Steven Forth is Ibbaka’s Co-Founder, CEO, and Partner. Ibbaka is a strategic pricing advisory firm. He was CEO of LeveragePoint Innovations Inc., a SaaS business designed to help companies create and capture value.
In this episode, Steven discusses the growing significance of showcasing economic value to customers and the challenges that companies encounter in accomplishing this, particularly with regard to AI monetization. There is a strong emphasis on the necessity for better understanding and communication of the value delivered by SaaS products to enable more effective value-based SaaS pricing strategies.
Podcast: Play in new window | Download
Why you have to check out today’s podcast:
- Look into the latest AI monetization report for 2024 and gain insights into the strategies for monetizing AI
- Find out the key trends in SaaS pricing related to AI for the year 2024
- Discover the compelling reasons why AI is truly revolutionary and why it’s crucial to embrace this transformative technology
“Don’t panic and cut prices.”
– Steven Forth
Topics Covered:
01:37 – How is AI going to significantly influence SaaS and pricing this 2024
03:38 – The impact AI is going to have on most businesses in the interface, functionality, and internal workflow levels
06:59 – What this AI monetization report is all about
09:46 – Looking on the value of the solution more than just the AI tool
11:05 – Why B2B SaaS companies are under increased pressure to justify their prices based on the value delivered to their customers
13:12 – Quantifying and truly delivering value to customers and product management’s critical function in understanding value
16:05 – Significant insights on customer success department’s role in value quantification
17:02 – Discussion about using SaaS versus obtaining perpetual license
22:38 – Summarizing the three major trends this 2024
24:47 – Expressing optimism that companies adopt better tool sets to assess, track, document, and communicate economic value
25:38 – Steven’s impactful advice
Key Takeaways:
“Vast new areas of applications are going to be opened by AI and things that we couldn’t do, or were too expensive to do in the past become easy to do and very affordable to do, already are today.” – Steven Forth
“If you can demonstrate value, then you have a lot of weapons that you can use against these [larger competitors].” – Steven Forth
“AI is going to be moving rapidly towards monetization, which means it has to be able to demonstrate value.” – Steven Forth
“There’s an overall pressure to better manage SaaS spending, which is going to lead to pressure on SaaS companies to be able to demonstrate that they are actually delivering value, not just happy users.” – Steven Forth
“Cutting prices is not going to solve your problem. That could just increase your churn. There’s no guarantee that cutting your prices will reduce your churn.” – Steven Forth
“You can’t compensate for a lack of value by lowering your price.” – Steven Forth
People /Resources Mentioned:
- Open View:https://openviewpartners.com/blog/tagged/research-and-analytics/
- Amazon: https://www.amazon.com
- Google: https://www.google.com/
- IBM: https://www.ibm.com/us-en
- Salesforce: https://www.salesforce.com/ap/?ir=1
- Oracle: https://www.oracle.com/ph/
Connect with Steven Forth:
- LinkedIn: https://www.linkedin.com/in/stevenforth/
- 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.)
Steven Forth
Don’t panic and cut prices.
[Intro]
Mark Stiving
Today’s podcast is sponsored by Jennings Executive Search. I had a great conversation with John Jennings about the skills needed in different pricing roles. He and I think a lot alike. If you’re looking for a new pricing role, or if you’re trying to hire just the right pricing person, I strongly suggest you reach out to Jennings Executive Search. They specialize in placing pricing people. Say that three times fast.
Mark Stiving
Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the changing relationship between them. I’m Mark Stiving. Our guest today is the one and only Steven Forth. You know everything there is to know about Steven. But as a quick reminder, he is co-founder and CEO of Ibbaka, and a frequent guest on our podcast. So, welcome Steven.
Steven Forth
Thank you, Mark. Looking forward to a very interesting 2024 together.
