I mean, in B2B SaaS companies that actually want [1:08:57] want to achieve like wall to wall adoption. I mean, in many companies, it's still a pipe dream. I mean, it's just, yeah, you can talk product-led growth, but if your pricing model [1:09:06] It actually incentivizes product-led growth. That's a whole different conversation. So what we would do is like, for instance, on one axis, you have seeds. [1:09:13] And on the other axis could be the number of departments that the product is being used at. [1:09:18] departments as HR, legal, etc. Right. [1:09:21] and then the more users and the more departments, you get a better per user price. So you've automatically built an incentive to actually say, if you want the better price, sure, you drive the right behaviors, which is get more people on the product and put it in the hands of more departments. So people can self-govern their pricing as opposed to just, you know, you come up with a price and you're just negotiating, right? So when you think about

[1:09:42] pricing models, you have to think about first picking pay-as-you-go subscription freemium, [1:09:47] Then thinking about the metrics. [1:09:49] And then thinking about the price structure. [1:09:51] Awesome. And maybe one more example, say marketplaces. [1:09:55] Basically, you're taking a fee in almost every case, and it's a question of how much you take, and then there's maybe a subscription piece on top of it. [1:10:03] Is that roughly right? [1:10:04] Yeah, absolutely. So you could take a rake on the transaction and there's probably a platform fee or a subscription fee. So that comes down to, again, a hybrid or a structure. So there's a portion that is predictable and then there's a portion that is the usage base. It's a bit [1:10:18] It's not a rake-based model, but it's similar to the HubSpot model in principle. Okay, one last question on this topic. [1:10:23] So you want to test different models. Say you're, say, seat based, and you want to try usage based. So you want to your usage base, you want to go seat. [1:10:29] Is that possible? If so, how do you do that? It's definitely possible. There are ways to test this. It's a science. [1:10:36] I mean, this is also what we do with many of our clients for a living, but maybe the easy Monday morning thing that I can actually ask your clients. [1:10:43] Listeners to do. [1:10:44] is what we call as a break-even exercise. [1:10:47] So let's assume that for instance, [1:10:49] Let's take a marketplace. Let's say you're selling, [1:10:53] $1, $100 item, as in your customer is selling it. [1:10:58] If you ask them, what should the pricing model be, 3%, [1:11:02] Transaction fee on a $100 item. [1:11:05] or 1.5% transaction in $1.50. [1:11:08] or $3 or are you indifferent? [1:11:11] This is a basic question because if you do the math,

[1:11:13] All of those numbers are the same. So an economic human being, rational, [1:11:17] Everything that business school taught us would say, okay, people will pick the indifferent options. [1:11:22] I mean I've done this thousands of times. [1:11:24] I've never seen the Indifferent actually win. [1:11:27] It's always people who pick one or the other. So then you actually start understanding what kind of model might make sense. I mean, same thing with B2B SaaS companies. You would say, let's say you have 100 seats and I would charge you, let's say, [1:11:39] $1,000 and $10 per seat. [1:11:42] or I would charge you $2,000. [1:11:45] flat or I would charge you $500 and the rest in the seed base amount that equals $1,500. [1:11:53] It's all the same. People would say, "I like the lower platform P and the variable," or they would say, "I like the fakes." So the indifferent never wins. That's an easy way to test. [1:12:03] pricing models, what makes sense. Awesome. That brings us to our fourth topic, [1:12:09] And I think this is something that everyone listening is going to be like, oh, no, I got this. I'm doing this great. [1:12:13] I don't need to learn about this. But your point is that it's almost always wrong. [1:12:18] which is focusing on benefits versus features when you're talking about your product. [1:12:23] So maybe as a first question, just what's a sign that you're probably [1:12:26] focusing too much on the features of your product when you're pitching it versus the benefits, which is to your point much more powerful. [1:12:32] I think I see some... [1:12:35] telltale markers or pattern recognition as to when people are talking more features as opposed to benefits. I mean, first of all, just to set the nomenclature right, what you build as a product person is features. What people actually get out of it is the benefits as like, what do the features actually do?

