Usage-based pricing is not new. We’ve experienced this in our personal lives with utility and cell phone bills. What’s new is that it has gained a lot more acceptance when it comes to pricing enterprise software. What is driving this acceptance and how has it helped SaaS startups in their growth? Sam Lee, the Director of Pricing Strategy and Monetization at Snowflake, discusses how this pricing strategy works for Snowflake and how it can work (or not work) for others. He also shares other insights about pricing strategy, including a discussion on why value-based pricing has become one of the most popular pricing paradigms at present, as well as how companies can hone in on the perfect pricing mechanism for their products.
The Rise Of Usage-Based Pricing And Insights On Enterprise Technology Pricing Strategy With Sam Lee
In enterprise technology, one huge growth lever for a company can be pricing. It can help you better monetize your solution, increase sales velocity, reduce churn and most importantly, accelerate revenue growth. With that being said, I was excited to have this conversation with Sam Lee, a lifelong enterprise pricing leader, who has worked at companies such as Microsoft and ServiceNow. He leads pricing and monetization at Snowflake. In this episode, we discuss all things enterprise pricing, how to implement a pricing strategy, what value-based pricing means and cover one of the most popular pricing strategies, usage-based pricing models.
Sam, I’m super excited to have this conversation with you. One of the things we hear most from our portfolio companies is pricing, strategies and the insights that go within that. I’m very excited to have this conversation with you to dig a little bit deeper and provide everyone with context on how pricing is done at scale and any enterprise technology company for that matter. I’d like to kick off the conversation by first learning a little bit about yourself. How did you get into enterprise pricing? Your experience across companies provides you with a unique lens on enterprise pricing strategies.
Thanks for having me. A lot of people fell into it. My undergraduate degree was in Political Science and Economics. After college, I landed a role at Microsoft with their public sector, federal deals desk. They call it a business desk there because it sits in the field. It’s a little bit different with the scale. I started out doing licensing agreements and working with customers in the field. My work in the field explains Microsoft’s very complicated licensing model and licensing agreement. I went on from there. I started a bit with an operator background and from a sales background and then move on to more as the back office, which is more to the strategy and the program management functions of pricing. Given that experience, I have a more expansive view and a bit of a different lens than someone say who came into pricing as a practitioner from more of the analytic functions or the analytic view or coming from a consulting background. My entire career has been through as an operator starting in sales and moving back into strategy and operations in the financial side.
Where do you see pricing having the biggest impact on organizations, at least from your experience? It can touch a wide breadth of the company’s activities and either benefit them or cause some friction. Where do you see it having the biggest impact?
Profitability comes to mind, a 1% improvement in the topline equates to a 12% improvement in profit because we got a lot of people often sites. The exact percentage depends on the industry structure and your cost of goods model. For an enterprise software company where your margin is very high, you might not get that bang for the buck. In general, pricing has some of the biggest impacts in getting pricing right and on your profitability driver for any company. It’s one of the most effective levers to drive profitability that anyone can tell you. Most companies tend to realize that over time and invest in pricing as a specialized function. Even for the smaller company if you take a more expansive view of pricing which I do, which includes the operations, the business model and a monetization strategy, pricing also impacts your end-to-end go-to-market activities.
If you think about pricing, that includes setting the commercial framework, setting the business model and then managing that operations overtime to make sure the pricing model can scale with your customer. The business that you want to go then impacts marketing and how you signal to market and talk about value to the customers. It also impacts the commercial terms of contracting and the field compensation, how you compensate and how the field engaged the customer pricing. Especially your business model is first in line around that if you could talk to any sales guys, they’ll tell you, “A price is the first thing they think about and how they get compensated is the second thing.” How you set up the pricing model impacts both.
What’s the difference in your mind between an expansive pricing strategy and maybe the one that’s a little bit more focused?
