Marcos Rivera is the Founder and CEO of Pricing I/O, a training and coaching boutique helping high-growth B2B SaaS companies accelerate ARR growth and market share. Marcos was the Operating Executive for Product Management and Pricing of Vista Consulting Group, and is the author of the book “Street Pricing: A Pricing Playlist for Hip Leaders in SaaS”.
In this episode, Marcos shares his insights on some the common problems in the subscription industry. He also talks about the different ways to approach pricing adjustments in relation to software innovations, and discusses the hot topic of usage-based pricing.
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Why you have to check out today’s podcast:
- Find out what the three biggest pricing problems are when it comes to subscription and know why you shouldn’t do those
- Discover why people don’t pay much attention on the expansion part of land and expand, and learn how to go for it if you want to
- Understand why it’s a good step to raise prices on the subscribers with highest usage first
“Go out there, get data, experiment and raise your confidence, and the pricing problem gets so much easier.”
– Marcos Rivera
01:32 – How Marcos got into pricing
02:33 – Biggest pricing problems in subscriptions: (1) Pricing without aligning their package of value to their clients
04:00 – Why decoupling pricing and packaging is difficult
04:47 – Enhancing your pricing when introducing software innovations
06:31 – Biggest pricing problems in subscriptions: (2) Underpricing
09:08 – Biggest pricing problems in subscriptions: (3) Overcomplexity in the model
10:55 – People not focusing on the expansion part of the commonly used phrase in SaaS, “land and expand”
14:02 – Understanding usage data in providing better value to your product
16:17 – Getting things to levels of sophistication and sophistication at scale
18:29 – Where, when, and how to utilize usage-based pricing
24:38 – Pricing table topics: “Raise prices on the subscribers with highest usage first.”
26:12 – Marcos’ pricing advice
“The way to start with pricing, especially if you already have an existing model and you’re looking to enhance it, believe it or not, is not where most companies start, which is “how much should I charge with this new thing?” It’s the first thing on their mind, the first question on their mind, but that question doesn’t get answered until you understand how your value is being changed…” – Marcos Rivera
“There’s nothing wrong with land and expand, but what often happens is that it’s mostly land and very little expand…. When you place so many of your chips on the land part of it, you start being overly generous with your limits or overly generous of what you’re including. What ends up happening is you put so much of your expansion opportunity into the land that your expand opportunities are limited. Overly heavy on the land makes it tougher to expand.” – Marcos Rivera
“Be a little bit careful about over indexing on what they’re doing in the system because you don’t want to inadvertently discourage them from using the product.” – Marcos Rivera
“Value is not in the people using it. The value is in the machines doing, and the volume and frequency with which it’s doing it.” – Marcos Rivera
“Remember, perceived value gets stronger and better with more usage. That correlation works out really well.” – Marcos Rivera
People / Resources Mentioned:
- Pricing I/O: https://www.pricingio.com/
- Vista Consulting Group: https://vistacg.com/
- Vista Equity Partners: https://www.vistaequitypartners.com/
- Netflix: https://www.netflix.com/
- Slack: https://slack.com/
Connect with Marcos Rivera:
- LinkedIn: https://www.linkedin.com/in/marcoslrivera/
- Website: https://www.pricingio.com/
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.)
Go out there, get data, experiment and raise your confidence, and the pricing problem gets so much easier.
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.
Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the hip relationship between them. I’m Mark Stiving and our guest today is Marcos Rivera, and here are three things you’d want to know about Marcos before we start.
He is the Founder and CEO of Pricing I/O. He was the Operating Executive for Product Management and Pricing for Vista Consulting Group, and after the podcast is over, Marcos, you and I are going to talk about Vista because I used to teach for them a lot. And he is the author of a brand-new book, “Street Pricing: A Pricing Playlist for Hip Leaders in SaaS”. He also speaks Japanese and Spanish.
Thanks for having me, Mark. Glad to be here.
Hey, how did you get into pricing?
