Episode Transcript
[00:00:00] Speaker A: So as we built our financial model to justify it, we assumed there would be increase in churn, because naturally, as people are being charged more, they may not convert or they might churn. And there was almost no impact on churn.
[00:00:13] Speaker B: Yo, Mike check. What's up, everybody? You're listening to the street pricing podcast, the only show where proven SaaS leaders share their mindset and mistakes in pricing. So we can all stop guessing and start growing. Enjoy. Subscribe and tell a friend. Now, let's break it down with your host and sought after slayer of bad pricing, Marcos Rivera.
[00:00:36] Speaker C: What's up? And welcome to the Street Pricing podcast. I'm Marcos Rivera, author, founder and pricing coach. And today I have one of the hardest working guys in SaaS joining me to have a big discussion. It's gonna be a lot of fun. Here he is, the co founder of pricing SaaS, John Kotowski. Welcome to the show.
[00:00:52] Speaker A: Thank you so much for having me, Marcos.
[00:00:54] Speaker C: No, I'm excited to have you today, man. You have so much data at your fingertips. I can't wait to get into it. But first, just give everybody a quick, in short, a little bit about you and what you do.
[00:01:04] Speaker A: I'm the co founder of Pricing SaaS, which is a data and content company. We basically track and monitor thousands of pricing pages, and we turn it into content and we share it for everyone to really consume and learn more about pricing. In terms of my background, I have product management background. I did product management for well over 20 years. Half of it is an IC as an individual contributor and half it as an executive, as a head of product. And that's where I really fell in love with pricing. I realized the potential of pricing and monetization while I was leading product teams. And when I realized how powerful it is when you combine product initiatives and pricing and how much impact you can have on company growth, amazing, amazing things have happened. So after I've decided to go off on my own and I really wanted to focus on pricing, I feel like there's a big gap in the market. So here I am today, man, and.
[00:02:00] Speaker C: I'll say this, this is probably why we connect so well, right? Because I discovered the power pricing while I was a PM or product manager, too, building value, trying to figure out how to get folks to sell it, to buy it. And it was such a powerful lever. I fell in love with it as I was moving in my career. And this is where I am now. Very, very deep into it. You know what I do remember? I think it was Dan Martell who introduced us a few years back. Is that true?
[00:02:24] Speaker A: That is correct. Dan Martell pubmed by one of our offices in Toronto one time, and he sort of flew in with a bunch of founders.
We talked shop for a while. So that's how I got to know Dan. And that's how I got to know you, Marcus.
[00:02:40] Speaker C: All right, shout out to Dan, doing all the great things he's doing here. All right, guys, so here's what we're going to do. I wanted to break down a little bit of the show and what we're going to talk about because I'm going to adjust it a little bit for you, John, just because of all that data you have at your fingertips. I want to get into it. So this show is really based on the bookstreet price, and so I structure it in a rewind. Play. Fast forward where rewind. We talk about a story in the past, play what's working now. Fast forward. Let's talk about the future trends. So in the rewind portion, let's talk a little bit about you've seen pricing and you've done it as a product person. So let's get into a pricing story. Success or struggle? We just want to know what you learned from it because all of us out there are still in learning mode in SaaS and trying to figure this stuff out. It's a little scary. We need to unpack it. And I love your line. Pricing is hard. We just want to make it easier. Right. And so that's a big thing there. And then when we move on to play, this is where I want to take a little bit of a shift and talk about the things you're seeing in all these pricing models or pricing page changes that you're tracking. That's out there. I know some trends are coming out and bubbling to the top. Let's talk about what's changing on these pages. And then in the fast forward portion, I want to get a little bit into some of your recent stuff on pricing AI and the trends there. That's going to be one of the biggest, I think, intriguing topics in pricing, especially in the software game, as AI begins to flex his muscles and stretch. So let's get into that piece. Are you ready to get straight with me?
[00:04:08] Speaker A: Let's get started.
[00:04:09] Speaker C: Awesome. Let's get started. Let's unpack a quick story. John, go ahead.
