Graphos Project

Episode transcript:

Laurier: Hey, product managers and marketing teams. If you’ve ever struggled with pricing a product, you don’t want to miss this episode

Welcome to Product: Knowledge, the podcast about creating and marketing products that improve people’s lives. I’m Laurier Mandin, founder and CEO of Graphos Product. My guest today is Ajit Ghuman, the author of “Price to Scale.”

Ajit has led the development and commercialization of enterprise products like Medallia, Helpshift, and Feedzai, and helped those businesses develop pricing models, differentiate their products and grow their businesses. He’s the head of product marketing at Narvar, a customer engagement platform that helps brands like Yeti, Levi’s and Dyson drive long-term customer loyalty by unifying shipping and returns.

Pricing is something that almost all product businesses struggle with, and can be a difficult thing to get right. It can make or break a product. I started our conversation by asking Ajit how he has taken this challenge that paralyzes or polarizes experienced product teams, to the point of being so digestible and actionable that a product manager can read ” Price to Scale” over a weekend, and develop end-to-end functional pricing in as little as 30 days.

Ajit: Thanks for the question, Laurier. This is exactly the purpose of the book. When I started my own journey in pricing, I couldn’t find a book that covered pricing in a simple format for product managers and product marketers, that they could employ it for their own products. There was generally a lot of consulting companies that did pricing or VC companies that talk about pricing.

And there was a little bit of a hype created around it. But when you actually look at it, the best person suited to do pricing is the PM of the product because they have understood their buyer. They have understood the user. They have understood how to position the product and, at least thought about the strategy to go to market. It doesn’t take a stretch to include in their competitive analysis and their user interviews and their customer interviews elements of packaging and pricing. And I just think it should be a normal part of product development that gets the PM at least to a very good hypothesis of the initial price.

And now when they use that price in the market, they will get market feedback back either via interviews or by actually selling the product. And they can refine on it. My hope for the book is that a PM can read it over the weekend, understand everything that goes into it, and then not have to depend on any external agency to get their pricing done.

Laurier: That’s amazing. that simple framework you just referred to is something you call PPP, which is Positioning, Packaging and Pricing. I actually love it. I love things that are easy to remember. And, it follows a logical order.

The first part of that is positioning and we had April Dunford on the show recently. You probably know of her. April is a positioning expert. She’s known around the world for what she does, and she has a succinct take on positioning and you have your own, can you summarize that first part, “Positioning,” and what your approach is to it?

Ajit: I think of positioning is really positioning your product or service in the buyer’s mind. So

positioning is really about your buyer’s mind. How do you create a heuristic framework so that they can associate you with, either your competition or alternatives or even at a meta level? With companies that bring AI products, do they consider you like this modern set of technologies, or a more, staid or legacy set of technologies? So there are many ways you can anchor into your prospect’s mind as to things that they think about when they look at you. I often use this example as a startup that you have to position yourself in the product category set, but you can also position yourself in many other ways.

Let’s say you’re a brand who has a podcast. You can position yourself as a thought leader. You can position yourself amongst other folks who are trying to solve the prospect’s problem in a certain way. Positioning for me is really about making sure that you are able to craft a set of heuristic associations in the buyer’s mind.

Laurier: I liked that you used the word heuristic because that context in the buyer’s mind is so important. When you’re selling a product, you can’t expect the buyer to do a whole bunch of research about you. You have to be able to grab onto something that’s relevant and relative in that buyer’s mind, and quickly and easily create something that corresponds with that so they can know where you fit in, what you deliver, what the value is that you create, and decide if that is right for the problem that they’re having right now. The next thing you have is Packaging, which is not putting the product into a mocked-up software box like they did in the nineties.

Can you define for us what Packaging is from the perspective of a software product and the value that it delivers to each segment?

Ajit: A couple of aspects of Packaging. At the high level, I will emphasize why Packaging is so important for software products is because very often when software products are developed, they kind of develop as the consequence of a wrong PRD list and you end up with a product that does a whole bunch of things.

And I deal with this at my day job on a daily basis, where I look at the product and I see, “Oh, you do this great thing, but we don’t even have a name for it.” So, it starts with recognizing the value that the product offers and the product can offer us value in many different dimensions. There can be many features or sets of capabilities that solve a problem, and then mapping that value back to the market overall.

