Episode 157: Aligning Pricing with Value in the Technology Space: Insights from Jean-Manuel Izaret of Boston Consulting Group

In this episode of the Product Thinking podcast, host Melissa Perri is joined by Jean-Manuel Izaret, Global Leader of Marketing, Sales, and Pricing Practice at Boston Consulting Group. Join them as they discuss strategic pricing and its importance in the technology industry. They explore different pricing models and strategies, including segmenting users and offering different pricing options based on the value received. They also touch upon the challenges of pricing AI models and the concept of fairness in pricing.

You’ll hear them talk about:

  • [07:56 - 09:11] - Traditionally, pricing has followed a cost-plus model, where you calculate the actual production cost, and then you add overheads, distribution cost, and margins. This model works for restaurants, construction businesses, and so on. You need to know your costs before calculating your price. However, in the software space, you don't have any marginal cost for the distribution of software. Most of the cost is in the development of the software. Once it's done, you have recovered the development cost and there isn’t any additional cost for a new customer. Most software companies have traditionally thought about price as a factor of value, but the value is not fixed as different market segments might derive different values.

  • [15:32 - 16:39] - If you have a piece of software that is priced per user and summarizes what this user did in the past two days or weeks, that's your standard model of pricing per user. You are enhancing the value of the human doing the work. You could also be in a situation where you're going to help automate tasks so much that you're going to drive directly to outcomes. If you can then price per task or price per outcome, this is when the model is in the niche and the segments of replacing humans. A quick view of the history of technology throws up many examples where we replaced what people do, and then that helps people focus on more valuable tasks.

  • [25:19 - 26:56] - A fundamental question product managers should ask even before the salespeople tell you what the customer wants is, “Do you have a really well-managed list of things you think are really important for a large number of customers?” And then you prioritize based on things everybody will want. Well, that's a no-brainer for sure. You're going to do that. You need to compare the request with the long-term view of what you need to build in your product roadmap. Having a clear view of what you want to build before you get input from the market is really important.  

  • [29:29 - 30:30] - You should hire people who are really good analytically, but also quite strategic. Sometimes you have people that are introverted, people that are really good with numbers, but don't really like talking to customers. You need people that go out and understand what the entire product management team is going to need, while also seeking inputs from the sales team and the customers. You need someone who can aggregate a lot of the inputs and make the synthesis of it in a really strategic way and then get to what the numbers should be. People in charge of pricing need to have the combined skill of being able to understand the market and to do the numbers.

Episode Resources:

Melissa - 00:00:01: Creating great products isn't just about product managers and their day-to-day interactions with developers. It's about how an organization supports products as a whole. The systems, the processes, and cultures in place that help companies deliver value to their customers. With the help of some boundary-pushing guests and inspiration from your most pressing product questions, we'll dive into this system from every angle and help you think like a great product leader. This is the Product Thinking podcast. Here's your host, Melissa Perri.

Hello, and welcome to another episode of the Product Thinking Podcast. Today, we're talking about a very hot topic, pricing. We're joined by Jean-Manuel Izaret, who's a managing director at the Boston Consulting Group and a co-author of a new book called Game Changer, which dives all into dynamic pricing strategies. I really enjoyed recording this episode with Jean-Manuel because I learned so much about pricing. And we dive into many different topics like how SaaS companies should be thinking about pricing, what to do with inflation, and a lot of other different types of topics that product managers are going to have to know about pricing. But before we get into that, we're going to our Dear Melissa segment today, which is very relevant to our topic. So in this segment on Dear Melissa, you can ask me any questions you have about product management or anything else that you think I might be able to answer. Go to dearmelissa.com. Send me your questions. I'm answering them every single week.

Let's see this week's question. Dear Melissa. I know that sometimes you're also talking about pricing. As I often develop our own internal tool landscape, I'm increasingly noticing how SaaS providers are moving away from clear, comprehensible pricing towards a wild combination of modules, user-based pricing, and additional prices resulting from the options. I remember it differently from two to three years ago, and I'm very reluctant to use such a tool at times like this. Of course, this also affects my own internal point of view regarding pricing. What are your thoughts on this kind of friction?

Well, like I said, very relevant to what we're going to be talking about today. But here's my thoughts when it comes to all of these different pricing strategies that we're seeing in SaaS right now. I get what you're talking about. Sometimes there are companies out there that have 20 different options that you can choose from. It's like mixing, matching, putting them all together. And it's very, very confusing to the user. One, I think this can be a symptom of... People not understanding what their customers want, right?

Pricing actually takes a huge amount of user research to understand what the value is to your users, how they use your product, and what they want to get out of it. When you're taking a spray and pray approach where you're not focusing on your core users, you don't understand your customer segmentation, you're trying to target everybody, you're probably going to be like, hey, let me just give them all the different options and see what they do. And I think this is what a lot of companies fall into when they're giving you 20 to 40 different options to create your own SaaS subscription. That's not what most users want. They don't want to pay for every little tiny add-on. They want something that is in a nice package that produces a value for the type of thing they're looking at. So to me, when I see something that has way too many options, I'm thinking that they don't understand their core users. They don't have great focus on a core customer persona or market or segment or whatever they are that they're targeting. And instead, they're just trying to throw a bunch of stuff out there and see what works. That's not a great strategy. You want something that's very clear to users. I like the transparency behind actually showing people what they're going to pay before you get into the product or so you don't have to call salespeople, which drives me nuts personally. And I think the transparency there is key.