[00:04:13] Speaker A: I'll talk about my experience at format. Format is basically a website builder for creative people. So they compete with squarespace, typical website builder, but with a templates specifically for photographers, artists, et cetera. I was there for three years as head of product. That was my last full time gig. 50,000 customers. So lots of customers, no salespeople. Everything was product led growth, self serve, average transaction, twelve to $15 per month. And when I joined, it was interesting because I joined as a product leader, but at the same time, because we didn't have a sales team, the CEO at the time said, hey, John, your bonus, your comp is tied to revenue targets, so you actually have a sales quote. It was, okay, this is interesting, but it was really interesting in the sense that it forced me to think about monetization from the get go. So as I was planning my quarterly roadmap initiatives, I knew at the beginning of every single quarter which initiative is going to drive revenue, additional revenue. And to be honest, Marcos, a lot of it came down to how we did pricing and packaging. Some of it involved increasing prices. Some of it involved introducing new plans, bundling certain features. But we had it down to a science where we could forecast revenue with probably 90% accuracy within a quarter or two. So it was really good. The biggest challenge was just coordinating the changes among so many customers. When you have 50,000 customers, a lot of them are on old plans. So grandfathering is a big issue. Logistics, coordinating with all the customer success representatives. And we had multiple, multiple projects. My team used to hate it because we had so much complexity in the projects, but at the end of the day, we pulled it off. So, again, like, the biggest challenge wasn't necessarily the changes themselves, just managing the complexity of the project when so many customers are involved.
[00:06:25] Speaker C: Yeah. And that. And then the 50,000, you said, right. In that base, that's quite a. That's quite a bit. But that means that that population also has probably some differences in them. If you were to break them up into cohorts, not just in what they're paying, but what they're using. And I think that's a big key in trying to step back and think. And so when, when your CEO said, hey, you got a sales quota now, which I think is a. It's a brilliant approach, actually, to get incentives aligned, if you think about it, right? I think it is, yes. I was like, well, maybe we should think about that more often. But one thing, that's, when that happened, you were probably like, oh, okay, something changed. Now that you have a sales quota or a component of your successes based on that, and you knew pricing is a big lever, what was the first thing you did when, when that change came into place? What was the first pricing change you did, if you could remember.
[00:07:12] Speaker A: Yeah. So, I mean, a lot of it was just getting my hands on the data and really understanding how revenue changes. So, you know, because it's, it was such a large number of customers, we initially, we used homegrown tools. We ended up adopting Chartmoggle, which is an analytics tool for SaaS companies. It helps you analyze MRR metrics such as churn expansion, contraction. So we got really, really good. I got really good at chomping the tool, understanding the movements that turn the expansion opportunities, and then furthermore, to your point, Marcos, breaking it down into different segments as well as cohorts, because when you have so many customers, you can actually start dividing it up and treating those segments differently. This is where a lot of the complexity came in because we identified certain segments that we wanted to experiment with or potentially, you know, creates certain buyer journeys, which again, like, introduce complexity. A lot of the systems we used, that format, this is six years ago, were homegrown tools. So we didn't have.
So, like, right now in the market, there's a lot more in terms of like pricing and packaging tool set billing tools out there to help you manage this complexity. Everything for us was homegrown. So literally we had to go through scripts, we had to go do all kinds of data analysis to see, again, I could be affected. We wanted to make sure nobody gets charged the wrong amount or they don't get access to certain features that they shouldn't be accessing. So just managing the complexity. But again, when you have so many users, you can do so much in terms of segmentation and how you, how you. So I create even an upgrade path. It's like, okay, I know somebody is using this certain feature. I want to introduce them to the plan that consists another feature that will sort be a natural extension to what they're doing. So we did a lot of these experiments and exercises, but again, like, it's just the complexity of managing this whole thing. A lot of it was human based. Luckily, I had one of the best teams in the world. So again, like, we managed to pull through it, but again, like, it was so much, so much work, manual work, just to manage the whole thing.
[00:09:35] Speaker C: Yeah, because everything is homegrown, right? So you had to do all this stuff, boots on the ground with your own hands, you know, building events to try to see like the right, the right transactions and all these key things. And from time and time again, I'd love to know that these things are often harder than people think. And if you think they're hard it's probably a little harder than you think. But when you. When you were able to kind of start seeing some of the fruits of that analysis and labor and information, when was that turning point for you guys.
[00:10:04] Speaker A: To be honest, Marcos? You know, like, when you. When you're delivering, when you. When you're growing revenue and, you know, like, you're hitting your targets and you say you'll do something, you actually get there, you get a lot of respect. So as a product leader, you know, like, as I started delivering and hitting my targets and growing revenue, I got more and more autonomy. So, again, like, a lot of people trusted me. I remember our CFO literally said, hey, John, do you need more budget? He was literally willing to give me more budget because, again, he saw that there was a lot of growth coming out of the product team compared to the marketing team, for instance. Right. So, again, like, as a product leader, I think, you know, like, this is one of the superpowers you can acquire. If you get good at pricing and monetization, that will literally set you apart from, like, 95% of the other product leaders that are out there. It is such a superpower.