Mark Stiving
Should be a lot of fun. And in fact, speaking of 2024, that’s what we’re going to talk about today. What trends do we think are going to shape SaaS pricing in 2024? Now, before we started our conversation, I knew for a fact that we were going to talk about AI. So let’s jump in. What do you think AI is going to be doing to SaaS and pricing?
Steven Forth
So, I think that we’re at a tipping point. So in 2022, 2023, especially last year, an enormous amount of investment and innovation went into AI and it’s now time to figure out how that is creating value and how to price for that value. So, to give you an example one of the key people shaping this in 2024 is going to be Microsoft. Microsoft is under a lot of pressure, both internally and from the market to justify the multi-billion dollars of money. over 10 billion into open AI, probably another 30 billion if you spread across the rest of the company and other opportunities, even for Microsoft, that’s a non-trivial amount of money. They have to figure out how they are going to price it. How will it be bundled, will it be part of their other bundles? Are they going to charge a premium for it? And what Microsoft decides to do, which I think will become clear over the next few months, will have a huge framing impact on everybody else. So, AI, I think 2024 is the year when AI monetization gets real.
Mark Stiving
So, I mean, I think that’s a really fair statement, but I don’t see that as a trend driving B2B SaaS. And here’s why I would say that, is that there are these AI companies and they’ve got to figure out how to monetize their product, right? There’s no doubt. So Microsoft and OpenAI, these guys are going to monetize their products, and I would think of that as any product. But when I think of most B2B SaaS companies, the question I would ask is, does AI influence them, affect them, impact the way they’re doing pricing or going to market? I would say in some cases the answer is yes, but in a lot of cases the answer is no.
Steven Forth
Yeah. So according to OpenView research about 70% of B2B SaaS companies have made some form of product investment in AI. and only about 15% of them have worked out how to monetize and worked out is probably optimistic because they’ve started to monetize, but they don’t really know exactly how to do it. So, I think you may be underestimating the product impact that AI is going to have. And I think this is going to flow at three levels. One is that the UIs are going to become almost completely AI-driven. So the shift from the command line interface to the graphic user interface was a huge market opportunity for many companies. and the companies that did not successfully cross that chasm have basically failed.
There are very few command line interface companies left. Many companies transitioned and other companies disappeared. So, the shift to AI-driven user interfaces is going to be as big or bigger. At the other level vast new areas of applications are going to be opened by AI and things that we couldn’t do, or were too expensive to do in the past become easy to do and very affordable to do, already are today. So that’s going to change the value dynamics and the pricing dynamics across most B2B companies. And then internally many business processes, including those that require creativity are leveraging AI. So there are very few people that are doing design today that do not make use of AI in some form of, or another. Very few people whose job includes writing which is, many managers who are not using AI.
And it’s showing up everywhere, right? If you do a LinkedIn post, there’s a little magic wand that shows up at the bottom that asks you to rewrite using, and invites you to rewrite using AI. Right now I’m working on an internal Ibbaka document on the major trends that are going to shape pricing in 2024. First thing I did was ask several different large language models what they think is going to happen. And they gave pretty credible answers, and when you combine them together, you start getting some insights that I might not have had if I hadn’t done this. So, the change here is going to be huge at the interface level, at the functionality level, and at the internal workflow and work process level.
Mark Stiving
Okay? You have to know that I am a general skeptic every time we have these conversations that I act as the skeptic here.
Steven Forth
Yeah.
Mark Stiving
Right. And so let’s assume that you’re right and that AI is going to change the products a lot. What that really says to me is that as pricing organizations, they’ve got to be paying close attention to what’s the change in, how is it that customers are getting value from our products? What’s the change in the way our customers are using or receiving our products? Because we’ve got to be much more flexible on our pricing models and what we’re going to do going forward.
