Lenny's Podcast: Product | Career | Growth - The art and science of pricing | Madhavan Ramanujam (Monetizing Innovation, Simon-Kucher)

Starting point is 00:00:00 when we talk about pricing, many people quickly gravitate to like dollar figures. That's just a price point. That's a dollar figure. 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, it really stands for, do people actually want your product? And would they actually buy it? And that is the whole willingness to pay conversation. And entrepreneurs and companies need to do this much earlier so that they can understand, you know, are they on the right track? Welcome to Lenny's podcast. I'm Lenny, and my goal here is to help you get better at the craft of building and growing products. Today, my guest is Madovan, Ramanujam.

Starting point is 00:00:40 Matavan is the author of Monetizing Innovation, the most widely read book on pricing strategy. He's also senior partner at Simon Cuchern Partners, which is the premier consulting agency for companies looking to get help with their pricing. And unsurprisingly, when I ask people on Twitter, who the smartest person on pricing is, Madovon 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 Madavan Raman Ajam after a short word from our wonderful sponsors. This episode is brought to you by lemon.io.

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Starting point is 00:03:24 Maravan, welcome to the podcast. Thanks, Lenny. 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 literally wrote the book on pricing strategy that everyone seems to read and share and talk about. And so I'm really honored to have you on this podcast. Thanks for the nice words. I'm excited to be here. To help folks fully grasp the level experience that you have around pricing and pricing strategy, could you just kind of talk about how many companies you worked with, maybe name some companies you can share, maybe how many people bought the book, anything that you can share but just the level of experience you have in pricing would be helpful.

Starting point is 00:04:05 Sure. So I work as a senior partner in a consulting company called Simon Kutja. So we are the worst largest pricing strategy consulting firm. We have about 2,000 employees worldwide in, you know, 43 offices. So I work in our Bay Area offices and I've been here with for the last 15 years. So I work primarily with tech companies here in the Bay Area, so that's software, internet, marketplace, companies, etc. So I worked with over 250 companies, more than 20 unicorns, on everything to do with pricing, monetization, profitable growth, and these kind of topics. So companies such as Uber, Asana, DoorDash, many LinkedIn, many come to mind. I think you asked about the book monetizing innovation that I wrote a number of copies, etc. I mean, look, when we first launched the book, I used to track some of these copies sales and everything else,

Starting point is 00:04:56 and I quickly realized that a book is only good if it actually creates impact. And that's also why we wrote the book. So the way I measure impact for monetizing innovation is literally there's probably, you know, someone reaching out on a daily basis saying, hey, I read the book. You know, we could make some impact around pricing monetization in our companies. And to me, that's real impact and that's what keeps me kind of going because, you know, when we wrote the book, we didn't want to write any marketing, you know, fluffy crap. We want to write something that was more actionable and to see that people find it actionable

Starting point is 00:05:31 and can use it Monday morning to actually make changes. I think that's real impact. But of course, the book has done well. It is still in top 10 categories in many categories in Amazon, for instance. It's been six years since we wrote the book. Wow. Need a second edition soon. That's incredible for a software tech-oriented book where they often get really out of date really quickly.

Starting point is 00:05:55 I was just reading it and it's amazing how many things still are very true. The topic is one that is relevant in, I mean, in even years to come. So I think hopefully it's robust that way. And you talked about the company Simon Coucher. I'll just add that 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. The company.

Starting point is 00:06:20 I like that. Maybe you should rebrand ourselves as the company. company. Let's do it. Let's talk about rebranding next. How did you get into pricing and pricing strategy? How did you first get into the world and put kind of focus your career around it? 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, you know, we had a lot of startup discussions thinking of like creating startup, very classic. And I was this guy who was actually in charge of coming up with the, pricing monetization strategy in our teams when we were actually pitching to VCs.

Starting point is 00:06:59 And I remember going and pitching our ideas and the VC asked me, how do you know you'll actually make money on this innovation? And I pulled up a spreadsheet. I showed him all the assumptions and I said, so I'm going to do it. And I still remember this. He said, you've labeled them correct. Those assumptions.

Starting point is 00:07:14 How do you truly know? And I was like, oh, I actually don't. I just made stuff up. Right. And within that same week, I got a call from the then managing partner of Simon Coucher, Matt Johnson. And he said, hey, there was a just pricing and growth strategy consulting firm. You want to come join us? We're looking for Sanford grads.

Starting point is 00:07:33 And I was like, whoa, I didn't even know you existed. I joined because I actually wanted to get to understand the science behind pricing, not just the art. And that's kind of what I've been focusing on in the last 15 years. And also my education in Stanford was in quantitative marketing. So many of those, let's say, theoretical models I could bring back into a practical industry relevant sense. So it's been a great journey. When I think about books that people find most useful and sustain are books that are based

Starting point is 00:08:07 on people's real experience to do nothing for like a decade. And your book is a great example of that. What made you decide to actually write a book? Because I know how hard that is from my wife's experience. Yeah, I think it probably started with some kind of mini frustration because we used to like get calls from like companies saying, hey, you know, we need a pricing strategy. We need a price plan. And they would have invested like years probably making the innovation. And then we would ask them like how long do we have? And they're like, we need it like yesterday. Right. I mean, so it was like time and again, we witnessed this, you know, spray and pray approach. And then, you know, we used to ask this simple question. Like, how do you truly know, without people who will actually pay for your innovation. 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. And then it had to change. I mean, when we benchmarked 72% of innovations actually fail from a monetization or,

Starting point is 00:09:03 you know, commercial perspective, simply because entrepreneurs or companies did not do the check earlier on. Had they done it, they could have probably, you know, pivoted the product, build things in a different way and build something that was more meaningful. So we wrote monetizing innovation because increasingly, you know, we were working with companies more early stage in helping them design the right innovations that, you know, customers need and what are they willing to pay for as opposed to just building a product and slapping on a price. It was crossing that chasm between knowing, hoping that you wouldn't, you know, monetize, like knowing that you truly will.

Starting point is 00:09:39 That was the motivation for writing monetizing innovation. Awesome. We're going to dive into a lot of these things that you've shared in the book and things you've learned. One more context setting question before we get into it all. Which part of the org do you believe pricing strategies should sit in? Is it product sales, finance, marketing, something else? Pricing by discipline is like a cross-functional discipline. I mean, you can't talk pricing in isolation of product, finance, sales, etc. I mean, there's always, you know, touch points. So it's extremely cross-functional. Back in the day, probably a decade ago, I used to say pricing needs to sit in finance

Starting point is 00:10:14 because my view was, 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 ultimately to the CFO. I have over the last decade, I've been actually advocating that this should sit in the product

Starting point is 00:10:40 site. And there was also the genesis of monetizing innovation because if we, truly believe that we need to build products that, you know, are simply products that customers need, they love, their value, they're willing to pay for, 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, if you look at monetizing innovation, the subtitle of the book is how, you know, smart companies design their products around the price. So if you take that viewpoint, then pricing

Starting point is 00:11:12 needs to sit in the product function or the founder product and sort of report onto this. This is my strong health belief, one that probably won't change now. Awesome. That's a great segue to kind of the meat of our conversation. So most of the listeners

Starting point is 00:11:28 of this podcast are product builders and people that grow product, product managers, founders, people that work on cross-functional product teams. And I was reading a book and I picked five topics that I thought would be especially useful to product leaders to kind of dig into.

Starting point is 00:11:44 And the first is the willingness to pay conversations, which I know is kind of foundational to the way that you think about pricing strategy and the advice that you share with people have how to think about pricing. So you just talk about just like what is willingness to pay as a concept

Starting point is 00:11:59 and then when should founders focus on these conversations to figure out the willingness to pay? Yeah, absolutely. So I think look, most of your listeners are many, you know, most product folks, They probably understand, you know, language like product market fit, especially made famous from lean startup and other kind of, you know, literature, which is awesome. I think that the issue is

Starting point is 00:12:23 it's not just about product market fit. It is about achieving a product market pricing fit. For instance, if someone comes and asks me, do you like the headset that you're using for this podcast? I'll 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, you're often here what you want to hear. It is truly about understanding whether, you know, customers are willing to pay for your innovation. And willingness to pay is a proxy for

Starting point is 00:12:49 do people actually value your product and, you know, how badly do they actually want the product? This even comes back to like understanding what pricing really is. When we talk about pricing, many people quickly gravitate to like dollar figures. That's just a price point.

Starting point is 00:13:05 That's a dollar figure. But when we think about price, we think about it as a measure. Like, you know, A liter is a measure of volume. Price is a measure of value. And when you think of it this way, it really stands for, do people actually want your product and would they actually buy it?