[00:10:59] Speaker C: I can attest to that. Absolutely. And the fact that they actually want to give you more budget, which is the exact opposite of what a lot of people wonder, like, how the hell do I get more budget, not less? I love that. And I think you're right. I think once you have some wins, and this is the thing that I'm picking up, and you can tell me, Marcos, that's not the point. But I want to. I picked it up anyway, which is you got to break it down and maybe get a small win under your belt, get something out there, get going, and then build on those small wins and go continue to get bolder and bolder. And I think just that first small win, always the toughest, because it requires the most work. But once you build momentum, it starts to get a little bit clear and easy. Right.
[00:11:38] Speaker A: And there's such a wide degree of. So, like, monetization initiatives you can do. Some of them are very, very risky. You know, changing.
Changing prices is always very risky. People are always scared of changing prices, but, you know, like, even little things, like, you know, creating add ons. So we. One of the first things we did is we created domain add ons. So you purchase a website, you get a domain for $20, or it's included if you subscribe for a year, that was a very low risk, and it had tremendous benefits, because when somebody attaches a domain to their website, it's such a cumbersome process. The likelihood that they will churn and leave goes down by, like 80% people. Once you sort of configure DNS and you have to touch a domain to a website, chances of you taking that to squarespace or another competitor are very, very low. So we created a double monetization mechanism. One is if you subscribe on monthly basis, we would sell it to you as an add on for $20 or include it for free if you signed up for an annual plan, which improved retention, which again had impact on. Mr. So that was sort of like an easy, easy initiative that we did ultimately, again, like, once we got started getting those little wins, we started getting more empowered. We were like, okay, now we're going to introduce a new plan. We're going to increase prices. I remember right before we got acquired, we increased prices, and I think it was like 25%. Part of it was because we wanted to increase revenue before we got acquired. But the point of this story is we assume the churn will go up quite a bit as a result of that price increase. And we had that built into our projections, and there was almost no impact on churn. Almost no impact.
[00:13:30] Speaker C: Say that one more time, because I think this is a big fear for people. I just want you to say it.
[00:13:34] Speaker A: Again when you were hiking the price up by a large amount, 25%. So as we built our financial model to justify it, we assumed there would be increase in churn, because naturally, as people are being charged more, they may not convert or they might churn. And there was almost no impact on churn.
[00:13:51] Speaker C: Almost no impact on churn. And you said 20, this is not a 2% price increase.
[00:13:56] Speaker A: We're talking 25% increase.
[00:14:01] Speaker C: I love that. I love that 25% increase. Hardly any churn. But I bet you your model assumes some and you perform better than your model.
[00:14:11] Speaker A: Absolutely. Yeah. That was a huge win. I wasn't there for, I was there for another six months after. And again, like, the churn or the retention persist like it was still good three years later. Maybe some of those annual customers have experienced higher churn. But again, like, initial results were amazing.
[00:14:30] Speaker C: Oh, my. And expanding like this space at that price range, the twelve to $15 kind of month payment, I mean, the price sensitivity is a little different than if you're spending 150 grand on something. So the changes and the thoughts, you just gave me an idea for a new framework just right now, in real time, you break it down, you make a bet, and then you go bold. So you do it in these three steps. Get the data, break it down, look for the opportunities. Let's take a small bet and let's just keep making bets after that. And then you start getting bolder after that one.
[00:15:03] Speaker A: Exactly what we did at formats. And it worked. It works.
[00:15:06] Speaker C: I just took everything you said, I just put it in three b's. That's all I did. That's how I think that was a fantastic story. I think a lot of folks, in thinking about and just listening to you, realize that you can change the structure. Take a small, easy thing like the add on, and by the way, charging for it on a monthly versus giving to them for the annuals. Genius way to give them the incentive. You don't always have to charge money for everything. You can use it to leverage to get something else, which then ultimately leads to higher ltv or higher lcd. I think you played it really smart here. The big takeaway for everybody. As you reflect on that time at format, the biggest lesson for folks before.
[00:15:44] Speaker A: We move on, if I was to do it all over again, everything again worked out really, really well. I think investing in good tooling and infrastructure will pay off in huge dividends, because again, as you create this list of initiatives or potential monetization experiments without good infrastructure, you're going to get bogged down in details and it will slow you down. So upfront investment in good infrastructure is a must.
[00:16:15] Speaker C: I think that probably would have helped ramp in the beginning of this whole journey if you would have had that tooling in place. Makes tons of sense here. And nowadays there's more and more options than ever. So if you look back five years ago, ten years ago, there's really not a lot of options for tooling, for monetization.
There's a ton coming out there now. So take a look, make sure you have the right data investment tools, make to make life easier for yourself and make pricing easier for yourself by doing that. I think that's a solid point. Yeah.