That's definitely a value component that you could have, but you want to make sure that your options are tailored to your customers and that there's a few options, not 47 for them to actually choose from. That's what I would be thinking about when I see this. I also think that there are a lot of people out there who copy pricing models that they've seen from other SaaS companies or from other businesses in the realm, and they're not doing it thinking about what kind of value do we want to hone in on and what can actually differentiate us. If you're just doing a typical per-seat license that's like per month per user, are you really thinking about how that scales? Are you thinking about what happens if those people leave? Are you pricing it for the actual value that your product is? Delivering.

That's what you have to think through in those cases. I've seen some products out there that are doing really interesting things with pricing. Dovetail is one of the ones that I actually like. So what Dovetail does is they are a user research aggregator. So you put all your user research into it. It's a repository and you share with everybody else in the company. And to get into large businesses, if you went with a traditional SaaS model, you can think about it where you'd have to buy seats for everybody in your 5,000 person, 10,000 person, 40,000 person company. Lot of large companies don't want to do that. So what Dovetail did is said, hey, actually, we have different types of users. We have the user researchers and the product managers and the people editing. So they put the user research in there. Let's charge a premium for their seats, and then let's make it free for everybody else to just view. And in that case, you're now appealing to a lot larger companies because they can see themselves scaling with it. And they're recognizing the value that people get as viewers and that they get as editors and how to actually make that work. So I thought that was a really interesting way to do that. Whereas a lot of other people or businesses rather would be looking at that and saying, no, if we have like 8,000 viewers, we just need to charge for it. I think Figma does this as well. They let you view for free on other people's Figma things. And then if you want to be an editor, you have to start paying for it. Great way to start thinking about how do you actually scale that value and how do you actually go up market as well to help with that scale? So there's a lot of different strategies you can think of out there for pricing. It doesn't have to just be pricing. It doesn't have to be pricing. It doesn't have to be pricing. It doesn't have to be per-seat, per month money. And we are going to talk about that in depth in this episode.

So I hope you stay tuned and listen to the rest of the episode. Did you know I have a course for product managers that you could take? It's called Product Institute. Over the past seven years, I've been working with individuals, teams, and companies to upscale their product chops through my fully online school. We have an ever-growing list of courses to help you work through your current product dilemma. Visit productinstitute.com and learn to think like a great product manager. Use code THINKING to save $200 at checkout on our premier course, Product Management Foundations. Welcome to Jean-Manuel. It's great to have you on the podcast.

Jean-Manuel - 00:06:52: Thank you, Melissa. I'm glad to be here.

Melissa - 00:06:54: So you wrote this book called Game Changer, which is about a really hot topic right now, all about strategic pricing. What made you want to write a book on pricing?

Jean-Manuel - 00:07:03: Well, because I had been working on pricing for almost 30 years, and especially working here in the Silicon Valley with a lot of technology companies. I had developed a set of ideas that I thought were not in any book. And especially with everybody thinks about pricing as just what is the price. And when you think about product management, you need to think about pricing much earlier. It's about monetization. It's about extracting the right value. And I thought it was important to have a book that would talk about strategic pricing as opposed to just the techniques of pricing. So that's why I wrote this book.

Melissa - 00:07:36: So over time, SaaS model pricing, streaming pricing is something that you put in your book for music. A lot of these things have been changing with the advent of technology and how markets change and the different things we put out there. When you think about price, how do people typically or traditionally in the past determine price?

Jean-Manuel - 00:07:56: Traditionally, almost everybody thinks about price as what are the inputs to price and costs is the starting point. And that works for restaurants, construction businesses, and so on. You need to know your costs before your price. When you move into the software space, you don't have any marginal costs for distribution of software. Most of the cost is in the development of the software. Once it's done, you don't have any costs for any new customer or limited. As soon as your costs disappear, well, you need to price something and it can't just be something times zero. You need to think about pricing in a different way. And most software companies have traditionally thought about value. So you need to think about that very carefully. But you have different segments. They all might have different value. You also have when you have limited amounts of costs, a choice about the pricing unit you pick. When you sell a box of cornflakes, you're going to price per box of cornflakes. It's hard to change your pricing basis. And your pricing unit. But in software, you could price per user. You could price for anything you want for the amounts of gigabytes that you're using on your servers or any other metric. And so these two things, limited cost and the need to have value and the choices about the pricing basis, make software a great experimentation place for pricing.

Melissa - 00:09:12: I think what you're honing in on with the value piece is something that we talk about a lot in product management. We're traditionally told, produce software that has great value for users and let's price it so that it's in proportion to that value. But determining what value is and how to price that has always been really tricky, I feel like. How do you determine and how do you recognize, I guess, the value of a product or service so that you can price it? What types of factors would you be looking at?