Starting point is 00:13:20 And that is the whole willingness to pay conversation. And entrepreneurs and companies need to do this much earlier so that they can understand, you know, are they on the right track? I mean, think of it this way. It's like, if I have the same sales and marketing conversation that I would have with a customer,

Starting point is 00:13:37 six months before launch of the product, pitch the whole value, and then ask them a simple question, would you pay for this innovation? And if someone says, no, chances are you can put all the perfume we want in the next six months, they're going to say the same thing. And if they do say no,

Starting point is 00:13:50 the most important question to ask is why, and you start hearing all kinds of information that you can use to design your product and maybe even pivot your product strategy, you know, accordingly. So it is literally the litmus test of whether people like your product. And so if I were to kind of summarize your main point, the idea is have these.

Starting point is 00:14:10 conversations right as you're thinking about designing the product. Don't try to just launch it, see how people like it, build a huge audience, and then figure out pricing your advice is start having those conversations early, right? Exactly. And the folks that first round summarizes in four words, I thought when they wrote a blog article on this and they called it price before product period. Right. So I think that that probably sucks in. But really, it's really that, right? Because frankly, Lenny, as an entrepreneur or company, 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,

Starting point is 00:14:50 obsess over the engineering, the product, everything else, and then slap on a price or in the market and hope to monetize or have this conversation much earlier, pitch the same sales and, you know, marketing kind of, you know, pitches and then try to understand whether the people who 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 tests and learn.

Starting point is 00:15:17 We are talking about testing and learning, pricing and willingness to pay. Why wouldn't you do that? And why would you postpone that to the very end? Do you have any examples of products or companies where they have these conversations either way too early, way too late, or even just like nailed it? Here's the thing. There's nothing like way too early for this conversation. I mean, I even tell people who are like, you know, early C stage or just thinking about an idea, I would say, hey, go check. If someone would actually pay for this idea.

Starting point is 00:15:43 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 this launch, etc. It's about understanding whether there is a willingness to pay. And then repeating this exercise as you go along so that you can refine. And when you're ready to launch the product, you have a much more refined view on what is the willingness to pay. 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. So it's about iterating and learning and sort of refining.

Starting point is 00:16:15 So there's never too early. Too late, I think, is most of the companies. This is why we wrote monetizing innovation, like I told you. 72% of innovations fail. And we also categorize them into why they fail. There are only four failure types. And I've written about that in the book so I can leave that for readers to actually go and see it. But all of those failure types happen because the conversation was just too late and pricing was an afterthought.

Starting point is 00:16:41 Companies that did it well, maybe, you know, one or two examples that I can probably take just to like motivate the concept, right? I mean, we talk about in the first chapter, a tale of two cars and about how Porsche actually did this. And the example is something like this, right? I mean, Porsche was really looking for launching a new innovation. They came up with an idea. they said, okay, it should be launched an SUV. And even before a blueprint was drawn, they basically

Starting point is 00:17:07 went and checked with the market. Is that a need per an SUV? Would people value it from Porsche? Are they willing to pay for it? And to their surprise, they actually found that. And then what they did next was more fascinating. Every single feature that actually went into the car or the benefit

Starting point is 00:17:23 that people had was battle tested with customers. And no amount of convincing from product or engineering was enough. It had to be battle tested with customers. 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, people didn't need it in SUVs out of the window,

Starting point is 00:17:45 right? They literally used to bring cars in what is called as 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 portals. and say, okay, did they like it? Would they pay for it, et cetera? And then they would fine tune everything,

Starting point is 00:18:06 the thing that goes on, right? So the innovation process is very different from the classic, you know, spray and pray, build something, slap on a price, throw it out. It was really designing the product around customer feedback around willingness to pay. You know, the outcome of the process could also couldn't have been more different than the traditional

Starting point is 00:18:25 approach of spray and prey. The, you know, this was, when they launched this SUV, it was called Cayenne, which we all know now. accounts for more than half of Porsche's profit and literally one of the the best roaring successes in automotive history. This is just an automotive example, but if I switch gears to more of a tech example

Starting point is 00:18:43 or a software example for your audience, right? I mean, there was this company which, think of this as a two-sided market place and I'll just keep it a bit abstract, but I'll tell you the details, right? I mean, two-sided marketplace. Think of this as they were already monetizing on the, you know, sell side.

Starting point is 00:19:01 And the CEO said, okay, let's go and build a product for the buy side and that, you know, people will buy. So the buy side monetization product strategy. So in classic fashion, all the product folks, product managers, etc., they went offsite, generated thousands of post-it notes, design thinking, yada, everything, right? And then they said, okay, we can't take all of these, you know, so many ideas to the CEO. Let's prioritize it somehow. And they prioritized it to like 40 ideas. and they took it to the CEO and said, this is what we want to build.

Starting point is 00:19:34 And the CEO asked a simple question, how do you truly know you would monetize? It's the same question the VC asked me, like, you know, back in the day. And they simply didn't know. They were just guessing. So what happened next was they took, you know, wireframes, blueprints,

Starting point is 00:19:49 they took, you know, product concepts, and they started testing this with their customers and prospects. So, you know, stuff that they actually thought was exciting, often was way down in the list of priorities. And if they didn't do these kind of tests, they would have probably built the product around this. To give you an example, one of the features that they were building was called,

Starting point is 00:20:12 or the number one feature that the internal team thought was, you know, that was awesome. They called it highlight connections from Facebook. And everyone in the company thought that people would pay for this. It's an awesome feature. They need it. They love it. And the thesis was something like this.

Starting point is 00:20:26 If as a buyer, if I'm buying a, you know, the product from the same seller and someone in my Facebook connection has already bought that product from that seller, that's credible information in lieu of reviews and everything else and, you know, people would find it acceptable and pay for this. When they went and tested this and pitched the idea, they got all kinds of reactions. So there was one customer group I remember which said, so, yeah, you know, you're telling me I can't pour to hundreds of reviews and make my own determination. that that's like

Starting point is 00:20:56 unacceptable. That spoils the fun out of actually doing research on products. There was another group of customers who said, do you like it? Yeah, like it.

Starting point is 00:21:07 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,

Starting point is 00:21:15 let's say premiumness associated with this and everything else. They could not find a single set of customers or a segment of customers who said, I love this feature. I would pay for it.

Starting point is 00:21:28 If they hadn't done this exercise, they would have built the entire product around this and it would have been a disaster. But because they actually did this, they could prioritize what they were building. Literally, I mean, for your product folks, the number one lesson, and I hope this is the biggest takeaway for your audience, you cannot prioritize a product roadmap without having a willingness to pay conversation. 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 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 have actually always seen, always across these hundreds of companies that I've worked,

Starting point is 00:22:11 20% of what you build drives 80% of the willingness to pay. It's a classic Pareto, right? And if you don't know this, you're probably over-indexing on like one or the other. It's much better to find out what is this 20% so that you're, you're probably over-indexing. you can focus on it, nail it, and focus on all of the usability around it and make an awesome product as opposed to not knowing

Starting point is 00:22:33 what drives the willingness to pay and just trying to put everything out there, right? And at the worst form, often what happens then is this 20% is the easiest thing to build. And what companies do is they will build it, they will throw it out, and they'll say there's an MVP,

Starting point is 00:22:50 give it for free, and then they are trying to chase their tails building, you know, 80% of stuff that is driving 20% of value. So you already lost the battle. So as a product person or product builder, 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. And this is the crux of everything that we are talking about. Amazing. It was interesting about the second example versus the first is in the Porsche example. they started with, we want to chart this much.

Starting point is 00:23:24 Let's build the car that we can sell for that much. In the second case, they had like a product they were trying to build and then they figured out which things to build. So it's interesting that this can come kind of along the journey at different places, but the main takeaway is do it early and earlier than you think. Correct. Either product ties to a price point and the willingness to pay or at least use willingness to pay as an axis to prioritize what you're building.

Starting point is 00:23:49 Either way, you'll 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. 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 stories of what they'll actually do. So what advice do you have for folks when they have these conversations? What questions should they ask?

Starting point is 00:24:10 What words should they use? I know you have a few frameworks that you suggest. Sure. You kind of talked about that. Yeah, we can go deep into this and you can pull me back or ask me to go deeper, or whatever, it doesn't matter, right? So, and you've written an entire chapter in the book, chapter four. It's called How to Have the Willingness to Pay Conversation.

Starting point is 00:24:26 If there's one chapter, just read that. That is, I mean, it's quite detailed and goes into how to actually do this. But look, I mean, if you go and ask someone, you know, how much should I charge for this product, you're actually going to get garbage back. That's your job, right? I mean, no one is supposed to tell you how much to charge. And that's the worst way to have the conversation. There are some really interesting and nuanced ways of having the conversation where you still tease out

Starting point is 00:24:48 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, and, and I can pass to see if you have any questions. So the first one is, you know, what we say is frame the question in a more relative manner, right? Because, you know, and sometimes I say tongue and cheek, that people are absolutely meaningless, relatively, relatively super smart. You know, what I mean by that is if you go and ask someone, how much should I charge, you'll get a meaningless answer. but if you actually ask it in a relative way, people actually give responses that are meaningful.