[00:16:41] Speaker A: Tools for feature flagging, planning, configuration, pricing, billing. There's a lot of options out there. So again, I think again, if I was to do it again, I would evaluate them, put in the framework, and then again keep going with initiatives.
[00:16:57] Speaker C: Yeah. And I also think PLG and usage based and AI, these are pushing the limits of some of these things. And that's where you're seeing even more capabilities now than ever, right? That's right. 100% on that one man team. I want to take a quick pause here to ask you for a huge favor. That'll mean a lot to me, please review and share the show. Share it with your team, your friends, your peers. Not only will it help them stop the guesswork in pricing, but it'll also help you and increase the chances that you'll take action and change for yourself. All right, much love. Now back to the show. Want to move on to a topic I know you're dying to talk about. So let's go into the play, right? Rewind the play. You are looking at. You probably look at more pricing pages than anybody out there, and I look at a lot. So you must be looking at tons. You have to tell me, man, there are probably trends that you're picking up on of how companies are changing their pricing page. And I want to touch a little bit about the whole publish, don't publish, because there's, you see that shift in and out of vogue. Some companies, they go and they publish, and then they turn around and then they take it down and they publish again. Right. So we'll get on that piece a little bit later. But just in general, man, what trends are you seeing? Pricing page, good or bad? What are you seeing out there?
[00:18:10] Speaker A: Yeah, so I can speak to some of the freshest data that's out there, which is, again, like, data that I've been working on this week. So I'm working towards our next benchmark report, which is looking at around 450 companies that do have public pricing pages that we've been tracking for about a year and a half. For this report, we're looking at data for 2024. So any changes that occurred since January 1? The first thing that I'm looking at is pricing changes. Everybody wants to know who's changing prices. The first, probably like, biggest insight for me is how. How many companies do not change prices. So about 23% out of the 450 changed their price this year so far, which is crazy if you think about it, Marcus, because that means over three quarters of companies have not adjusted their price points, which is absolutely crazy, because, again, if you think about inflation alone, they're not even adjusting for inflation. I'm a landlord. I do this to my tenants all the time. Every year I raise rent a. These two keep up with inflation. But over. Over three quarters of companies out there haven't increased or adjusted their prices this year so far, which I think is wild.
[00:19:32] Speaker C: That is wild. You're not saying half, you're saying three quarters. So that's three quarters. Most are leaving it steady, and I wonder if it had anything to do with the economic uncertainty and some of the turbulence there. That's a big number.
[00:19:48] Speaker A: Yeah. I mean, it could be a number of reasons. One is, you know, like, I think fear is one of them. I think companies are afraid to increase or change prices. Prices. And they fear that, you know, as soon as they send a notification to the customer, they'll be like, okay, do you really need that SaaS tool? So they may have the fear that customers will churn as soon as they touch pricing. The other one could be infrastructure. Changing prices is not easy. You have to adjust all the billing systems. You have to communicate it to the customers. Again, it is a project, and part of it could be just, I don't know, laziness or lack of, or lack of skills or expertise or maybe even lack of ownership. As you probably know, Marcus, pricing is one of those disciplines that typically doesn't have a dedicated owner within the company unless they get really, really big. So, again, sometimes it just falls through the cracks because the CEO or the founder who used to do pricing is now too busy growing the company. So nobody really owns pricing. So it's like, let's leave it at as it was because it's always worth for us. So again, like, that's one of the biggest insights, is, like, most companies haven't touched pricing so far this year.
[00:21:01] Speaker C: Breaks my heart every time, man. Every time. No reason I say this because it's. I know they're working hard in the background, building, adding more capabilities to their roadmap, to their infrastructure. They're getting faster and smarter, and they're not capturing that hard earned value they're putting in there. And it's. You're right. I think it's usually fear that sales will slow down, customers will churn. It's a lift. Nobody has the time and energy to do it because we're all running so hard, so fast, and doing more with less. And who has all this free time to dig into the data and do pricing and manage that change all the way through, right?
[00:21:35] Speaker A: Which is crazy, right? Because it's so easy to justify, right?
Spend it, invest the time to do a project like this, and you can increase your overall revenue by 1015, 20% easily without, you know, like, without too much effort compared to some of the other initiatives that you take on. Right. But I don't have to. I'm preaching to the part.
[00:21:57] Speaker C: You don't have to twist my arm, my friend. Right. I mean, it is the fastest RoI value creation you can do, talking from coming from somebody who did value creation for a living for tons of companies, right? It was the fastest and quickest it was the quickest and also, by the way, led to the highest impact. So if I hired a sales rep, that would add some ROI and add some revenue, but you got to have the hiring, you got the ramp up, the training and all that before their fully productive rep. You're looking at six months or so, plus all that cost. A pricing change going into play, not just new business, but also on the base, can lead to a very fast.