Jean-Manuel - 00:09:42: The first element of value is about what are you comparing yourself to? If you have a new breakthrough product and there's nothing out there, well, your product still allows people to do things that they were doing differently before. So for a lot of software, initially it was replacing pen and paper processes with software. Well, look at what do these processes cost? And that's the overall value sum, all of that. And you say, we're going to replace that with software. Well, all of the traditional costs that companies had in doing these paper processes, now they do it on software. You compare the two and you always want to price below the value. You don't want to extract all the value. But thinking very carefully about the value you create by saving money to your customers is a really good way to start. Now, that's true when you have a product that replaces essentially an old process. But very often you come into a market that exists already and you just have a better version. And so then you're going to, the value is how much improvement do you bring to existing other software? How much better is your software? Does it save people time? Is it easier to use? Do you add revenues to your customers? All of that can be part of the equation for that.

Melissa - 00:10:56: When you're looking at doing those studies and how you want to price on it, you mentioned in the book that you have seven games, right, for the strategic pricing hexagon that you put out there and you have to choose what type of games you're playing. Can you explain us a little bit about what you mean by that and how you should start to think about all the different levers of cost versus value and how you want to go against competitors and when that's good or not?

Jean-Manuel - 00:11:22: Yes. One of the main points of the book is to make things simpler by distinguishing different types of situations and saying different situations you're going to price differently. People tend to think about pricing is just like a ball sports. I want to be good at the ball sports. Well, it depends on which sport you're playing. The strategy for baseball is very different from soccer and football and basketball. And so in pricing, you also have to differentiate that. The cost plus pricing, which is one type of game, is really relevant for construction businesses and really practical businesses. For most software companies, you're never in the cost plus. Forget about cost. But then there is another game, which is about when you're in markets that are very comparable to each other and you're going to play the elasticity game. So you compare yourself to the others and you optimize your price. That's the kind of game that restaurants are in. Very often in the software space, again, you're not, you're not like a restaurant business. You're not like a consumer goods that is on the shelves of a supermarket. So you're not in this elasticity game. But very often you could have the value game is one where you have a unique value proposition and nobody compares to what you do. And therefore, you need to price that value the way I was talking about earlier. That value game is very often very relevant for software players. Now, software players can also be in a situation where they're not the unique one in the marketplace. There are three or four alternatives. And very often they offer a number of choices to their customers, a lineup of choices. And it's really important to think about the different elements of your lineup. That's what we call the choice game. These are four examples. We can go into some of the others, but these are four examples of different pricing games. And understanding the rules of each of the game and what it takes to win in each game is really important in order to maximize your pricing and revenue opportunity.

Melissa - 00:13:14: So how do you think about which pricing model to choose, especially if you're a SaaS company? Let's work with that to help optimize your goals for the business. I work with companies sometimes that are in very crowded markets, right? They've got competitors. It's not something new. It's not like the first iPhone on the market. And they're looking around and they're pricing against other people. And typically in SaaS as well. You almost always find this kind of like per-seat subscription model, right? Per-seat, per-user subscription model. And that tends to be the standard across the board. If you are trying to beat out competition or do something new, is there something that you can leverage? In playing a different game or looking at different types of goals to help compete against them when it comes to pricing.

Jean-Manuel - 00:14:00: Yes, of course there are. To finish the point about the different types of game for software and SaaS players, I'm going to add another type of game that I find in the technology space, which is what I call the custom game. And the custom game is the game when you negotiate with every single customer and the software and what you offer is going to be different customer by customer. For SaaS companies, you end up having a choice between three games. The value game. The choice game or the custom game. The value game is you are better than anybody else. There's nothing comparable as you. You got a price to value. The custom game, usually you have a good value proposition, but you have a lot of customers. They all want something different. You're going to custom code a lot of different value propositions for them or have a lot of SKUs. That's the custom game. And the choice game is in between the two. It's a place where you're not going to have thousands of SKUs. You're going to have 10 to 20. When it gets to 50, it starts to be a lot. And you're going to offer choices to customers and guide their choices. Many SaaS companies need to choose which game they're playing, and that depends on the level of competition and the level of fragmentation and how different their customers are. If every customer is completely different, then you need to customize, right? These are the choices between these three. And the way to win are different in each of the games that we could go into that in more detail later on. The second part of your question was around the pricing model and the price per user per month, which is the default of SaaS. First, let's give SaaS. It's due. It's been a fantastic new pricing model that came out in the early 2000s that has allowed to make software much more accessible to so many industries and so much innovation has come out of that. This is a great innovation. Will there be another wave of innovation? There might be with GenAI and other pricing models. And the price per user should, for instance, not be a forever pricing model, especially when you're going to replace users. If the purpose of your software is to automate a lot of tasks so that companies are going to have less users, your price per user, you're going to have a problem down the road because the pricing, the units of your pricing basis are going to tend to go down. The same way if you are in the healthcare space and you price per nurse, but you automate the work of what nurses are doing, it's probably not a really good idea to price per nurse. So you have all these dynamics that you need to think through about where your value is, and down the road, what are the trends, if your value is to take out users. Well, maybe users is not the best pricing model.