Starting point is 00:25:22 So like, for instance, if you're a B2B SaaS company, okay, and you're trying to see if your product actually has willingness to pay, one way to have that conversation is to say, okay, hey, to your customers, you know, do you use products like Salesforce in your install base? Yeah, I do use. Okay, if Salesforce was indexed at $100 in value, where do you think we are in terms of like the value that we bring to your,

Starting point is 00:25:44 let's say, day-to-day business operations? 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 and stall base. And then if you say, okay, if Salesforce was indexed at 100 in pricing,

Starting point is 00:25:59 where do you think we should be? 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, right? So this is some relative ways of asking these questions are the most basic,

Starting point is 00:26:16 ways of actually doing it. Then we have questions where, you know, we, we, there's some methods where we actually want to understand are there some psychological thresholds or budgets when it comes to like, you know, willingness to pay. So the way to do this is let's, you know, take your product that you're going to launch, pitch the, you know, value to your customers, have that exact sales and marketing conversation that you would have after you launch the product but before. And then you ask them, what do you think is an acceptable price for this innovation? Look, I mean, everyone would like, you know, would like to low ball. They will negotiate with themselves. Let them give an answer, clock it. Then ask them, what do you think is an expensive price?

Starting point is 00:26:55 And then follow that with what do you think is a prohibitively expensive price. 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. If you're in true growth mode, maybe you can put it there. It's a no-brainer price, no friction, et cetera. The expensive price tends to be the price that is value price

Starting point is 00:27:18 as in they don't love you, they don't hate you, they would pay you, but it's a neutral reaction. Prohibitively expensive tends to be the price that they will laugh here out of the room.

Starting point is 00:27:27 And if you do this at scale, what you'll start seeing is that there are some cliffs in these kind of demand curves where suddenly when you cross from, let's say, 99 to 101, you know, 20 or 30%

Starting point is 00:27:37 might say it is expensive or it's prohibitively expensive. And that's what we look for. or to see if there are some psychological thresholds that if you actually cross, you know, you have a perception of being expensive. So hiding behind some of these psychological thresholds become important. We, Rahul Wura from Superhuman, actually read the book,

Starting point is 00:27:57 and he talked about this on an A16C podcast. He actually used this method to come up with his $30 price point for the Superhuman app. And I think that's a quick and dirty way to actually get to, you know, what is a willingness to pay and what's a psychological threshold. So I think that's an interesting method that you can do Monday morning.

Starting point is 00:28:16 But the key here is to 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 after launching the product to create, awareness and showcase the benefits. Do it and then ask these questions

Starting point is 00:28:34 so that you're priming them to the value that your product gets and you're not just having a, you know, random conversation. There are other techniques that go more and more, let's say, rigorous. For instance, purchase probability questions. So if you ask someone, okay, would you buy this product? That's like a meaningless question. At least if you ground them on a scale and say on a scale of one to five, would you buy it?

Starting point is 00:28:55 One is, I'm not at all interested. Five is, you know, 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. What we have actually seen is even if people say five, you know, they are probably only like 30 to 50% sure about whether they will buy. No, I mean, so like you can start. And if they say four, it's like 10 to 20%.

Starting point is 00:29:18 If they say three and below, they're never going to buy it. So you can start, 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. And if someone says, let's say, three for a certain price point, then you can, you know, 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

Starting point is 00:29:41 elasticity. Two more, if I may, I think. Another one is what we call as most and these kind of questions. And the thesis behind this is, if you go and ask people, okay, I give them a list of 10 features, let's say, and I say rank them 1 to 10,

Starting point is 00:29:58 most people will find that exercise painful, horrible, because there's always this messy middle where everything is great, they all look the same, right? I mean, there's a lot of psychological theory that people are very adapted, at identifying the extremes, when it gets in the between,

Starting point is 00:30:12 that's when things become tougher. 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, we would take a subset of, let's say, six or so features out of those 10, and then they say, in this set of features,

Starting point is 00:30:28 identify the most important for you and the least important. 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. This people can do all day long because they're just picking the two, right? And then we will change the set of six, another combination from the 10 and ask that same question. So if you do this a few times, you would be able to, you know, prioritize the entire feature set in a relative fashion and truly understand what drives willingness to pay.

Starting point is 00:30:59 The last method which gets into more advanced methodology is what we call us 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, 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, etc. Then we would change that and say, okay, if you change the features and the price, how would you react?

Starting point is 00:31:26 Would you buy any of these products or would you say, I won't choose any of these? These are, you know, more like shopping scenarios for your products. But it's realistic and it's akin to real life based on how they choose these. these products, 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 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.

Starting point is 00:32:01 So these kind of things, you know, if you do these kind of exercise, you can get more precise on things like price elasticity, you know, build some simulation models, try to understand how the market would react, etc. And different methods are actually applicable at different stages of a product and different stages of a company. You know, 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.

Starting point is 00:32:28 Then you hear a lot of good information. If someone says, yes, 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? 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 C 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. Or if you're launching a product and it's in late stage or late stage in the product or the company life cycle and you need to get more precise in terms of like your pricing and packaging strategy,

Starting point is 00:33:03 then some of the methods are around tradeoff exercises, most least all of these things. become incredibly relevant. Sorry, it was a long answer, but there's so many methods. It's all summarized in chapter four. So just one chapter to read in the book. That was perfect. Thank you. Amazing. You mentioned that you want to ask why a lot, and that's something you talk about in your book a bunch. I think something like 50% of your question should be why after the answer of these questions. Is that right? Right. That's absolutely right. Yeah. Cool. I was tempted to ask you why, but that would have not been very relevant. Nope, not in this question. I'll throw it up later.

Starting point is 00:33:38 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? Does it come at the end of, here, I'm pitching you on this product, or I'm trying to get desirability user research feedback?

Starting point is 00:33:51 What is that meeting set up for on behalf of the customer? It's usually either a one-on-one conversation with a customer, much early stage you're a founder and you're having a conversation. It's basically you're pitching the idea and trying to understand not just product market fit, but a product market pricing fit. Let's say if you're a bit more late stage and you have a cross-functional team,

Starting point is 00:34:12 this could be a conversation that the sales teams could actually be having, along with the product teams, to actually understand this. That's also what happens in companies like LinkedIn. For instance, when they launch a new division, you know, the team has to like book in a credit card or lock in a budget from a customer for pilot POCs and everything else.

Starting point is 00:34:29 And if they don't, they don't necessarily go down the route of productizing it because they didn't, I mean, that was no final word. verdict on whether people would actually pay for these kind of innovations, right? 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 a one-on-one with one-on-one as in 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. So it's usually done with the team having that kind of conversation.

Starting point is 00:35:03 it can also be done in terms of like focus groups where you bring in, you know, a set of customers and then you sort of mediate and moderate, you know, answers and trying to get to like what is the right thing to do. And often we also do a quantitative version of this where we are doing more test and learn through either, you know, A, B testing or most importantly through controlled surveys that we would actually have, you know, 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, you know, what is the willingness to pay in the market based on those kind of responses. So from a basic qualitative one-on-one validation all the way to more quantitative testing using other instruments. So this is usually a part of a larger customer development product market fit discussion. Like here's a product we're thinking here is like classic user research. Yes. Is our ability discussion?

Starting point is 00:35:55 And at the end, you kind of talk about willingness to pay stuff. Yeah, exactly. I mean, I would think of it as, 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 who actually use it. This is a one step before conversation where you're trying to understand, you know, testing and learning whether people buy into your idea, do they see the value, is that an ROI? And frankly, what needs are you actually solving in the market?

Starting point is 00:36:23 Like, this people can articulate all day long. Like, you know, what is their jobs to be done or what is their needs? main point. What product to build is your job in some way as a product person? But when you showcase the product and say, okay, this is the product that I'm building which will actually meet this need. You want to see if people's eyes slide up. And that's also when you need to have the willingness to pay conversation. 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. And then when

Starting point is 00:36:56 you actually do this more and more, like I said, like, you know, I trading or refining things, then you can bring this into other pieces of the conversation and gets more smarter before you launch the product. 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? Yeah, I get this question all the time and I say, please talk to one person, right? I mean, jokes apart because most companies are not even doing that. But Joe, in terms of willingness to pay conversations. But, But, you know, if you're, let's say, a B-to-C company, of course, you have scale in terms of reaching customers.