[00:22:32] Speaker A: Rocks, especially the base. Right. Because it's all of your existing customers, times whatever change you've made. So if you increase price even by 10%, that's an extra 10% in revenue minus the trend.
[00:22:45] Speaker C: You're saying it, right. Exactly right. The CAC or the acquisition cost of that revenue is so much cheaper, flows to the bottom line. There's lots of good reasons to do it. Obviously, it's something that you want to put thought and handle carefully. Right. Which is where we strike the counterbalance on that. But the point here is that it's a way to capture more value and boost the top line. I think where companies get a little nervous is, again, like the implementation, the execution, all those key things, but it's always worthwhile. So when someone asked me, Marcus, should we hire a pricing lead? And they're like an $80 million company with seven products, I'm like, yeah, you absolutely should.
[00:23:22] Speaker A: No problem.
[00:23:22] Speaker C: And even sooner than that, right? I mean, it's one of those things where there's always Roi in that. So we see eye to eye on that one. Any other big change you're noticing? And so nobody, so the big change is nobody's changing, but what's the other one you see?
[00:23:33] Speaker A: So even within that 2020, 3% of people or companies that are changing prices, what's interesting is, I think only about half of them did price increases. There's a lot of other companies, or the rest of those companies are. Some of them are actually decreasing prices. This is what I'm digging into right now. So there's definitely economic pressure to decrease, especially entry level prices. So entry level plants are getting a little bit more affordable, which is also an interesting trend. Obviously, companies like OpenAI and some of the larger infrastructure companies are competing heavily against each other, are lowering prices as well, because it's usually cost plus or some sort of variation of cost plus pricing. But again, like, not every price change has to be a price increase. There's also. I've noticed that. So, like, more and more companies doing intro discounts, which is also interesting. So intro discounts, meaning that they lower the price for new customers for typically some period of time. So, you know, 50% off for the first three, three months. Even slack. Slack is doing this, but there's more and more companies doing intro discounts. It used to be things like Quickbooks used to do this all the time, especially like, all the accounting software, because they know once you're in, you're not switching. So it's like whatever it costs you to get somebody. But again, like, intro discounts are interesting because it's different than doing freemium or a free trial. You typically get more time to develop those habits to use that software, which I think is suitable for quite a few, quite a few companies. So I'm looking at this data right now. Once we publish the benchmark report for it, I'll have more insights. But those are some of the key trends there.
[00:25:22] Speaker C: That's a big one. That one really surprises me, too, because pricing going down, you're thinking, typically speaking, they're going up and nothing crazy. Sometimes it's just 10% or a couple of bucks here and there. What you're seeing is that actually not only pricing going down but also promo sort of entry. Let's just accelerate this acquisition motion and get them to try so they can buy. Right. I think freemium and free trials have been around for a while, which is the lowest risk way of getting into a new product. But there's boundaries in terms of time or there's boundaries in terms of how much capability you get access to. But this is a little different, and I think you're really right on to point out that this is an acquisition strategy. It makes it easier to get into the product. The play is hopefully that when that expires, you're already hooked in and loving the new world with the product versus the old world without it, and then you're able to keep going. So one dangerous thing about a three month half off or six months at a special introductory rate is something that there's a bit of a churn cliff that happens here.
I worked with a company, and they. They lived and died on this intro rate. And one of the things is, if you get hooked on it because you're like, ooh, there's a bump in conversion. And look at all these new deals coming in. It can sometimes lead to artificial or lower anchoring. And then after the 90 days or 30 days, whatever, this is over, you may notice a blip in your drop offs or in your churn and folks leaving, because when you do the intro raid, you're also opening the door for what I call price buyers, not value buyers. Right.
[00:27:05] Speaker A: So that's a very, very, very good point, Marcus.
So actually, I have a story.
[00:27:12] Speaker C: I want to hear it.
[00:27:14] Speaker A: So going back to my format days, so when format got acquired, so we sold format after I was there for about three years, the company that acquired format, Zenfolio, was addicted and I was, I'm using this, this term literally. They were addicted to intro discounts. So they always had 50% off sale going on every single month. They would just literally update the month. You know, it's like September sale, October sale, but always 50% off because as soon as they turned it off, their nuke revenue just dropped, it tanked. But then they had a trend issue because again, like on renewal, when those customers had to pay full price, they don't want to pay full price. So to your point, again, like a lot of those customers were shopping around and they only bought in because it was 50% off and it was a deal, not because they were really interested in the solution or the value of the solution. And that's, so to me that's a very, very tricky, very slippery slope. It's a double edged sword. You can increase your adoption or new customer acquisition, but if you're losing most of those customers when the full rate kicks in, then it's, I don't know if it's working. So it's definitely tricky. I think it works well for really sticky solutions. So accounting software, great again, like once you're on it, but again, like, I'm with you on this one, this is a tricky, like, I don't know if.