So, the market will have different buyer types. It may have different customer segments. And so, packaging is the process of mapping your product’s capability into the benefits that the buyer is going to get. The beta product managers and product marketers do that; it succinctly conveys the value of the product specifically to a particular, persona or archetype of buyer.

And then they can understand, “Yes, this is, for me; it seems that they’ve created this product just to solve my problem.” And that to me is packaging done right.

Laurier: As you said, it’s understanding that segmentation, then mapping the features of the product to specific buyer types. And that’s really critical to determining the pricing options that are going to be appropriate for those different types of buyers, those different personas, with the budget that they’ve got. Briefly helped me to understand your approach to identifying those segments and which feature set is going to be attractive to each one when a product is new and it’s a startup because they don’t necessarily know from experience exactly what feature set is going to be appealing to what segment, and they also don’t know what the budget is that the segment is going to be willing to pay right out of the gate.

Ajit: It’s a great question. The zero-to-one problem is perhaps the most data-lacking of any market data. Generally in these situations the best approach is to start with a hypothesis and move forward. What PMs can do is take an outside-in approach and form a hypothesis around their customer archetype.

Let’s say you’re trying to build a customer service platform, and you’re trying to build this just for companies that offer their service on mobile. You will have a certain archetype of your buyer. Let’s say, this is a product manager that builds gaming applications. Let’s consider that segment.

Now, you probably already have that in mind as a PM When you think about this person and the problems that they’re trying to solve, maybe they’re trying to optimize so the app works very fast. They’re trying to optimize for the customer journey within the app. They are probably using certain words in their day-to-day life, like monthly active users, conversion ratios, different metrics that the product manager thinks about, and maybe there are specific terminologies and keywords in that world of gaming products that the product manager speaks.

That’s what, as a PM of a product that you’re trying to sell to this person, you have to keep this verbiage in mind before you package your product to them. So now you’ve built the product. In order to name your feature set and then sell this product to them, you have to word it in a certain way. For the prospect, if it’s more important that they engage customers, you can name something, a particular feature as an Engagement Manager. Or as Engagement Optimizer. So, when the prospect then sees that capability in your feature list, they say, “Oh, okay, you have this engagement optimizer. What does that do?”

“The CX is actually designed just for you, it’s for mobile. And you can look at all your users and see how they’re behaving.” I’m just using that as a very fictional example, but the idea is once you have a hypothesis, you build a product and then you start to sell it.

And in that process, you will get feedback on that hypothesis. But everything is around that initial kind of archetype of the buyer.

Laurier: It is. And it should be because it’s the buyer that’s going to. In the end, decide what the value is of the product and whether or not they want to pay for that product month after month on an ongoing basis, right? How should a product business decide what that range should be from the starter to enterprise, or if they want to be a product driven company, how do they decide from if, whether they’re going to have a freemium product to start out with, how do you recommend that they address those types of questions?

Ajit: That’s a great question. And to a certain extent, this does depend on your archetype. And, it also depends on the alternatives in the universe, and some amount of it is learned experience. When you think about freemium products, there was a study, it was referenced by this VC, his name is Tomasz Tunguz, and he wrote an article on freemium products. And this topic has been covered at SaasStr as well.

Freemium products work, in a place where it is really a very high-volume market. So when you know that the addressable, not only revenue size, but the addressable unit size of the market is really big. Then freemium products can work. Think about Gmail, right? It’s a totally freemium product and it helps Google sell many other things on top of it. That’s where freemium products work. But the thing is that their conversion rates are very low. So roughly two to 4% conversion rates into paying customers. And even then, when you have paying customers, they’re going to be anchored to low ESPs.

So that’s that is something to keep in mind when you think freemium, because nowadays in SaaS, there is a natural tendency to say, “Oh, we’ll do freemium. And then we’ll undercut our competitor.” But what many companies realize after they’ve gone in this path is that their revenue, they have really not picked up. And then they start this process of trying to go enterprise. So initially I think a very important decision to make is whether the segment and the persona that you’re targeting, if you build a distribution curve on an X and Y axis, where on the X axis you have all of the companies of that segment, and Y axis, you have the revenue sizes, you would expect it not do fall off immediately.