Starting point is 00:37:32 You might have, 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 thousand, 2,000 responses, that could be statistically significant and easy to do and pull off. If you're like a B-to-B SaaS company and you have, you know, you're focusing on, let's say, 20 to 30-30 accounts leading 80 to 90 percent of your business, try to talk to as many of those as possible. So like at least, 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

Starting point is 00:38:06 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. And then once you have your initial thought on what pricing should be, how often do you suggest folks iterate on their pricing strategy? Yeah. Usually we say at least every six months pass and think, whether you should read. visited within 12 to 18 months, probably there is time to revisit, especially given market dynamics in most industry verticals that people are in today. 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, you know, introducing some new features. All of those kind of moments in time from a product

Starting point is 00:38:47 journey standpoint would necessitate having this conversation. 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 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? First of all, start educating yourself that there is science on this topic. It's not just an art. Get confidence that people have done this before, not only just startups, but companies like

Starting point is 00:39:16 Porsche, you know, and then read chapter four and do it. Okay. Topic two, which I know is really a big deal to you and a core part of the, the way you think about it in addition to willingness to pay and it's segmentation, thinking about how to segment your customers and product. So can you just talk about broadly? Why is this so important to think about segmentation when you're thinking about pricing? Look, segmentation is a topic again, just like product market fit is a well understood term for

Starting point is 00:39:42 many of your listeners. Like when we go and ask companies, do you have a segmentation strategy? Roughly about 60% would say, yeah, we have it. And then when we check it, probably 10% of them actually have a meaningful segmentation strategy. What I mean by this is most people think of segmentation as a demographic or persona exercise or, you know, how do I position this product to like different personas and things. And they get it horribly wrong. I mean, Tang and chic, I'll give you this example. If you think about a person who's 70 plus years old lives in a castle, incredibly wealthy in the United

Starting point is 00:40:15 Kingdom, you'll probably think about Charles, but that also fits Ozzy Osborne. And I would probably measure that both of them have dramatically different tastes, you know, need different things, value to things differently and are willing to pay for things differently, right? I mean, if you just base things on persona, you often get it wrong. 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? So the key lesson that I want your listeners to take away is you need to be able to productize

Starting point is 00:40:47 to segments. If you're trying to build a product and try to position it to different segments, you've already lost the battery. because segmentation comes down to needs and understanding needs and building products based on those needs and willingness to pay so that you can treat your customers differently. 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.

Starting point is 00:41:10 I mean, take a simple example. If you think about the water that we drink, in a fountain, it's free, in a bottle is $2. You put gas in it is $2.50. Throw it in a mini bar, it's $5. It's the same damn water, but it's packaged productized differently because people have different needs. I mean, I'm price conscious. I want it in a fountain.

Starting point is 00:41:29 I want it to carry it around. I probably take in the bottle. I like the taste. I take gas in it. Or I'm just simply ultimately lazy and I would pay the $5 to like get it out of the minibur and not go down the hotel lobby and get it for free because that's my need. Right. I mean, if you don't understand these kind 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.

Starting point is 00:41:51 needs-based segments and you won't get it right for anyone right and we've worked with all kinds of industry verticals we have not found a single vertical where you know or customer where their clients needs are homogeneous it is heterogeneous whether you want to accept it or not and you know if you accept it then you would start getting into the heart of segmentation and say where is that heterogeneity how do the needs differ in the market how does the willingness to pay different in the market. And what can I productize to different needs and willingness to pay, you know, segments? So productizing to segments as opposed to building one 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.

Starting point is 00:42:32 I would quickly correct them and say one size fits none. So it's a bit of that. That's why this topic is deep because people get the definition of segmentation wrong. So segments are something that people hear often. And I think like you said, sort of understand and they, To your point, they think they've kind of done segmentation, but again, to your point, a lot of times they do it wrong. You have this framework that is really interesting. This, like, one phrase they use, you can act differently to help you think about whether a segment makes sense and how to think about segmentation.

Starting point is 00:43:05 So you just talk about, like, what's a sign your segmentation is correct versus not and maybe how to think about this framework? So the three most important words in what you said is you act differently. So you as in, you know, your product teams, your sales, sales teams, your marketing teams, your finance teams, act as in come up with new products, build a business case, come up with the product marketing messages, sales strategies, differently as in there's no point in doing segmentation and having the same reaction or treatment to everyone. You need to be able to act differently. So what that means is if I know what you need,

Starting point is 00:43:40 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. And the key here is to understand if there is a significant, 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 drink, you know, have gas.

Starting point is 00:44:12 Would they pay for it? And then when you understand these segments, then you can say, okay, what do I build for these different segments? And then focus on that segment when you launch the product, have the marketing message for that segment and target that segment, as opposed to just building one thing and hoping that somehow these four groups will sort themselves out into your product. And that's the key thing. 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, often the excuses like, hey, we don't have time. We're actually like putting stuff out of the wall.

Starting point is 00:44:50 We need to get something out there. It's okay. Time is of the essence. So, you know, we need to build a product. And usually they would say, let's build just a product, which is like every awesome thing that we are working on. And then we come back and revisit whether we want to build other versions, et cetera, right? And we don't have resources to even build multiple products. well, that kind of logic makes sense when you don't understand the concept of segmentation.

Starting point is 00:45:14 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 based on your idea, you would say, who's actually willing to pay for this innovation? You know, what do they need? How many of them are there? Can we productized to this first compared to the others? Then you will start prioritizing not only your R&D roadmap, but you're resourcing to say, which segment should I start with?

Starting point is 00:45:37 And then what segments would I actually add? And then your value messaging would be tailored to that segment. People will understand the benefits. They will say, you know, your product will be launched and people will get it and they would actually go for it. So having done this exercise early, will tell you how many segments are there, what is the size of these segments, how to prioritize them, which one to pick first and which product to build first for that segment, and then productize to the other segments later.

Starting point is 00:46:07 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. Amazing. So basically understand the segments right from the beginning. 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.

Starting point is 00:46:29 I mean, and plus you don't probably want to be too complex when you're launching your products. But focus on the right segment and launch it for that first. Today's episode is brought to you by Miro. Creating a product, especially one that your users can't live without, is damn hard. But it's made easier by working closely with your colleagues to capture 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.

Starting point is 00:47:04 With Miro, you can build out your product strategy by brainstorming with this. 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 around wireframes where anyone can draw their own ideas with a pen tool or put their own images or mockups right into the mirror board. And with one of Mirro's ready-made templates, you can go from discovery and research to product roadmaps to customer journey flows to final mocks. Want to see how I use Mirro? head on over to My Mirrorboard at Miro.com slash Lenny to see my most popular podcast episodes, my favorite Miro templates.

Starting point is 00:47:41 You can also leave feedback on this podcast episode and more. That's M-I-R-O.com slash Lenny. Are there any examples? You show 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 like a can that just looks really cool. Yeah, keep getting these tweets from Peter. Yes, I mean, I love the product, actually. It's like water packaged as an $8 product.

Starting point is 00:48:09 So it's great. 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 debt, eight bucks. Yeah.

Starting point is 00:48:21 Any other examples is kind of the premise of my question. I would probably start with like a few obvious and famous examples so that you just remember the point in some way. and then we can drill down, you know, further if needed. But if you look at, for instance, Apple, right? Let's assume the conversation on Apple was something like this. Hey, we need to just, you know, build one product, one iPhone because we need to like maximize our market share and we will throw it out and, you know,

Starting point is 00:48:47 slap on a price and hope to get the market. They wouldn't be the most profitable company in the planet today. What did they actually do? There is an iPhone for $299, $399, $499 all the way to $1,499. they have built products to different segments. I mean, I remember walking into the Apple store when iPhone X was launched. I didn't know what a part with a thousand bucks. I was checking the phone out.

Starting point is 00:49:10 And I looked at the features. I really didn't want the retina features and all these kind of benefits. And then I saw that there was a phone without that for $7.99. And I picked the AITS and I walked out. So 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. And if you look deeply, Apple is not just priced their iPhones.

Starting point is 00:49:36 They're productized to different price points and willingness to pay. And that's where it gets actually fascinating. I think that's a great example of understanding differentiation and then sort of product ties to different needs. And I think that's a good example. Another one that comes to mind where we worked with this was in the pre-IPO days. Even Bright, which is a B2B SaaS company. They used to have one product that was actually servicing all of their customers. And then we went through an exercise of understanding who are their customer segments

Starting point is 00:50:10 and how do we productize to different segment needs. And if you look at what they have today, they have like three plans, you know, and because they're like, you know, segments behind this. And if you look at the plans, like there are plans like, for instance, the entry level plan has something like you can only launch an event with like like one ticket type, like a gender admission, right? Okay. And then if you take the middle plan, it are unlimited entry type. So you can have a general admission, a VIP admission, whatever, when you're actually having events. It actually makes sense because if you're, let's say,

Starting point is 00:50:40 hosting 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 need it like, you know, multiple event types and you're having an event of that nature, then there's another product that actually appeals. But because of doing this, the one that has only one even type, that product is cheaper than the other one. So there's an essential product and there's a professional product and they have enterprise product. 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. Maybe another example that is obvious in front of us when we use our apps like Uber

Starting point is 00:51:20 is a great example of also segmentation, right? 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. The UberX, we used to even have the Uber pool pre-pandemic. I don't know if it's back now. I think it's back. It's back? Great.