[00:28:42] Speaker C: I would recommend, it's super slippery. I would say. I think you're absolutely right. The stickier the better. And I'll offer one more thing before we move on, which is you may have to double down on your onboarding and your cs, your customer success. And what I mean by that, you got to get them to value and you got to get them to do the right things in your software solution to create that stickiness. They got to hit some milestones, send that invoice, integrate that system, whatever it is, get to that point in order to take advantage. So if you are thinking about a promo or intro, I'd say be double down on that onboarding motion on that customer success.
[00:29:15] Speaker A: Yeah, it's almost like you're treating it as an extended trial. So during that discount period, your discounted customers have longer period of time to try. So again, like you want to do everything to get them to adopt and, you know, create that stickiness with the product because again, like that reduces the.
[00:29:32] Speaker C: Risk of churn hundred percent, 100%. So all you guys think about there a tactic that we're seeing and out there as part of the data and the research, I would say tread carefully. I think Jon would say the same last section here. I want to move forward to where we talk fast forward in the future. It's almost like the future happening now, which is AI and AI pricing. And I'm thinking about some of the things where they were starting to see companies beginning to gain some courage and try to monetize the AI. There's still a big chunk of them that are not monetizing. I want to hear your thoughts about that. But where do you see these guys going? Are there some trends you see popping up here in the data? Let's talk about AI.
[00:30:11] Speaker A: AI has been top of mind. We spent a lot of time looking at AI and how companies are pricing AI. We run some surveys as well for people who are signing up our newsletter. We surveyed them and based on just the survey results, it sounds like roughly about half of them are monetizing AI. So a little bit more than the pricing changes, but more than half, or like about half are still thinking about it. So they've actually invested money into building AI capabilities over the last twelve months, but they're not making any more that they used to prior to that, which again, to me is crazy. And I think it's even worse with AI because as you know, Marcus AI usually has costs associated with them. It's not like it's not cheap. Most of these companies are building on top of openAid, Google, Gemini, something, an infrastructure that has cost per usage. So the more their customers are using the AI features, the more it costs them. So it actually hits their margins. And yet they're not increasing prices or necessarily monetizing AI explicitly. So I think right now it's been roughly a year since OpenAI has really disrupted the industry with chat, GPT, and there's been this gold rush of companies jumping on the bandwagon, adding all these AI features. I think right now we're at the point where a lot of them are now like, okay, now it's time to actually start thinking about monetization. So we've looked at every company that we have in our data set that has monetized AI just to see how they're doing this. And there's really like three ways that companies are doing it. One is either as an add on, so they create an add on and this could be per seat add on or usage based add on notion. For instance, charges per seat. And you can buy notion AI by paying an extra eight or $10 per seat to turn on the AI features. Algolia search company allows you to buy an add on, but they charge per number of searches or so. Again, it's usage based. So add ons is one type of AI pricing monetization that is quite prevalent. The other one is just incorporating it into your existing tiers. So if you have a good, better, best type of model where you have different plan tiers, including a free one, what we've noticed, a lot of companies will stick AI features into one of the existing plants, and it ranges, it ranges all the way from let's give it to everybody, including the freemium plan, to just like the premium middle tiers to just enterprise depending on how were they slotted. There's different monetization opportunities. To me, what this tells me is these companies are monetizing it based on the constraints that they have today. So again, without investing in a new pricing model or new infrastructure, they have existing tiers. It's easy to insert AI and treat it like any other feature. With the add ons it's a little bit easier. So like easy as well because they already charge per seat or, you know, without goal yet for usage. So it's like an extension of what they do. But I think the real opportunity is with either by creating new products, some companies are spinning up new products. Aha. The roadmapping software is an example. They've created aha knowledge. So like uses AI to parse through documents, which is a great multi product strategy in some cases, as you probably know, companies are doing outcome based pricing. Intercom is the perfect example, but very few do it. So outcome based pricing basically means you're charging based on some successful outcome in case of Intercom, successful support resolution. I read an article last week that Salesforce is talking about changing their model from seed based to conversation because they think over the next decade AI will totally disrupt how CRM works. So I think we are going to see a lot more in terms of outcome or different type of model for AI pricing. But I think the state of the industry today is companies are basically leveraging their existing pricing infrastructure and billing software somehow monetize AI. I don't think it's the optimal way of doing it. It's just the easiest way of doing it.