It’s interesting because I find myself to be not much of a consultant, to be honest with you. I started in pricing through my roots of product management, so actually, throughout my career in the late ‘90s and 2000s, building software and having to price the value of everything I’ve built. And in doing so, I’ve learned how to price value simply by doing it in so many different technology contexts, and just got good at it. I launched about 42 products in my career, and so that was a lot of pricing. And then from there, I joined Vista Equity Partners and their consulting group and did it at scale across their entire portfolio. So that’s pricing all different types of companies in different types of industries and helping them optimize their packaging and their model.
For anybody who doesn’t know, Vista Equity Partners is a private equity firm. They own lots of different companies, which have lots of different products and pricing problems.
So, okay, your whole book, your whole emphasis is on SaaS subscriptions. And by the way, I also wrote a book, Win, Keep, Grow on subscriptions. But I want to ask you, what do you see is the biggest pricing problem in subscriptions?
I think the biggest pricing problem that I see, there’s certainly a top three in my mind, but if I have to give you the one of them all is that they’re pricing without any purpose and without aligning their package of value to their clients.
So, what I mean by that is in subscription world, the customer tends to pay over and over again for a product, for access. What ends up happening, in technology especially, is that innovation happens rapidly. You get new features, new value is introduced, but they don’t know what to do with it. So, they just are shuffling it around everywhere and guessing where it might belong. And before you know it, you’ll start having different awful mixes and packages that are either too heavy for some clients, too light for others, and that starts to throw the price value equation off balance. And no one knows this is happening. They don’t realize it. And then over time, it comes to a point where either the customer starts finding a better fit with a competitor, or they stop using the product overall, and then it begins to catch attention, but by then, the damage is done.
So, I always look for pricing with intent and being very focused on which value you’re selling to which customers.
It’s kind of interesting, the answer you just gave, because you tied pricing and packaging together very tightly. Do you usually think that way?
It’s really difficult to decouple the two. The reason why is because I look at pricing as pricing an experience to the customer, especially in technology. So, it’s whether they have the types of access to the product, how they’re onboarded, how are the integrations, the features, of course, how they’re supported, training – all those things are part of the experience and you’re trying to set a value for that experience. So, I find it difficult to separate packaging and pricing. While they’re not the same thing, I find them closely related.
Yeah, I would agree completely. And so, what’s the solution or what’s the approach that someone should take if we’re going to create new technologies, new capability, and we’ve already got a SaaS platform out there, maybe we’ve got a good, better, best offering already that we’ve put together. How do I decide where I’m going to put this new feature or new capability?
That’s an excellent question. I get that almost every day, now that I think about it.
The way to start with pricing, especially if you already have an existing model and you’re looking to enhance it, believe it or not, is not where most companies start, which is “how much should I charge with this new thing?” It’s the first thing on their mind, the first question on their mind, but that question doesn’t get answered until you understand how your value is being changed, who actually cares about this innovation more than others, and then even before that, I’ll be a little bit of a Simon Sinek person here, but the why. Why are you selling this thing? Is this something that is a part of your goal to get more users into your system? Maybe you’re looking for a network effect you’re trying to build out; maybe you’re trying to lift your profits. Whatever that core goal is you’re trying to achieve, you should tie it to the type of customer you’re trying to capture, and then how that values enhance, which finally leads to the price.
So, it’s not a very satisfying answer, Mark, right? I mean, people want to know “what’s the number?”, “tell me what to do”, “just put it in there, lift the price by 10% and be done with it”. But if you actually take a few steps before that to clarify what you really want, the who, and then the what and how that changes, pricing actually gets a lot easier.
Yeah. I find that most people don’t think about what’s the strategy, why are they doing what they’re doing, and then the price segmentation, right? Who are we pricing it for? Can we price it for different people? There’s so much going on, which is pretty fascinating.
So, you said there were three big problems and you just gave us one. That just leads us into what’s the next one?
On purpose, by the way. That was just me planting a seed.
