Karen Chiang is a co-founder and managing partner of Ibbaka, a company that provides software and expertise to enable business growth by optimizing revenue performance through customer value management and talent optimization.
In this episode, Karen discusses the importance of linking your pricing to value and creating pricing packages that accurately reflect the value provided to consumers.
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Why you have to check out today’s podcast:
- Understand the concept of net dollar retention in relation to your customer base and as a means of measuring your revenue from operations
- Learn how to effectively package your offers by linking value to pricing
- Explore these net dollar retention levers to better understand the value your customers are seeking
“Getting to a value-based mindset is extremely important in order to improve your pricing power.”
– Karen Chiang
Topics Covered:
01:19 – How she got her into pricing
02:33 – Defining ‘net dollar retention’
04:48 – Pricing as it relates to net dollar retention
09:18 – Linking pricing to value [where churns are concerned]
11:25 – Strategy to keep half a customer rather than losing completely
13:56 – What you must think about in the design of your offer
15:03 – What is product packaging and how it differs from cross-sell or upsell
18:23 – Pricing models and various packaging designs
19:32 – What a cross-sell and upsell are in terms of using the good, better, best
25:12 – Karen’s best pricing advice that can impact one’s business
26:29 – Net Dollar Retention levers by level of importance
29:04 – Usage based pricing as part of net dollar retention levers
Key Takeaways:
“Pricing has to be linked to value. When you think about it, we want to come up with a pricing method or approach that really tracks the value that is being generated.” – Karen Chiang
“There always has to be an understanding of what you are negotiating. What will you give up in your package to make it more feasible for that discount? That’s why it’s actually a shrinkage in the package itself.” – Karen Chiang
“From the get-go and from the design, when we think about the design of our offers, we really have to be more cognizant of, what are the different components that go into that entire offer?” – Karen Chiang
“A good, better, best strategy is one where you try to get people into a certain level, starting with good and you’re trying to increase their growth and package by getting them to a better package then a best package.” – Karen Chiang
People / Resources Mentioned:
- Steven Forth: https://www.linkedin.com/in/stevenforth
Connect with Karen Chiang:
- LinkedIn: https://www.linkedin.com/in/karen-chiang-2623241/
- Email: [email protected]
Connect with Mark Stiving:
- LinkedIn: https://www.linkedin.com/in/stiving/
- Email: [email protected]
Full Interview Transcript
(Note: This transcript was created with an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)
Karen Chiang
Getting to a value-based mindset is extremely important in order to improve your pricing power. And you need to have a system that builds this in while you’re doing the work.
[Intro]
Mark Stiving
Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the intrinsic relationship between them. I’m Mark Stiving, and our guest today is Karen Chiang. Here are three things you want to know about Karen before we start. She’s the managing partner and co-founder of Ibbaka with my friend and frequent guest, Steven Forth. She was in IT consulting for many years and she went to Australia for the very first time last month and avoided all the deadly spiders. Welcome Karen.
Karen Chiang
Thanks, Mark. I’m really happy to be here with you today.
Mark Stiving
Hey, it’s going to be fun. Thank you so much for coming back. So remind us all, how did you get into pricing?
Karen Chiang
I got into pricing because of your good friend Steven Forth. I’ve known Steven for many, many decades, giving away age here. But, he sort of dragged me into many of his various endeavors. And his latest one is centered around pricing. So I am now much involved in the pricing world.
Mark Stiving
Did you work with him at Leverage Point? Steven was one of the co co-founders of Leverage Point, wasn’t he?
Karen Chiang
He was one of the co-founders at Leverage Point, and no, I did not work with him at Leverage Point. I think at that time, that was when I was more involved in the IT space and really helping drive growth from a technology transformation viewpoint.
Mark Stiving
Got it. So, after the podcast, can you and I sit around and gossip about Steven for a while? Is that okay?
Karen Chiang
Absolutely. Ask away.
Mark Stiving
So we decided we were going to talk about net dollar retention today, and let me just leave it wide open for you. Could you try to define it? I do this a lot in speeches and stuff, and I don’t think I’ve ever done it succinctly and perfectly, so let’s hear your shot at it.