Steven Forth
Yeah. And we did some research recently at Ibbaka on how people are approaching monetizing AI which is available now as the AI monetization, in 2024, research report. But it was very interesting. So one thing we did is we ran this through one of our own AIs and did some clustering analysis. And when you use, K means clustering we found, we forced it to find four clusters. One of those clusters are what we call the reluctant adopters. So they’re adopting AI, they’re skeptical about it, but there are some combinations of competitors and investors and customers are forcing their hand. And for those companies, the main way that they are measuring value is through things like customer satisfaction and net promoter score. So they’re not really looking to economic tools like economic value estimation or ROI to measure the value that they’re creating for their customers.
On the other hand, there is another cluster, a smaller cluster that is really driving to disrupt industries. And it’s super interesting that those companies are primarily using value-based pricing as a way to price their products, and they’re measuring their impact in terms of the dollar value that they are returning to their customers. So there are some very, very sharp differences in strategy that companies are taking towards AI. Some of this is related to verticals. So not surprisingly, the data companies tend to be very positive about AI and to be investing heavily and to be looking at the dollar benefit that they can deliver. I’ll leave it to you to decide if it’s surprising or not surprising, but the HR and EdTech companies are much less likely to be taking that approach. They’re much more likely to be focused on customer satisfaction and they’re sort of dragging their feet and their pricing approach is either cost-plus or compared to a competitor
Mark Stiving
I have to say, I don’t think that does surprise me at all. And when I think about it, okay, I’m a reluctant user, right? I use AI, but I don’t say, hey, this is going to be my future. I’m not going to drive this. And so as a reluctant user I don’t have a need or desire to say, here’s the value of me using AI to somebody else. But if I’m leading with it, right? If it’s the thing I’m driving, then I’d better be able to put value on that and say, here’s the value of what it is we’re doing. And by the way, I don’t have to put value on the AI, AI is just the tool in the background. I have to put value on the solution I’m providing to my customer.
Steven Forth
Exactly. Yep. Which you always should have been doing.
Mark Stiving
Correct.
Steven Forth
Yeah. There’s nothing new here. We’ve been talking about the importance of value and the value imperative for more than a decade.
Mark Stiving
Yes.
Steven Forth
But I think what’s happening now is the hype and excitement of 2023 will be replaced by many companies in 2024 by the need to be able to demonstrate value. And some companies that adopted AI because it was a pretty bobble may struggle to do that.
Mark Stiving
Yeah, I think as in every tool that we get, it’s what’s the use case? What can you do with it? And it may be that I just don’t have the vision to say, here are all the things that AI is going to do for us and where all the capabilities are. But, in my world, I use it to help me brainstorm, and that’s it.
Steven Forth
That I think is an incredibly valuable thing. And in the past, you probably relied on a network of friends and associates to help you brainstorm
Mark Stiving
And a bunch of really weird Google searches.
Steven Forth
That’s cool. I would love to know what some of those searches are, and you may want to pry them as prompts.
Mark Stiving
And in ChatGPT or in AI. So, yeah. Okay. So that’s one. We’re a third of the way through our podcast. What’s the second one that you want to chat about?
Steven Forth
Well, I think that related to this is that not just for AI, but generally speaking B2B SaaS companies will be under a lot of pressure to justify their prices in terms of value. So CFOs and controllers are starting to scrutinize the cost side of their businesses much more intensely. And they’re also trying to reduce the number of applications that they rely on. So they’re trying to consolidate it down. And in order to maintain renewals, which is of course, one of the key foundations of having a good net revenue retention number, you’re going to be forced to demonstrate that you actually have delivered economic value during the past subscription period. And the companies that are unable to do that will find not so much pressure to reduce their prices, they just won’t get their subscriptions renewed, period. So I think that there will be higher churn in 2024, which will put a lot of pressure on net revenue retention. And that reducing prices is not the solution. companies that say, oh, we’re seeing churn, therefore we’re going to reduce prices. All that does is reinforce, oh yeah, you don’t provide much value, therefore you’re reducing prices. But you know what, we don’t really need you. Reducing prices is the wrong response to this.
