Madhavan Ramanujam: evaluation

Transcript context

…All right. Third topic, around your pricing model. This is something that you talk a lot about that people thinks too much about how much to charge and not enough about how to actually charge the pricing model. So could you just talk about maybe what that is and why people maybe don't think about it as much as they should? We usually say how you charge is way more important than how much you charge. Take a quick example and then bring the point home and then we can talk about why this is actually essential. So taking a non SaaS or software example, if you think about Michelin, which is a tire company, probably one of the most price sensitive, let's say, markets because, think about it, you actually go into a tire store, you see all of these things look similar, but they're somehow priced differently. How are you supposed to make a decision? It's very hard when you need to understand what you're paying for. And they came up with this new tire, which was supposed to last 20% longer, was a true innovation in the industry, and these are tires that were used for moving trucks from point A to point B. And when they thought about it, they said, okay, if we go and ask for a 20% premium, there's no chance they would get it, because it's a price sensitive market. If they don't ask it, the tires are going to overrun and they're going to cannibalize 20% of their business. So what they actually did was they changed their pricing model or monetization model and they said, "Okay, we are going to charge based on the number of miles that a person would drive." The truckers actually love this model, not just because it was pay as you go and they could pay when they actually use the tires and how and everything else. That was the obvious reason. But then now they could also invoice their end customers and say, "Okay, my journey was 798 kilometers or miles, and that's the amount of tire costs," and they could pass it through because it became a variable cost and people love this kind of model. And of course, the tires lasted long. Michelin [inaudible 01:01:37] that more, but more people jumped into the Michelin bandwagon, because now they could actually buy a tire that's on a pay as you go basis. Now, if a tire could be actually with... And the age old model for tires is on a per tire basis. If a tire could actually be sold on a pay as you go consumption model, then obviously most products can actually explore this route, especially in a software setting. But the key lesson here is how you charge was the most important question. It was not the how much. The how much came about because of the how you charge. Another SaaS example that is probably top of mind for me is B2B SaaS's segment. This was before they went to Twilio. They used to price based on APIs. So the number of APIs that you actually have with Segment, that used to dictate which plan you would be and how much you would pay for it. But increasingly, they were also shifting gears towards selling to different personas within companies. And what is an API is a debate. Probably a marketing person does not necessarily understand exactly what an API is and the how you charge question became very critical. rent personas within companies. And what is an API is a debate. Probably a marketing person does not necessarily understand exactly what an API is and the how you charge question became very critical. And what they actually did was, we worked with them and we identified their monthly tracked users what was a much better metric into how customers perceive value, and that was the more fairer metric for customers. If you're tracking more users in Segment, you're probably willing to pay more compared if you're tracking less. So the packaging was changed to a monthly track user instead of APIs. This is literally exactly the same Michelin per mile models, on a B2B SaaS was number of monthly tracked users. So that was a different example. So the how you charge question is super important, way more important than how much. If you don't focus on it and just rush to one or the other, often you're sub optimizing like crazy.…

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