Karen Chiang
Wow. So Mark, I’m not sure if I’m up for that challenge either. However, I think there are a number of things that we can think about for net dollar retention. And so when we think about how organizations are tracking revenue, they’re often driving what’s called the net new logos. But what net dollar retention does not track is net new logos. It’s actually more a measure, and I would say it’s a proxy for your overall revenue operations for sure. But this is where we’re actually looking at your existing customer base and are we doing well in terms of keeping that existing customer base, so we measure things like churn. We also want to understand whether or not they’re growing in their relationship and use of your offers. There’s the growth and package. We are also looking at the opportunity to increase revenues for those existing customers through upsell and cross-sell.
Mark Stiving
Nice. Okay. So let me take a shot at it and see if I can simplify it and say what you just said in fewer words. And that is, in my world of subscription business, we focus on three revenue buckets, win, keep, and grow, and net dollar retention measures keep and grow and ignores win.
Karen Chiang
Yes. Although, yes, that’s pretty much it. Yes, that’s a good way of thinking of it, but I always think of things as winning all around, but yes.
Mark Stiving
Yeah, I’m with you. But, I think of winning as we have to win new customers, so you have to win new logos.
Karen Chiang
Correct.
Mark Stiving
And then everybody understands churn. That’s like, the 800-pound gorilla. We all hate it. We have to avoid it. And what I find is that companies don’t spend enough time on the grow part, right? So how do we take our current customers and get them to pay us more money next year than they paid us this year?
Karen Chiang
Correct.
Mark Stiving
Excellent. And so you are going to teach me about pricing and its impact on net dollar retention. What is it that we need to know? How does pricing impact net dollar retention?
Karen Chiang
So I think it really is going back to the basics, right? I mean, you and I and your guests have always talked about how things have to be rooted in value. And so I think part of all of these metrics, whether it’s the reduction of churn, growth, and packaging, the ability to upsell, cross sell, it really comes down to truly understanding the value that your customer is seeking, right? So then when you think about value over time, the value that they receive currently may not be the same value that they’re looking for, say, a year down the road, right? So, I think one of the case studies I talked about, we sort of looked at and I’m going to use the churn metric first, right? Is, we had a customer where they were, when we started looking at their data, we found out that a number of their new customers were finding buyers’ remorse.
And so they would churn within a month, right? And, which is crazy, and it accounted for, I think it was something like 7% of customers churning out within a month, which then came to say, okay, well why is this happening? So again, I think it could be that instance of, hey, did you really segment your market? Are you targeting the right ICP? Are you establishing first a value position, which they understand? And on top of that, are you delivering the value within a certain time frame of expectation so that they are not churning, right? The other thing that was interesting here was that there was another aspect of churn which was occurring after two quarters. And so what was happening there was, again, the sales reps were thinking that they were providing tremendous value because they were actually giving credits, right?
So think of credits as a form of discount, right? So then once those credits had expired, then same thing, these customers were not recognizing the value, essentially they were buying their customers. And so we had a churn factor there. So it really comes down to really understanding that package. And then I think the other area which was significant was that they were experiencing churn at a three year mark. And you would think that, okay, in terms of lifetime customer value, if you have a customer who’s loyal for three years, right? You would think, okay, well why are they suddenly churning at three years? Well, this is because they felt that the value they had captured or had received over the three years was good enough. But they weren’t getting incremental value beyond those three years, right? So then I think that strategy there was to actually look and say, hey, how can we really understand the value chains and the value path to then come up with a growth and package where they were innovating in a way to provide more value over time so that they could still retain those customers on an ongoing basis beyond those three years. So it goes back to that fundamental of value created to then what is the package, and then to price accordingly.
Mark Stiving
So, the first thing I love about everything you just said is you used the word value about a hundred times, which I think isn’t enough if you want to know the truth. So when I look at the three different examples that you gave, the first one was time to value, absolutely huge, right? And so I think what I heard you say as I listened to all of these examples is, okay, we need for net dollar retention, step one, don’t have churn, okay? So how do we avoid churn? Well, what we really have to do is we have to look at where we’re churning today and see if we can figure out why, and then fix that problem, whatever that problem happens to be.