You will expect it to have a gradual distribution. You will expect more companies to have lower revenues, fewer companies to have higher revenues. But if you build some sort of graph like that, you can then see, okay, do you have enough market runway to sell to enterprise? So if you found that, okay, we have 5,000 companies in the enterprise segment with revenue about a hundred million dollars.

That’s a good amount of market runway to then decide and say, I think, maybe we should just make it an enterprise offering. Maybe not even have the pricing on the webpage. However, if the market is distributed, let’s say it’s a lot of mom-and-pop pizza stores or physical locations. In that case revenues are going to be sub 5-million for this market segment.

And so you just cannot have enterprise pricing for them, right. Then your decision is you come up with either some sort of SMB pricing or to come up with more of a freemium model. So the model that you choose has a direct correlation with the market runway and the amount your buyers can pay.

Laurier: And there’s different variations on these things, because freemium is in my mind, different from product-led. I think of a company like Zoom, where users come in and they can utilize the software, download it, create meetings. But if they want to have something longer, if they want to have, probably in most cases, really useful access to the product, they need to upgrade and become a subscriber.

Similarly, with Slack, as you can have this bare-minimum use of Slack, but as soon as you want to have a decent sized team of people, now you have to start paying for it.

Ajit: Right. Maybe this is a point of terminology. I, in my mind, kind of bucket those two things together, like the freemium approach or the product-led approach. Product-led approach doesn’t necessarily have to be free. It’s more about creating optimization within the product, so that there is a marketing engine built within the product itself and not just externally, from emails or social media and so on. So that’s how I think about product-led. Freemium is, I think about it more as the initial offering, you provide to incent the users, to come in. So, in that sense, I think Zoom does follow both of these models because they have a really wide market for communication software, it’s really everybody in the world that wants it.

So, because of that, even if the conversion ratios are low, that is, that can work in their favor because they’re literally trying to sell to the whole world.

Laurier: Yeah, they’re doing that thing, that marketing, we say your audience is never everyone and it almost never is, but Zoom is one of those few products where it is almost everyone now, especially with things like the COVID pandemic that we’re still going through at the time we’re recording this,

Ajit: Very

Laurier: you know, it’s really made it so that.

grandma is your audience as well as enterprise companies.

Ajit: Very true. Very true. Yeah. And I think, in that sense that it could have been a little bit serendipity on their part to have had this model when the whole world changed and the model became more effective.

Laurier: Yeah, I wouldn’t recommend to any business out there that they try and follow that particular model for global domination is to have a, have an unprecedented world event come in and make way for you. And you get to be the one company. Because there’s so many other video producers, there’s BlueJeans, there’s, all these video conferencing companies out there, even, Google Meet hasn’t really thrived the way that this…

Ajit: This has been a very challenging space to actually succeed in before Zoom came along.

Laurier: Yeah. Yeah, it has. And whatever happened to Skype, right. There are still countries where Skype is prevalent tool. But in North America, everybody is using zoom right now. and if you want to have a meeting, everybody assumes you’re going to be having it on zoom. It’s really gone that way.

We mentioned that pricing is very important to sales success, but it matters on a larger level too. How does pricing roll into strategy for the longer game as in, how can it affect a business in attracting venture capital scaling, going to IPO or being acquired?

Ajit: Yeah. Again, great questions, Laurier. I think if you think about the objective of an exit, which is an IPO or an acquisition, in many cases, either the public market or the private buyer, they’re buying you because you are going to give them a return on investment.

And I remember at Medallia, this is a quite a few years ago. I think it was 2015-16 timeframe. We were doing a company strategy project and we were trying to think about how we can best prepare the company for IPO. And one of the things that we try to solve for is, okay, when we IPO, we will need to have four or five hens that lay these eggs and you need, we need these offerings that provides some sustainable runway for the investor.

In that context, I would say that strategy-first comes before the pricing. You need that strategy and thinking: what is my product portfolio going to look like? Most companies start with one product, and then they evolve their portfolio to three or four or five ajacent products.

Maybe they’ve acquired a company. And the next part of that is to have strong margins. Right. And I know Warren Buffet looks at pricing power as one of the key elements of knowing how much stickiness a brand has. So, at that point, if you have then done a good job of building your brand, the pricing goes along with it.