I take a more expansive view of pricing as a function. Other people who came from more of a pricing analytic background focus on price optimization. Pricing has a lot of specialization. If you think about pricing the more expansive view then it counts for both strategy operations and sales support. The strategy, you can think of it as supporting the overall company strategy. Your pricing strategies should align with your overall company goal. Is pricing there to support the top line or is it there to support a market expansion? Extraction versus expansion is important. Pricing should be like any other strategic paradigm that anyone uses to analyze the market. If you think of a more expansive view of pricing, then it counts the strategy operations and its sales support. The strategy itself needs to support the company strategy. The company strategy is often paid by not just your intent, but the constraints of your customers and suppliers, etc.
Pricing is a part of that paradigm that any company needs to manage. Moving on to an operational side, it’s about not just the internal operations of how you take a product to market, which is that bridging that gap between product management and sales operations and sales. There’s a whole set of things that companies do that you need to. It goes from taking a product to market and a lot of companies called that NPI, New Product Introduction, that whole functions. Sometimes that falls in the pricing. Sometimes the sales ops or the product manager will take on that in the early days.
Finally, sales support. From a pricing perspective, a lot of companies called deals desk specifically managed contract negotiations and non-standard pricing support. All of those falls under this price and bucket. In some cases, this whole overlaps about our functions. Sales operation is one that takes on the tail end. Product management takes on a lot of that early on strategy function. Business operation is another one that tends to have a hand and lobby more analytics aspects of this. Overall, you can see pricing hits many of these functions. Individual companies would organize all of these either underpricing or according to their business affinities or available talent.
You stood up the pricing organization at ServiceNow and at Snowflake. When do you think is the right time, based on your experience for an enterprise technology company, to think about making this a dedicated organization?
There’s no hard and fast rule. What I’ve seen generally is that, at least in the enterprise software space, companies start to think about adding a dedicated, specialized, and private pricing person. Add that pricing guy, when they hit around $100 million to $200 million ARR, or when they start standing up that mixed product line. One product line management is relatively easy, but when you start having multiple offers that you have to manage that as a portfolio, you need someone to organize across product management and also organize the cross-sales and that complexity. It drives someone to say, “I need someone to handle that bridge between product management and the sales organization, the sales operations.”
Other times what you’ve seen in enterprise technology companies, especially ones where the pricing was first owned by the product manager. That often happens with the product manager, especially in an enterprise technology company, in general, tends to be viewed as a CEO of their product. They have end-to-end responsibility. At some point, product management needs to be specialized. They become inbound, outbound and they could have those functions. Depends on the affinity and the needs of specialized, you’ll see product management becoming less engaged on the pricing focus. That’s when companies start to think, I need a pricing person to manage this part.
One thing I wanted to touch upon is oftentimes, we think you make a pricing change, but there’s a lot that goes into it. It’s very much a cross-functional decision when you do a pricing change, who are the important stakeholders to have at that table and have their input. More importantly, when should their input be involved?
As early as possible and high as possible, especially for startups, the executive team, the CEO, CFO, and the head of sales, all should be involved in pricing. At Snowflake, in the early days, Bob Muglia, the former CEO, was the chief pricing officer. He was the one who was credited with setting the tone of how pricing should work itself as a pricing model in terms of that our capacity consumption or pay as you use model. A lot of these models are not easy to implement. In the early days in a company, there are a lot of ways to think about monetizing your product. You need that executive alignment to make sure that you have the conviction to stick with a pricing model, especially enterprise software companies where they tend to learn over time how to work a pricing model. It’s important to have the conviction to stick with it and iterate and work through it, to get it right, to make the pricing models stick.
Even if the company scaled, the CEO should always be interested in pricing. They might have people doing the work and building out and managing pricing over time. It’s important for the executive team to be very aligned on the pricing strategy as the company scales. The CFO has a big role in understanding the cost, the structure and the economic structure, and the economics of the pricing model. As the company scales, then it’s not just the executive staff, but everyone has the next layer down, the key execs in marketing and finance and in sales operations.
At the scale, Snowflake, for instance, my go-to team as we think about pricing or running an MPI process would be someone in finance, billing and collections to make sure that revenue recognition and everything works, product management in terms of setting the strategy and formulating the strategy and you have the setting and fitting or creating a new business model and the business owner aspects of the team. Making sure that sales operations, sales strategy, and the back office of sales are aligned on how to launch this thing and there’s someone to catch the ball at the other end of the funnel. Those are the organization and the teams that I engage very early to bring them in. They will tell you what constraints they have as we were launching or changing prices or launching a new business model, which is even more complex.
