Stephen Plume has more than 20 years of success in venture, executive leadership, and consulting. He is a General Partner of an early-stage venture fund since 2019, driving business strategy and coaching executives in the portfolio.
In this episode, Stephen discusses how AI is shifting pricing models from human-based to consumption-based metrics. He emphasizes the importance of identifying the right value metric that resonates with customers encouraging businesses to experiment with pricing to uncover hidden revenue and margin opportunities.
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Why you have to check out today’s podcast:
- Gain insights into the cutting-edge pricing strategies for AI companies and how these differ from traditional user-based models to get a glimpse of the future of tech pricing.
- Learn about actionable strategies like identifying the right value metric and conducting low-risk pricing experiments, which can help businesses capture hidden revenue and improve margins.
- Deep dive into how venture capitalists think about returns, risk, and value, which can benefit entrepreneurs and business owners seeking to understand how to attract investment.
“There is so much opportunity to learn from low-risk pricing experiments, and people worry so much about their reputation. Get over that feeling, go out and experiment, and learn from it.”
– Stephen Plume
Topics Covered:
01:54 – A funny thing about Stephen not related to pricing
02:46 – How he found his way into pricing
04:21 – Reflecting on his first pricing project with Sybase
05:57 – Contrasting enterprise-level pricing with startup pricing, highlighting the complexity of pricing for larger companies
09:12 – The importance of focusing on the Ideal Customer Profile (ICP) for early-stage companies
10:39 – Explaining how companies often face pricing erosion as they grow and introducing the concept of ‘layering’ and ‘fencing’
16:38 – Discussing how companies, like HubSpot and Salesforce, often start by solving a specific problem with a focused solution but later expand by adding numerous features and add-ons
17:27 – Delving into the concept of competitive positioning
21:40 – The importance of delivering significant value to customers to motivate a decision to switch from a competitor or the status quo
25:09 – Sharing insights about pricing for AI companies and broader trends in AI adoption
29:14 – Discussing the concept of pricing metrics in the context of AI and SaaS
30:32 – Stephen’s best pricing advice
Key Takeaways:
“When I’m working with early stage companies my drumbeat is, don’t worry about anybody else right now, worry about your ideal customer profile. Because they are the ones who, by definition because math is a thing, will pay you more money faster than anyone else.” – Stephen Plume
“In the venture world what I tell the early companies I work with is, for someone to take a bet on you, they’re expecting venture returns. They need to be getting 10X their money out. That’s not just the investors. That’s the customers need to be getting 10X their cost out, or they’re not going to adopt you.” – Stephen Plume
“The advantage of a platform growing to solutions is, if you do it right, your margins improve rather dramatically.” – Stephen Plume
People/Resources Mentioned:
- Sybase: https://en.wikipedia.org/wiki/Sybase
- Salesforce: https://www.salesforce.com/ap/?ir=1
- Cisco: https://www.cisco.com/#tabs-35d568e0ff-item-194f491212-tab
- Regis McKenna: https://en.wikipedia.org/wiki/Regis_McKenna
- Geoffrey Moore: http://geoffreyamoore.com
- Steve Blank: https://steveblank.com
- HubSpot: https://www.hubspot.com
- Zoom: https://zoom.us
- LinkedIn: https://www.linkedin.com
- Siebel: https://www.oracle.com/ph/cx/siebel/
- Zendesk: https://www.zendesk.com
- Intercom: https://www.intercom.com
- Clayton Christensen: https://en.wikipedia.org/wiki/Clayton_Christensen
Connect with Stephen Plume:
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.)
Stephen Plume
There is so much opportunity to learn from low-risk pricing experiments, and people worry so much about, ‘Oh my God, the impact on our reputation.’ No one knows, no one cares, no one’s watching. Get over that feeling, and go out and experiment, and learn from it.
[Intro / Ad]
Mark Stiving
Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the pervasive relationship between them. I’m Mark Stiving, and our guest today is Stephen Plume. Here are three things you want to know about Stephen before we start. He’s the managing partner of the Entrepreneurs Fund. He’s been doing that for over 10 years. He’s also been an independent consultant in enterprise strategy and pricing for the same 10 years. And by the way, he was on our webinar a couple of months ago with Alexis Underwood. The webinar was titled, Portco Pricing How PE Can Drive Value Without Compromising Relationships. Welcome, Stephen.