[1:12:50] and that's the benefit that a customer gets. And you need to pitch benefits. If you pitch features, you're not talking value. And if you're not talking value, no one is going to get it. [1:12:58] So if you are super excited about the product and passionate about every single thing that the product is doing, [1:13:04] most likely you're talking features and not benefits because you're showcasing how cool your product is and [1:13:09] how the [1:13:11] different bells and whistles actually work as opposed to focusing on what is the actual benefit for the customer. [1:13:16] there are probably also other signs like for instance if you [1:13:19] If you don't see market traction for what you actually built, [1:13:23] It is, I mean, either what you built is off base, but in the good outcome of this could be that people actually don't understand what they're getting. [1:13:32] And then actually then changing the speak to being more benefits is key. [1:13:37] To take an example, for instance, SmugMug, [1:13:40] which is a ridiculously awesome company. [1:13:43] They used to actually publish their pricing plans, which was like you had to scroll literally three or four pages and then you would see. [1:13:49] The price, it's all the features, everything else that the company did. [1:13:53] They changed it to... [1:13:55] benefits-based communication. So like a very simple thing, like for instance, the ability [1:13:59] to sell photos online is a benefit. There are probably 15 features that is behind that that actually enables that stuff. [1:14:05] but then focusing on the benefits, they had a double-digit improvement in revenue, no changes in products. [1:14:11] We show the before and after also in monetizing innovation, if someone is interested in what it was, was what they actually did. [1:14:17] So, [1:14:18] If you don't see enough fraction, that could be a marker coming back to your question or it could

[1:14:23] It could just be that if you're too passionate about your products, then your chances are as a product person, you're talking features. [1:14:29] Is there any other examples of companies that you think do this super well to make it even more concrete? [1:14:34] To take a, let's say, non-SaaS example, my favorite, I'll come back to Porsche again because their value communication is [1:14:41] To me, a legendary. Like when they launched Tekkan, which is an electric car, [1:14:45] Their value communication was something like this. I'm trying to remember it, but it was something like, [1:14:49] Taycan is not your most affordable electric vehicle, but that was never Porsche's goal. [1:14:54] Porsche's goal was to actually build a car that was first and foremost a Porsche. [1:14:58] That kind of value statement, what they actually built, totally resonates with their audience. [1:15:05] Taking a maybe SaaS example, [1:15:08] Shopify is one of my favorites in terms of like looking at the plans in terms of their benefit, like what do they actually put out? [1:15:14] All of the plans emphasize benefits. [1:15:16] and less features like for instance [1:15:20] the number of locations that you can track inventory is a benefit, because if you actually have a more complicated supply chain, it's different from, [1:15:28] a lot. [1:15:29] So there are plants which actually, you know, have different number of inventory locations, which is a benefit that I mean, if I can track more or not. [1:15:35] But behind this, there could be many features that actually enable this. [1:15:39] So if you look at the [1:15:41] the plans that Shopify has. I think, [1:15:44] That's a great example. And also they have a lot of, [1:15:47] good value communication in there. I remember something like, [1:15:51] The tagline for Shopify Plus was "Fair pricing, unfair advantage."

[1:15:55] and just things that actually make bloody sense, then you see it, what you're actually getting. [1:16:00] So I think that's a great example that listeners can go and see. Maybe as a takeaway, folks should probably look at their website, browse through their pages and just look, am I pitching features or am I pitching benefits to the reader? [1:16:10] Correct, correct, exactly. [1:16:13] That brings us to our very final topic. [1:16:15] which is behavioral pricing. You have a whole chapter on this concept of behavioral pricing. [1:16:20] And it's super interesting. [1:16:21] And it's interesting because you don't have to rethink your price. You could just sell at a higher rate by just thinking through this lens of behavioral pricing. [1:16:30] So just to set context, what is behavioral pricing and why is it important? [1:16:34] The behavioral pricing basically is [1:16:37] tapping into the irrational modes of our decision making and not just rational. [1:16:42] I think that when I talked about the break-even exercise, [1:16:45] If you take a very rational view, indifferent would always win. But like I said, [1:16:49] I have never seen it. [1:16:51] So there's always a, you know, irrational side of our brain that actually makes decisions and understanding this as a product person. [1:16:58] would lend yourself to building products and also, [1:17:01] positioning or framing the product conversation in such a way that appeals to both sides of the brain. [1:17:06] The Predictably Irrational was a great book from Dan Ariely, made the concept very famous. [1:17:12] We build on top of that where we actually talk about product and pricing strategies. [1:17:17] that actually [1:17:18] You need to take care when you think about the irrational side. That's what we call behavioral pricing. [1:17:23] To take a concrete example, and he may be