The two other big things that I’m seeing for the most part is in addition to not aligning those packages to customers, I’m also seeing a lot of underpricing, if I have to say it just out loud, where the customer or the clients that purchase today are very happy to pay the same price they’ve been paying, but you don’t know if they’re willing to pay more. And if your pricing comes from a lot of guesswork, which unfortunately a lot of companies do guess on their pricing, it’s really hard to tell if you are underpriced or overpriced without knowing how to look for those signals.
And what I find often times is that, going back to what I said a minute ago about packing in more and more value, especially in technology, they don’t actually reassess what that value is and how to capture if they’re actually capturing their fair share. So, in most cases, not every case, there’s going to be some good reasons to lower your price too, especially if there’s the elasticity to justify it. But if you’re really a fast-moving company, you’re growing and you’re packing a lot of value, you often times would show signals to me that you underpriced. So, looking for places to lift price is the exercise there.
Yeah, and I think it’s kind of fascinating because not only do we add more technology or we add more capability, but I think the other thing that happens is a lot of times, when people first buy our subscription, they can only use their perception of what the value is going to be, and they’re always going to underestimate that. And once they get the product and they start using it and we do a good job with our customer success departments, they’re realizing a lot more value than they ever thought they were going to in the first place, which essentially says, “Hey, there’s room to raise prices.”
Absolutely. Precisely the point is as you gain more experience, your customers gain more experience, too, and they start realizing – now that they’ve used it – the value of it, and then you start imagining the world without it and realize it’s so much better with the product and the value which also includes the price. And again, a lot of SaaS entrepreneurs out there aren’t taking that into effect for reasons I can’t understand. I mean, they’re trying to grow a business, they’re trying to get as many customers onboard, maybe there’s some revenue optics they’re trying to put together for a fundraise; lots of things going on. But this is going back in not reassessing your pricing to your value after you’ve already used some of the good new capabilities there.
Yeah, nice. Okay, number three?
Number three – and this is one that I think that a lot of companies can relate to – and that is overcomplexity in the model. And what I mean by overcomplexity in model is too many moving parts.
So, for the other side of those, I’ll just kind of leave it alone and maybe keep it too simple, and even on the table, there’s the other side that they tend to overcomplicate things with too many value metrics or too many moving levers, too many add-ons, too many things to consider, and what ends up happening is you start confusing the buying process, confusing the buyer, and you confuse minds very much. The idea of having equal friction out of that process is another big win for a lot of companies, and it’s usually a quick win as well. Sometimes, it’s just collapsing a few things together, clarifying the packaging, maybe readjusting the bundles of it, and you can see right away, much faster and easier, the sales conversations.
Yeah. And I think the attitude or the intent for the complex pricing is the right attitude or intent because we’re trying to capture as much value as we can, but as you point out, when customers get confused, they don’t want to buy. Customers are afraid to make a mistake. And so, if they think they’re going to make a mistake by picking and choosing the wrong things, it’s easier not to decide, which is one of the reasons why packaging good, better, best is such a such a phenomenal approach.
I like to use the George Bushism, “don’t overcomplexificate it”.
I love that.
But I guess you have to be old enough to know who George Bush was.
I was around with the Reagan years. I get it. Yeah.
Okay. So, one of the things that I find fascinating whenever I deal with SaaS companies is you hear everybody throw out the phrase “land and expand”, or you hear “acquisition, retention, expansion”. And people spend a lot of time on acquisition and a lot of time on retention, but it seems like nobody focuses on expansion or the expand part of land and expand. Can you just pontificate on that? First off, why don’t they? And then secondly, what are the things they need to think about to help them get there?
Yeah, that’s a super good question because land and expand, you’ll hear that in a lot of circles with SaaS growth and technology investors. That’s kind of a big play that everyone is after.
I’ll tell you a couple of things. One is that there’s nothing wrong with land and expand, but what often happens is that it’s mostly land and very little expand. And there are a couple of things at play going on here. First thing that is happening is that when you place so many of your chips on the land part of it, you start being overly generous with your limits or overly generous of what you’re including. “Hey, let’s just throw that in to sweeten the pot, to sweeten the deal”. And what ends up happening is you put so much of your expansion opportunity into the land that your expand opportunities are limited.