Stephen Plume
Great, thanks, Mark. Glad to be here. Looking forward to it.
Mark Stiving
Before I hit record, I forgot to ask you a question that I always ask. So now I’m going to ask it so everybody can hear. Tell me something fun about you that has nothing to do with pricing,
Stephen Plume
Depending on whether you’re taught, asking my family if it’s fun or not. I don’t know, I was a lifelong competitive runner and did a half marathon the day after I turned 60 on the theory that I had to be the youngest person in the age group. And it was missed by one attempt to win the age group. So, a guy showed up who was just way too much faster.
Mark Stiving
So, it reminds me of a quick story. This was 20 years ago. I’m riding up this ugly hill after a 70 mile ride. Some guy passed me and I asked him, how old are you? And he goes, I’m 70. And I said, I can’t wait till I turn 70 so I can ride like that.
Stephen Plume
Yeah. I’ll share another one with you after we’re done. Doesn’t have to shoot time up here, but, yeah. Funny.
Mark Stiving
How did you get into pricing?
Stephen Plume
I joined a small consulting firm in Palo Alto way longer ago than I want to admit. And I’m the FNG on the bench, right? And especially kids the first project comes on, and I don’t know if you remember Sybase but at the time, Sybase had set the record for fastest time to $1 billion from founding to a billion in sales. Now, that record’s been broken many, many times since then, but at the time, they were the world record holder, or became the world record holder. And the VP of marketing was a good friend of the head of the firm. And they had done a couple of beta projects at two of the Wall Street brokerage houses, and one of them had called up and said, ‘Wow, this stuff actually works. What does it cost?’ And our friend said, ‘I’ll get back to you.’ Called my boss. Said, what does it cost? And we did a quick kind of six week project on what it needed to cost and went back and gave them the answer. And that had a couple of effects. One, I stayed with that firm for a long time, and these genealogy charts while Sybase went public and did really well. And so the next tier of management all blew out and started their own startups, many of which did well, and they took us with them. And somewhere along the line, I just became known for having done a lot of pricing projects. So I haven’t added it up in years, but it’s somewhere between 80 and a hundred.
Mark Stiving
And as you look back at that first Sybase price, how well did you do the pricing?
Stephen Plume
Boy, by where I sit today, I’d give us a B by where we sat then they launched like a rocket ship. So it was tough to argue with the results. And it was a huge technology risk, right? This was the first time anyone had tried to use a relational database for a high value, high speed transactional application. And so there was no way they were going to go in and charge top dollar because the risks were just too high until they proved they could do it. And then they were famous for doing eight-figure deals, nine-figure deals.
Mark Stiving
Yeah. And I think that’s pretty common in the world of entrepreneurs, is that the first price doesn’t matter that much, right? You have to prove that someone cares, and then you figure out what it’s worth.
Stephen Plume
Yeah. It doesn’t, I mean, fast forward 37 years. Some guys called me earlier this week and said, ‘Oh my God, we got to launch in two weeks. And the two founders are arguing about the price. What do we do?’ We did a desktop pricing project in two hours, and they went away saying, ‘Oh,’ and the first thing I wrote back to them was, ‘Guys, it doesn’t matter. You’re not in the market yet.’ It has to be approximately okay. And because you’ve got all kinds of space to fiddle with it.
Mark Stiving
And it’s going to change as you learn more, as your customers learn more. Yeah. There’s so much that’s happening so I’m really fascinated, because when you were on the webinar, we talked a lot about the entrepreneurs from a VC perspective. But your LinkedIn also says that you’ve been doing enterprise-level pricing. And so what’s the difference if you were to say, here’s what I do differently for entrepreneurs versus enterprise.