Feedback from the field is also very important. That’s part of changing price. You always want to make sure that field is comfortable with the price change. Finally, this is doubly true when it comes to creating a new business model or anything that has more operational systems impact, is your IT organization. Nothing gets done without IT. If this business model or this thing you want to launch that has a large system’s impact, it’s important to make sure your backend systems are aligned.Pricing is one of the most effective levers to drive profitability to any company. Click To Tweet
How often are you engaging with the product team on new feature development and the impacts that may have on pricing? I imagine that’s a symbiotic relationship and what they do from a product side could influence pricing, whether what features go and what tiers, if you’re tiered based pricing or what not?
It’s a symbiotic relationship. It’s always a work in progress in every company. I asked the team to engage me as soon as possible. Some companies are not as good. The often complaint from many pricing folks is that product would build this thing and they’ll throw it over the fence to a pricing person, “Price this thing,” and figure out how to price this thing. The best practice is if you have a pricing team, the pricing lead should be part of the concept review of the product. Before you even build the product, you should think about how you’re going to monetize it or where that product or feature is going to fit or not into your existing pricing structure or monetization structure. That gives the team, especially the cross-functional team, a lot of room to either work through that problem and figure out how to price it, or in the case where you need a new business model to support this new thing you’re building to work with all the teams and build that, and the infrastructure to support that. It’s super important to engage early. That’s a best practice. Engage before you even built the product as part of the strategy formulation or the product formulation.
I want to talk about pricing on two axes. One is the methodology and then two is the actual pricing execution strategy. On the methodology side, there are four popular models. There’s cost-plus pricing, competitive-based pricing, which a lot of startups default to. Let’s look at what our competitors are doing and price similarly, demand-based pricing and value-based pricing. The one that’s risen to the top in the enterprise technology conversation and even more broadly across any type of company is value-based pricing. Can you explain a little bit about what value-based pricing is and why it’s become so popular?
Value-based pricing is the latest catchphrase in the world of pricing. The four pricing models are not really models. They’re four different lenses of looking at the same problem. The goal of pricing is to extract maximum economic value from the goods and services you provide. In marketing, they teach you the 3 Cs and the 4 Ps. If you think about pricing, it’s unique. The only P is about the value extraction, communicating value or providing value to the customer. It’s the flip side of what you communicate. The customers say, “I’m providing you this much value. I’m extracting this much.”
It’s the different lens of looking at the same problem with value extraction. Value-based pricing is the latest popular thing because it’s inherently the most customer-centric. Value-based pricing is always saying you should price based on what the perceived value of your goods and services provide to the customers. You shouldn’t consider your cost and competitor. You should consider what the economic value add that you are providing customers and then extract the portion of that. It’s taking the other lens off. It’s not to say you can’t take the other lens to go with it.
Cost-plus is very popular with a lot of industry. It has fallen out of favor, but cost-plus ensures your company can hit a certain profitability target. It’s inward-looking if you think of it in a traditional sense because it focused on internal operations and focused on your costs, the cost-plus, the cost side and financial metrics. It’s not necessarily true. If you think about the plus side of cost-plus, the plus side can be value-based. You can think about cost-plus as understanding your costs. The part of the cost-plus could be determined through a value-based methodology and understanding what that price premium you can price based on the value that you provide the customers.
The competitor-based pricing is popular in tech especially in industries where there are lots of competitors out there offering similar things. You’re trying to get a hold of the market and try to gain market share. It’s important to understand how your competitor’s price. Using one methodology doesn’t necessarily mean you can’t use another, but I’ll say those are all tools that you use to analyze the market and try to triangulate the price and the price of strategy you set.
When you do cost-plus pricing and then you look at it through a value-based pricing lens, what you typically find out is that you’ve underpriced your solution?