Starting point is 00:51:37 And, you know, they also launched this thing called Comfort, which is a bit between Black and UberX in terms of both price and also the types of cars. But it comes with certain features. Like, for instance, you can say, you know, quiet preferred on a comfort or a black. And that's literally why I take one of these, because. 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 that's, I belong in a different segment.

Starting point is 00:52:04 But of course, if I'm using, you know, let's say Uber for my, you know, 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 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 was not very,

Starting point is 00:52:53 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 very fascinating. So there are multiple steps. First, do the segmentation right. That's the basic. Getting at a static view.

Starting point is 00:53:14 Maybe if it's relevant, even a dynamic view at this is the next frontier. Which you sure just now reminded me of another really interesting framework in your book 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. But specifically, you have these kind of concepts of either want to be maximizing,

Starting point is 00:53:34 you want to be penetrating, or you want to be skimming. 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? Sure. When we talk about pricing strategies, you know, we hear many buswords

Starting point is 00:53:47 and 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. And if you know this, then you can follow one of these and, you know, will break through success products. The first one is skimming strategy, which is like your Apple, you know, 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. So it's, and connotation

Starting point is 00:54:14 of these kind of products is also, it's a premium product. Price is a signal of like quality, etc. If you take penetration, that's probably made famous by Amazon. And Amazon, you know, I mean,

Starting point is 00:54:26 they're probably operating at, you know, much thinner margins, but they're playing the volume game. Much more harder game to play because you need to have all of your costs in order, supply chain,

Starting point is 00:54:35 everything else, and you're fine-tuning towards the volume game. Often I see entrepreneurs would say, let's just price low to like gain growth. That's a fallacy.

Starting point is 00:54:45 I mean, if you don't have a business model that actually supports this compared to Amazon, then you probably know shouldn't be in a penetration strategy. And even in a company like Amazon and AWS has a very different strategy compared to their e-commerce marketplace, right?

Starting point is 00:54:56 I mean, so within even business units, you can actually have different 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 maximize in the next couple of years? I mean, in my opinion, at least Microsoft would probably belong in that kind of category. And if I look at Apple, Microsoft, Amazon, I mean, companies that have reached trillion value in our lifetime, probably the only three in some way, shape of farm. They have dramatically different pricing strategies. The point is not about picking, like 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,

Starting point is 00:55:33 how to pick one, not just pick one, but how to build your products around this executed, live and breathe your business model strategy, which leads you to your pricing strategy. Amazing. I just want to say I love how deep are getting into all these topics. This is amazing. 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 at each which I love.

Starting point is 00:55:56 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. You talk about how to think about the importance of that. The way to unlock your segmentation is to think about bundling and packaging as in you're configuring your product based on what customers need,

Starting point is 00:56:14 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, right? So it's a question of, that's the way you unlock segments, you're productizing. It's like the iPhone X versus the iPhone 8S,

Starting point is 00:56:31 different products, different features, different packages, etc. The quick framework to think about packaging, bundling, you know, we call it the leaders, fillers, and killers exercise of framework. So if you think about the classic, let's say, bundle, you know, like a Big Mac or a Happy Meal, right? I mean, the Big Mac is the need a product. That's the, in the Happy Meal, right? That's what people go for when they go to McDonald's.

Starting point is 00:56:56 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. And, you know, most people who wouldn't have bought a French fry or Coke, but if you just say for a dollar or two more, 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 with, you know, marginal increase in price, you're also able to sell multiple products, which they wouldn't have if you didn't have it. The killer is the one way if you put it in the product, it just kills the bundle for everyone.

Starting point is 00:57:28 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. But there are people like me, Lenny, who love to have coffee with their burgers. So these are great candidates for selling them as add-ons. because if I actually, I mean, I would pay for the ad on because I actually want the coffee. So I would take the burger stand alone and I would take the coffee stand alone. And that's why it's actually listed separately in the menus, right?

Starting point is 00:57:55 If you bundle it, what happens is it just depreciates the willingness to pay across the entire customer base to the point where no one actually wants it. So you need to find pockets of customers who want it and then maybe only sell it to them. So the rule of thumb that I usually say is, you know, if 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

Starting point is 00:58:20 just for them kind of thing. And if more than 50% of people want something, that's a leader product. So if you understand all these leaders, fillers and killers, then you can configure your product in such a way that you're productizing to segments and you'll unlock maximum value.

Starting point is 00:58:36 Your example reminds me I just went to in and out yesterday and how I don't think they've changed their model ever, somehow just work. They nailed it. It somehow works. I think in and out has said. That's a story for another day.

Starting point is 00:58:49 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 comes from these willingness to pay conversations. I imagine the stuff that people stack rank at the top. It's most likely going to be your leaders. Yes. Exactly.

Starting point is 00:59:05 So when you do those most and least kind of questions and you stack rank them, the must haves will pay or must have table stakes. be the leader products or leader features or benefits. You know, the ones that are nice to have and might consider paying or nice to have, those kind of features are probably the fillers and that don't need other killers. 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. It includes it. Exactly. Maybe we should change the language in the next sequence monetizing innovation.

Starting point is 00:59:44 Don't change anything. All right, good. All right. Third topic around your pricing model. There's something that you talk a lot about, that people think too much about how much to charge and not enough about how to actually charge the pricing model. So can you just talk about maybe what that is and why people maybe don't think about it as much as they should? We usually say how you charge is way more important than how much you charge.

Starting point is 01:00:08 Take a quick example and then bring the point home and then we can talk about why this is actually essential. So like taking a non-sass or software example, if you think about Michelin, which is like a tire company, probably one of the most price sensitive, let's say markets, because when think about it, you actually go into a tire store, you see all of these things look similar, but they somehow price differently. How are you supposed to make a decision? I mean, it's very hard when you need to understand what you're paying for. And they came up with this new tire which was supposed to last 20% longer. It was a true innovation in the industry. And these were tires that were used for like moving trucks from,

Starting point is 01:00:44 you know, so moving trucks from point A to point B, right? And when they thought about it, they said, okay, if we go and ask for a 20% premium, there's no chance they would get it because it's a price and sensitive market, right?

Starting point is 01:00:55 If they don't ask it, the tires are going to overrun and they're going to cannibalize 20% of their business. So what they actually did was they changed their pricing model or monetization model and they said, okay, we are going to charge based on the number of miles

Starting point is 01:01:07 that a person would drive. The truckers actually love this model, right? not just because it was pay as you go and, you know, they could pay when they actually use the tires and how and everything else. That was the obvious reason. But now they could also invoice their end customers and say, okay, my, 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. And people love this kind of model.

Starting point is 01:01:33 And of course, you know, tires lasted long, Michelin recoup, that. But more people jumped into the Michelin bandwagon because now they could actually, you know, buy it. tire is on a pay-as-you-go basis. Now, if a tire could be actually, I mean, the age-old model for tires is on a per-tire basis. If a tire could actually be sold on a pay-as-you-go kind of consumption model, I mean, then obviously most products can actually explore this kind of route, especially in a software setting.

Starting point is 01:02:01 But the key lesson here is the how you charge was the most important question. It was not the how much, the how much came about because of the how you charge. Another SaaS example that is probably top of mind for me is B2B SaaS's segment. This was before they went to Twilio. They used to price based on APIs. So like the number of APIs that you actually have with segment that used to dictate which plan you would be and how much you would pay for it. But increasingly they were also shifting gears towards selling to different personas within companies. And what is an API is a debate.

Starting point is 01:02:36 Probably a marketing person does not necessarily understand exactly. what an API is and the how you charge question became very critical. And what they actually did was we work with them and we kind of identified that monthly tracked users was a much better metric into how customers perceived value. And that was the more fairer metric for customers. Like 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 user instead of APIs.

Starting point is 01:03:09 This is literally exactly the same Michelin per mile kind of models on a B2B SaaS where it's number of monthly tracked users, right? So that was a different example. So the how you charge question is super important, way more important than how much. If you don't focus on it and just rush to one or the other, often you're sub-optimizing like crazy. It's interesting that both your examples are usage-based models winning, and it feels like in general usage-based is kind of where people are trying to go more and more.