[1:17:26] you know i i remember walking into a company and and and they had three [1:17:31] products and I remember asking the CEO, [1:17:33] Why do you have three products? And he said, I learned that good, better, best is a great strategy in business school. [1:17:38] So I'm like, okay, that sounds great. [1:17:40] But when you actually look at [1:17:42] what was going on, they were giving the farm away on their entry-level product. [1:17:46] So they had three products, $49.79 and $149. That was the price points. And what they... [1:17:50] Actually, what we're doing is they gave a lot of features for the 49. So they were giving the farm away. So 60 to 70% of people were taking the $49 product. [1:17:58] Not many are actually opting to the others. [1:18:01] What they did was actually super interesting. They just reframed the argument. [1:18:06] And they found out that [1:18:07] Between 79 to 99, the pricing was inelastic and there's a threshold at 99, not at 79. [1:18:14] It is the same exercise that I talked about in the acceptable and expensive price, etc. [1:18:18] So they moved the price from 79 to 99. [1:18:21] And they moved the price of the $149 to like $199. [1:18:24] because of the same kind of reasoning. [1:18:27] And then what they actually did is they built another product that [1:18:31] 299 which was simply a decoy. [1:18:34] to make the $99 product look attractive. [1:18:36] So if I put a $99 product that looks awesome, [1:18:40] Next to a $299 product, it looks even more attractive. [1:18:43] I mean, God bless the 2% that even take the $299 product, right? [1:18:48] But what you actually see is the mix shifted. More people took the $99 product because the pricing made sense. It was respecting the psychological thresholds and next to a decoy,

[1:18:57] it actually made more sense to pick that product. I mean, so this is just reframing the conversation. [1:19:01] It was a 30 plus percent increase in MRR and ARPU right after they actually did this change. No changes in products, no changes in features, just in terms of how they reframed the conversation. I mean, [1:19:13] These kind of things. [1:19:15] are around us and we need to understand these. For instance, if you go to a movie theater, [1:19:20] You'll see a small popcorn for $7. [1:19:22] An extra large popcorn with butter on it. [1:19:24] Huge one is a dullest. [1:19:26] Most people will say for $1, I'm getting this extra large one. Let me buy it. [1:19:30] But that $7 popcorn is a decoy. I mean, [1:19:33] If that was not there, most people would be scratching their head saying, why am I paying $[redacted address]? [1:19:38] So this kind of behavioral framing and nudging becomes important. It's not about [1:19:42] deceiving your customers, etc. But it's just about framing the products in such a way that it also appeals to the irrational side of the brain as much as the rational side. [1:19:51] The example that I talked about in the SaaS product on the three products and compromising to the 99 rather than going for the early product, [1:19:59] It's simply product discipline. Don't give too much away in your entry-level product. Don't give the farm away in your entry-level product. [1:20:05] sort of at least preserve something for the $99 product. So if you build the packaging correctly, [1:20:11] you can emphasize a compromise effect. [1:20:14] and there's a well-known behavioral theory where people avoid the extremes. If you're quality conscious, you go to the right. If you're budget conscious, you go to the left, but most people will compromise in between. If you actually see your packaging mix is like this and it's not the normal distribution, as in most people actually prefer the entry-level product, you're giving the farm away. Maybe you should think about how to change your features and benefits so that you can actually steer more

[1:20:39] outcomes towards a middle package compared to the entry level one, [1:20:43] And also then, you know, charge based on the value that you're actually bringing to the table. [1:20:48] So we have talked about [1:20:50] Many behavioral pricing strategies in the book dedicated an entire chapter to this. Could you actually share a few of them, just like some of these tactics that you find? I don't know if you have them in your head, but yeah, anything that you could share. You can talk about these topics all day long, and I'm probably going to keep telling you what I know, but tell me when you're bored. That's great, when you're bored. So there are a few, right? I mean, the compromise effect is a good, better, best that we talked about. [1:21:11] The next one is what we call as, let's say, pennies a day effect, or how you actually frame your pricing. [1:21:18] So like for instance, if I tell you, [1:21:20] 8. [1:21:21] $30 per month price [1:21:23] It's very different from $1 per day. [1:21:26] like the way you actually frame your price, if you can actually showcase some kind of bargain. Like AWS does this really well. [1:21:33] The price that you actually see is so less because also the units and consumption is so less. But of course, the bills stack up if you use it a lot. [1:21:40] But if that started with a higher price point compared to a lower price point, that could have been different. [1:21:46] you know, sort of situations. Similarly, for instance, [1:21:49] You know, when you take like... [1:21:51] Let's say you have a [1:21:52] monthly subscription in your SaaS business and you also have an annual subscription. [1:21:58] you need to showcase your annual subscription as a monthly price like if it's like for instance it is [1:22:03] $29.99 if you actually take an annual subscription, but it's 40 bucks a month if you actually do monthly subscription, but you're still messaging the price as a