Melissa - 00:16:40: That's a really good point. That reminds me of Zapier. Zapier prices per tasks because it automates the different tasks and you get a certain number of blocked tasks per month, which is a great example of that. I think the pricing things as well, I see a lot of companies not take into account to what types of companies are going to be purchasing from them, especially in the B2B space. And for instance, one company I saw that did it really right, and I love this because I was working with this really large enterprise. They have over 8,000 people in their software part, product managers, designers, everybody. And they were looking for a user research tool. And we were going around looking at different software and they were saying how expensive it was getting for them to use Jira and to use all these other different productivity tools around it. And they were like, oh, one more software. And that's, I think, part of the consolidation that we're seeing around some of these productivity tools as well. Everybody's turning to Microsoft or they're turning to Atlassian for all of this to kind of congregate. And one of the tools that I was telling them about was Dovetail. And I hadn't looked at their pricing before, but we opened it up. And Dovetail is a SaaS scale up for user research. But what I loved about what they did is they priced per editors to put the things into the user research repository, but then they made it free for unlimited viewers. So you could come in and digest the research from all the company, but you needed to pay for the people to actually edit it. And it wasn't cheap for the editors, but they looked at that and they went, oh, well, we can afford that now, right? And instead of it being like $99 per month for per person per seat, and you're trying to scale that to 5,000, 8,000 people, it's more like, I think they're in the thousands. It's like $5,000 per seat, but you only need three or four of them in there. So everybody's like, oh, I can do this in a large enterprise. See if I can tap into this and then spread it and spread it and spread it if I need more editors. And I thought that was such a genius way to do it where a lot of SaaS companies weren't looking at those taper levers. And I thought that was such a genius way to do it where a lot of SaaS companies weren't looking at those taper levers.

Jean-Manuel - 00:18:41: That's right. I think for SaaS companies in particular that tend to have a pricing model based on the subscription per user per month, you need to think very carefully about your users and having different types of users and having different licenses per users. And what you describe is a very typical thing that happens in many businesses where you have a super user that creates a lot of contents. Then you want the content to be used by everybody else. Well, these are two very different because you have a creator and you have a consumer of content. And so you want the price per consumer to be as little as possible because you want it to spread and the value is going to be distributed. But you can extract value for a lot of per creator basis. Now, you need to be careful about how that scales up. And so if you have very, very few creators, one, two or three and millions of users, well, maybe you find a way to monetize the users as well in some other way. But your point is very well taken. Segmenting the types of users you have and even giving them different names. Well. It will help you realize that maybe you have different software models. The features you're going to put in the software are going to be different for different users and therefore justify the different price point for different users.

Melissa - 00:19:50: So if you were somebody who was looking at your pricing model and trying to figure out, are we doing the right thing? Can we actually price and package this differently? One that we just talked about was like looking into user behavior and how people look at it and consume. We talked a little bit too about tasks versus seats. What other factors would you tell a SaaS company to look at to figure out if they have the right pricing model or not?

Jean-Manuel - 00:20:13: We may talk about this a bit more later, but very often I see companies very focused on the features they're offering and not focused enough on their customers. And so one way to uncover different elements of value to price buy is to ask yourself, do all my customers get the same value or do some customers get extraordinarily more value? And that will give you a sense about maybe I should segment and find something different for these customers. Let me take an example. If you have a piece of software that helps manage employees, well, you have different industries, different value per employee, and you have some industries that pay the employees enormous amounts. Let's take investment banking, for instance. I price my software the same way for industrial goods companies and manufacturing companies and to investment bankers. And the value of my software is proportional to the value of the employees. Well, you need to segment the customers that are the high value customers to here on the investment bank. In any markets, you're going to find that some niche sometimes has a value extracted that is an order of magnitude more than the others. Another example, if you are having a software that helps manage risk and can be used by small businesses as well as a large corporation. And you have a risk manager, but a risk manager managing billions of risk versus risk managers managing, you know, a million, two million, five million of risk is very different types of value that we can create. Do you have the packaging of your products that corresponds to segmenting for these different groups of customers that have different value? And then what are the... You have the features that the customers that get the most value want that the others don't want. Once you develop these features, you could sometimes price 5x, 10x more to these customers because they get 100x the value. Why wouldn't you price much more there? And so back to your questions, thinking very thoroughly about what is the value that your customers get in orders of magnitudes with the basic features that you have is really important. If I may, very often when you... When you're a SaaS company, you also try to have very transversal use cases, right? When you try to get into the market, you want use cases that are going to be relevant for as many people as possible. Well, that tends to be use cases that have a value that can be very different for different customer segments, but everybody needs them, but different people have different value. And that's where, when I was talking about earlier, it's really relevant. And that will drive a decision about how you package your products before you even decide on the price point.

Melissa - 00:22:55: Do you have any examples of pricing that you've seen in SaaS companies where you're like, oh, this fits perfectly for the value they're trying to deliver and it's a little outside the box?

Jean-Manuel - 00:23:06: Yeah. One good model for a long time about how to try SaaS companies is one of the most successful SaaS companies ever, Salesforce.com. And one of the things they did well really early on is they made sure they didn't have too much discounts. And they also made sure they had a product lineup that was quite wide with a range of price points that got from, I think, 18 bucks a month at the beginning to 180 bucks. So 10x differential that allowed them to segment their customers. They did that well. Many other people have done similar things before. Now, of course, Salesforce.com became such a much bigger company with so many different products and so on that it becomes more complicated. And we could have an entire podcast talking about just how they price. But think about how Salesforce.com started between 2002 to 2003, where their models matured. You'd have to say on the pure Salesforce product. They were doing really great, applying a lot of the best practices that we've seen work for many years.