Karen Chiang
That’s right. You found you have to understand the cause.
Mark Stiving
Yeah. Yes. We have to understand the cause. Now, I want to ask a hard question, and it’s totally okay because I love everything you’ve said so far, but you said we were going to talk about pricing and its impact, and you didn’t say the word price, you said the word value a lot.
Karen Chiang
Yes. And I think this is because pricing has to be linked to value. So when you think about it, we want to come up with a pricing method or approach that really tracks the value that is being generated, right? So then when we think about what is happening and why NDR is such a hot topic today it is because I’ve been told that there are certain industries which are not really focused so much on growth as they have been focusing more so on just overall retention of existing customers. And in fact, they may actually have to reduce and shrink the packages that are being offered because organizations are finding it difficult to have, let’s say, discretionary spend. And that’s the other piece is if you have a solution which is viewed as more of a discretionary spend then this is where you really have to pay attention to your package, and then you would price accordingly. So then you would actually see a down take in terms of the revenues that you can actually capture. And I know I still haven’t mentioned the price, Mark. I make sure I get outta that one.
Mark Stiving
Trust me, I love the conversation, so it’s okay. And I actually find what you just said very interesting. I don’t think any of my clients I’ve worked with on that problem before, but I think that it’s absolutely makes tons of sense where if I start to see customer churn or I start to see people who say, I’m not getting enough value, could I downsize their package, get them a lower price, and still keep them as a customer? Sure, that counts as churn. If we talk about dollar churn, I didn’t lose a logo, but I lost some percentage of those dollars. But I’d rather keep half a customer than lose the customer completely. So, I think it’s really interesting.
Karen Chiang
Yeah. And so I think there, what we’ve seen happen is companies would automatically default sometimes to just sort of say, hey, we want to retain you. You’re a valued customer. We’re going to give you the same level of service, same level of offer, but for this period of time, we’re going to discount you X amount. Right? And so for us, we would encourage against that type of behavior because what you’re doing is you’re actually discrediting the value that you do actually provide. And then your customers are going to wonder, well, if they are able to discount 20% now, why is it that they just charged me for the rate that they charged me in the first place? Right? So I think there always has to be an understanding of what you are negotiating. What will you give up in your package to make it more feasible for that discount? So that’s why it’s actually a shrinkage in the package itself.
Mark Stiving
Yeah. I love that strategy. Now, I know people who call, I’m not sure of the company, I’m going to say it’s DirecTV, it may be Dish, it may be Charter, but I know people who call DirecTV every year when they raise their price and say, I’m going to cancel if you don’t bring my price back down. And every year they bring their price back down and it’s for the exact same thing. So they’re not changing the package, they’re just changing the price, and they’ve taught their customers, this is what you do if you want to keep a lower price.
Karen Chiang
That’s right. And I think this is, I mean, I’ve been in those situations myself, right? Where it’s a customer loyalty program, right? That it gets escalated and yet to talk to the customer loyalty rep, and then they sort of look and say, okay, how long have you been a customer for? So then, and then they’ll match the competitor’s posted price? And this is a very risky business in terms of an industry because the industry as a whole, when we get into price wars this is where the whole industry can devalue and erode the entire service. And so this is a point to be very careful about.
Mark Stiving
Yep. No, I’m a huge fan of reducing the package, reducing what I’m going to deliver if I’m going to lower the price. Not a fan of lowering prices for no reason.
Karen Chiang
Yeah. So, I think it’s a challenge for organizations to do this. And so this is one of the things that, as from an education point of view, from the get-go and from the design, when we think about the design of our offers, we really have to be more cognizant of, well, what are the different components that go into that entire offer? And where can we start to fence things to sort of govern good practices in terms of being able to technically even monitor and adhere to a package shrinkage?
Mark Stiving
Yep. Absolutely. Okay. So we spent a bunch of time talking about the churn side. Let’s talk about the growth side. And you broke growth up into two different types. You said We have product packaging and that we have upsell and cross-sell. Now I actually break it up differently than that. And since I break it up differently, I want to ask you about how you’ve done this, and let’s talk about product packaging. What do you mean when you say product packaging?