[1:22:12] monthly price because if you actually just do the computation and say, okay, instead of saying $30 a month, I would end up saying it's $360 a year. That price could actually look like a higher price. But if you reframe it, it looks like a more attractive price. So that's a penise a day kind of effect. I think that kind of makes sense. [1:22:29] On a product side, if what you're building is products and consumables, [1:22:33] then things like the RazerRazer blade model actually makes a lot of sense. [1:22:37] Most famous, made famous with razor blades, right? I mean, if you think about the Gillette stick that you are buying, it's probably cheap, but that razor blades add up very quickly. So that initial pricing or investment is less, but then you're making money on the consumables, right? Like the HP print cartridges, same thing. The printer is cheaper, but then the cartridges add up. For a SaaS product, it's very similar. If you actually have a product that's a base platform, but then you have like consumables, then you might want to make the platform price attractive so that people onboard. [1:23:07] themselves on the platform and then they are paying for chunks of usage or things like this, which is a razor. [1:23:13] you know, razor blade model, which is much more attractive for people typically because, [1:23:18] There's a lot of scrutiny on the upfront costs that people are actually paying as opposed to doing an entire TCV calculation, like a total cost of ownership calculation. [1:23:27] Most people don't do that. [1:23:29] They're looking at what they're actually going to pay. If you're more attractive upfront, [1:23:33] That could be a different way to reframe your product or price. [1:23:37] Maybe an advanced version of like a behavioral tactic that I would probably talk about from product side is,

[1:23:42] what we call is a Panini effect. [1:23:44] The thesis for this is like when we were kids, [1:23:47] Or for those of your listeners who have kids at home, [1:23:50] One of the most repetitive exercises that we all went through as kids was to like, [1:23:54] build puzzles or like fit different things together. Right. I mean, [1:23:58] I mean, I used to do that. [1:23:59] I thought I grew out of it. It so happens that you never grow out of this from a psychology standpoint. Right. People love to build puzzles and have a compulsion because they just started with most of this in their childhood. [1:24:11] So it's a Panini effect comes from the sticker book album that we actually used to collect when we were kids or building puzzles, 500 pieces, whatever, all of these kind of things. [1:24:21] So when you actually... [1:24:23] build a product and even in some of the most complex SaaS industries like financial services, [1:24:29] When we have tested this with our clients, [1:24:32] If you list the products, [1:24:34] usually 20% of people will buy more than one product or they will attach themselves to more than one product because most of them are just buying one. Like you have a real estate product, let's say you have a, [1:24:44] you have a brokerage product, you have a different investment product, etc. You just list all the products. [1:24:50] But if you show it as a puzzle, [1:24:52] And you actually say, hey, these are the six products that we offer. And if you complete it, you complete the puzzle. You have actually finished checking a few of these and these are empty. And that's like the first thing literally people actually see when they come into the product. [1:25:06] we actually see the attach rates going crazily up. [1:25:09] like 40 to 50% of people suddenly start taking more products because there's a compulsion to say, yeah, if I didn't finish this one,