Starting point is 01:03:39 Or maybe not. So maybe two questions. Do you feel like that's the future of SaaS pricing generally? And roughly, do you feel like that should be a default way of approaching when you're building, say, a B2B SaaS company? Or is it still seat-based? I would say it this way. It's like most B2B SaaS companies follow what is actually in work at that present point in time. You know, if subscription is in work, then they say, oh, subscription is the best strategy.

Starting point is 01:04:02 If usage is made famous by Snowflake and others, they would say usage, right? I mean, so I think usage is obviously, let's say, invoked right now. I think it comes down to really understanding, based on your business situation, does subscription make sense or should you be usage or pay as you go if you're a SaaS company? I mean, there are different markers which actually identify this. If customers demand, let's say, predictable bills or usage is very similar month over month, as in if you're subscribing for tight parts, for instance, not like you're going to wash more clothes one month versus the other. The usage is the same month over month. Or, you know, when the usage is

Starting point is 01:04:40 highly variable, which is, you know, changing quite a lot between month over month. And if you price based on 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 very tough conversation with your customers. In all of these kind of situation, a subscription actually makes a lot more sense. Or it could also be like, you know, usage is intermittent, but the value delivered is ongoing, right? I mean, like LifeLock is a great example. It's a product that you probably have to protect your identity theft protection. The value is ongoing.

Starting point is 01:05:11 The usage of the product is only episodic when your identity theft gets compromised. I mean, if they say, okay, I'm going to price based on usage, I would be dramatically wrong pricing model. Right. So in those kind of cases, subscription makes sense. Or simplifying the pricing conversation is to your advantage. You know, let's say the Spotify was a good example, right? If everyone wants to listen, everyone you should listen on a per song basis, but having a subscription. actually made sense.

Starting point is 01:05:34 It simplified the pricing conversation, same as Netflix, all of those kind of situations. So don't just rush to something like usage just because understanding that is key. Usage makes sense when people want low commit or less friction. So like making it easier to buy like an AWS kind of thing, you know, you're on board people and then you grow over with the product.

Starting point is 01:05:54 And I think those kind of situations make sense. Or when customers would demand transparency and fairness, note, please note that don't mix transparency and fairness with being predictable. Those are very different things. Transparency and fairness just means that you charge for the product right. For instance, 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.

Starting point is 01:06:17 That's nothing to do with being predictable. But if they're demanding fairness and transparency, often usage-based pricing model could make sense. Or alternatively, you know, usage is intermittent or episodic, And the value delivered is also episodic and not ongoing. Like you, for instance, book the movie theater ticket or you book the flight. It's also intermittent usage, intermittent value. So the pay as you go kind of makes sense.

Starting point is 01:06:40 Or maybe there's even some underlying cost that scales with usage like an AWS. Pay as you go can make sense or even probably lastly. If there's some most important thing for pay as you go, Lenny, is you need to have clear metrics that 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, often it's a really bad idea. And then, of course, you can also be more hybrid sometimes. And that's also a winning model. Like, for instance, if you take HubSpot, it's a hybrid model between a pay as you go and a subscription. And it actually works well for them because there's

Starting point is 01:07:17 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 rush into one versus the other based on what is in style, had a given point in time, but give it a deep thought and say, what is your business, how are your customers, how are they situated, what are you servicing, and what makes sense between the two models? Awesome. On the point of 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 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

Starting point is 01:07:57 owes you. Maybe a couple more questions on this topic. One is just like, what's like a simple way of thinking about the options, say a B2B SaaS company? There's like seat-based pricing, there's flat-based annual contract pricing, there's usage-based. You can lop on freemium to make a free version of it. 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 rate of subscription, pay as you go premium, these kind of things. And of course, the price metric that you actually pick, like, what measure are you charging on? And then how do you structure? The price structure that you pick is important.

Starting point is 01:08:33 Because, for instance, are you flat for a certain amount of time and then it becomes variable? That's a structure. Right. I mean, and then, or for instance, can you be two-dimensional in your structure on two metrics? So, like, 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, I mean, in B2B SaaS companies that actually want to achieve like wall-to-wall adoption, I mean, in many companies, it's still a pipe dream.

Starting point is 01:09:01 I mean, it's just, yeah, you can talk product-led growth. But if your pricing model, 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 seats. And on the other axis could be the number of departments that the product is being used at. Departments is HR, legal, et cetera, right? And then the more users and the more departments, you get a better per user price.

Starting point is 01:09:25 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 pricing models,

Starting point is 01:09:43 you have to think about first picking pay-as-you-go subscription premium, then thinking about the metric, and then thinking about the price structure. Awesome. And maybe one more example, say marketplaces, basically if 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.

Starting point is 01:10:03 Is that roughly right? 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-based. It's not a rake-based model, but it's similar to the HubSpot model in principle.

Starting point is 01:10:22 Okay, one last question on this topic. Say you want to test different models. Say your seat base, so you want to try usage base. So you want to go seat. Is that possible? If so, how do you do that? It's definitely possible. There are ways to test this.

Starting point is 01:10:34 It's a science. I mean, there's also what we do with many of our clients for living. But maybe the easy Monday morning thing that I can actually ask your listeners to do is what we call as a break-even exercises. So let's assume that, for instance, let's take a marketplace. Let's say you're selling a dollar 100 item, and I mean, as in your customer is selling it. If you ask them, you know, what should the pricing model be, 3% transaction fee on a $100 item, or one and a half percent transaction in $0.50 or $3 or are you indifferent? This is a basic question because if you do the math, all of those numbers are the same.

Starting point is 01:11:15 So an economic human being, rational, everything that business school taught us would say, okay, people will pick the indifferent option. I mean, I've done this thousands of times. I've never seen the, you know, indifferent actually win. It's always people will 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,

Starting point is 01:11:39 $1,000 and $10 per seat. Or I would charge you $2,000 flat. Or I would charge you, you know, $500. dollars and the rest in the seed-based amount that equates the $1,500, it's all the same. People would say, I mean, I like the lower platform fee and the variable or they'll say I like the fix. So the indifferent never wins. That's an easy way to like test, you know, pricing models, what makes sense.

Starting point is 01:12:05 Awesome. That brings us to our fourth topic. And I think this is something that everyone listening is going to be like, oh, no, I got this. I'm doing this great. I don't need to learn about this. But your point is that it's almost always wrong, which is, focusing on benefits versus features when you're talking about your product. So maybe as a first question, just what's a sign that you're probably focusing too much on the features of your product

Starting point is 01:12:28 when you're pitching it versus the benefits, which is, to your point, much more powerful? I think I see some telltale, you know, markers or patent 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 as the benefits as like what do the features actually do? 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. Right. So if you are super excited about the product and passionate about every single thing that the product is doing, most likely you're talking features and not benefits,

Starting point is 01:13:06 because you're showcasing how cool your product is and, you know, how the different belts and whistles actually work as opposed to focusing on what is the actual benefit for the customer. They're probably also other signs like, for instance, if you don't see market traction for what you actually build, 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, and then actually then changing the, you know, speak to being more benefits is key. To take an example, for instance, you know, Smug mug, which is a ridiculously awesome company, they used to actually publish their pricing plans, which was like, you had to scroll literally three or four.

Starting point is 01:13:47 pages and then you'd see the price, it's all the features, everything else that the company did. They changed it to benefits-based communication. So like a very simple thing. Like, for instance, the ability to sell photos online is a benefit. There are probably 15 features that is behind that, that actually enables that stuff. But then focusing on the benefits, they had a double-digit improvement in revenue, no changes in products. We show the before and after also in monetizing innovation if someone is interested in what it was, was what they actually did. So if you don't see enough fraction that that could be a marker coming back to your question, or it could just be that if you're too passionate about your products,

Starting point is 01:14:26 then your chances are as a product person you're talking features. Is there any other examples of companies that you think do this super well to make it even more concrete? To take a, let's say, non-sass example, my favorite, I'll come back to like Porsche again because their value communication is, to me, a legendary. Like when they launched Tekon, which is the electric car, their value communication was something like this. I'm trying to remember it, but it was something like, Takan is not your most affordable electric vehicle,

Starting point is 01:14:52 but that was never Porsche's goal. Porsche's goal was to actually build a car that was first and foremost a Porsche. That kind of value, say, you know, statement, what they actually build totally resonates with those, you know, their audience. Taking a maybe SaaS example, Shopify is one of my favorites in terms of like looking at the plants in terms of their benefit, like what do they actually put out? All of the plans emphasize benefits.

Starting point is 01:15:17 and less features. For instance, the number of locations that you can track inventory is a benefit because if you actually have a more complicated supply chain is different from a lot.