Not necessarily. If you don’t think about the value that you provide to customers, the pitfall of cost-plus pricing is you look purely at your internal metrics. You say, “This is how much it costs me to build and from unit economics to provide the goods and services through to my customer. This is my profitability targets like that on this much. Here’s the price.” Let people throw it out and say, “This is the price.” The problem with that is you can either underprice your products and services or you can overprice your products and services, in which case, you know that very fairly quickly.
You probably want to re-evaluate the business in general because margins are coming down.
The thing about it is that you should use both. If you use some value-based pricing methodology to figure out where you should price in the market and use a cost-plus based pricing to understand your cost model and your profitability target. If the cost-plus pricing number is higher than your value-based pricing number, then you don’t have a product-market fit. The competitor-based pricing is higher. If you use a competitor-based pricing model or lens to look at where your competitors are pricing and valuing this thing and if that number again is lower than your internal cost-plus-based pricing, you don’t have product-market fit. It’s important to understand this. Pricing is a moving target. More profitability is also moving targets. Understanding that long-term unit economics, can they come down over time to hit those targets you need, it’s very important. That’s something that the pricing team collaborates with the FP&A. If there is an FP&A team or finance team to work through these different models.
One of the challenges, especially in enterprise tech is you’ll have a competitor racing to the bottom of a pricing strategy perspective. If you’re competing against Amazon, around enterprise technology, the AWS services, 46 times they slashed the price or some crazy number. In that scenario, if you had to put yourself in the role of a pricing leader at that point, what would you do?
That’s where value-based pricing helps reinforce the line because it forces you to find that value differentiator. If you compete for price and don’t look at features and the total ROI that you’re providing your customer, it’s very easy to fall into the lens of let me price my competitor price to this. It’s a forcing function to force a company to look at exactly what I am offering as a value premium. What’s the willingness to pay for my customers for that value premium? Understanding that using value methodology, you can align your whole company, not just pricing, but it gives you the confidence to hold the price firm, but then also align the rest of your company towards that value-premium that you’re doing. You will align your sales organization to talk about those differentiators. You would align your marketing functions to market those differentiators to stand firm on the price.
It almost helps clarify the value proposition and the credibility for you to come into the market with the higher price if you can think from that value-based pricing lens. Communicate that throughout the organization, which is key. We looked at it from the methodology and now the pricing execution standpoint. We’re all familiar with tiered-based pricing. We’ve seen this a lot, good, better, best, the per user-based pricing or seat-based pricing. A new enterprise pricing strategy that’s evolved and has come to the forefront. One of the reasons is Snowflake is usage-based pricing. Frank in the IPO Road Show talked about how this is a new paradigm of pricing enterprise technology. We wrote a piece on this that took some of the 24-high growth SaaS companies and compared them from a growth and NDR perspective, net dollar retention compared to usage-based pricing public companies. There was a lot of difference in our alpha per se in their growth rates and NDR compared to their high growth peers. It’s one deterministic factor of these companies’ successes, but it does seem to be a common thread. Can you explain a little bit about usage-based pricing? I’d love to talk about how these changes the paradigm of how you operate as a company?
Usage-based pricing is not new. Everyone has paid their electric bills and paid their cell phone bills back in the days when cell phones didn’t have unlimited minutes. If you’re old enough, you remembered you pay per text and pay per minute on your cell phone bill. The idea of usage-based or pay-as-you-go isn’t new. What’s new is what we’ve seen in the last few years is a much broader acceptance of the usage-based pricing in enterprise software or in enterprise. Traditionally, even go back five years, what you would hear from most enterprise procurement shops is that predictability is key. I want predictability over pay-as-you-go. I would pay a premium for predictability. A lot of places still do that. It’s still has a preference for the predictability.
I want to talk about how these things can coexist. Usage-based pricing, the biggest difference between even five years from now is the acceptance. The prevalence of that acceptance of usage-based pricing is driven by both the tooling that’s out there in terms of the ability that these companies have like Snowflake and other companies have learned to provide our customers, to provide some of that usage predictability. Also, by some very large enterprise companies, a software company, comp providers, evangelizing this model and getting to a point where customers are used to predictability, some of these pay-as-you-go type of model. There are a lot of advantages to justify. You’re only paying for what you use at the same time. AWS, Azure and GCP have been running this model for many years now. A lot of enterprise companies are used to it. They pay their AWS bill and they found out that like, “My AWS bill is predictable once at scale.” Folks learn to get over that fear of unpredictability.