[1:25:15] even in a B2B SaaS setting. But of course, if you're a B2C customer, like say you're a food delivery platform or you're ride hailing, for instance, if you say, "Okay, this is your weekly puzzle, [1:25:27] And if you like take a light every day or if you take a light during evenings or if you, [1:25:30] If you give people a task or a puzzle and show them the puzzle and show them that, [1:25:36] You have done this, but then these are the other things that you have not done. [1:25:39] People change their behaviors because they actually feel a compulsion to finish it. Starbucks actually launched a bingo card, which is the same principle, right? [1:25:47] So the, [1:25:48] Benigni effect is [1:25:49] is a nice way to actually think about how to showcase your products in such a way that you create compulsion for people to buy multiple products. [1:25:58] I mean, if there's show notes in your podcast, I'm happy to give you some visuals that you'll see. It's bloody obvious. Absolutely. Please send. We will include them. I don't get why it's called the panini effect. It makes me think of LinkedIn and their whole little completion percentage, but is it panini because you make a thing and you... [1:26:14] I think the Spanini effect, it comes from the... [1:26:19] Panini sticker books, whatever, like all the things that we used to use before. I mean. [1:26:23] Okay. [1:26:24] No, it's not the sandwich. And... [1:26:27] Yeah, I mean, I guess we made a category out of what this is. -We just call it the NINIA. -Got it. There's something else you touched on that might be worth doubling clicking on, is this price threshold. [1:26:38] psychological trick. Is there like heuristics or just rules of thumb of like here's thresholds people generally have? [1:26:43] Or is it generally very custom to the product?

[1:26:46] If you look across B2B SaaS or consumer products, you'll find some [1:26:50] thresholds that [1:26:52] often makes sense. Like for instance, if you are looking at $29, [1:26:56] Most people would say equate that to a dollar a day and say that $30 is a threshold. So you'll see some of these things. [1:27:03] Beyond this [1:27:05] You need to test for your own products and categories because the anchors are also referenced based on [1:27:11] other competitive alternates, you know, what their perception of value is and so on. [1:27:16] So doing the exercise, like I described earlier, the acceptable, expensive, and probably really expensive would give you a psychological threshold. And by the way, that's also a behavioral pricing thing because you're saying, [1:27:26] If you cross 99 to like 101, there's a steep drop in the demand curve. And if you didn't know this, you can do all the quantity you want. You're going to probably optimize your prices somewhere. But, you know, at the end of the day, people are also looking at pricing from a psychological standpoint. [1:27:42] And often we are able to validate this statistically and significantly as to what are the different thresholds for your products in the market. [1:27:49] And this also gets a bit more quickly complex. And that's why the testing is important, because it's not just about the product, but what happens when you have add-ons, what happens to the thresholds when you have price structures or what happens to the thresholds when, let's say, you have a platform plus a usage strategy. So then. [1:28:05] the testing and learning becomes inevitable. [1:28:08] and there's no rule of thumb that you can just apply. [1:28:11] Of course, there are certain things like [1:28:13] 30 bucks a month or whatever. That's a usual threshold that we see or 9.99. Famously, you know, made famous by all the subscriptions that we probably use.

[1:28:22] Awesome. [1:28:23] Well, to start closing our chat, just a few more questions that I wanted to get through. One is... [1:28:29] the market is slower, the economy has slowed, [1:28:34] Purchasing seems to have slowed. [1:28:37] Do you have any advice for founders when they're product managers or anyone thinking about pricing in this kind of market that we're in now? [1:28:45] yeah i think it's a great question because we need to prepare for it but of course uh [1:28:50] Be proactive. I would say three things that [1:28:54] Founders can keep in mind when it comes to product pricing, if there is a downturn especially. [1:28:59] The first thing to think about is, you know, [1:29:02] Building a lesser expensive alternate compared to what you actually have and keep it in your back pocket. [1:29:07] So like for instance, if you have a product, a SaaS product, [1:29:10] I would think of like, what can I de-feature from this product? [1:29:13] and then create a [1:29:16] Lesser expensive alternate. [1:29:18] that I keep in my back pocket to reduce churn. So if someone says, you know what, [1:29:22] I can't afford this anymore, it's a downturn. [1:29:24] Give them the lesser expensive alternator. [1:29:27] keep them in the system as opposed to them going away. [1:29:30] If you just discounted price, [1:29:32] Guess what's going to happen six months later? That's going to be a new price. So before you price discount [1:29:38] Think about what value can you exchange to actually justify that [1:29:43] price discount. So you're taking value away in a de-featured product and hence you can discount. [1:29:49] Having that kind of price integrity is super important with your customers.