Mark Stiving
So one of the things I find fascinating about subscription businesses is in order to win a new customer, we have to go and convince them that there’s a lot of value in our product. And so I think of this as perceived value. What’s the perception that they have of the value that we have that we’re offering once we’ve won a customer, though it’s no longer about perceived value, it’s about how much value are you truly delivering to that customer? So companies put together customer success organizations to go in and make sure that we’re actually delivering value to the companies. But what I never see is a company quantifying how much value they actually delivered.
Steven Forth
Yeah.
Mark Stiving
And that’s really what you’re talking about.
Steven Forth
Yes. That is where they’re going to be forced. And I’ve heard a number of conversations with company people who are responsible for renewals at major SaaS companies, and they say our CSAT scores were great. Our customer satisfaction scores were great, but they had no predictive value as to whether a company was going to churn or not. You know? Oh yeah. You guys are nice people. We like you, you’re friendly, you’ve got good support. Yeah. You do a great job, but not really sure if you create any economic value. So, sorry. Goodbye.
Mark Stiving
Yeah. Well, and so what do you see as best practices for companies are, is there a separate department that’s out quantifying delivered value?
Steven Forth
So I don’t know that it needs to be a separate department, but that’s a critical function that either product management or customer success needs to have. They need to have people who are trained in, first of all, in understanding what economic value is and then are accountable for gathering the data to demonstrate it. People who have built ROI calculators have a lot of the right skillset, but let’s face it, most ROI calculators are used in the sales process, not in the customer success process.
Mark Stiving
Yep, exactly. Right. And so it feels like it belongs in customer success or it would fit well in customer success. But to be devil’s advocate, I think customer success departments have a hard time doing customer success, let alone trying to quantify how much value they’re actually delivering to a customer.
Steven Forth
Yeah. But so, I agree with both your points. One is, there’s a natural fit with customer success but also that customer success is likely to struggle with it. But just as we used to criticize, or we still do criticize salespeople for discounting instead of selling on value, but we haven’t given sales the tools that they need to sell on value. The same thing is true with customer success. Have you armed your customer success organization with tools to document and then communicate the value that as you say, you’ve actually delivered?
Mark Stiving
Oh my God. I’m going to take that and run with it for just a second, Steven. So think about what we do as salespeople, and we always make fun of them because they’re out pitching features or they show up and throw up and maybe we talk to them into talking about benefits. But you and I say, look, what’s the dollar value? How much more money are you going to make your customer? Can we turn that into value? So now let’s flip that around to customer success and customer success, people are always watching, well, what’s the usage of this feature? And how well does that correlate to churn and the likelihood of churn? But what if instead of that, we said, look, you’re going to predict churn based on how much profit you’re making that customer. And if we could do that, oh my gosh, I think that would transform customer success departments.
Steven Forth
And I think that’s the future. That’s where we have to go. And that buyers, especially the people responsible for renewing are going to force companies to do that. I think that’s going to be one of the major trends of 2024, that there’ll be enormous pressure on SaaS companies to demonstrate economic value. And if they can’t do that, then they are putting their revenue at risk.
Mark Stiving
So I haven’t worked at a big company since the SaaS revolution happened, right. Since everybody’s been buying SaaS products. And so I don’t understand very well, how is it that companies make the decision that they want SaaS or they want a perpetual license, right? That they’re willing to pay this fee every month, which is a big number. And how they decide, well, are we going to pay that next month or not? What’s that whole situation look like? Do you know?
Steven Forth
Well, I think first of all, I think that at the enterprise level, there are very few month by month contracts, most contracts are annual. and some contracts I’ve seen quite a few contracts that go out three years. The month by month is really more of an SMB kind of situation. large companies don’t buy that way. And the costs of adopting software are high enough, regardless of whether it’s on premise or in the cloud. They don’t want to, and they should not move that quickly. So they’re on more of an annual cycle. Very few companies today want to have large IT departments with lots of expensive servers. Let’s face it, no industrial company or very few software companies can operate the large clouds of servers remotely as efficiently as Amazon or Google or Microsoft, or to some extent, Salesforce and IBM. They don’t have the scale, they don’t have the expertise. They can’t afford to buy the chips. If we’ve been talking about AI, if you’re going to do AI at any sort of scale you need to have the right processors, whether they’re GPUs from NVIDIA or TPUs, I don’t think you can even buy a TPU tensor processing unit on the open market. So AI will just force more and more companies into the cloud, and nobody wants to go back to on-prem that I’ve spoken to.
