Impact Pricing Podcast

Ep127: Value-based Pricing for Subscription Businesses with Arjun Patnaik

 

Arjun Patnaik is Head of Pricing & Commercial Finance at Pine Labs. He used to work at GE as an Audit Manager. 

In this episode, Arjun talks about how the role of pricing is richer in subscription businesses than any traditional business as it allows you to pull many pricing levers. He shares how triangulating the three important factors of knowing your value, communicating it, and figuring out people’s willingness to pay drives the whole point of pricing.

 

Why you have to check out today’s podcast:

  • Learn to differentiate and understand how pricing works in a traditional versus subscription business 
  • Learn about the whole customer lifecycle and lifetime value in pricing subscription 
  • Find out the three pillars of subscription pricing where everything flows from there 

         

Don’t undervalue yourself. Don’t leave money on the table. Do the hard work. Don’t just go for a cost-plus or competition-based pricing. Spend the time, talk to your customers, understand their value equation and willingness to pay. It’s going to pay off. So, spend time, money, and effort on pricing, and it will pay you back. 

 Arjun Patnaik 

      

Topics Covered:

01:46 – Arjun’s accidental entry into the world of pricing 

02:46 – What pricing for him is 

03:56 – What was GE’s pricing approach, as he used to work there 

06:13 – How was it like for him moving from cost-plus pricing to value-based pricing 

08:51 – Why is the role of pricing much richer in subscription business than any regular sales business 

10:18 – What he thinks of subscription pricing 

14:11 – The business he was involved in at GE 

14:56 – Talking about businesses transitioning from traditional ones to subscription 

15:58 – His thoughts over Finance people being the wrong people to run pricing 

17:59 – The need to marry data and solid customer research 

     

Key Takeaways: 

“When I think about pricing, I need to think about the whole customer lifecycle, especially in my business, right? So, I need to think about, at what price is my sales team acquiring customers efficiently? So, at what price can I maximize productivity and lower the cost of acquisition? – Arjun Patnaik 

“Beyond just the core product that I’m selling, which I’m getting the recurring revenue for, how do I sell more services to this customer because it’s much easier, you get a much larger bang for the buck, monetizing compared to acquiring.” – Arjun Patnaik 

“I think that’s why we need to marry data, which we have an abundance of, with solid customer research. Because if someone says the customer wants this versus that and they’re not able to prove that, it just comes down to, like, a bit of faith, experience, and gut feel. But then I just believe in customer research, and there are so many tools in pricing to figure out what the price range is.” – Arjun Patnaik 

      

People/Resources Mentioned: 

        

Connect with Arjun Patnaik:

        

Connect with Mark Stiving:   

                          

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.)

Arjun Patnaik   

Don’t undervalue yourself. Don’t leave money on the table. Do the hard work. Don’t just go for a cost-plus or competition-based pricing. Spend the time, talk to your customers, understand their value equation, and willingness to pay. It’s going to pay off. So, spend time, money, and effort on pricing, and it will pay you back. 

[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 recurring relationship between them. I’m Mark Stiving. Today, our guest is Arjun Patnaik. I hope I didn’t mess that up too badly. Here are three things you learned about Arjun before we start. He is currently Head of Pricing in Commercial Finance at Pine labs. He had a long stint at GE with many roles, the last being responsible for transforming business practices. And he’s a good cook. You’ll find out he’s Indian, and he cooks Indian really well, but he also cooks Italian really well. Welcome, Arjun.  

Arjun Patnaik   

Hey, thanks, Mark. Thanks for having me.  

Mark Stiving   

My pleasure. Hey, how did you get into pricing? 

Arjun Patnaik   

Ah, I accidentally got into pricing. So yeah, I mean, for my whole life throughout my career have done many roles across finance, marketing, sales have been kind of a financial analyst, right, seeing different parts of the business. And then, yeah, I mean, one of my previous managers was the CFO of this new company that I worked for, Pine Labs, and he said that he had a role in pricing and commercial finance. And I said, hey, I’ve never done that before. So, he kind of told me, look, you’ve done marketing, you know finance. So pricing is just kind of an amalgamation of marketing, finance, and business. So, yeah, it should be a cakewalk for you. So yeah, I mean, when I accidentally got offered to me without any prior experience in pricing, but yeah, I’ve been loving the experience so far.  

Mark Stiving 

Okay, I have to say, I did not expect that answer. So awesome. Now we’re going to go in a different direction. What are you learning about pricing? What do you think the pricing is at this point in time? 

Arjun Patnaik   

Okay. I mean, at the end of the day, pricing is just about knowing the value that your product is worth, right? Whatever you’re selling, whether it’s a product or a service, right? And then what is it worth? And how do you communicate that value to the end consumer, right? And then just figuring out what’s been consumer willing to pay for your goods or service, right? So, if you just think of all these three things, how well you know your value and how well you communicate your value, and then whatever is your customer’s willingness to pay? I think just triangulating that point is pricing. I hope that’s not too complicated an answer. 