Starting point is 01:15:29 So there are plants which actually have different number of inventory locations, which is a benefit, if I can track more or not. But behind this, there could be like many features that actually enable this. So if you look at the plans

Starting point is 01:15:42 that Shopify has, I think that's a great example. And also they have a lot of good value communication in there. I remember something like the tagline for Shopify plus was fair pricing, unfad advantage. And just things that actually make bloody sense, then you see it, what you're actually getting. So I think that's a great example that listeners can go in. So maybe as a takeaway, folks should probably look at their website, browse through their pages and just look, or am I pitching features or am I pitching benefits to the reader?

Starting point is 01:16:10 Correct. Awesome. Correct. Exactly. That brings us to our very final topic, which is. behavioral pricing. You have a whole chapter on this concept of behavioral pricing, and it's super interesting, and it's interesting because you can, you don't have to rethink your price. You could just sell at a higher rate by just thinking through this lens of

Starting point is 01:16:29 behavioral pricing. So just to set context, what is behavioral pricing? Why is it important? Behavioral pricing basically is, you know, tapping into the irrational modes of our decision making and not just rational. I think that when I talked about the break-even exercise, if you take a very rational view, Indifference would always win, but like I said, I have never seen it. So there's always a,

Starting point is 01:16:52 you know, irrational side of our brain that actually makes decisions and understanding this is a product person would lend yourself to like building products and also positioning or framing the product conversation in such a way that appeals to both sides of the brain. The, you know,

Starting point is 01:17:07 predictably irrational was a great book from Dan Ariale made them made the concept very famous. We build on top of that where we actually talk product and pricing strategies that actually, you know, you need to take care when you think about the, you know, irrational side. That's what we call as behavioral pricing. To take a concrete example, and he may be, you know, I remember walking into a company and, and they had three products. And I remember asking the CEO, you know, why do you have three products? And he said, I learned that good, better, best is a great strategy in business school. So I'm like, okay, that

Starting point is 01:17:39 sounds great. But when you actually look at what was going on, they were giving the farm away on their entry level product. So they had three products, 49, 79 and 149. That was the price points. And what they actually were doing is they gave a lot of features for the 49. So they were giving the farm away. So 60 to 70 percent of people were taking the $49 product. Not many are actually opting to the others. What they did was actually super interesting. They just reframed the argument. And they found out that between 79 to 99, the pricing was inelastic and there's a threshold at 99, not at 79. It is the same exercise that I talked about in the acceptable and expensive price, etc. So they moved the price from 79 to 99. And they move the price of the 149 to like

Starting point is 01:18:23 199 because of the same kind of reasoning. And then what they actually did is they built another product at 299, which was simply a decoy to make the $99 product look attractive. Right. So if I put a $99 product that looks awesome next to a $2.99 product, it looks even more attractive. I mean, God bless the 2% that even take the $299 product, right? 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, it actually made more sense to pick that product.

Starting point is 01:18:59 I mean, so this is just reframing the conversation. And it was a 30 plus percent increase in, you know, MRR and ARPoo. right after they actually did this change. No changes in products, no changes in features, just in terms of how they reframe the conversation. I mean, these kind of things are around us, and we need to understand these. Like, for instance, if you go to a movie theater,

Starting point is 01:19:20 you'll see a small popcorn for $7, an extra large popcorn with butter on it, huge one is $8. Most people will say, for $1, I'm getting this extra large one, let me buy it. But that $7 popcorn is a decoy. I mean, if that was not there, most people would be scratching their head saying,

Starting point is 01:19:35 why am I paying $8 for popcorn in the first place? Right? I mean, so this kind of behavioral framing and nudging becomes important. It's not about, you know, 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. 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 is simply product discipline. Don't give too much away in your entry level product.

Starting point is 01:20:03 Don't give the farm away in your entry level product. you know, sort of at least preserve something for the $99 products. If you build the packaging correctly, you can emphasize a compromise effect. And this is a well-known behavioral theory where people avoid the extremes. If you are quality conscious, you would go to the right. If you're budget conscious, you'll go to the left. But most people will compromise in between. If you actually see your, you know, packaging mix is like this and it's not the normal

Starting point is 01:20:29 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 outcomes towards in a middle package compared to the entry level one and also then, you know, charge based on the value that you're actually bringing to the table. So we have talked about many behavioral pricing strategies in the book dedicated an entire chapter to this. Did you actually share a few of them just like some of these tactics that you find?

Starting point is 01:20:57 I don't know if you have them in your head. 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. You're a board. So there are a few, right? I mean, the compromise effect is the good, better, best that we talked about. The next one is what we call us, like, let's say, you know, pennies a day effect or, like, how you actually frame your pricing. So, like, for instance, if I tell you a $30 per month price, it's very different from $1 per day.

Starting point is 01:21:26 Like, the way you actually frame your price if you can actually showcase some kind of bargain, like AWS does this really well. 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 but the price if that started with like a higher price point compared to a lower price point there could have been different you know sort of situations similarly for instance you know when you take like

Starting point is 01:21:50 let's say you have a monthly subscription in your SaaS business and you also have an annual subscription you need to showcase your annual subscription as a monthly price like if it's like for instance it is $29.99 if you actually take an annual subscription, but it's $40 a month if you actually do monthly subscription. But you're still messaging the price as a 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,

Starting point is 01:22:23 it looks like a more attractive price. So that's a Benisaday kind of effect. I think that kind of makes sense. On a product side, if what you're building is products and consumables, Then things like the razor razor blade model actually makes a lot of sense. 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.

Starting point is 01:22:54 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 view themselves on the platform and then they are paying for chunks of usage or things like this which is a razor blade model which is much more attractive for people typically

Starting point is 01:23:17 because there's a lot of scrutiny on the upfront cost that people are actually paying as opposed to doing an entire TCV calculation and like a total cost of ownership calculation. Most people don't do that. They're looking at what they're actually going to pay. So if you are more attractive up front, that could be a different way to reframe your product or price. Maybe an advanced version of like a behavioral tactic that I would probably talk about from product side is what we call as a Panini effect.

Starting point is 01:23:44 The thesis for this is like when we are kids or for those of your listeners who have kids at home, one of the most repetitive exercises that we all went through as kids was to like build puzzles or like fit different things together. Right. I mean, I mean, I used to do that. 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 fill puzzles and have a compulsion because they just started with most of this in their childhood.

Starting point is 01:24:11 So it's a Panini effect comes from the sticker book album that we actually used to, you know, collect when we are kids or building, you know, puzzles, 500 pieces, whatever, all of these kind of thing. So when you actually build a product and even in the most, some of the most complex SaaS industries like financial services, when we have tested this with our clients, if you list the products, 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.

Starting point is 01:24:43 Let's say you have a brokerage product. You have like a different investment product, etc. You just list all the product. But if you show it as a puzzle 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.

Starting point is 01:25:06 We actually see the attached rates going crazily up. 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, 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 a, you know, right-haling, for instance, if you say, okay, this is your weekly puzzle. and if you like take a ride every day or you take a ride during evenings or if you give people a task or a puzzle

Starting point is 01:25:32 and show them the puzzle and show them that you have done this but then these are the other things that you have not done. 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?

Starting point is 01:25:47 So the Panini effect is a nice way to actually think about how to showcase your products in such a way that you create compulsion for people to like buy multiple products. I mean, if there's show notes in your podcast, I'm happy to give you some visuals that, you know, you'll see it. It's bloody obvious.

Starting point is 01:26:05 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, you know, a little completion percentage, but is that Panini because you make a thing and you,

Starting point is 01:26:14 it all comes together? No, I think this Panini effect, it comes from the Panini sticker books, whatever, like all the things that we used to use before. Not the sandwich. I mean, so. Okay. No, it's not the Sandini effect.

Starting point is 01:26:26 rich. And yeah, I mean, I guess we made a category out of what this is. Cool. Okay. Just call it Panini. Got it. There's something else you touched on that might be worth doubling clicking on is this price threshold psychological trick. Is there like heuristics or just rules of thumb of like, here's thresholds people generally have? Or is it generally like very custom to the product? If you look across B2B SaaS or consumer products, you'll find some thresholds that often make sense. Like for instance, if you are looking at $29, dollars, most people would say equate that to a dollar a day and say that $30 is a threshold.

Starting point is 01:27:01 So you see some of these things. You know, beyond this, you need to test for your own products and categories because the anchors are also referenced based on other competitive alternates, you know, what their perception of value is and so on. So doing the exercise, like I described earlier, the acceptable, expensive and probably expensive would give you a psychological thresholds. And by the way, that's also a behavioral pricing thing because you have. you're saying, if you cross 99 to like 101, there's a steep drop in the demand curve.