Stephen Plume
Enterprise, yeah, what do you want to call it? Let’s say anything north of a hundred million. Sure. Yeah. A 50 million, right? It means they have multiple product lines, they’ve got multiple lines of business, they’re dealing with multiple customer segments. And so the pricing just gets a lot more complicated. And then you have an issue with, I don’t know, I never did pricing for SAP, but when I last looked at them in detail maybe 15 years ago, I got to tell you, they had the most brilliant set of pricing models in the world. But it was all partitioned off by here’s our supply chain pricing, our Salesforce automation pricing, our ERP pricing, our finance pricing. It was and so you can fence it like that, and that makes it more tractable to deal with. But if you’re in a company whose business inherently is networking, for example, we would all know with Cisco, or you rolled back some years’ aspect communications, which was doing call centers, which might then be networked to multiple call centers and multiple geographies. Well, you can’t fence the pricing, right? You have to think about where it is, I mean, it’s a topic near and dear to your heart, I know it is okay in this big mess of products that we are rolling up into a solution. Where does the real value lie? People, maybe it’s in the whole integrated thing, so why are you counting widgets? It’s just a waste of everybody’s time, or maybe this widget is so much more important than all the other widgets. This should be the lead point of the pricing mechanism. And don’t worry about the other stuff too much.
As you come down to the startup world and early stage, let’s say anything below, well, certainly in the software world, anything below about 15 million, you’re really only working with one product. Maybe you’ve got a freemium model, maybe you’ve got a good, better, best. But again, I’ll echo something you said five minutes ago. It doesn’t matter that much. Don’t be wrong and learn. And I’m always kind of surprised and frustrated by how few companies pay attention to how their customers behave differently both with respect to how they use the product and what the different reactions are with respect to some pricing or packaging action. It’s like, oh my God, you just ran a natural experiment that gave you 10,000 data points and you didn’t spend any time looking at what it really meant. Well, the price went up or revenue went up.
Mark Stiving
Well, good for you. Maybe it should have gone up three times more than it did. And how do we just think about it? What I find interesting, by the way, I agree with what you said in terms of the multi products versus singular products, or at least a smaller subset of products. What I find fascinating about the smaller companies, the entrepreneurial companies, is that it’s time to start thinking about, I’m going to use the word market segmentation, and I say that word, you could replace it with use case and say, what are the different use cases that people are using our product for? Because some people are getting a ton of value and some people are getting very little value. I mean, more than the cost and money, but not the ton of value. And and that’s where it’s really fascinating to start thinking about how do I price differently? How do I build out my product portfolio? So I target the people who want to pay me a ton and not so much the people who aren’t paying me all that much.
Stephen Plume
Yeah. There’s a whole evolutionary process there. I was thinking about this. I took a little walk before we got on just to clear the head and boost the energy levels. And I was actually thinking about this topic. A very common phrase right now is the ICP, right? The ideal customer profile. And when I’m working with early stage companies my drumbeat is don’t worry about anybody else right now, worry about your ideal customer profile. Because they are the ones who, by definition because math is a thing will pay you more money faster than anyone else. Because they need what you’ve got more than anyone else. And you’re going to have to help me out. This goes all the way back. It wasn’t Regis McKenna himself, it was a guy who worked at Regis and kind of made very popular the early adopters and the visionaries, the early adopters, late majority, et cetera. Can’t remember his name, for the life of me.
Mark Stiving
Oh my God, I can’t believe you asked me that question. Yes, I know who it is, but go ahead.
Stephen Plume
But what we’re talking about are the early adopters, right? What are they going to pay and why, and what do they care about? And forget about everybody else. And the conversation, I more often than not have the…
Mark Stiving
That was Geoffrey Moore, Crossing…
Stephen Plume
Geoffrey Moore, thank you. Yes, that’s exactly who it was. Okay, yes, Geoffrey Moore and then Steve Blank extended that and did a lot of really interesting stuff with it among others. But the conversation I often have with entrepreneurs is, but we can do all these other things and serve all these other people. Said, ‘Great.’ I’m not saying don’t, I’m just saying don’t try to do it all at once. Right? Go after the highest value beachhead and great book zero to one. and one of the refrains in that book is, ‘Every great company’s been built on the back of a small number of highly committed users,’ right? So go find those highly committed users and figure out what they’re going to pay and why.
Because it’s inevitable. And I’ve got a stupid little chart in one of my presentations where you basically assume, visualize a single pricing model that just the more you buy, the more it costs, right, as it goes up with scale. And what happens even though so much is automated humans are stimulus response machines. And as you get out of that early adopter segment, that ICP segment, which you will eventually absolutely, right, a hundred percent, you will start getting complaints that your prices are too high. Well, of course they are for this new segment, your price is too high, kind of by definition. But what we do as managers and business people is we keep hearing the steady drumbeat of your price is too high, your price is too high.