So then the question becomes, but it’s much easier to switch these things on and off when they’re in the cloud. you don’t have your own server, so what are you, you don’t have any questions. Yeah. What am I going to do with all those servers? No, I’m just going to stop the contract. Thank you. Oh, and send me the data. And let’s be real here though. when these subscriptions get canceled and you get sent the data, it’s usually not in a format that is very easy to use. That’s probably intentional. In most cases, you just go forward with your new vendor who in many cases, and this will take us to our third trend is probably one of the, very large companies in the industry. because the part of this pressure on consolidation means that people are going to consolidate back down into the very large players. So it may end up being a very good year for the Oracle’s and Sales Force’s and Microsoft’s and even the SAPs of the world or in healthcare for the epics of the world there will be a retrenchment, over to those companies. And there, there’s a pendulum right? Where that swings back and forth between best of breed multiple solutions and very large standard solutions. I think 2024, there’s going, the pendulum’s going to swing a bit towards consolidation into the large solutions, which will make it a tough year for many B2B SaaS companies. But again, the ones that have ways to document the value that they’re creating are going to be able to fend off those large vendors.
Mark Stiving
Yeah. And what I’ve seen of the large vendors is they have a hard time because they’re trying to take singular pricing processes and apply them across the entire portfolio, which essentially says the only pricing metric they get to use is user-based. Right. Which I find amazing.
Steven Forth
I don’t know if that’s always true. I think that some of these large deals are not necessarily user-based. they’re, they’re all sort of one-off negotiations. And then, the large vendor ends up promising a lot, say, if you use us, we will take care of everything you need. you don’t need to worry about getting any more software because we will develop what we need. And if we can’t develop it, we’ll buy the company. We won’t buy the software, we’ll just acquire a company to do it. So don’t worry, be happy. We will take care of you. And in return for not having to worry, please write us a very large check.
Yeah. And then the point solution providers have to say, we will provide you this value. You cannot get this value from our larger competitor. They say that they can, but let’s look at the facts. In fact, they can’t. And if you can demonstrate value, then you have a lot of weapons that you can use against these. But if all you can say is, your users are really happy with us and they won’t be happy with that big guy, eh, yeah. I’m glad that you guys have given us high CSAT scores. That’s really nice. We love you too. Please shut the door on the way out.
Mark Stiving
Yes. That kind of reminds me of one of my favorite analogies, and that is HR software. I won’t mention any names, but if you are not in HR, so you’re a manager in a company and you have to use HR software, usually it’s a horrible experience. And that’s because you have no influence on the purchase. and so essentially you’re saying the exact same thing. And that is, if I can’t demonstrate value, and all I could say is, look, your users, your employees are going to be happier. They have no influence. They’re not going to influence change that decision.
Steven Forth
Yeah. If we summarize the three major trends, AI is going to be moving rapidly towards monetization, which means it has to be able to demonstrate value. There’s an overall pressure to better manage SaaS spending, which is going to lead to, again, a lot of pressure on SaaS companies to be able to demonstrate that they are actually delivering value, not just happy users. And then finally, at the sort of senior buying positions people are going to be tending to gravitate towards we’re a Microsoft shop Microsoft is a leader in AI. If Microsoft isn’t doing it, they’ll be doing it soon. And if they’re really not doing it, it’s probably not that important anyway. It’s going to be a tough year, I think. But to come back to pricing, a tough year does not mean that you cut prices. Cutting prices is not going to solve your problem. And, oh, our churn is up. We have to reduce prices. That could just increase your churn. There’s no guarantee that cutting your prices will reduce your churn.