Mark Stiving   

I actually thought that was a really smart answer for someone who hasn’t been in pricing as long as say I have, right, because I’ve been in pricing almost my entire career. So really nice. You spent a lot of time at GE and did a bunch of audits and things like that. Out of curiosity, how did GE think about pricing? So now that you understand pricing is about capturing customer value and customers’ willingness to pay, was GE focused on that? Or did they have other systems or processes they tended to use? 

Arjun Patnaik   

GE had a very different approach to price. I mean, you talked about a B2B setup. Right? And GE talked about, like, large contracts, right? I mean, your long-term service contracts, equipment, sales, and so on. So, GE used to do a lot of bundling, right? So, for example, let’s pick up GE Aviation, right? We sell airplane engines to like two different airlines. So, along with the airplane engine, we also sell long-term maintenance contracts for these engines stretching into 10, 15, 20 years, right? So, a lot of the times, we used to sell the engines at a loss, right? But then our margins are so great on these long-term contracts that we used to recover whatever and much more than the cost of the engine. So, at GE, we used to think about bundling products and services together, right and then think about profit margin combined. A lot of it was, a lot of the times it was cost-plus pricing, right? I mean, just figuring out what it costs for you to deliver the service or the equipment. And then just figuring out what your customer was, we used to get into quite a lot of negotiations. It’s not a very sort of retail setup. And then GE used to also participate in a lot of tenders, government contracts, right. So, then it’s just about looking at what’s the cost, and then what’s the minimum margin you want to make on your equipment and your service contracts. So, I think that was a very wide spread-out way of approaching pricing. In GE, I never managed the thing. 

Mark Stiving   

I think that’s pretty common in companies with hardware products, companies with a real cost of serving; then they tend to do a lot of cost-plus. I want to know my costs; I manage it really closely. And as an auditor, you probably were all over that. And understanding did they really know their costs or not and other costs? So, what was it like when you move to the new company, and suddenly you were thinking about value and willingness to pay instead of cost-plus? 

Arjun Patnaik   

So, I’ll be honest, I mean, on day one, probably not even day 90, I wasn’t thinking about value and willingness to pay. Right? Because I mean, I just came in, I put my finance hat on, and I just go into I mean, old habits, just what does it cost for me to deliver this good or service? And then what am I charging for it? How much money am I making on it? So, on day one, or rather week one, I just make a P&L right, and just see if you’re making any money or not? Turns out in some places we are, other places we are not? It further turns out that my approach to looking at the product’s profitability or the service that we were delivering was completely wrong because the business that we’re in is subscription-based, right? So, all I was doing was, when I’m looking at the customer view, I’m like, okay, monthly revenues for the month, this is the cost of service. Okay, this is my profit. But then, over time, as I read, I mean, I went on different websites, probably yours as well. And I understood that pricing, when it comes to subscription models, is very different, where you have to think about the lifetime value of a customer like, what’s the churn rate of the customer segment? What’s my cost of servicing? What’s my cost of acquiring the customer, right? Which doesn’t come in your static P&L view. So, then we just went back to the drawing board, looked at the company, end to end, looked at the different metrics such as attrition, cost of acquisition, calculated lifetime value, and got really deep into the unit economics of the business. So that’s how we figured out. Okay, this is how pricing works, or this price, and doesn’t work and a lot of ratios, which can help you figure that out. 

Mark Stiving   

Yeah. Okay. So, by the way, I thought that was absolutely brilliant. One of the things that I try to teach people, when we think about subscription versus traditional business, is that in a traditional business, you sell something, doesn’t matter what, we sell a jet engine, or sell a hamburger I don’t really care. I know what I sold it for. And I know what it cost me to make it. And I can tell you if I was profitable on that sale or not. In fact, this is not true in a subscription. Okay, if I go win a customer and you only stay for a month, the odds are really good; I lost money on you. I did not make money. And so now, all of a sudden, we’re statistically guessing how much money I’m going to make from any given customer, or I’m trying to average it out, or however you want to look at it. So, it’s a really interesting realization like that. Look, I got to deal with the uncertainty of every individual customer now. 

Arjun Patnaik   

Yeah. And that’s what I loved about… that’s how I feel the role of pricing in a subscription business is so much richer than a regular sale business, right? I mean, you set the price per salesperson who goes out and sells it; you either make money or not. When you think about pricing for a subscription company, I mean, there are so many levers you can pull, right? And typically, if the lifetime of let’s say three months, you can adjust pricing, you can do discounting; you can see what the attrition rate is. How do I manage the attrition rate? So, I think it’s a lot more involved, the role of pricing. Which is why I think I feel the role of pricing is even more important for companies who are looking at subscription models like the SaaS companies, right? 