And so either in principle, we lower our prices, or in practice, we start discounting and the average price goes down and you still have people screaming that you’re too expensive. So it keeps going down. And meanwhile, there are all these people above that line who are laughing all the way to the bank and never telling us that our prices are too low. Right? And so this is in part why, I mean, I have not actually gone and done the analysis, but this whole slowing of growth, I mean, sure there’s diminishing returns to scale and all the rest and bigger companies are harder to manage, but some of it is unnecessary. Some of it’s just because we’re letting price erosion happen.
Mark Stiving
And it’s because we’re not identifying the value we’re delivering to which customers.
Stephen Plume
It’s either we’re trying to price the same to everybody. Okay? You’ll get oatmeal, or we are actually, that’s kind of what it is. Either we start by pricing the same to everybody, or we do the stimulus response thing where we lower the prices so that the mass market will start buying instead of saying, ‘Okay, we’ve reached a breakpoint. Well we’re now working with either a fundamentally different use case or fundamentally different customer segment that places different value on what we’re doing.’ And so it’s no longer just a pricing question, right? Because it’s kind of illegal to sell the same product at A price and B price to different people, right?
Mark Stiving
Not illegal, but that’s okay. We do it all the time.
Stephen Plume
Yeah, we do it all the time. But we shouldn’t. Alright, ask any gas station. But so you have to create moats between your offerings. And are you, have you run into the terminology layering versus fencing of pricing and products?
Mark Stiving
I’ve not heard the word layering. We do fencing a lot. Fencing has to do with price segmentation and how I keep one person from buying into a different category.
Stephen Plume
Yeah. So fencing is, okay, different use cases, right? You’re a mountaineer and I’m a swimmer, so we’re going to buy different sports apps from whatever company. It’s right, layering you’re perfectly well aware of, you just don’t know it by that term. That’s just the good, better, best.
Mark Stiving
Oh, I live by good, better, best. Right?
Stephen Plume
Okay. So, most companies, most small companies face a choice between the two. A small company usually isn’t going to do one or the other out of the gate. It’s just too complex. But when you reach this breakpoint, and I don’t think it as I’m talking, I’m saying, ‘Okay, could I say it’s at $5.32 million? No, I have no idea. I think it’s going to be idiosyncratic for every company.’ But you’re going to come to a breakpoint where you’re facing tremendous pricing pressure. Now it’s time to go look at, okay, how do we break our packaging into two and do we take a fencing approach or a layering approach, right? And then you can preserve the value you’re capturing from the customer segments that love you and capture appropriate value and appropriate share from the customer segments who think you’re pretty cool, but they don’t actually want to get married.
Mark Stiving
You know why I love talking to you, Stephen, is because you described things that I think but in different words, in different concepts. So let me say what I think you just said, but I’m going to share a different set of concepts. And I call it the difference between a platform and a solution. And so a lot of people build platforms. So LinkedIn is a platform.
Stephen Plume
Absolutely.
Mark Stiving
And Zoom is a platform. And so we build these platforms and we sell them. And as you pointed out, the price is going to come down because we’re trying to reach that lowest common denominator, right? I want to sell to as many people as possible, but if we were to step back and say, ‘Hey, I’ve got this platform, how do I build a solution on top of that?’ And so LinkedIn builds sales navigator, LinkedIn builds the recruiter version. Zoom has the telemedicine version of Zoom, right? And so all we have to do, not all we have to do, but what we need to do is start saying, ‘Hey, we’ve got this platform, now, let’s build solutions.’ And those solutions I think of as market segments. So I think, ‘Hey, I’ve got to go build something for a segment and now I can create good, better, best inside that market segment.’
Stephen Plume
Yeah. I think that is somewhere between 90 and a hundred percent overlap with what I’m saying, phrased somewhat differently. As you’re talking, I’m thinking, okay, are there examples of companies where the platform metaphor doesn’t apply? And I’m not coming up with anything like, great, I mean, Zoom check, LinkedIn, check what else do we use in our…
Mark Stiving
I think we do have companies that launch as a specific solution to a problem. So let’s go to HubSpot, right? HubSpot launches with a specific solution to a problem. And then over time it expands out into that same type of mess.