And so, putting too much into the land, over discounting, which oftentimes can anchor the price a bit lower and make it harder to expand. Full, maximum extraction of the value upfront also makes it a little bit harder to expand. When you spend so much money upfront, you couldn’t have much appetite to spend any more until you feel like you’ve gotten the ROI value which you already bought.
So, I would call it overly heavy on the land makes it tougher to expand. That naturally happens through a lot of the sales efforts.
Other thing I would say, the second thing I find very common and also linked to what I said a minute ago about friction is that in the model, because it’s so optimized around expand, you often don’t see a lot of really good opportunities or even thoughts on what the expansion actually looks like.
So, what I mean by that is getting someone to a certain point in the software milestone, use case, wherever that is, oftentimes signals they receive some value. So where do you actually draw all these lines before they start moving to these next echelons of them where they start increasing maturity and sophistication, being able to put the right parameters in place, the right fences in place to then trigger the conversation and move them there. And that could be as very simple as understanding in your own product what are the core four or five things that get done with this solution, and then where do you go from there? What are the advanced things that you do? How do you extrapolate from there? If you understand that journey, you then start building in the right areas and the right trigger points to start expansion, which is the beautiful part.
Yeah. And I find that most people don’t even think about the expansion well enough. Ahead of time, they haven’t thought it through. I like the way you phrased it. What are the four core things you’re going to do in the in the good package? And then what’s the next thing you really want to get accomplished as you’re going to move up the chain or up the of the product line?
I often coach companies to look at usage, right? So, SaaS cloud-based companies should have access to all the usage data of their customers, and now they have the ability to say, “The people who get tons of value, these are the features they’re using, and the people who get a little value, these are the features they’re using.” Do you coach companies? And how do you coach companies to create those fences or those products?
Yeah, that’s a great question because it does boil down to usage. What are we actually doing in the product? Licenses, how many API calls, how many automations, what type of reports are they accessing? All these things matter to really see what type of value they’re extracted from your solution. Most companies don’t have that data up their fingertips. Some of them do, but most have to work hard to extract and pull it out. Although with the new solutions out there, like Pendo and Mixpanel and all these other great offerings, you can start free building in those hooks and you could see that usage is lot better.
So, the way I think about coaching it is those four or five use cases tend to be the most core reasons to even buy your product in the first place. It’d be silly to use it without having these core capabilities in there. And that’s usually the genesis of the product. But why you even built it in first place as a SaaS founder? But then you start to extrapolate…
Would it be fair to use the phrase MVP or minimum viable product for that?
It’s fair, although the word minimum is where I trip up a little bit because that’s fairly relative. It could be the minimum viable product to achieve the amount of value that accentuates your differentiation, meaning you’re coming to market with something new; either you’re faster, you’re better, whatever it is. And you want to make sure that that minimum viable product takes them to the point where they say, “Wow, this is actually something I really need to use.” Some minimum viable products are either concept tests or even only a part of the value that may not be enough to get them to the point where they’re willing to pay. That’s my only trip up with the word minimal.
But yes, in that sense, that’s where it is. You want to get them to that point where they’re getting value with the base use cases of the product.
Okay. And then the next step up? I interrupted you.
No. Absolutely no problem. The next step up from there is now that you have those core base use cases, and you have the amount of usage, the big thing you want to look for when you’re doing this, by the way, is not to discourage use of the product. Lift them up. So, if I was a Netflix user and you were to charge me for every minute of viewing time or for every show that I watched, I would change my behavior a little bit. I’ll have to think twice be a little bit careful about over indexing on what they’re doing in the system because you don’t want to inadvertently discourage them from using the product before watching, which could get in the way of me extracting value. So.
So, from the base, you then move on to the next tier, which these are things that require a little bit more integration, a little bit more data, maybe more conditions and rules and more automation. I am speaking in the tech world. Most technology does the same thing. Robert Smith, the founder of Vista, was critiqued for saying that most software tastes like chicken because most of them do the same thing. They’re designed to create efficiencies through doing something faster or getting your data faster, avoiding the compliance issues, things like that. So, when it comes to the second tier, you’re now looking for things that are more mature your user would be looking for in the sense of data, automation, and integrations. Those are the big ones that start to fold into that next tier.