The predictability can be a misnomer in some cases because you can structure deals. With pay-as-you-go, you can still negotiate upfront commitments, which provide some of that revenue certainty for your company.
In a lot of cases, in exchange for a discount or an extension volume-based pricing is the volume licensing of the SaaS world. You don’t have a licensing agreement anymore. You have what they call an EBP, an enterprise purchasing agreement or an enterprise purchasing program, no buying, price buying program. In those cases, you are making an upfront commitment to cloud providers and/or to a company like Snowflake. Based on that upfront commitment, you commit to spend certain amounts like set a budget based on that amount. The exchange is that the cloud provider or a SaaS company gets a commitment and a certainty around the amount of future revenue that you can collect. In exchange, you provide a discount on a unit basis for that consumption.
In our electric utility example, I would look back at my bills and say, “I consume this many kilowatt-hours.” I would approach the utility company and say, “I’ll pay all this in advance.”
Both of these can live side by side. You can say, “What’s typically very popular?” Every company is a base plus overage model. You make a commitment. Your commitment is at a discounted rate. Anything above and beyond that it’s a burst rate or an overage rate. Utility company does that too. In the summer, my overage utility bill is very high because I exceed my usage tier. I’m charged at a higher rate beyond that because I ran the AC too much. That happens.If your cost plus pricing number is higher than your value-based pricing number, then you don’t really have a product-market fit. Click To Tweet
I’m getting flashbacks of the old cell phone bills before we had unlimited plans. The overage would be crazy. What are the type of benefits you see in an enterprise technology company that does adopt usage-based pricing? Do renewals become a little bit of an easier conversation for lack of a better word? What are the benefits you see in an organization that adopts usage-based pricing?
Two things come to mind. One is that it makes the land and expand strategy work well, because oftentimes that first deal you sign, the customers become the proof of concept. You don’t have to do an extensive proof of concept with no commitment before you signed that big contract. Your first contract is that proof of concept, it’s that commitment. You’re able to take that customer or acquire that customer early with a very much smaller footprint and let them land that customer first and then over time expand. It gives you a look at a wider expansion strategy, not to say outside of usage-based pricing you can’t do that. You see that even with any role-based or user-based pricing. We can acquire a small subset of users and then you’ve expanded over time, but usage pricing ties that to the unit economics of the usage.
It doesn’t matter how many users you use. It gives you that flexibility of anyone in the company who can use it. You don’t have to restrict them to a certain number of users. At the same time, you’re still charging a very small amount to get things rolling. It helps with that expansion strategy if you’re able to do that. You don’t have that user-based or organization-based silo. Usage-based pricing also gives more flexibility to that expansion. One of the things that you’ll see, especially at companies like Snowflake is that expansion is not just driven by organizational silo, but it’s driven by workload. If I can add more workload then upsell becomes a workload conversation. Once you lay on the customer, you can go around to different organizations to bring those workloads into Snowflake. You can projectize those upsell activities.
What has been the biggest challenge from a usage-based pricing model? The technology stack not there to accept usage-based pricing models since it is relatively a new concept in enterprise technology and has created other friction points. One of the things that come to mind is when a product wants to do a new feature. If you’re usage-based pricing, do you then do tier to get to that feature or does that feature typically roll into the existing solution and hope it increases the consumption of the solution itself? How do you make those decisions with a usage-based pricing model?
That’s not new. Should I take that feature to hire additional, more premium-based products versus making it available for everyone to drive more consumption or more usage? It doesn’t matter if you’re in usage-based pricing or others. That happens in the usage-based pricing model. The big one with usage-based pricing is if you’re committed to pricing metrics and usage-based pricing and your product management came out with a feature or functionality whose value is unique and doesn’t align to those pricing metrics that you have chosen to meter. You have to make that hard choice to say, “Do I leave that alone or do I create a new meter to be there for this one new thing?” The problem of course is once you go down a path of creating one meter, then you can create another. Next thing you know you have a very long and complicated ratable consumption table that you have to manage.