Mark Stiving
Yes. Okay. When you first brought up the topic to me that said, hey, let’s talk about trends in pricing for B2B SaaS. I got to tell you what I thought. And so what I thought is the trend, it is the same as always because 90% of companies don’t understand the value of their products. They don’t talk about the value of their products, they don’t sell the value of their products. And so the trend should be to get that to 85% instead of 90%, right? Because it feels to me like people don’t understand pricing. They don’t understand value so much that I don’t need to worry about what’s the trend. Now when you’re up at the Microsoft or the Salesforce level absolutely we’re focused on what’s the latest and greatest, what’s the next individual piece. But boy, I’ll tell you, I think most companies just need to go back to the basics and figure out what the basics are.
Steven Forth
And I’m a little bit more optimistic than you are, Mark. I think that this is going to happen more quickly, and I think we will have better tool sets available to figure out the economic value, track it, document it, communicate it. I think over the next few years that we’re going to see a major shift. Now, I’m an optimist on this side and frankly, the headwinds that SaaS is facing in 2024 could be just the tonic, the sector in order to shift to much more compelling value-based practices, not just for pricing, but also as we said, for customer success and product development.
Mark Stiving
Yes, absolutely.So Steven, any other thoughts before we wrap this up?
Steven Forth
Well, it’s going to be a super interesting year. Reality is going to hit back hard after the dreaminess of some of the conversations around AI in 2023. But AI is the real deal. And companies are going to be under huge pressure to change how their UIs work, change how they manage data, change their platforms, so that their core platforms are built on top of AI. And I’ve talked to probably five companies in the last two months that are replatforming into an AI platform. And companies that avoid replatforming and just try to stick stuff on around the edges I think are going to set themselves up for failure.
Mark Stiving
Okay. And I’m going to take everything that we’ve talked about and apply it for pricing people for just a second. And here’s my advice for pricing people. Watch the value of what you’re delivering to the marketplace, because it’s going to be changing rapidly. It could be changing rapidly, and you want to get out in front of that as much as possible. That’s where your competitive advantage is.
Steven Forth
Yeah. And I would also say, don’t panic and cut prices.
Mark Stiving
Oh, gosh, yes.
Steven Forth
Well, some people are going to see churn go up and they’re going to say that what’s the easiest thing we can do while we can reduce prices? but I don’t think that will work very well in 2024.
Mark Stiving
Yeah. Let me reiterate one of my favorite sayings. There’s two reasons for every lost sale. Your price was too high or there wasn’t enough value. And you really need to focus on the value side and not on the price side.
Steven Forth
Yep. And, you can’t compensate for a lack of value by lowering your price. Because people want the value they need, whether you are helping people upskill and re-skill their workforces, or if you are helping them manage their pipeline more effectively, or if you’re helping them optimize their production process, whatever it is, people want that. And they’re willing to pay for it, but they only want it if that value can be demonstrated.
Mark Stiving
Yep. Steven, we’re going to have to wrap it up. Thanks for your time as always. If anybody wants to contact you, how can they do that?
Steven Forth
I think the easiest way is by email, [email protected]. And I am also very active on LinkedIn.
Mark Stiving
Nice. I find it funny that you spell Steven, but not Ibbaka.
Steven Forth
Oh. Does everyone know how to spell Ibbaka at this point?
Mark Stiving
No.
Steven Forth
Ibbaka.com.
Mark Stiving
Alright. Thank you for your time. To our listeners, thank you for listening as well. If you enjoyed this, would you please leave us a rating and a review? And finally, if you have any questions or comments about the podcast or pricing in general, feel free to email me, [email protected]. Now, go make an impact!
Mark Stiving
Thanks again to Jennings Executive Search for sponsoring our podcast. If you’re looking to hire someone in pricing, I suggest you contact someone who knows pricing people contact Jennings Executive Search.