Then the highest tier, just thinking about the good, better, best just to go with the very common model, is usually about getting it to the highest level of sophistication at scale, right? So, you have basic, you have sophistication, then you have sophistication at scale, which are now things that get into admin control. More controls, more ability to grant permissions to different types of users, security, privacy, even deeper data, more complex integrations or hand-holding when it comes to rolling out and training; all these things that tend to fit well at scale. So that’s how at a very basic high level, you start thinking about how to break up the different capabilities, as a matter of fact.
Nice. Okay, you brought up a topic that I actually don’t have a really good answer for in my mind yet, so we’re going to debate this a little bit, and that is usage-based pricing. Everybody’s talking about usage-based pricing now, and you just pointed out that if I charge you by the minute of movie you watch if I’m Netflix, I charge you by the minute of movie you watch, I’m going to change your behavior and you’re going to watch less movies. So, what’s the tradeoff between incentivizing people not to use my product because I’m charging them for usage and taking advantage of the fact that the more they use it, the more value they get, and the more we should be capturing of that?
That’s a very hot topic right now in pricing circles. I talk about it a lot with enterprise companies and even companies at a smaller size as well, looking for a way to introduce some usage basis.
So, I got a couple of things. One is, is usage even right for you? And then I talk about how to think about usage-based pricing directly to your question, which is inputs versus outputs, and how to be very careful with that type of behavior. So, is it even right for you in the first place?
I look at companies and age-old classical seat-based, user-based pricing that is the dominant way most companies price in subscription software today, I look at that and I say it may not be appropriate in all context anymore. It’s not the devil though. It is actually still appropriate. A lot of great companies like Slack, like Salesforce, Atlassian, they don’t charge by the use, and they’re all doing just fine.
So, what is this usage-based pricing piece and how do you take advantage of the benefits of going usage-based? It really depends on the software itself. And it comes down to really two dimensions. How much is the machine doing and how much is the man for the person doing? So, the idea here is thinking about what the software and what the person is doing in your solution, and that usually leads you to some answer or at least directional answer on going usage-based. Imagine two by two. Because your software is a tool. Think of a software that maybe the UX designers use and they’re very heavily in the tool and the output is really just a result of what the human is doing in the system. And oftentimes, having a seat-based price in there is perfectly appropriate with some of this in there, getting a lot of individual value, that’s just fine. But in other solutions like, say, Datadog or AWS or Snowflake, where it’s actually the system doing a lot of the work, the algorithms, the A.I., whatever that is; now, in those cases, it’s the machine, it’s the solution doing most of the work and humans aren’t doing much in setting things up or creating connectors. In that case, then usage-based gets even more interesting because now it’s the system that’s using it. There’s really not a lot of humans in there doing much. So, is charging by the seat even appropriate or even aligned to value? Value is not in the people using it. The value is in the machines doing, and the volume and frequency with which it’s doing it. So now that’s usage based.
But you’re probably thinking, Mark, “What if a software does a little bit of both?” We got like project management software, you have other softwares that content management is another one where people are doing stuff in there and the system’s automating stuff in there. So, in those cases, I actually like hybrid where there’s some flatter usage-based pricing as well as some elements of usage-based, either limits, fences or parameters that sort of help you extract value at higher usage levels so that with those that use it a ton pay more, and those that use it very little pay less. So that’s how I look at usage-based pricing.
As far as to your question directly about how to not discourage it, thinking about inputs and outputs of your software. In Pricing I/O, my company comes from inputs and outputs thinking about this. And so, if I look at a solution like Snowflake, where I’m thinking about the data and what it’s doing with all the data, it’s very natural to say that if I pump up ton of data through these I should be doing more than the kind of less data. And the more I use this, the more data I actually want to consume. So there has to be this notion of the more input or the more volume or frequency of this activity, the more value that I get, and there’s no way I can gain or control.