There are complexities to usage-based pricing like the AWS pricing model. If you pick all the products and list out all the different pricing models in there. That’s complicated. That’s the complexity of managing a consumption table, pipe usage-based pricing model. That problem is not unique to usage-based pricing. Every pricing model and every company as they scale, you have to fight that tendency to make things complicated over time. That’s the physics of pricing. In terms of things that are uniquely difficult with usage-based pricing are billing and metering. There are not a lot of software vendors out there that do usage-based pricing given the diversity in terms of what can be metered. You can’t rely on out-of-the-box solutions from outside vendors. There are companies out there that have billing software and metering software that help billing and invoicing and CPQ for meter, for usage-based pricing.
By and large, most companies at a certain scale build their own. Billing and metering are so integral to the part of the product experience. If you think about giving customers that right experience, which includes forecasting, the ability to help forecast a workload, give them a bunch of predictability to throttling. In some certain cases, maybe it’s not a mission-critical application but at certain times, the customer wants to say, “I only want to spend this much and give me the tools to manage my usage. I want a notification that I’m about to hit my limit at 90%, to be able to set the limit, and a notification that’s set to start throttling if things are at 90%,” etc. It’s those things you have to build into the product itself. I would say that’s someone unique to usage-based pricing that you have to build in. It adds more load to your product itself.
Alerting and monitoring are critical if you’re going to pay on something that can be elastic based on consumption habits.
Reporting as well, customers would get a bill and a chart. You have to be able to provide customers with good usage insight, like where my money is getting spent especially if they’re on a commitment-based model and they pay you upfront. They want to know, what’s my run rate? Where am I spending? Where are some of the anomalies that I should be aware of?
I also want to talk about the impacts on sales because there are a few of them. One is, as you mentioned, the lands are smaller and there are enormous expand opportunities because you can test it out and get the full solution at a nominal cost and almost run like a paid POC rather than doing POCs the conventional way. One is the quota. Two, you can give us some examples, but who’s responsible for burndown. Enterprise sales, you have your sales team, you have an account management team handling expansions, and then a CS team handling renewals, making sure that value is being seen by the customer. How do you see it in usage-based pricing?
I’ve seen all larger companies, especially ones that came, older companies like Microsoft. It came to mind because I’m most familiar with it. It’s about retrofitting your existing sales organization to use usage-based pricing. You’re not going to tear up your AES and Microsoft language, your AES, and your IT used to fit this model. You try to retrofit that into their existing sales structure. In smaller company usage-based pricing, as you mentioned the land typically is smaller. In terms of managing your territory and account, you need to give your team a little more stability, which is tough. When you’re in a high-growth company, you’re constantly recharging or reorganizing your sales territory.
The other thing is when you think about burndown, who’s responsible for burndown? In the smaller-scale company, at Snowflake, we tend to think about that as part of the account team’s responsibility. Our philosophy here is that you tie your AES and your SCU or account team to the success of the company. The success of the company and how the company is measured is driven by consumption, not on top-line, on bookings. Your account teams should be aligned to that too. Their activities should be aligned to that metric, which is about revenue, in turn, is tied to burndown and consumption. Here at Snowflake, we don’t have a separate customer success team because a lot of the account teams are splitting their time between acquiring new customers. That’s important, but a lot of the revenue and it’s about ensuring that they’re burning down to the right rate. Discovering and finding new workload to bring on to Snowflake. That’s an upsell motion.
It requires a unique sales talent because not only do you have to have the ability to hunt for deals, but then also farm and cultivate those existing deals.
It’s just not farming, but it’s about expanding the farm and managing the farm. Over time as the company gets bigger, when you get to the size of AWS and Microsoft, they have a specialized team to figure it out.
That’s in the future for Snowflake as well. Strategic accounts that require that dedicated support.