Karen Chiang
Okay, so then I think when we look at different organizations, they may have a singular package, but then they might sort of try to, I guess, tier the various package offers, whether it’s through feature set or through a level or a bucket of service access, right? So when I’m thinking, should I try to give an example here?
Mark Stiving
Well, I’m completely with you, but can I ask you, how is that different from upsell? So I often teach companies that product packaging is the basic example, let’s do good, better, best. And I get someone to buy my goods, and then later I’m going to upsell them to better and upsell them to best.
Karen Chiang
So then I think we can talk. So Mark, that’s a good entryway to also talk about the dynamics of a package and what you’re trying to have the package do. So you’re right. A good, better, best strategy is one where you try to get people into a certain level, starting with good and you’re trying to increase their growth and package by getting them to a better package then a best package. Okay? So that is a standard approach. The other approach that we’ve worked with customers is that they have a very, how to say, different view on how they want to segment their markets. Well, not different, but it’s an approach where they segment their markets where they say, hey, this portion of the market is probably going to land on a good package and we’re not going to see a lot of movement between them graduating from a good to a best. Okay? So then you might have a scenario where you have more so different components which comprise an offer, and you are looking for them to land in a specific component. But you may want to sell them additional feature sets or sell them complementary components, if that makes sense, rather than architecting it in a predefined good, better, best scenario.
Mark Stiving
Yeah. But I’m going to use my words and my frameworks, if that’s okay.
Karen Chiang
Yep. Okay.
Mark Stiving
So, before we do good, better, best, we really want to step back and say, what are the different market segments that we’re serving? And if we can define these market segments well, we may be able to create good, better, best packaging inside a market segment so that I have different market segments that say, oh, this is the set I’m going to choose from, and another market segment that says, here’s another set that I’m going to choose from. And any of those market segments, I might have options. So I have additional features I could add. But I might have some capabilities that are in some one market segment’s features and other capabilities are in different market segments’ features. But the point is, I want it to be easy for any one buyer who comes to me to see what my pricing looks like for them.
Karen Chiang
Yes. That’s a good synopsis, Mark. I think the way to think about it as well is, because we talked about different packaging. So then good, better, best is kind of almost like the standard now when we think about B2B SaaS. But then when you think about it, there are other approaches than this sort of tiered pricing model. So you, as I said, you can have the one big package but then within that package you may have independent modules. So you may have different offer sets or different modules, again, for different verticals or different segments. You might have a version of packaging where it’s a platform with various extensions to that platform. You may also have an approach where you want to think of your pricing in terms of menu options. And so you’ve got different tiering for the menu options and then you have a pulldown list of the different feature sets, et cetera. But then you can also have the combination of these things as well, right?
Mark Stiving
Yeah, absolutely.
Karen Chiang
So, I think when it comes to upsell and cross-sell, then what we want to do is say, okay, because your method or the classic scenario, you’re right, is good, better, best, and you’re sort of extending a person from the good package, selling them more the best and better. But then the other way to think about it, if you have the independent modules, is you start them off with an independent module, but then you may want to add another module to how they purchase. Or if you have a platform then you may have this sort of base platform, but then you may have numerous extensions or packages of extensions that you may want to add on to how they engage with you. Is that a bit clearer?
Mark Stiving
Absolutely. So, let me do the platform one with you, if I may.
Karen Chiang
Sure.
Mark Stiving
So imagine you are Amazon and you want to sell a Kindle. So I just sold you a Kindle and now I get to sell you lots of books that ride on top of your Kindle.
Karen Chiang
Yes.
Mark Stiving
And so I’m selling you modules or add-ons to the product.
Karen Chiang
Yes. And I think this is where, I think the platform, when we talk about platforms, I think this is going to be a really interesting space for pricing as well. Because organizations that are going more of a platform play we have to pay more attention to the entire marketplace and ecosystem and platforms are winning because they can not only sort of carve out niches for themselves but they’re also building the ecosystem of partners to build those value chains as well? So when you think about the multi-sided market, right? The multi-sided market is no longer just between the vendor and the buyer. But it now becomes an extension of other vendors who can add increased value to a base. And you’re right. I mean, Amazon is an organization that is doing well in this as well as, other other platform players.