Mark Stiving 

Yes. So, when you think of the role of pricing, I struggle with this concept a little bit in that I just wrote a new book. It’s called Win Keep Grow. It comes out July 5 and paperback. I’m sorry, an eBook in October and a physical copy. But the thing about writing this book is I always think of myself as a pricing guy. And most of what I wrote wasn’t about pricing. Most of what I wrote was about running a business and how to make sure you’re creating value, and how to get people the right options so you capture more of the value that each customer is willing to pay you. How do you think about pricing subscriptions? And what all goes beyond just I have to set a price on this? 

Arjun Patnaik   

Good question. And I mean, I’m reflecting on the work that I do day to day, so I’m just trying to take myself out of it. But when I think about pricing, I need to think about the whole customer lifecycle, especially in my business, right? So, I need to think about, at what price are my sales team acquiring customers efficiently? So, at what price can I maximize productivity and lower the cost of acquisition. So, I need to balance that out with just like the lifetime value that I will earn from the customer because if I set my price too low, then again, my total revenue over the lifetime is going to be low. So, I need to balance that part of the equation too. Then you get to once I’ve acquired the customer, how do I retain the customer? Right? How do I keep them sufficiently engaged? So, I mean, we’ve seen in our business that the level of early churn is much higher compared to later vintages. So, if I can get people over the hump for six months, I can give them a flavor of what my product is worth, get them to like experience to realize value, and then I’m comfortable that okay, I can increase my lifetime. So, I need to work with my customer experience engagement team to make sure that, okay, you customers are using the product; that’s what activates. I tracked the activation ratios as well. Sorry, another part again, which, and this reminded me about early churns. So, because early churns are so important, right? That’s why I am able to use discounting techniques when it comes to different plans that we have, right? So, you think about monthly plans, every six months annual plans; if I can get someone to sign up for an annual plan, I know that customer will probably not churn in the first 12 months, right? So, I had to think about, okay, how much low is the churn rate for a 12-month customer compared to one month, and it’s just my pricing accordingly? So that’s the acquisition side of it, right? And then I also need to monitor, okay, if someone is coming to churn, he doesn’t want to continue my service, how do I retain the customer? So, thinking about retention offers? Right? Can I mean, not only price, but can I give some, can I model something for free? So that’s the second most important pillar, retention, and the third one is monetizing, right? So beyond just the core product that I’m selling, which I’m getting the recurring revenue for, how do I sell more services to this customer because it’s much easier, you get a much larger bang for the buck, monetizing compared to acquiring. I need to invest much less in monetizing the customer and getting revenue that way than acquiring the whole new customer. So that’s how I think about the three main pillars, acquisition, retention, and monetization. So those are three pillars that I think of, and everything kind of flows from there. 

Mark Stiving 

Yeah, thank you for the advertisement for my book, because my book is called Win Keep Grow, which are actually those three pillars, right? Its acquisition, keeping is customer retention, and then growing a customer is monetizing. How do I get a customer to pay me more money once I’ve landed a customer? 

Arjun Patnaik   

Look, everything I know, I’ve learned from research and like talking to smart people like you. So yeah, you can take some credit for that. 

Mark Stiving   

Well, everything I’ve learned, I’ve learned from talking to smart people, too. It’s just amazing to see the ahas when you start playing in this subscription business space. So, when you jumped into this company, they were already subscription; you didn’t have to transition them from a traditional business into subscriptions. Is that true? 

Arjun Patnaik   

That’s true.  

Mark Stiving   

And so, one of the things I find fascinating, you said that you, your LinkedIn profile said that you were part of transforming business practices at GE. Did you ever transform a traditional business to subscriptions at GE?  

Arjun Patnaik   

At GE, we didn’t have a subscription business. Actually, the closest we got to a subscription were annual maintenance contracts. Right? But the business transformation I was, I mean, more involved in was, how do we make the finance function more efficient? So, not directly linked to pricing; it was more of consolidating operations into COE’s. And again, thinking about reducing costs, but, yeah, costs directly flows to P&L and then makes you more profitable. 

Mark Stiving   

Yep, absolutely. And so, the reason I asked is because transitioning from a traditional business to a subscription business is one of the hardest things for companies to do. Yeah, it really is. It’s so valuable, but it is so hard. 

Arjun Patnaik   

Yeah, and I think the best case study is Adobe, right? The transition they make. I think they were the first big company to do it. 

Mark Stiving   

Right. And they actually just flipped the switch and said, let’s do it overnight, we’re going to stop offering our traditional products.  

Arjun Patnaik   

So that was a bit of an overlap. I think, from what I read, there was like, maybe 11, 12 months, but perhaps I’m mistaken. But yeah, I read that, I mean, that’s a famous case study. Right? 