The other thing is vertical overlays become important because those workloads that you’re trying to upsell customers to are very industry-centric. If you want to have that conversation with a customer about bringing on a new workload or discovering your workload, you need AES and folks that understand that industry and business. A generalist account team could talk about the benefit of the product and the services that your company provides, but to drive good upsell, having an industry-specific lens to look at those problems is important.
From a generalist standpoint, maybe get the initial land, but to get the expand, you have to understand the business use cases.
Driving the premium offering, if you’re trying to drive upsell matches from getting additional workload or try people to use more of the premium features, you have to take those premium features and speak about those value propositions in the contexts of that industry. I don’t think it’s any different than larger, more successful enterprise software companies and the enterprise sales organization. With the usage-based pricing, it forces you to start thinking about that way to organize sales a little bit earlier.
Sam, I talked about the excitement around usage-based pricing and the rise of dev ops and infrastructure has lent itself well to usage-based pricing. One thing you said to me was not every company is built to sell their software in a usage-based pricing model. What companies do you think should explore this? What are the key characteristics to have to be a good usage-based pricing company? It would be interesting to understand your perspective.
It’s a moving target with the acceptance of your usage space meter changes yearly, weekly, monthly based on what the market is. In general, there are two rules. One is the meter you choose to base on should be predictable and measurable. It should align the value. If the meter that you have or you’re thinking about doesn’t align to the unit of work or the unit that you want to measure it, your meter doesn’t align to the unit of value that your customer extracts, then it’s hard to get that to do a usage-based pricing model. The customer will look at this as completely orthogonal. As I scale my usage, I’m not scaling the value that I’m getting from you. This is a bit more of customer perception that they need to be able to mentally tie that unit of work to the unit of value that they’re getting. That unit should be predictable. You have to be able to make that predictable and transparent to the customer. The ability to explain it and explain why this is the right thing to customers is important. It’s about customer acceptance.
The second part is more for startups where you don’t have the cloud or the market power to dictate pricing terms. Those cases are hard. You typically don’t want to go against where the market is. This is where that competitor-based pricing is important. Look at the competitor, especially the market leader in that space who has set the tone for the pricing model. It’s not to say, that you can never change the pricing model in the market. In general, you want to be aware of the dominant pricing model for your product or your product line or services in the market. You have a dominant player in the market that sets the tone of how these things should be charged. You come up with something completely different. It could work well and be very disruptive or it may come out and that will be dead on arrival so to speak.
We have seen a challenge Elastic went usage usage-based against Splunk, which was a different pricing model. With the rise of the product-led growth, this whole element of freemium, which a lot of companies that they competed against didn’t have that type of model. It is an experimentation space in this. If there was any place to do it, it would be probably early on.
Experimentation tends to work well at the margin. For example, in usage-based pricing, you may experiment with freemium to try to drive customer acquisition. The problem of freemium is then conversion. Conversion for the pay is it’s always a challenge. That’s a bit of a signaling exercise. How much do you want to signal the product is free versus paid? Where do you draw that line? In the case of enterprise software, it depends on where you are. Personally, I’m not a fan of freemium, the conversion thing. The customer conversion is always saying, “It’s a dark art that I haven’t mastered.” It works well for other companies.
I want to talk a little bit about team building and leadership. You’ve joined two organizations, ServiceNow and Snowflake that both on their rocket ship trajectory. We’re asked to staff and create a function within an organization that was already going at a very fast rate. How do you do that? What’re the keys to build an organization within one of these high-growth startup companies? A lot of them were also startups, but now large enterprise technology companies.
These are two very different experiences for me. At ServiceNow, they’re a little bit late to the game. They are looking for someone to start bait or build a pricing organization or pricing functions. They were already well over $1 billion in ARR. It was driven by product management. The product management, because of such high growth, they went from 1 BU to 7 BU in the span of eighteen months. What they found was that it’s easy when you’re selling ITFM and when you’re trying to coordinate business model and go to market sales motion pricing operations across seven BUs and trying to get into that pricing operations funnel, it’s difficult. It’s also difficult to coordinate strategies. They saw a large proliferation of business models and pricing models.Whenever you’re building a pricing team, you want to make sure that they don’t get unduly influenced by sales. Click To Tweet
The customer starts to complain like, “Some of these don’t make sense. Why is the CSM price much different than IPS when they were the same things.” You see a lot of issues there. They want someone to go in and help coordinate the pricing strategy around the different business units. That was the need that drove them to realize they need a more centralized pricing organization. My job there was to try to herd the capital a little bit and work on convincing the rest of the company, that there is a need to centralize pricing. It’s a function and build that out. They had a robust and strong pricing operations team in terms of getting skewed to the market and getting all the contract order forms updated when a new product rolls out from PMs.