[00:34:36] Speaker C: I think easy versus optimal is the key here from what you're seeing. Right. I think the. And by the way, there's just a lot of learning going on, right? So we're just sort of trying to figure this stuff out in terms of, you know, who wants to buy it. And so when you talk about integrating it into tiers, some are doing it everywhere, some are doing it in just a premium think about box, right, where they have enterprise. Enterprise plus includes AI. And what you're doing is you're giving it to the most complex and highest willingness to pay customers, let's face it, right? And so you kind of see where their tolerance is for paying it, and then you can sort of propagate from there as you learn. So this is a bit of a toe in the water. What's the temperature like learning phase. And so everything you're seeing out there, I want everybody to be careful. It's not necessarily the right way to price for AI. It's just what companies are doing to experiment, lean in, see where the value is, and see where that threshold of value exchange is. And then this will continue to evolve quite rapidly. So if you're thinking about something that's a little different, maybe against the grain, but you think it works for your value, I would say give it a test. Go for it, right? It's okay. There's no established rule just yet. I mean, you would agree, right, John, what you see?
[00:35:47] Speaker A: Yeah, I think you're spot on. I think AI is different than everything else we've done before in so many different ways. Companies are learning. We're sort of like, in this learning phase. Like, how do you actually quantify the value that it generates and how do you convert it into dollar size? Right? So, but I think, you know, like, the point about experimenting and you're like, testing it is key, right? Like, there's nothing stopping you from running these types of experiments. They're low risk and you want to get the feedback from customers. I think one of the biggest challenges that these companies are facing right now is around positioning of AI features. Because AI is such an overloaded buzz word right now that just because you add AI, it doesn't mean anything to anybody. In reality, it means something different for every single product. But how do you explain this quickly on your homepage or your pricing page, what you'll find these days on pricing pages, there's usually a whole section, like ClickUp or wrike. They have these sections on AI. It's like, turn on AI, by the way, you get this, this, this and this and this, right? But it's like just saying AI doesn't really mean anything. So, like, how do you even explain what you get, I think a lot of it is, comes down to, like, experience. Like, I think sometimes it's even hard to articulate it in words. My recommendation would be like, experiment by giving people access, see where there's uptake, and then you can sort of like, figure out where you put in your monetization gates. It's like, okay, this is bringing value. How do I monetize this? And then. So, like, started experimenting with those.
[00:37:25] Speaker C: That's right. Small steps first, right. And just kind of see and build from there. It does mean something different for everyone. And depending on the vertical and depending on if your AI is, is more, you know, complementary, then. Or maybe it's something that replaces something else. Maybe it's integral to your whole platform. Like, depending on all those different, various factors, it could take a different path in that experimentation. So I think it's. Folks, keep testing. But I will say this, the add on approach, just like your story with format, is a nice little safe way to kind of see who buys it, who doesn't, and sort of ease your way into it. You could always add it as a promotional piece. You could always give it for something else, like that year commitment. But add ons tend to be that segue. I think that's why you see so much of it. And then from there, expanding an add on. It's just a great launchpad, if you will, for something new coming in. One more thing from an AI perspective, you were talking to a founder of an AI company right now, and he was saying, how should I price my AI tool? What would be your answer? I know what my answer would be, but what would be your answer to that founder?
[00:38:30] Speaker A: That's a loaded question, Mark.
[00:38:32] Speaker C: It's a loaded question.
I'm setting you up. I'm setting you up to fail, my man. No, because you're a product person. I'm a product person. The classic answer is it depends, right?
[00:38:42] Speaker A: And that's so context, I think, is everything, the nature of the product, who your customers are. But I think companies that are starting from scratch, so they're AI first, they're not bogged down by historical pricing or historical subscriptions, have really the opportunity to really, really disrupt monetization or AI. With monetization together, outcome base is always the best. So, like, from, for pricing people, that's always like the best way to go. But it is hard outcome. Sometimes it's not possible because of attribution. It's like you drove a certain outcome. But again, like, how do you prove that it was your tool or your software that drove that outcome. I heard somebody mentioned AI agents that are priced based on, again, different outcomes. So popular trend with AI agents right now is within sales, so acting as bdrs. And I think I heard somebody mention that again, like, now they're starting to get priced more outcome based or not necessarily outcome. Sometimes it's output. So output versus outcome, meaning that instead of closing a deal, it drove a meeting. Right. So again, I could close the meeting, booked a meeting. So, you know, like, I think these companies that are like creating virtual or ad based sdrs or vdrs are now starting to experiment with, like, okay, instead of charging you based on like, usage or per month fee, we'll charge you based on the number of meetings booked through this AI agent. But again, it's such a contextual question, it's really hard to sort of like give one universal answer to that question from you.