So, if you are a premium brand, generally seen in software premium brands are able to get 30 to 50% higher margin. So, pricing then, and I even saw this at Medallia where, once we had a really enterprise sales team come in, they were able to raise average selling prices much higher through solution selling, which is also a specific part of pricing. That is a lever that companies should definitely look at, despite whatever they’ve done in the past, if they are a couple of years out from IPO pricing, both for scalability and revenue predictability, as well as margin, become really important. And often companies find that they can improve all of these metrics at one time.

They can improve the predictability by creating packages that better conform to the buyer, and they can improve margins, by sometimes just being able to see how, if you create another package and if you create a different way of pricing and communicating the value of the product, many times the communication of the value also lets them increase the price.

So definitely a lever for companies to pull when they’re closer to IPO and acquisition, for sure.

Laurier: Ajit, I see doing pricing implementation as being very often a teamwork project. How do you recommend that a product manager who reads your book, and wants to bring onboard the team to implement their new pricing? How do they get team members on board to understand that this is a good way to do it when everybody’s kind of all over the map and has their own ideas about how the product should be priced?

Ajit: That’s a great question. And often, this sort of execution challenges make the difference between having a good outcome and not. Something that I like to do in my job is I have this Alliance mindset. So generally, product managers, product marketers, we don’t really have reporting authority.

So before I have a big project coming up, I speak individually with a few sales reps who I try to get a lot of feedback from on the market, make sure that I can test buyers, I can sit on calls with, maybe I can pitch certain parts of my suggestion.

And then I try to form an alliance around business operations, other executives, maybe on the customer success side, who have seen a lot of customers and are intimately familiar with their needs. Eventually that team will also then provide feedback and take inputs from the CEO. But I basically try to form a team that believes strongly in that product or in that project, which, in this case, maybe pricing, and who have strong opinions on, what the customers want and where the market should be.

And so, by building that kind of alliance, it not only provides these folks who have had strong opinions a place to voice them, but now you have enough momentum inside the organization to then say, ” No, Mr. CEO, we’ve analyzed this from all different angles; we’ve analyzed it from the perspective of impact on the current customer base. We’ve analyzed it from an impact on market runway, we’ve spoken to the CTO. We know what execution effort is going to take. So by the time you get to the CEO, you have a pretty buttoned-up story. and that’s the benefit of bringing on a lot of, stakeholders across the organization onboard much faster.

Laurier: Yeah, because generally everybody knows how important pricing is. They know the consequences of not being priced, right. They know the impacts of being too expensive or being perceived as too cheap and low value. So, if you’re the one person on the team who really has a good understanding and good plan for the way forward, chances are that if presented properly, you can get buy-in for the rest of those team members.

Ajit: For sure. And often the person most aligned with you on this project naturally is going to be the sales person because they’re incented to sell more; they’re incented to sell higher deals.

And many times, if the organization hasn’t had a very structured process for win-loss, you’ll hear them either complaining that, okay, the prices are too low, which is very often a value communication problem, or they’ll say… actually in a company that I work right now, the feedback I got was, “we’re leaving money on the table.” And if a salesperson is telling you this, then there’s a great opportunity to partner with them and figure out a way that can actually end up helping make them more money at the end of the day.

Laurier: Well, and you can have the opposite coming from your director of sales too. That we’re too expensive, right?

Ajit: Yeah, totally. And both dynamics are an opportunity to engage, and when they’re saying it’s too expensive, I’ve found that’s a great opportunity to engage and say, “Hey, can I build an ROI calculator for you? Can we build more customer stories or case studies to really illustrate how we bring value to the customer?”

So we flip that into a value conversation.

Laurier: That’s probably one of the most important things you can do is if you have everybody focused on value and you have your sales team understanding how to convey that value that you deliver, that you’re not just selling a tool; you’re selling a better way forward to the customer.

So finding ways to get everybody interested in conveying that messaging in getting that positioning through to the audience. That’s a really big part of pricing success to me.

Ajit: As I’ve written the book, I’ve had interviews with a lot of pricing experts. I’ve learned a lot by writing the book, because I’ve had to speak with many folks.

So I spoke with folks who have done pricing at Gainsight, Citrix… yesterday I had a call with somebody who was leading pricing at Mixpanel, and the number one lever that I realized in all of my conversations, once you figured out your positioning and packaging, as far as pricing is concerned, is the specific value metric that a product manager chooses.