Stephen Plume
Yeah. The one I was thinking of as you said, HubSpot, I was thinking Salesforce, but yeah, exactly. I mean, you start with this, you solve that problem, it’s a solution to that problem. And now we are going to get you with our 2,000 add-ons that always click up and never click down.
Mark Stiving
Yep.
Stephen Plume
Now, it becomes a great revenue engine. And the advantage of a platform growing to solutions is if you do it right, your margins improve rather dramatically.
Mark Stiving
Oh, yeah. And you’re cherry picking the market segments to get the most value from your platform.
Stephen Plume
Yeah, completely.
Mark Stiving
Agree. Makes all the sense in the world. One of the things, when I asked you what you wanted to talk about, one of the things you mentioned was competitive positioning. And I always find that a fascinating topic. So what is it that you are thinking when you say the words competitive positioning?
Stephen Plume
Whenever a company goes to market with very few exceptions, there’s an alternative solution. It may be people or company customers doing it themselves. There may be some legacy thing out there that like Salesforce and HubSpot basically went after Siebel and I don’t even remember the names of the other early CRM systems, right? They’re all just dead. You have scores of small marketing, sales and support systems going after trying to rip chunks out of Salesforce and HubSpot, okay? This happens all the time, right? Or you’ve got direct competitors, right? Some other startup launched what you had the same month you did and you didn’t know you were out there. And so it links to the customer’s sense of value, right? They’re getting something out of their existing solution.
And is your solution valuable enough at the right price where they’re willing to incur the costs and risks of making a switch? Okay? So then you got to think about, ‘Okay, where do you go? Do you want to be positioned as we are more expensive because that’s a statement that we are more valuable?’ Yes, you’re going to pay more, but you are going to get so much more. And I hate to keep bringing examples out of ancient history but since it’s on my mind anyway, Sybase Oracle was the dominant relational database player on the planet, and Sybase came out priced 30% above, right? And they’re like, ‘You guys are crazy.’ Worked fine, thank you very much. Because they had the technical benchmarks to prove it for several years, right? And then dynamics changed. For example, you and I were talking about before the webinar you now have a plethora of AI native customer support and help desk applications coming out, taking off after Zendesk and Intercom and half a dozen other comp installed legacy vendors who are trying to bolt AI on.
But they have a real problem because their whole market valuation is based on pricing by agents. Human agents. So how do you migrate that pricing model without losing, oh $6 billion in market cap, which would be a bad Monday. And so what you see is these AI only coming in at a price 10 to 20% of the incumbent charge, right? And you go, I know you’re going to say this because you said it before, but oh my God, look at all the value you’re giving away. Yes. But how do you chip away at them? And to me, this just comes back to God, I’m showing my age Clayton Christensen innovator’s dilemma, right? You got a big installed low risk, it works just fine, incumbent time after time, industry after industry, whether it’s cements and motorcar automobiles and Christensen’s book or you fast forward today and it’s AI-enabled customer support systems. You had to come in at 10 to 15% of the incumbent price, or you make no traction, you get nowhere. That’s just the cost of, that’s the trade off that you offer to compensate for the risk and cost of switching. In this case, sorry, go ahead.
Mark Stiving
No, I was going to say I often talk, by the way, I love having these conversations because I get to use way different language than you do. I often talk about two different decisions buyers make. One is a ‘will I’ decision. And then after they said, yes, I want to buy something in the product category, then they go on to make a ‘which one’ decision. And usually if I tell someone how to price a ‘will I’ decision so someone’s not going to make a which one, they’re just going to make a ‘will I’ decision. I usually say it is, you get 10% of the value that you deliver to your customer, right? So if you can quantify the economic value, you should be able to price about 10% of that number. Now, what you just said fits that perfectly because I’m trying to get someone to switch from a status quo and here’s what you’re paying and I’m going to charge 10% of that number in order to get you to switch. Which is exactly, which is a ”will I’ decision, right? Will I make this decision or just stick with the status quo?