The need was first to convince to align the company on the need to centralize and the benefit of building a centralized pricing team. As part of building centralized pricing, there are a couple of pillars that we’re missing. Looking at the company, what’s missing? The pricing operation is robust. We don’t need to touch that, but what’s missing is there’s a pricing strategy function, the PMs. You can’t let each PM run in silos anymore. There needs to be a more coherent monetization strategy across the entire product portfolio. We need a pricing team to help coordinate that and help the PMs because they are becoming very specialized.
You need a partner with the leadership of those business units. The GMs of those product management organization could be their business partner to help manage and craft that pricing strategy, and coordinate the pricing model and pricing strategy across all the BUs. The middle part, which was once we have a set of pricing licensing models from the business unit, from the PM, how do we slot that into volume discounts and pricing, manage that volume discount, volume purchasing, volume licensing programs, which was missing at ServiceNow? As the company scales and grows and you become a multi-platform product portfolio company, you need to think about the buying program as a whole.
There’s that missing piece in the middle there that needs to be built out. The function was focused on building out those two pieces. I’ve taken on convincing the executive team, the staff to invest and build out an overall centralized pricing team, and then took on the role to build out the pricing team within the business units to build out the BU functions. At Snowflake, it was a little bit different where they came in and already decided that there was a need for someone to run pricing. They did it much earlier, which is great. The need was to harden the pricing operations and pricing processes.
The company’s product portfolio is relatively simple. You don’t need to do a lot of work coordinating with the product management team yet starting to change, but what I’ve done in 2020 here was mature the company’s operations to make sure it’s ready for IPO from a pricing operations perspective. That means hardening the decision-making process around pricing, tightening up the pricing committee process and then documenting those approvals, and hardening that MPI process, that rollout of pricing models into the field.
That middle process of connecting sales operations to product management. It’s slightly different roles in terms of building out that function. Every company’s going to be a little bit different based on how the company grew up, the affinity of the company. Some companies are very sales-centric in which case pricing typically sits in sales. Other companies are very product-centric and pricing sits in the product. At some point, neither of those poles tends to work well. You need someone in the middle of that organization and bridge these two areas.
You need your equivalent of Switzerland, a neutral site too.
That’s one of the pitfalls of pricing that one of my previous managers would say, “Wherever you build a pricing team, one of the biggest risks is that co-oping.” You have to build a pricing team in sales. You want to make sure that they don’t get unduly influenced by sales. They don’t pick on how that sales lens of the world too much because you do have to worry about the profitability finance and also product strategy and product value perspective. You have to be careful wherever you put it, there’s going to be some co-oping involved. That’s why it’s important for pricing to have strong executive support and to be able to stand up to that independence because without that, it’s very hard to be Switzerland.
I want to ask this one for fun. What is the most used app on your iPhone or your Android phone?
It’s my Kindle app. I read a lot of books. I’ve abused the crap out of Kindle Unlimited subscription. Amazon probably didn’t like me too much because in 2020, I read 160 some odd books.
What was the best book you’ve read in 2020?
It’s a lot of sci-fi fictions and fantasies.
Anyone you want to call out?
I’ll keep those private for now. If you’re into those genres, I’ll Slack you a couple of them.
I’m sure there’s a Slack group for it. Sam, I want to thank you for your time. Monetization is a key strategy for any enterprise technology company, any company at all for that matter. Understanding the nuances is critically important. This was insightful. If people want to find you, I’m sure they can connect with you out on LinkedIn. We’d love to keep the conversation going on this topic.
Thank you for setting this up. I enjoyed the conversation.
Thank you so much.
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