Melissa - 00:24:08: One thing that I think that's interesting about Salesforce too is something that you were talking about before with that custom model for SaaS, right? And in product management, I feel like I'm desperately trying to get some people... Away from that custom model, right? Especially like scale-up companies because they are typically, you'll get one or two really big clients in the early days as a startup and then you've got them and you just find out that when I used to come in and work with Insight Partners, we'd go through the backlogs of some of their companies and find out that 80% of the work was targeted to one or two customers that were the biggest customers. And then it became a balance of do you want to be a custom software shop just creating all the requirements for these customers or do you want to do something that scales and how do we actually look at it? So I feel like there's a lot of product management considerations that go into these pricing models as well. When you're a product manager, and you're approaching your work and building, you know, trying to figure out what to build, what to look at, what should you be thinking about pricing-wise? Like, should you be considering pricing from the start when you start building, or how does that conversation come up to make sure that you're doing this from the start?

Jean-Manuel - 00:25:19: As a product manager, you should think about the pricing strategy. I don't want to say exactly your price points, but there's a general strategy really early on when you package your products. We took the examples on a different segment. You need to think about that. When you're in a SaaS company too, you also need to be very careful about what your sales force promises to your customers. So the situation you described, I've seen this even in large corporations with a billion dollars of revenues. You can still see large customers, pick one, Walmart driving 30% of the spend on one particular year's product development. Well, sure, Walmart is really important, but it's a very unique customer. One fundamental question for product managers is, before you even get to answer what the salespeople say the customers want, or a few customers want, do you have a really well-managed list of things you think are really important for a large number of customers? And then you, of course, prioritize when one customer asks for things you know everybody else will want. Well, that's a no-brainer. For sure, you're going to do that. But you need to be able to always compare what the requests that just came out with, with the long-term view about what you know you need to build in your product roadmap, and then build it together. Having a clear view about what you want to build before you get input from the market is really important. Now, you can't forget about the input of the market. Adapting to what the market wants and so on is also fundamental. You know, never successful if you don't really completely innovate on what customers want and so on. But being able to not be too focused on one single customer's good aggregation process is really fundamental for a product manager.

Melissa - 00:26:58: One of the hot topics too, I think, in product management is who owns pricing? Is it something that the chief product officer owns? Sometimes I see the chief revenue officer own it. Sometimes there is a pricing team. Sometimes there's not. How do you think about who owns pricing?

Jean-Manuel - 00:27:12: That's one of the insights about the book is who owns pricing depends on the game you play. And if you were an airline, the pricing should belong to the statistical departments, the data science people. They are the best. Prices vary all the time. Trust them to define the right prices. Software companies are not airlines. They don't change their pricing every day. You need data science in many different ways. Most of the time, data science should not be completely in charge of your pricing. You may remember that I said there's three games for SaaS companies, the custom game, the choice game, and the value game. The choice game is in the middle between the two. And very often in the choice game, deciding what products to offer is really the critical decisions of pricing and how you offer choices. And so product management in the choice game should be in charge of pricing. So this will come nicely for people that are in charge of product management that thought they should own pricing. But that's something we have demonstrated and proven. If you play the choice game, you give too much power to the Salesforce, for instance, to about how to price, to discount things. That's going to drag you into the custom game, which will have all of the issues about having to answer development requests for single customers. That will drag you even more into the custom game. And go to the custom game if your market is really fragmented and that's what you chose to be in the custom game. The Salesforce tends to own most of the decision on pricing. But if you want to play the choice game, product management should own pricing.

Melissa - 00:28:38: I can see everybody taking this podcast and sending it to their CEO so that they listen to that. So that's going to make a great clip and a lot of people happy.

Jean-Manuel - 00:28:48: I even have a number about the size of your pricing team for choice game company, depending on the size of the company. Roughly, you should have in your pricing team around four people per billion dollars of revenues. When you get much below that, so that's for companies that are in the two to ten billion dollars. When you get far above this, then it doesn't apply. And when you have 200 million revenues, you probably need at least one pricing guy, even if you don't have a billion.

Melissa - 00:29:13: So if you were a chief product officer and you own pricing, who should you hire first to help you with that? You're going to be looking at the value drivers, obviously, but there's got to be a lot more work to set the pricing, figure out exactly what the number should be, all that.

Jean-Manuel - 00:29:28: The typical profile of people, you should hire people that are really good analytically, but also quite strategic. Sometimes you have people that are, and I have an introvert people, that are really good with numbers, but don't really like talking to customers or to, you know, they're more on the introverted side. You need people that go out and understand what the entire product management team is going to need, but also through the sales and the customers. So someone who can actually aggregate a lot of the inputs, make the synthesis of it in a really strategic way, and get to what the numbers should be. So the combination of being able to understand the market and to do the numbers is what you want for people that are in charge of pricing. There's now 20 years of SaaS pricing experience. There's a lot of people that have done most of their careers in the pricing department. So there's a large number of people in my network that do this year after year and love the job. But take someone who's done... I've done this before.