Stephen Plume
Yeah, I don’t know where, I mean, I’d be interested in your experience somewhere along the lines in enterprise software, it became common wisdom that if you could pay back in two years and deliver a 3X return on the investment corporate checkbooks would open. I don’t think I’ve ever seen that. It has to be so much higher than three times for corporate checkbooks to open. And it really, it’s funny you should say 10X because in the venture world what I tell the early companies I work with is, for someone to take a bet on you, they’re expecting venture returns. They need to be getting 10X their money out. That’s not just the investors. That’s the customers need to be getting 10X their cost out, or they’re not going to adopt you.
My analogy is especially in these post COVID travel days, you get to the airport and you probably have status, I had status, I’m like almost fifth on a list of three upgrades, right? Some days I’m fourth. And it’s like, ‘Oh, almost got it.’ And most decision makers and corporations kind of have three things they’re focused on for the year. And if you’re not in those three, it doesn’t matter how good your argument is or what your value is or what your … Because you’re fourth on a list of three. Good luck.
Mark Stiving
Yeah. I don’t know where the 10X came from. I remember I heard it from a business partner of mine many, many, many years ago. And I’ve just been watching over and over again and it just seems to always be true.
Stephen Plume
Yeah, I agree with you.
Mark Stiving
That number just seems to be true. And when I teach it and people ask, ‘Why 10X?’ I usually say it’s because you’re asking your customer to take a risk and they need a return on that risk.
Stephen Plume
Yeah. And I’m not sure how far to push the venture analogy, but if I’m fairly confident when I make the investment that I’ll get 10X on my return, right? If that’s the investment thesis, then I’m going to 10 times my money back knowing that statistically that’s not going to happen. Right, the odds are not that, but if the bet is 10X, I’m probably at least getting my money back in the worst case instead of going broke. And if the bet is on 3X, I’m going to lose all that money. I’ll never see any of it again. Just walk away.
Mark Stiving
Yeah. And I always thought the venture math worked, you expected to lose eight out of 10 deals anyway. And the two that hit paid back for all of them.
Stephen Plume
Yeah. I mean, they’re different. you should have that conversation with people far more famous in venture than I am. But one really common, and I think good way to think about it is, one return needs to be so good that it pays off the whole fund. Another collection of five or six have to be so good that they pay off the fund a second time, and then everything else has to generate a third return of the fund. And now you’ve got a 3X return fund and you will have no trouble raising a new fund. People will be lining up for you. Which means at least half of them were zeros, half to 60% were zeros. And if you look at the stats, right, that’s for a successful fund. If you dig into Pitch Book and look at the stats, 80 to 90% of companies who raise a series A never raise a series B. And it’s not because they’re all going public. Yeah. The numbers are carnage, it’s a tent pole game. Just like summer movies. One movie will take 80% of the earnings.
Mark Stiving
Okay. So are you doing any pricing for AI companies right now?
Stephen Plume
Yes. Very early stage things. One is in extremely high resolution geospatial imaging. So, satellites can get you to a meter, LiDAR can get you to 10 centimeters. These guys are down at two centimeters. And so the usefulness of that is now you can use AI to do very fine scale mapping. So different use cases. One is vegetation mapping. So if you use LiDAR or satellite, you can basically say that’s trees, that’s grass, that’s parking lot, that’s sand. These guys can map 10,000 individual plant species down to the two to five centimeter revolution.
Mark Stiving
And so when you think about pricing AI, does it matter that it’s AI or does it just matter that you’re solving a problem and what’s the value of the problem you’re solving?
Stephen Plume
I think it goes back to, I think it’s the value of the problem. I mean, you and I have both been through. I mean I didn’t quite enter the workforce when we still had terminal host machines, but I sure did summer internships when those were there, right? And then we got to client server and then we got to the internet and then we got to ASP and then the internet and then the cloud, and now we’ve got AI and they’re not exactly analogous platform changes, right? It’s just Moore’s law at work getting us the next cool thing. And every time, every single transition you can find the articles in the conference this time it’s different. This is the biggest thing ever. And it looks pretty much the same as it always did. AI is a really neat way to solve, I guess there are two aspects to it, that the aspect that all the previous transitions have in common, as does AI, is, there are certain problems you can now serve much, much, much more cheaply. It’s just translating Moore’s law through to the consumer wallet or the enterprise wallet. Wow, we can do this for one 10th the cost, 100th the cost. That’s great. And I don’t think there’s anything really new. Well, there is something new about pricing. Let me tell you the second what I think the second dynamic is, and then come back to the AI pricing.