[1:29:53] So don't just rush to like dropping price. That'll be the absolute worst thing you can do to yourself. [1:29:59] at that moment and also in future. [1:30:01] So having these kind of less expensive alternates. Second one I usually say, which is in line with, [1:30:07] not dropping the price is to think about three non-pricing actions that you can do [1:30:11] when this actually happens. For instance, [1:30:15] Do I give more product to preserve the price? That's a non-pricing action. [1:30:20] So I give more value and say, "Hey, times are tough. Take the best product professional. You've been a great customer. [1:30:27] earn the loyalty but when [1:30:28] you know, times are great, you're probably going to renew the pricing at [1:30:32] let's say a higher price because you just gave them [1:30:35] and [1:30:35] product for one year at the same price that they're actually paying. [1:30:39] So I think that's a non-pricing alternative. [1:30:42] or it could be change the contract terms like say that, okay, [1:30:46] take a three-year contract or two-year contract and then [1:30:49] Think about that as an alternative as opposed to reducing price [1:30:52] or things like, for instance, [1:30:55] payment terms. Like, okay, if you say it's difficult, I'll change it from 15 days to 30 days. [1:31:00] and live with the payment terms as opposed to changing price. So three non-pricing actions, we need to write about some of these. [1:31:06] Also in the book. And the last one I would probably say. [1:31:09] you know, is think about changing your business model or pricing model. Like, [1:31:13] You talked about usage-based pricing. [1:31:16] frankly, an outcome-based or attribution-based pricing, [1:31:20] frankly, this is the best time to actually think about these things. Like if [1:31:23] If people are not using the product, changing it to a usage-based, people would say, that's great because there's a downturn. We're not using the product. And they would opt into a usage-based pricing because they are going to pay lesser because they're not using. But when times are good again, they're going to use it. And basically what you did is you just lodged in a usage-based pricing easily compared to trying to do that when the times are good. And people are saying, oh, I actually want fixed. I don't want the usage and things like this.

[1:31:53] change. I mean, one extreme example that was interesting during the pandemic, [1:31:57] is a software company that was actually providing software to hair salons. [1:32:03] Just as an example, hair salons. [1:32:06] I mean, it used to be a per seat model. I mean, that just used to make sense. But, [1:32:11] They want to think about usage. During the pandemic, no one, for instance, went to a haircut. They were all taking this at home. [1:32:18] So they said, okay, let's change it to like a per hack head basis. [1:32:22] But of course, when things are back again, [1:32:24] that kind of model can recoup a lot more compared to a perceived model, because that's really where the value is actually getting derived. I mean, this is an example, but, [1:32:32] So, three things again. One is, [1:32:35] you know, thinking about [1:32:36] changing your pricing model, three non-pricing actions that you can take, and then how can you de-feature something and keep it in your back pocket so that [1:32:45] you can have a proper pricing conversation and not just drop a price. That is some killer advice. [1:32:50] Thank you for sharing all that. Thank you. Something else is during our chat. [1:32:54] Preparing for this call, you mentioned that you're maybe working on a new book. [1:32:58] Can you... [1:32:59] Yes. We'll talk about what it's going to be about and anything else. Sure. I will try to see what I can talk about without getting too detailed, but... [1:33:06] The thesis of the book is that the title of the book is called Unlocking Growth, Growth That Is Profitable, Better, etc. So unlocking growth and the [1:33:16] Subtitle is Breakthrough Strategies for Acquisition, Monetization and Retention of Customers. [1:33:21] So this is a bit like where monetizing innovation stopped and this book picks up from that.

[1:33:26] I mean, let's assume you've built a great product, you know, based on what customers need, what they value, what they're willing to pay for. Now what? [1:33:32] You need to acquire customers, you need to monetize them, you need to retend them. So this book actually gets into all of those. [1:33:39] dimensions. [1:33:40] And the key pattern that we have seen Lenny over and over again is, [1:33:44] Now, most companies would have teams and people dedicated to these three functions. I mean, acquisition, monetization, and retention. That's the... [1:33:51] If you unlock these three, you're getting to profitable growth. [1:33:54] I mean, that's literally the three things you have to focus on. [1:33:57] But what ends up happening is, [1:33:59] Most people don't understand the interaction effects across these, or in the worst case, they even treat it as silos. So the acquisition team works on something. [1:34:08] but the monetization team is not looking at the interaction of what they actually do. [1:34:12] For instance, [1:34:14] 90% of customers or people who we meet who claim to have a land and expand strategy are only landing. They're not expanding because they gave their farm away in the land. [1:34:23] So how do you actually think about a land and expand strategy in such a way [1:34:27] that you can acquire, monetize and retain customers. So this book actually goes into breakthrough strategies to [1:34:34] balance the trade-off between acquisition, monetization and retention, [1:34:38] and build the right products and come up with the right pricing strategy. [1:34:41] You're going to have incredibly strong product market fit with this audience. [1:34:44] Is this something anyone can pre-order yet? Sign up to get notified when it's out. [1:34:48] I think the pre-order probably is still open in Amazon. So I think that's something you can check. I wouldn't [1:34:54] Check lately. [1:34:55] but you can follow me on Twitter at