And this is when companies become really big and it becomes really hard to change. So an example here is, companies like Salesforce or Zendesk, they offer what I call the “capability model.” They offer their solution on a per-seat basis. And that’s a legacy construct in some types of software that works, but there are new types of software too, nowadays, the Twilios of the world.

And it’s more of a consumption model. So Twilio says, “You want to buy 5 million SMSs from me, you pay certain amount,” and then they have a per-SMS cost, per-SMS rate card. What I found in almost all of my conversations is that however you define the value metric, you can use that to optimize for revenue.

You can also use that to optimize to gain more market share and to reduce churn. So, a couple of examples. At Helpshift, which is a former employer, I spoke to my original VP of revenue. What he mentioned is that they knew going into the market that they would be judged based on what Zendesk charges.

So the difference that they did in terms of pricing initially, was they charge on a monthly active-user basis. So, while other customer service software were more for the web, Helpshift was more for mobile and they aligned it to the thought process of a mobile product manager.

And if they had not changed it, they would have gotten five to 10 times less revenue from an account than they actually got, because they were able to tie it into monthly active users, and the value per monthly active user looked reasonable to the client. So that’s how the company was able to get really high-paying clients initially, which is a great insight.

And you only get that insight when you really understand the buyer well.

Laurier: Yes, because I was going to add to that value is constructed in the mind of the buyer. It’s not constructed at the end of the product company.

Ajit: A hundred percent. Another example of a call I had last week with the head of sales at a company called Nostu. They provide e-commerce product recommendations. When the company started to gain market share, they said, “you only pay us when we convert.” Right. So they’re building us analytical and tracking infrastructure in the product so that they could measure when someone clicked on their module on a website, and actually convert it to revenue. They only took a chunk of that. And the insight there was by deploying that model, they were able to increase market share like anything, there was no doubt who this company was.

It was easy, you didn’t really have to get any approval. You say, “Okay, fine. I’ll just include the code. And later on, if I make any money, I’ll pay you back.”

If you have the right value metric, that value metric can get you a long way. And the reason I’m mentioning it is sometimes people focus a lot on the surveys and the Van Westendorp models and the conjoint analysis.

Whereas the value metrics, if you pick the right one, can at least sustain you for two to three years before your business evolves into something else and gives you enough room to optimize on the specific dollar value per unit value.

Laurier: Do you make recommendations for how to find that value metric? There are so many different things you can choose from with any given product. How do you find the value metric and know which one is going to resonate with the buyer?

Ajit: It’s really dependent on your goal. Generally, there are consumption-based value metrics or capability based, right? So, if you think the value is proportional to how much it is being used and you can measure it. And you can account for it later, and the customer also looks at it the same way. Then you can provide a usage-based value metric. However, think of hardware. For you to go and say, this is the amount of ROI I provided to you, or this is how much you consume because you just, you provide, you gave somebody a router or a switch.

Even those companies are trying to switch to value metrics. That is a little harder. Then you may have a capability model where you say, “Hey, the license cost X amount and you renew and, you pay maintenance costs and so on.” So yeah. It depends on the type of product.

And then it depends on your goal. if your revenue is your goal, you’re going to be more incented to tie it into value. If market share is your goal, then you want to provide a value metric that is very low-risk for the buyer. So, it depends on the goal and the type of product that you have.

Laurier: Yeah. And it’s important to remember too, that value is not even really related to cost the cost for you to provide a service to your customer has nothing to do with the value that they perceive. Although cost is a factor in being profitable.

Ajit: Hundred percent. And this is one of the most common, everyday fallacies I have in conversations in my company where somebody will say, why are you charging so much for this? Because it’s so easy for us to build and I to respond like, how much we charge for something has nothing really to do with if it’s, easy for us to build; it has everything to do with the value the buyer is getting.

Laurier: That’s it for this episode of product knowledge and my conversation with a Ajit Ghuman, author of “Price to Scale.” You can find out more about Ajit and his book in the show notes or at AjitGhuman.com. That’s A-J-I-T G-H-U-M-A-N dot com.

Be sure to visit GraphosProduct.com, where you can listen to all the podcast episodes, read the transcripts and get insights from our blog. Reach out to us on Twitter @ graphosproduct or email us through the form at graphosproduct.com. Thanks for listening. I’m Laurier Mandin.