[00:40:29] Speaker C: Yeah, I call it something, I use this term called distance to the goal. So everybody buys software to get to a goal at the end of the day. And the closer you are to the goal, the outcome, the more you can align to value, and even the more you can charge frankly, or the willingness to pay gets clearer, the farther away from the goal, from outcome to maybe output, output to input, input to even something else. It gets really hard to draw that line, and it gets harder for you to capture that value. It's really difficult to jump all the way to the very end. I think you're right. Outcome is ideal. People want it. It's just, again, really hard, fuzzy to nail down. It can get confusing on who's driving the value and where there's confusion. You know what Dan always says, right? A confused mind never buys. It's been around for a long time. You don't want to introduce a metric that is perfectly aligned and perfectly confusing to everybody. So I think there's something we have to be very careful about there, in my view. That's a good point. Big home. Let's take it back. AI pricing, the big do and the big don't. What do you say?
[00:41:32] Speaker A: I think the big do is what we already discussed. It's like, don't be afraid to start testing and experimenting, both with adoption and seeing how people use it, the value that they derive, but also like, pricing it, add on, super simple way of like testing, willingness to pay, I think with add ons. My only caveat is you still want to create a path where they can experience it without committing, whether it's a trial or something. That, again, gives them a sense of this is what I'm getting. I think it's key in terms of don'ts. I think companies are at this phase now where they have to be careful with overusing the term AI, because, again, I remember back in the day, big data used to be a big term. Do you remember those? I do. But it's like, big data this, big data that, and to the point where it's like. It's like just noise and it doesn't actually help you sell or doesn't create. So, like, improve the communication or it just creates confusion. It's like, okay, AI is like, whatever. So stop slapping AI on everything and, you know, like, go back to the basics. Like, really, you know, talk about the value that you're creating. You know, whether it's more efficient way of booking meetings or etcetera. But again, like, talk about the value. Instead of just saying we're AI driven, we're AI this. Because again, like that. That is getting. This is getting old already.
[00:43:01] Speaker C: I like it. I like it, man. So it's all about, you know, testing the right thing and talking about the right things. I think you got it right on those key things there. Now, for my last question for you, man, I'm going to throw you a curveball. You've given us so much value and so much knowledge so far, but I got to know you as a human being. Sometimes I wonder if you are human because you just work so damn hard and so much. You're probably AI talking to me right now, right? No, I'm kidding, Josh. But I would love to ask you this question, man. I love everyone's response to this, which is, what was your favorite jam growing up? Your favorite song? The thing you could just listen to over and over again gets you smiling, gets you going. What is it?
[00:43:37] Speaker A: I've got to say, nirvana.
Oh, great. You know, growing up in the nineties, you know, like, that was, like my go to band.
[00:43:46] Speaker C: Excellent. Like, teen spirit. Oh, this must, like, teen spirit, that big jam, right? I love it. But I love it, man. No, excellent. I can see it now. I can see you getting motivated and working all day, all night, probably, on things, man. John, I want to thank you for coming on today. And would you be willing to come back and share an update in the future?
[00:44:03] Speaker A: Of course. We collect data, so we have fresh data all the time. So all kinds of insights that I'm always happy to talk about.
[00:44:12] Speaker C: Highly, highly recommend. I read the insights all the time. For those out there who want to see what's going on in pricing pages, go visit pricing SaaS. You got to grab their stuff. It's really good. It's real. You said 450 right in the sample size. So it's a meaningful group.
[00:44:29] Speaker A: All of these resources are free. We make money through sponsorship, so we give away all the resources for free. There's a ton of resources. We also publish a weekly newsletter, so.
[00:44:39] Speaker C: Pricings.Com sign up and it's free. It's free, everybody, right? That's a hard price to beat, man. John, thank you for coming on today. So team, that was John Kotovsky. I really again recommend his material. Also take a lot of the lessons that he walked through today. Not just how we launch pricing at format, but also thinking through some of the lessons that he's seeing and the trends within changing your pricing and AI take it. Get 1% better. And remember, stop guessing and start growing. Until next time, thank you and much.
[00:45:15] Speaker B: Love for listening to the street pricing podcast with Marcos Riverae. We hope you enjoyed this episode and don't forget to like and subscribe. If you want to learn more about capturing value. Pick up a copy of street pricing on Amazon. Until next time.