Melissa - 00:30:27: Are you eager to dive into the world of angel investing? I was too, but I wasn't sure how to get started. I knew I could evaluate the early stage companies from a product standpoint, but I didn't know much about the financial side. This is why I joined Hustle Fund Angel Squad. They don't just bring you opportunities to invest in early stage companies, they provide an entire education on how professional investors think about which companies to fund. Product leaders make fantastic angel investors. And if you're interested in joining me at Angel Squad, you can learn more at hustlefund.vc.mp. Find the link in our show notes. If you're a smaller company, so you said four people per billion dollars of revenue, let's talk about like scale ups for a minute. You're making 20 to 50 million dollars in revenue, right? Like we're not at a billion yet and we need to do pricing. Is that something that you're going to be revisiting constantly where you should hire somebody full time? Or is it something where you should partner with an agency or consultancy to do it? How should the smaller companies think about when to bring on somebody for pricing?

Jean-Manuel - 00:31:29: In my experience, at the beginning, the most important pricing decisions are the decisions about the pricing model. Not about the prices, but the formula by which you price. What will your price depend on? That's a CEO and head of products type of decision because this is really fundamental. Each time you put a price on something, you discourage a little bit people buying. And so that's the balance you need to put the price in the right place. Delegating that to someone managing the prices comes when I would say you pass 50 to 100 million and you start to have quite a bit of complexity, a lot of different customers. The pressure from the sales is all about we need to grow, grow, grow. So this is the deal is better to have this deal and move on than not have this. Sure, that's true, but within some confines. And so some rigor about how are you going to discount comes when you pass 1000 customers or $50 million in sales. So it's going to be different for different average size of what you sell. But that's sort of when you need to have one person that is in charge of pricing. And maybe at the beginning, if the pricing decisions are not so frequent that you need to change them all the time, that person could also help with strategy in different ways. And then you expand from that as you grow.

Melissa - 00:32:46: One of the things that that kind of brings up in my head is something about like price changes, which is something that we've all seen with SaaS increasing their prices lately. I think MailChimp sent me every month that they were increasing their prices. And I was like, what have you done to make this better in the meantime? And there has been a whole conversation of that on Twitter and everywhere. When you mentioned like the most important part is getting the formulation of how you're going to price right, not exactly the number. How do you consider price changes, like price increases? What's too much? How should you actually put it out there to the world? Everybody's like blaming inflation right now for increasing prices. And customers aren't buying it, right? They don't love that. So what's the right way to actually address a price increase if you have to?

Jean-Manuel - 00:33:36: I'm going to be careful. It's an answer that, of course, depends on the situation that you might be in, all sorts of factors and so on. But a few lessons on price increase. First, for most companies, let's realize that they tend to be too careful about increasing prices versus where they should be. In other words, they have lower elasticity than they think. If they increase prices, they will lose less customers than they might fear they would. What is really interesting is with COVID and inflation, a lot of companies started to increase pricing, even the ones that didn't have any increase in their costs. And because structurally they had price too low, well, these price increases didn't turn into any lost customers. So we're like, oh, this is great. We could do that again. And some of them went too far, like the one you described, right? So there's also a way to go too far. So a second principle is... Each time you increase prices, have a justification. Why are you doing it? For some companies that sell steel, iron ore just came up, and that's a justification. That's cost plus. For all the SaaS players, that is not gonna be the case. Not buying a lot of commodity that you package into your software to sell to your customers. So you can't use the inflation of your costs. Sure, there is some inflation in labor costs, but this inflation in labor costs is not something that happens every month and a half. We have long-term contracts and so on. So therefore, that might serve as a good justification once a year, but certainly not every month. The other justification that is a much better justification than your cost is I am adding more value. I did all these things for you that you could not do. And now you can do and look at all these savings, look at all these revenues you're going to generate with my software. That should be the main justification. And so being able to explain why you change prices and what justifies your price changes is really fundamental. And just to finish quickly, the justification of we increase prices because we think we can and you don't have a choice is when you pass to the side of being a really established arrogant companies, let's say Oracle, for instance. And that doesn't get you on the good side of customers.

Melissa - 00:35:44: Talking about this made me think of the flip side too, which I have never asked anybody about it. So I'm curious what you think about this. What if you started off with a price that was way too high? You were an early company, you were growing, and you got a good number of customers for it, but you didn't get a ton of customers, right? You weren't able to tap into a large enough market to sustain. And you want to reduce the cost or not the cost, well, the price of what you're doing. How do you do that without being like, oh, it's on sale for 50% off, right? How do you think about restructuring your pricing, I guess, down market, or maybe not even down market, but just to the same market to fit better without making it look like you're discounting or that people didn't buy it?

Jean-Manuel - 00:36:27: Let's distinguish two different types of pricing strategies that are at the opposite end. There's the premium pricing strategy, which is basically putting a product for free and then trying to ramp the prices up. And then there is the skimming pricing strategy that we described, where you start really... Really high, and you're happy to have a few customers, and then you go down. In both of these strategies, you're going to need to package your product slightly differently in order to access different price points. And it's much better to do this than just to skim. If you start at 1,000 per users, and you find that there's no users out there that wants to buy that, and you say, well, I'm going to try it 100. And then two months later, you have a promo for 750. And then one year later, you're at $400. And customers are like, hmm, I'm going to wait, the deal is going to go down. Usually the packaging and the licensing model varying that is the better way to change your prices rather than changing the actual number. Now, the actual number can be changed, but for short-term interests. And so for you are at the end of life for one product, and you want to encourage your customers to buy that, and you have a temporary promo to get them, and then you encourage them to buy the new one. These are different elements about how you could price on a short-term basis. But very, very much, very often, when your price varies by more than 20%, put some different product packaging on your product in order to vary your price, whether up or down.