Mark Stiving
Yep, understood. And I was going to say that it’s filled with partners unless you’re Apple, but I guess even Apple has some partners they just try to dominate most of their marketplace.
Karen Chiang
That’s right, that’s right.
Mark Stiving
Most of their own platforms.
Karen Chiang
And we have to remember how Apple won against Blackberry. I mean, Apple won against Blackberry by opening up the applications and they had people develop the applications that could be used on the iPhone. And again, that is very much the beginning of the Apple app, Apple ecosystem and platform dominance.
Mark Stiving
Yep. Nice. How do you define upsell versus cross-sell? Or do you even bother to try?
Karen Chiang
I don’t know if I want to even bother to try. Do you want to try that one?
Mark Stiving
I think of upsell as buying more of what I’m doing or making what I’m doing a little bit better. And I think of cross-sell as solving a different problem for the same customer. But I could see a lot of overlap in those two definitions.
Karen Chiang
Yeah. I think when we think about upsell, I think it is very much like the good, better, best model where you’re starting off at a certain point and you’re trying to get to a, for lack of a better word, a higher level of value, a higher-end product. Whereas cross-sell, it’s not so much that it’s a higher end product as it is more trying to include complementary related enhancements, if that makes sense.
Mark Stiving
Yeah. I think that’s a good way to say it. Complementary products or complementary enhancements is a good way to say it.
Karen Chiang
It’s kind of more standalone, right? Because each of those complementary elements may themselves be standalone offers, if that makes sense.
Mark Stiving
Yep. So, if I were to put myself in HubSpot’s shoes, I think of a cross-sell as if I have their CRM module and I want their marketing module. So I’m actually doing two different functions. And in fact, that really makes sense in HubSpot’s case because I could have just the marketing model and I could have just the CRM model module.
Karen Chiang
That’s right. Yeah. And then you can upsell more functionality of the CRM model by including more feature sets, more enhancements specifically to the CRM. So that’s a good example, Mark. Thanks.
Mark Stiving
Yep. Cool.
Karen Chiang
Makes it easier for our listeners,
Mark Stiving
Yeah. So what have I not asked you that’s really important?
Karen Chiang
I don’t know. Let’s see, what have you not asked me that’s important?
Mark Stiving
Let’s just assume I covered it all. Well, we covered it all because you gave all the great info. But I’m going to ask you the final question before we quit.
Karen Chiang
Okay.
Mark Stiving
What’s one piece of pricing advice you would give our listeners that you think could have a big impact on their business?
Karen Chiang
So one pricing advice that I can give is, getting to a value-based mindset is extremely important in order to improve your pricing power. And you need to have a system that builds this in while you’re doing the work, if that makes sense.
Mark Stiving
Yep.
Karen Chiang
Because what I find is that you have to almost look at it as a cultural mind shift change to sort of break certain poor habits, right? And I think giving the tools and the process and a common language for the team is a critical path to establishing that.
Mark Stiving
Yeah. I really like the phrase value-based mindset. One of my clients used that one and said, we’re trying to establish a value-based mindset. And I was like, yeah, that’s a really good phrase. And in truth that’s what we want to do because whenever we see a problem we should be coming back to, well, why did that happen? And guaranteed it happened because customers perceive value in some way that we weren’t expecting or we didn’t think. So, absolutely.
Karen Chiang
So Mark, I don’t know about the question, but I would like to share if I may that of course because we are constantly doing research and so our latest research, we do actually have a survey out right now around the net dollar retention levers. And so I just want to share some preliminary results here . We’ve actually asked respondents to order the six NDR levers by level of importance. And so I’m just going to sort of name out what the most is and I’ll just sort of go down the list in order. So definitely reduced churn was top of the list in terms of a key lever and we spent a lot of time talking about that. The second was growth and packaging. So Mark, you’re spot on in terms of ordering the sequence. So growth and package was the second in terms of what people are trying to improve.