Mark Stiving 

Right. And that’s pretty fast anyway. So, tell me now that you come out of finance, and you’re now in pricing. I usually say finance people are the wrong people to run pricing. And the reason I say that is because usually finance people don’t understand the value of the product. And it’s someone like product manager, product marketer. Even salespeople, though I don’t think salespeople should own pricing either understand value better than finance. So, what are your thoughts on you running pricing? 

Arjun Patnaik   

So, I have the benefit of working in sales, marketing, and product in my previous life. And when I say my previous life, that’s my last company. So, I’ve seen that side of the world, so I sympathize with them. And for me, so I try to keep a fair balance between profitability and growth, right. And traditionally, you’re right; finance has traditionally been just looking at the books looking at black and white numbers. But the role of finance is also changing. I feel in today’s world, especially in the newer companies, you can call them startups, you can call them tech companies. I consider ourselves to be a tech company. So, finance is playing a more proactive role in the business in growing the business too. So, traditionally, finance, people look at finance as accounting and financial reporting, investor relations, etc. But yeah, I mean, the role of finance is also changing. And I think that’s happening a lot in Silicon Valley. And a lot of US companies like Uber. In fact, Uber has a function called strategic finance. And that shows up directly to the CEO. So yeah, I challenge the traditional thinking that finance is probably not the right people to be owning pricing because I just feel like the role of finance is evolving as the world changes and as companies evolve. 

Mark Stiving   

Yeah, I think my opinion is that finance needs to be involved. Finance has a lot of power and influence inside a company. And they have access to all the data. So, I love the idea that finance is involved and interested and helpful. I just think they don’t know the value of the products as well as other people know the value of the products. Right? So, if we just sit back and say, what’s a customer willing to pay? Who in your company knows the answer to that question best? And rarely is the answer to that question finance. 

Arjun Patnaik   

That’s true. And I think that’s why we need to marry data, which we have an abundance of, with solid customer research, right? Because I challenge a lot of people who work in product and sales in my company, who told me, okay, the customer wants this versus that. And I mean, they’re not able to prove that. So ultimately, it just comes down to like, okay, a bit of faith is like, experience and gut feel. But then I just believe in customer research, and there are so many tools in pricing, just to figure out what the price range is? What’s the willingness to pay, right? What features the customer value more than the other, right? So, in fact, I’ve commissioned research recently into the market, both my existing customers and my potential customers, and just trying to figure out what features they value of others and then just claim to attach willingness to pay with that. So again, having the data mindset. I just, I value feedback and experience from people who work in product and sales. But yeah, ultimately, I’d like to hear from the customers. 

Mark Stiving   

I couldn’t agree more. I think that product people should be listening to customers. And they should be able to go to finance or whoever’s asking the question and saying, here’s how customers value our products. Here’s how they think about our products, not just give you an opinion that says I think they like this feature more than that feature. Yeah, that’s lazy product management. 

Arjun Patnaik   

And too often we look at the competition that competition is offering this so that I’m like, okay, competition, maybe offering that, but do customers really want that? And so, who do I need to make me do product? So, yeah, I mean, you consider what the competition’s offering. What would put you here in the market, but then, I think ultimately, it’s the customer who decides what they are willing to pay. 

Mark Stiving   

Yep, absolutely. Absolutely. Arjun, we are running out of time. But I will ask my final question that I always ask what’s one piece of pricing advice you would give our listeners that you think could have a big impact on their business. 

Arjun Patnaik   

Don’t leave money on the table. Don’t undervalue yourself, don’t leave money on the table, do the hard work, don’t just go for a cost-plus or competition-based pricing. Spend the time, talk to your customers, understand their value equation, and willingness to pay. It’s going to pay off. So, spend time, money, and effort on pricing, and it will pay you back. And this doesn’t apply just to people in place and where it applies to anyone running a business. 

Mark Stiving   

Awesome answer. Thank you, Arjun. And thanks so much for your time today. If anybody wants to contact you, how can they do that? 

Arjun Patnaik   

I’m on LinkedIn. I’m very active on LinkedIn. So, you can search for me by my name, Arjun Patnaik. I hope it will be listed on your podcast. So yeah, reach out to me, follow me, connect with me on LinkedIn, and I’m more than happy to exchange thoughts and notes.  

Mark Stiving   

All right, thank you so much. Episode 127 is all done. Thank you so much for listening. If you enjoyed this, would you please leave us a rating and a review? Those help us immensely. And finally, if you have any questions or comments about the podcast or pricing in general, feel free to email me at mark@impactpricing.com. Now, go make an impact! 

Mark Stiving 

Thanks again to Jennings Executive Search for sponsoring our podcasts. If you’re looking to hire someone in pricing, I suggest you contact someone who knows pricing people. Contact Jennings Executive Search! 

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