The second dynamic, and this is getting way out over my personal headlights, but I read about it and so maybe people who could tell you more is AI’s letting us solve problems we couldn’t solve before. Right? And so I don’t know what to say about that. And you could even say that anthropic and open AI and so on they’re solving the problem of providing large language models to millions of people, which was completely insoluble before. Okay. I don’t know. but come back to, okay, we’re just doing things cheaper faster, but in this iteration, the cheaper faster is without humans in many cases or with a vastly reduced need for how many humans. If you go now, for my entire professional career, and certainly it’s the last 50 years, most software has been priced by how many humans use it, number of agents, number of calls, salespeople how many people are on your cell phone plan, how many people use the internet in your house, right? It’s all human based. Well, if a lot of this is now LLM, what’s the impact of that? And I think what generic AI, I don’t know enough to speak to, but AI deployed as part of a technology solution. What I see nudging towards is a consumption based rather than a human-based model. So instead of 50 agents per seat per month, it’s now 5,000 resolutions per month or whatever the number will be.
Mark Stiving
So in cloud-based SaaS or just SaaS in particular, we, in my industry, in the pricing world, we spend a lot of time thinking about something called the pricing metric. What are you going to charge for? And we try to get people to move away from user-based pricing. Unless it’s the right answer, right? So Salesforce user-based pricing is probably the right answer, right? But in a lot of cases it’s not the right answer. And so how do you go find something different? And I think that’s just the step into AI because in AI we may not have users.
Stephen Plume
Look, my version of that advice to the people I work with is, okay, we all spend time writing these 3, 5, 70 page long proposals that justify our product, our solution, the details every widget costs, and the ROI, and we send them off. And my belief is visually it worked better in the days of paper, but the same thing works now. The guy picks it up, scans to the back page, skips the first 69 pages, completely looks at the number and divides that number by something and then he either laughs and throws it away and moves on. Or he goes, okay, I can work with this. We’ll start negotiating. And the whole trick to pricing is figuring out what he divides by. If you know what he divides by, you know how to get a deal with him. And most people pay no attention to figuring out what that might be.
Mark Stiving
Yep. And so I think of what you just described as the value metric, right? So how is it that they’re measuring the value of our product, right?
Stephen Plume
Absolutely. What does it tie to?
Mark Stiving
Yeah, Steven, this is fun. Oh my gosh. But I do have to ask the final question. What is one piece of pricing advice you’d give our listeners that you think could have a big impact on their business?
Stephen Plume
Do I get a run on sentence for the next 20 minutes? I think the single most important thing they can do is what we were just talking about, which is identify that value metric. But since we’ve already talked about that, let me give you a bonus. We kind of touched on it early on. There is so much opportunity to learn from low-risk pricing experiments, and people worry so much about, ‘Oh my God, the impact on our reputation, the impact on…’ No one knows, no one cares, no one’s watching. Get over that feeling and go out and experiment and learn from it. Experimenting without learning is pointless. But experiment and look at the data and figure out what you can learn that will get you there. There’s a lot of revenue on the table and there’s a lot of margin on the table that most companies just aren’t even aware it was there. And the work you do and that I do on the venture side and that other people think like us do, it’s always, it’s there for the taking. Go take it.
Mark Stiving
One example that I like to use for clients or for people that are learning from me is you’ve always heard the phrase it’s easier to lower prices than it is to raise prices. Well, that’s true if you’re Apple and everybody knows your price, but if nobody knows your price, nobody knows you raise prices. So who cares, right?
Stephen Plume
Or add our cool software app now with all temperature cheer and add 20%. I mean, you raise the price at no cost. I mean, at the cost of a few marketing words, you raise the price, it’s fine.
Mark Stiving
Yeah. It’s easy. Stephen, thank you so much for your time today. This was a lot of fun. If anybody wants to contact you, how can they do that?
Stephen Plume
Best things on LinkedIn right now. Stephen Plume, The Entrepreneur’s Fund.
Mark Stiving
And we’ll throw a link to your URL on the show notes to our listeners. Thank you for your time today. If you enjoyed this, would you please leave us a rating and a review? And if you have any questions or comments about the podcast or pricing, feel free to email me, [email protected]. Now, go make an impact!
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