And then the next piece is more so the upsell, which is kind of in line with the growth of the package. Because as we said, for upsell, it is really about getting to that higher value of the component offer. The next was to increase cross sell. So then to increase the complementary adoptions and then next was reduce shrinkage in package and then reduce down sell. So I thought I would just share that because I think churn is always on people’s minds. And of course for us, we want to think about growth in packages and how to increase upsell and cross-sell. Because I think we are a positive bunch, those of us who are in packaging, pricing and value creation.
Mark Stiving
Yeah. And as you were talking about that, it suddenly hit me, of course churn is most important because of prospect theory, right? So prospect theory says losses loom larger than gains. And so people hate losing more than they love winning. So if I lose a customer on churn, it’s like, oh my God, I hate that. So that’s got to be number one, right? Yeah. But the one that we haven’t talked about today, and it probably fits in one of these categories, is I separate out usage. So if I’m using usage-based pricing and I get you to use more of my product, I make more money. And so I think of that as a lever that I can use to grow. Now you might argue that that’s part of packaging because how did I set my pricing and how I set my packaging? You might argue that that’s part of upsell because I’ve convinced you to use more products. I tend to separate that out myself.
Karen Chiang
Interesting. I think that usage is definitely a gauge to how we should think about structuring the package. And, and then along with that, the pricing metric, right? You may have had Steven in the conversation to talk more about the hybrid pricing model where you kind of have a base pricing metric, but then you want to introduce yet another, how to say pricing metric, which then sort of scales. And I think, when we think about that, what that hybrid pricing metric should be, typically it is one associated with scaling, which, again, usage can be a proxy for that. I do believe that it does, it’s actually an input into how we think about how we set the price as well as how we want to define the package.
Mark Stiving
Yeah. And then as I, as I thought about the three, your number two and your number three on your list, they could be the same or they could be different. And here’s how I would define them differently, where the second one is we have to figure out how to package our products properly. And the third one being we need to convince our salesforce or our customer success department somebody to actually go upsell and focus on upselling and cross-selling as opposed to having the products to do that.
Karen Chiang
Well, you bring up a really, really good point, right? Because I think this is the other study we’ve been doing around growth motions. And I think in our world of B2B SaaS, it is significantly driven by product-led growth. And so as a result, and this is why you brought up usage, right? Because when we look at the stats of usage within the product itself, then we’re thinking, okay, well how is it that people are getting value out of the product itself? The product alone through its interface and the investment in the product is able to sell, and we should get the product to, in a way, be useful enough where there’s enough value that people will automatically renew, no questions asked, right? But then we also see, as you said, the importance of not just sales-led growth motion, for the initial part of, hey, let’s just get the subscriptions and let them sign up and let’s think about churn.
But then this is where we see the role of customer success playing more in increasing, important role is to understand, well, how is it that we can really track the value that we’re delivering? And then we always talk about the value ratio, right? Which is the value we delivered in comparison to the price we charge is the shorthand, right? And so we want to be able to really measure that impact so that it becomes less of a question mark as to whether they should renew. But then on top of that, we should also be saying, okay, well what are the typical value paths so that we can really increase the upsell and cross sell? And that’s where the market research and looking at the statistics and the data become really important. And your product alone, I’m not sure your product alone can do that. And I’m not even sure whether an AI can do that, right? You’re going to still apply the sort of critical thinking as well as the rationale to then say, okay, where should the investments be made and how can you guide your customers to that adoption, right? So, yeah, I love that.
Mark Stiving
All right, Karen, we’re going to have to wrap this up. Thank you so much for your time today. If anybody wants to contact you, how can they do that?
Karen Chiang
They can contact me via LinkedIn or through email. And my email is [email protected]
Mark Stiving
And you’ll have to look at how that’s spelled on the show notes. To our listeners, thank you so much for your time. If you enjoyed this, would you please leave us a rating and a review? You can get instructions for leaving us that review on ratethispodcast.com/impactpricing. And finally, if you have any questions or comments about this podcast or pricing in general, feel free to email me [email protected]. Now, go make an impact!