Melissa - 00:37:53: Good tips. With that, you know, what we were just talking about with the increases as well, we mentioned a little bit about inflation. And some of the corporations are out there just jacking up their price, jacking up their price and saying it's inflation. There's this whole feeling, I think, right now, not even just in SaaS, but like the price of groceries, for instance, that the value exchange is not fair, right? The corporations are making tons and tons of money, but where people are making ends meet. That fairness piece of pricing, I think, is really, really interesting. How do you think about, with the advent of technology, and especially these corporations incorporating self-checkout, streamlining their automations on the back end, lowering their costs, right? How do you think about that value sharing that you get from that with customers in a way that's fair? And how should you approach that as a corporation?

Jean-Manuel - 00:38:47: Pricing fairness has two components. One of them is, is your pricing fair when two customers compare the price they pay? And the second one is, is your pricing fair between prices away to exchange value? The more money I make, the less value I give to my customer and vice versa. What is the right way to share value between me and my customers? On the first topic. People tend too much to think that a fair price is a price that everybody else pays, and the price should be the same for everybody. Well, as we talked about, different customers have different value. If you price for 20% or 50% of your value for everybody, you have a higher price for people that get 10 times more value than the others. That's perfectly fine. And if you explain that with differences of what you deliver for customers, so your packaging, that's why a product manager should own a lot of the pricing decisions there, you could have more differentiation in pricing than people tend to think, if you justify it by different value. Fairness between different customers. It's all about, am I distinguishing my prices depending on the value that customers get? And can I make the case that the people who pay more are people who get more value? The second part, most people are taught in Econ that they should extract all of the value they create. Well, if you extract all the value you may create, then you don't leave any value to your customer. So why would they choose you now? Most technology companies don't make that mistake. The pharma industry tends to make that mistake too much. So I don't want to generalize too much. It's a bit theoretical, but I've seen this. It's less of an issue, but always think in the technology space, many companies have tended to share a lot of the value. And so you need to always think about what's the proportion of the value that I'm extracting, what proportion I might share. A good number, when you're in the consumer space, you could share 50% of the value or you take 50% of the value. It's a 50-50. That is a very common number in the B2C space. In the B2B space, the buyers tend to be larger and they tend to appreciate and will want to have more of the value. And so proportion of value that you can extract is more in the 15% to 30% range. That's a good amount of value. I have seen some companies in the technology space extract only 5% of the value they create. And that usually is showcasing an opportunity for increasing prices or finding a way to get more value. So I'm trying to give you some orders of magnitudes. It's going to, of course, depend a little bit on number of circumstances. The main answer to your question is think about how to be fair with your customers. If you were to tell them, this is the value for you, this is the value for me. And would they say, that seems fair? That means you have a good price point. If you were telling them how much money you make and how much money they make, they will say, wow, you extract that much value? That probably is wrong. So think about, for instance, the gaming companies that basically started to tell Apple you're taking too much of the value just for selling on the platform, on the renewals and on the subscriptions. That's an example of customers saying, really, we're giving you 30% for doing nothing? And then you have that backlash coming up. That's that number I was talking about, 30%. It was starting to be a bit high.

Melissa - 00:42:11: That's an interesting way to look at it. One other hot topic that people talk about with pricing these days too, and you mentioned it a little bit before, but was generative AI. How do we think about pricing when it comes to automation and even like an OpenAI with their tokens, especially if people are going to get replaced with automation? What types of factors should you be considering when it comes to generative AI, whether you're building a model that helps automate things for other people or you're using it internally or you're building tokens, I guess, or what OpenAI does?

Jean-Manuel - 00:42:46: There's a few differences or a few interesting things with OpenAI. So first, the promise and the potential is enormous. And so it's not surprising that everybody is talking about, well, how do I include GenAI in my products? What value am I creating with GenAI? And how do I price that buy? These are excellent questions and we see them coming up. A few things to pay attention to. The first one is GenAI has more costs than the average software. So therefore, you need to be careful about customers who might use a lot more than the average. For instance, if you continue to price on a per subscriber, but you have some subscribers that automate and use a lot of your generic products so that they use maybe 100 times because they automate things more than your average customer. Then suddenly they got to create 100 times more cost. When this cost was almost zero, it didn't matter as much. Now that this cost can be quite meaningful, you need to be really careful about that. And you need to have some kind of pricing pre-usage that you need to incorporate in your pricing so that when people use 100 times more than the average customer, it's probably because they find some value there. You need to price for that value. And if they don't find the value, well, stop them costing you money. So that will be a good mechanism. Now, to the fundamental question that everybody is thinking about GenAI, you know, are we getting to the point where we're replacing humans? Well, sometimes yes, sometimes no. A really simple way to think about this is if your models are enhancing the value that humans, for instance, if you have a subscription model per user that your users create for their companies, if you enhance the value of the users, price per user, and that model is not going to replace the users. It just makes the user add more value. And so, for instance, if you have a piece of software that is priced per user and helps summarize all what this user did in the past two days or week or something, that's a typical pricing per user. You are enhancing the value of a human doing the work. But you mentioned before, you could also be in a situation where you're going to help automate tasks so much. That you're going to drive direct to outcomes. Well, you can then price per task or price per outcome. And this is when your model is in the niche and the segments where we're going to replace humans. And, you know, you can be afraid of that. But if that's what your software does and that's where the value is, you know, we have a lot of history with technology where we replace what people do and then that helps people focus on more valuable tasks. And that's okay to price per task if that's your goal. But then be ready to be explicit on the communication about this. We are pricing per task and we think we can do better than humans. This is not true for all tasks everywhere all the time, but for what we do, we think this is a better way for the companies to, for our customers to, to work with our software. That's why we price it per task or per outcome.