Starting point is 01:27:31 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, you know, psychological standpoint. And often we are able to validate this statistically and significantly as to what are the different thresholds for your products in the market. 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,

Starting point is 01:27:55 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 the testing and learning becomes inevitable

Starting point is 01:28:07 and there's no rule of thumb that you can just apply. But of course there are certain things like 30 bucks a month or whatever. That's a usual threshold that we see or 99, famously made famous by all the subscriptions that we probably use.

Starting point is 01:28:22 Awesome. Well, to start closing our chat, just a few more questions that I wanted to get through. One is the market is slower. The economy has slowed. Purchasing seems to have slowed. 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?

Starting point is 01:28:46 Yeah, I think it's a great question because we need to prepare for it. But of course, you know, be proactive. I would say three things that founders can keep in mind. when it comes to product pricing, if there is a downturn especially. The first thing to think about is, you know, building a lesser expensive alternate

Starting point is 01:29:04 compared to what you actually have and keep it in your back pocket. So like, for instance, if you have a product, SaaS product, I would think of like what can I de-feature from this product and then create a lesser expensive alternate

Starting point is 01:29:17 that I keep in my back pocket to like reduce churn. So if someone says, you know what, I can't afford this anymore. It's a downturn. Give them the, less expensive alternate, keep them in the system as opposed to them going away.

Starting point is 01:29:30 If you just discounted price, guess what's going to happen? Six months later, that's going to be a new price. So before you price discount, think about what value can you exchange to actually justify that price discount. So you're taking value away in a de-featured product and hence you can discount. Having that kind of price integrity is super important with your customers. So don't just rush to like dropping price. That'll be the absolute worst thing you can do to yourself at that moment and also in future.

Starting point is 01:30:01 So like having these kind of less expensive alternates. Second one I usually say which is in line with not dropping the price is to think about three non-pricing actions that you can do when, you know, when this actually happens. Like for instance, do I give more product to preserve the price? That's a non-pricing action. So like I give more value. They say, hey, you know, times are tough. Take the best product professional. You've been a great customer.

Starting point is 01:30:27 Earned the loyalty. But when, you know, times are great, you're probably going to renew the pricing at, let's say, a higher price because you just gave them a product for one year at the same price that they're actually paying. Right. So I think that's a non-pricing alternate or it could be change the contract terms. Like, you know, say that, okay, take a three-year contract or two-year contract and then think about that as an alternative as opposed to.

Starting point is 01:30:51 to like reducing price or things like, for instance, payment terms. Like, okay, if you say it's difficult, I'll change it from 15 days to 30 days and live with the payment terms as opposed to like changing price. So like three non-pricing actions, we write about some of these also in the book. And the last one I would probably say, you know, is think about changing your business model, a pricing model. Like it's a, you talked about usage-based pricing. Frankly, an outcome-based or attribution-based pricing.

Starting point is 01:31:19 frankly there's the best time to actually think about these things like if you know if people are not using the product changing it to a usage base people would say that's great because you know 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 like trying to do that when the times are good and people are saying oh I actually want fixed or I want you know I don't want you know I don't want won the usage and things like this, you actually just took that as an opportunity to change. I mean, one extreme example that was interesting during the pandemic is a software company that was actually, you know, providing software to like hair salons, right? I mean, just as an example, like hair salons. And this company, I mean, it used to be a per seat model. I mean, it just used to make sense, but they want to think about usage. During the pandemic, no one, for instance, went to a hacker.

Starting point is 01:32:16 They were all taking this at home. So they said, okay, let's, you know, change it to like a per-hacket basis. But of course, when things are back again, that kind of model can recoup a lot more compared to a per-seat model, because that's really where the value is actually getting derived. I mean, just as an example. So three things again. One is, you know, thinking about changing your pricing model, three non-pricing actions that you can take. And then how can you de-feature something and keeping your back pocket

Starting point is 01:32:44 so that you can have a proper pricing conversation and not just drop a price. That is some killer advice. Thank you for sharing all that. Thank you. Something else is during our chat preparing for this call. You mentioned that you're maybe working on a new book. Can you talk about what it's going to be about and anything else? Sure.

Starting point is 01:33:02 I will try to see what I can talk about without getting too detail. But the thesis of the book is, the title of the book is it's called unlocking growth, growth that is profitable, matter, etc. So unlocking growth. And the subtitle is Breakthrough Strategies for. for acquisition, monetization, and retention of customers. So this is a bit like where monetizing innovation stopped, and this book picks up from that.

Starting point is 01:33:26 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? You need to acquire customers. You need to monetize them. You need to retend them. So this book actually gets into all of those dimensions.

Starting point is 01:33:40 And the key pattern that we have seen, Lenny, over and over again, is, you know, most companies would have teams and people dedicated to these three I mean, acquisition, monetization, retention. That's the, you know, if you unlock these three, you're getting to profitable growth. Right. I mean, that's literally the three things you have to focus on. But what ends up happening is most people don't understand the interaction effects across

Starting point is 01:34:02 these or they, in the worst case, they even treated as silos. So the acquisition team works on something, but the monetization team is not looking at the interaction of what they actually do. For instance, 90% of customers or, you know, people who we meet who claim to have have a land and expand strategy are only landing. They're not expanding because they gave their farm away in the land. So how do you actually think about a land and expand strategy in such a way that you can acquire, monetize, and retain customers? So this book actually goes into breakthrough strategies to balance the trade-off between acquisition, monetization, and retention,

Starting point is 01:34:38 and build the right products and come up with the right pricing strategy. You're going to have incredibly strong product market fit with this audience. Is this something anyone can pre-order yet, sign up to get notified when it's out. I think the pre-order probably is still open in Amazon. So I think that's something you can check. I wouldn't check lately. But you can follow me on Twitter at Madovin SF. That's M-A-D-H-A-B-N-S-F.

Starting point is 01:35:01 I usually tweet about this book and in general, or follow me on LinkedIn or add me on LinkedIn. I think those are probably some good ways to keep in touch. The book is supposed to be out in Q2, Q2, Q-3 time frame, so watch out for it. Amazing. So it's called Unlocking Growth. They can search on Amazon, right?

Starting point is 01:35:20 Yeah, absolutely. If you look for unlocking growth and even book market, you're going to have it in your list of books that you want to buy. All right. I'm going to pre-order it immediately. Any other good resources that you recommend for folks that want to learn more about pricing and just all the things that we talked about other than your book? There are a number of resources.

Starting point is 01:35:39 Our founder, Herman Simon, of the Simon of Simon Cudgeon, has a lot of books. Particularly, I like one which is a lot of the book. is called Confessions of the Pricing Man. I mean, he started this business 35 years ago and literally out of university and academia and we have grown to where we are today, but it talks about some of the lessons that he has learned. I find it fascinating.

Starting point is 01:35:59 And it's probably the better book compared to monetizing innovation. So I think I would urge to read us to definitely read that. The other book that probably we also put out, which is topical right now, is one of my partner colleagues, Adam, Hector, and Herman wrote a book on pricing during inflation. and inflationary times. So I think that's a very topical book that I think readers can pick. This is within our Simon Coucher assets

Starting point is 01:36:23 of people who have actually written books. Another resource to probably look at is Kyle Poyar from Openview. He puts out some really good stuff on product-led growth, pricing, etc. I mean, he's an alumni of Simon Coucher, so we're proud about our alumni, but it's some fantastic work that he has done.

Starting point is 01:36:41 He has also written some SaaS pricing guides, etc. So I would highly encourage you to check Kyle's work. I think that's fascinating. And I also feel 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. Matavan, this was everything I hoped it would be. This is probably the record for the longest podcast we've done.

Starting point is 01:37:04 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? Online I mentioned LinkedIn, so Madovan Ramana Jim. So that's on LinkedIn and Madovan SF on Twitter.

Starting point is 01:37:25 That's probably where you can find me online or even at the Simon Kutcher.com and you can search for leadership and you'll probably see my name there. What can listeners do? I think I would probably say that the fundamental level if you can talk about this topic, actively share what you have learned,

Starting point is 01:37:43 And if there are sections of the book, for instance, that you like, talk about it. You know, the biggest, biggest thing that we can all do is to educate each other and everyone, that there's a science behind all of this and it's not just an art. And if that's relevant, then I think message accomplished. That's also why we wrote monetizing innovation. What a beautiful way to end it. Marapan. Thank you again for being here.

Starting point is 01:38:07 Thanks, Lenny. Thank you so much for listening. If you found this valuable, you can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. Also, please consider giving us a rating or leaving a review, as that really helps other listeners find the podcast. You can find all past episodes or learn more about the show at lenniespodcast.com. See you in the next episode.

Lenny's Podcast: Product | Career | Growth - The art and science of pricing | Madhavan Ramanujam (Monetizing Innovation, Simon-Kucher)

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