[1:34:57] MadhavanSF, that's M-A-D-H-A-V-A-N, S-F. I usually tweet about [1:35:02] this book and in general. [1:35:05] or follow me on LinkedIn or add me on LinkedIn. [1:35:08] I think those are probably some good ways to keep in touch. [1:35:11] book is supposed to be out in [1:35:13] Q2, Q2, Q3 time frame, so watch out for it. [1:35:17] Amazing. So it's called unlocking growth. They can search on Amazon right [1:35:20] Yeah, absolutely. If you look for an unlocking growth and even bookmark it, you're going to have it in your [1:35:24] List of books that you want to buy. All right. I'm going to pre-order it immediately. [1:35:28] Any other good resources that you recommend for folks that want to learn more about pricing? [1:35:33] and just all the things that we talked about other than your book? There are a number of resources. [1:35:39] Our founder, Herman Simon of the Simon of Simon Kutcher has read a lot of books. [1:35:44] Particularly, I like one which is called Confessions of the Pricing Man. [1:35:48] He started this business 35 years ago. [1:35:51] literally out of university and academia. And we've grown to where we are today. But it talks about some of the lessons that he has learned. I find it fascinating. [1:35:59] And it's probably the better book compared to Monetizing Innovation. [1:36:02] So I think I would definitely read that. [1:36:05] The other book that probably we also put out, which is topical right now, is one of my [1:36:10] by your partner colleagues Adam [1:36:12] Actor Anne Herman wrote a book on [1:36:14] pricing during inflation and inflationary times. So I think that's a very topical book that I think [1:36:19] Readers get big. [1:36:21] This is within our Simon Kutcher assets of people who have actually written books. [1:36:25] Another resource to probably look at [1:36:27] is Kyle Poyar from OpenView.

[1:36:30] He puts out some really good stuff on [1:36:32] product-led growth, pricing, etc. He's an alumni assignment coach, so we're proud about our alumni. [1:36:38] It's some fantastic work that he has done. He has also written [1:36:42] some SaaS pricing guides, etc. So I would [1:36:45] highly encourage you to check Kyle's work. [1:36:48] I think that's fascinating and I also feel [1:36:50] The folks at first round are pretty good at putting some good content on pricing, product, etc. Amazing. We will link to all of that in the show notes. [1:36:57] Madhavan, this was everything I hoped it would be. [1:37:01] This is probably the record for the longest podcast we've done, and it's no better topic to spend a lot of time on. Thank you again so much for joining me. Two final questions. You answered most of them, but just in case there's anything else. Where can folks find you online and learn more, and how can listeners be useful to you? [1:37:18] Online, I mentioned LinkedIn. So Madhavan Ramanujam. So that's... [1:37:23] on LinkedIn and Madhavan SF on Twitter. That's probably where you can find me online or even at the simonkutcher.com and you can search for [1:37:30] and you'll probably see my name there. [1:37:32] What can listeners do? [1:37:34] I think I would probably say... [1:37:36] at the fundamental level [1:37:38] If you can [1:37:39] talk about this topic [1:37:41] actively share what you have learned. [1:37:43] If there are sections of the book, for instance, that you like, [1:37:47] Talk about it. [1:37:48] The biggest thing that we can all do is to educate each other and everyone that [1:37:53] There's a science behind all of this and it's not just an art. [1:37:57] And if that's relevant, then I think

[1:38:00] message accomplished. That's also why we wrote Monetizing Innovation. What a beautiful way to end it. Maravan, thank you again for being here. [1:38:07] Thanks, Lenny.