So, what I mean by that is if you use the Netflix example, just to keep it simple, I could gain that. I could skip a show, I could turn it off, I could go to my friend’s house and watch. I mean, there’s ways that you can work around the input there, which makes it a bit dangerous because at the end of the day, what you’re looking for is you want folks to go in there to tell their friends, “Did you just see that episode on Netflix?” and create that viral effect you have to have. So, by measuring a little bit more about the output of watching Netflix is that viral effect, and the referencing, and everything else, as well as the algorithm that they have that gets smarter about what you watch the more you watch, which has a perpetuated behavior. You want to then not price for that that activity, that input of watching. You want to price more on your wall access, which in this case is the human. Very, very simple.
I’ll give you another one. Slack. A lot of people use Slack, right? Do they charge by every message you send? Probably not. What would happen if they charge you by every message? You’ll probably stuff entire essays and paragraphs in your message so you can reduce the amount of times. What happens when you reduce the amounts of the messages is you start reducing the collaborative nature of the matter. So, you don’t want folks to not send messages, so you charge on user basis, which again, going back to my earlier framework – are people in Slack actually using it as the output a result of human input? It sure is. So that is where usage-based pricing is facilitated.
Yeah, nice. I love that answer. I think I learned something great there. That was awesome.
Hey, Marcos, I think we can have this conversation for hours. I’m really enjoying this. But we’re going to have to wrap up. So, we’ve got two things left to do. First, pricing table topics. So, just so the audience knows, I intentionally selected a card for Marcos today, although I haven’t told him what it says yet, and that’s because I wanted to make sure it had to do with subscriptions.
And so, you get the five of diamonds, Marcos. Five of diamonds, and the saying is, you got one minute – “Raise prices on the subscribers with highest usage first.”
“Raise prices on subscribers with the highest usage first.” I, for one, find that to be, more often than not, effective way to start testing the value on the high end. So, what you’re doing is when you see the high usage, which the usage I’m assuming is something that matters to the client, it is something that you cannot gain, something that you cannot work around, and it’s something that you understand and can predict, which is the other element there, your ability to raise price and actually capture the higher value proposition there, the higher perceived value is a much better likelihood than for the low usage cases. Remember, perceived value gets stronger and better with more usage. That correlation works out really well. I fully support increasing prices first at the high usage level as a lower risk way to understand how much for it you can do.
Alright. Thank you, Marcos. If you care, you only went 50 seconds. You could have done another 10 seconds for me. But that’s okay. Good job.
And then we’re going to wrap this up with the final question; probably my favorite question. What’s one piece of pricing advice you would give our listeners that you think could have a big impact on their business?
The one piece of pricing advice that I always tell folks is that pricing is about confidence. If your confidence is low, you’re going to start asking yourself questions like, “Am I charging the right amount? Am I charging for the right thing?” If those questions are living in your mind, that means you have an opportunity to raise your pricing confidence. Go out there, get data, experiment, and raise your confidence, and your pricing problem will get so much easier.
Alright. And one of my favorite sayings is “Salespeople have to be confident they can win at your prices.”
I love it. Fits right in.
Yeah, exactly. Marcos, thank you so much for your time today. If anybody wants to contact you, how can they do that?
Absolutely. A couple of ways. I’m easy to find on LinkedIn. You can either go straight to Marcos Rivera with a Pricing I/O. You can also go to my website at https://www.pricingio.com/. But the biggest way is to pick up a copy of my new book, “Street Pricing” sold where all books are sold. Amazon, Barnes & Noble. It has all of my 23 years of experience and 300 pricing projects packed into one book that has a fun musical spin to it. Pick up a copy of that and you’ll learn everything I talked about today and more.
Alright. Thank you so much, Marcos. Episode 188 is all done. Thank you for listening. If you enjoyed this, would you please leave us a rating and a review? And if each of you can get one more person to listen, that would double our audience. Don’t you love how math works?
And finally, if you have questions or comments about the podcast or pricing in general, feel free to email me: [email protected]
Now, go make an impact.
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.
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