Melissa - 00:45:49: So if you're OpenAI, there's a tricky balance there, right? Because you want people to build more things on top of your GenAI. And then they're going to go price it for other things, right? We're not talking about the B2C ChatGPT option here. It's the selling to businesses. And then they're going to go try to bring that to somebody else in a product. Their users are going to use it. And now we've got like a cost control type thing coming through. So that middle business that's selling it to somebody else who's using and buying things from OpenAI. Has to make sure that their users don't go crazy, you know, with being able to do all those tasks. Is OpenAI's model with tokens the right way to do that? Or how do you think about it if you're building an LLM model like that and you're trying to offer up an AI to somebody else?

Jean-Manuel - 00:46:37: OpenAI strategy has been really interesting. So first they introduced the token, which is due to the fact that they're positioning themselves in the middle of the value chain. And you were right to say ChatGPT is a sideshow from that perspective at $20 a month. But so they want many other people to use their NLMs. And the token is a way to calculate costs. Proportional to cost and the price per token is a price per cost. Now we all know cost plus pricing is not the best way necessarily to price. And if they were to be in a situation where a lot of other models, Entropic and others catch up and the models get commoditized, then the risk with this cost plus token based model is that the margins could be eroded. But it doesn't mean so if they keep innovating and they are at the forefront and they have better models and it's just two or three companies that have better models, then they will be, even by pricing cost plus, have the plus be really big and allow them to reinvest and to innovate and to do more things. If you want to have two analogies about what has happened in the past in technology, think about chips and Intel versus memory hard disk drive or solid-state drive. Hard disk drives, a lot of competition, very innovative for like difficult to do for a long time, five or six competitors playing in that space. Margins were eroded very low. The price of the hard disk drives were going down quarter. Quarter after quarter. And it was hard to extract really good value in that space. And same thing happened in the memory space. On the other side, Intel and AMD being able to have good margins because they were innovating a lot and not many other companies were able to innovate as much. And that drove a lot of good margins for them. Will the future for OpenAI look more like memories and hard disk drives or more like chips and sophisticated semiconductors? We don't know yet and we'll see. It will depend a little bit about how themselves they evolved and keep being at the forefront, very differentiated.

Melissa - 00:48:43: And then you were mentioning too, like if you're a product manager that is using, let's say, OpenAI and you're surfacing that up, that ability to tap into that to your customers, right? This is what I feel like all corporations want them to do, the math behind it, right? How do you justify and think about pricing it so that you're still delivering the value to the users, but you're maintaining the cost if you don't know what the users are going to do with your generative AI?

Jean-Manuel - 00:49:11: Well, that's where you need to monitor very carefully the different types of users and to think very aggressively about what users can do. So if I take the example of email, the number of emails people receive sure varies. Some people receive 10 emails per day. Other people receive 200, some 1,000 emails per day. Nobody receives 20 million emails per day. And so if you have a price per user and it's about summarizing the emails and so on, the number of tokens is not going to vary by a factor of 1,000. And so from that perspective, think about essentially these factors by which your users, the factor varies between 1 and 10. Well, as long as the cost is really low and you have good margins and so on, like the average is going to be, let's say, a factor three. So you have a factor times three for the high users versus divided by three for the users. You have a good average. If that factor 10 is now a factor 1000... You're going to have users on the $1,000 end that are going to use so much more than everybody else that your costs are going to go through the roof. And therefore, your pricing model is going to be wrong. So therefore, in that situation, you need to have a pricing model where there's a portion of your pricing that is proportional to what will be your cost and the tokens in that particular situation.

Melissa - 00:50:33: Well, thank you so much, Jean-Manuel, for being with us and talking all about pricing. I certainly learned a lot from this, and I hope everybody listening did too. If the listeners want to go buy your book, where can they find it?

Jean-Manuel - 00:50:45: It's on Amazon and on any other hook retailer. Game Changer pricing. Search on Google should be relatively easy to find as well.

Melissa - 00:50:52: Great. And if they want to connect with you, where can they find you?

Jean-Manuel - 00:50:55: Our websites, but they can also email me directly. I have an easy email to find. My initials, jmi.bcg.com.

Melissa - 00:51:04: Great. And we will put all of those links in the show notes. If you go to the product thinking podcast.com, you will find them there. Thanks again, Jean-Manuel for being here. And thank you listeners for listening to the product thinking podcast. We'll be back next Wednesday with another episode and we'll see you then.

Jean-Manuel - 00:51:20: Thank you, Melissa.

Stephanie Rogers