Laura Fay is currently the VP Research & Advisory of XAAS Product Management for Technological Services Industry Association (TSIA) and founding member of Health Tech Capital. Laura is a technology industry veteran with over 30 years of experience driving business growth in the enterprise software industry via leadership roles in product management, general management, product development, and customer success.
In this episode Laura, who is a results-driven person and a very successful in driving enterprise software growth shares her perspectives about the role of pricing on subscription-type businesses and the relationship between pricing and product management. She will also reveal the pitfalls that she found out in subscription pricing and how value metric and pricing metric are differentiated.
Why you have to check out today’s podcast:
- Learn the not-so-good strategies that companies do using subscription pricing
- Know the pitfalls in subscription pricing
- Discover what a pricing roadmap is and how is it related to big business decisions
“If you’re going to build a pricing model based on your value proposition, you’ve got to understand at a deep level how the customer is getting value from the solution.”
– Laura Fay
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01:20 – Laura tells a brief background and the business model of TSIA
03:13 – Her role in TSIA
04:08 – How pricing fits with product management
05:13 – The role of pricing on subscription-type businesses
07:13 – Relationship of pricing and product management
08:38 – What companies don’t do well when it comes to subscription pricing
13:35 – Estimated percentage of businesses that will not transition to subscription pricing in the next five years
16:22 – Two pitfalls that Laura sees in subscription pricing
18:58 – The difference between value metric and pricing metric
23:06 – Two stages of the pitfall in timing when product management starts to think about pricing
26:18 – Pricing roadmap and what it means
27:49 – A piece of pricing advice which could impact the listeners’ business
“Understanding the value proposition that’s being delivered and getting into those level of detail of understanding the customer process, how they use the product so that you can start doing that alignment of value and pricing. It’s not something you can turn on a dime overnight once you suddenly decide to do it. So, having a point of view on that earlier in the game and evolving it is pretty critical.” – Laura Fay
“I know the timing thing is only thinking about pricing at the launch phase and not thinking about pricing during the product design, and the offer design phase because they are interdependent. You might choose to move things around and how you put your packages or your solutions together, how you put your product suite together and what features, functions and capabilities and use cases and value go into each element in the portfolio. And that’s going to pose how you price it. But if you don’t think about that until the very end, you’re probably missing an opportunity.” – Laura Fay
“Product managers should be called value managers because ultimately, that’s what their job is. The promise of that value proposition is the promise of the product, and that is to put a value proposition that you’re going to realize when you purchase whatever solution they’re defining and building.” – Laura Fay
“The remit of product management to understand how the customer is perceiving that value that they’re creating and then leverage that in into their pricing design.” – Laura Fay
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Full Interview Transcript
(Note: This transcript was created using Temi, an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)
Laura Fay: You could argue actually that product managers should really be called value managers because ultimately that’s what their job is. The promise of that value prop is what’s the promise of the product was to put the value proposition right, that you’re going to realize when you purchase whatever solution they’re defining and building.
Mark Stiving: Welcome to Impact Pricing, the podcast where we discuss pricing, value and the relationship between them. I’m Mark Stiving and today, our guest is Laura Fay. Here are three things you really want to know about Laura before we start. First, she’s the VP of Research and Advisory for XAAS product management at T.S.I.A. That’s a lot of acronyms, we’ll hear about those later. Uh, she was VP of Product Management at Salesforce, in the early days of Salesforce. This will be fascinating. And she actually started her career as an engineer and moved into product management. Pretty fascinating. Welcome, Laura.
Laura Fay: Thanks, Mark. Great to be here.
Mark Stiving: All right. First off, what is TSIA?
Laura Fay: A TSIA is Technology Services Industry Association. So we are for-profit research and advisory firm, really focused on bringing research insight on operational practices to the technology industry and in the form of proven practices, KPIs, people, process technologies. And My area focus of the course is product management specifically as a service business model. So not just sort of I’ll say product management generally, but specifically, how do you hone and master what’s appropriate and what’s relevant and essential to thrive within as a service model.
Mark Stiving: Nice. How do you guys make money? Who pays you?
Laura Fay: Great question. Our model is a membership model. So companies, enterprises will sign up for a membership of particular research practice, whether that’s X as a service, product management, support services, professional services, suspicion, sales, etc.
So we have a membership fee that enables membership, which gives member companies access to all of the research, the outputs, if you will, of all of the research on an online portal and provides vouchers to conferences that we have twice a year.
And we engage with companies and really kind of honing in on their strategic initiatives and helping them move forward. So it’s really all about access to the data to help them with their models and their planning and their operations, conferences, and outcomes. So those are the elements.
Mark Stiving: That sounds fascinating. And so as we talk about pricing and in particular pricing in the subscription world, you’re going to be speaking from real knowledge, real research as we go through this. That’s going to be awesome. So what do you do there?
Laura Fay: I lead the research and advisory for X as a service product management for that practice. And so my customers are product management leaders in, in the technology industry. So we have a number of quite a sizable membership and growing companies that you would expect to, uh, to participate.
Some very big companies like, like IBM, like Microsoft, some born in cloud companies like service now, gain sight and number of health tech companies. Um, networking equipment companies like Cisco and many, many more.
Mark Stiving: Yeah. It’s fascinating. As a pragmatic instructor, I probably taught every company that you mentioned at some point in time or people from every company.
Laura Fay: I’m sure. Absolutely. I’m sure.
Mark Stiving: Yeah. This product management space is absolutely fascinating. Tell me, I certainly have a strong opinion, but how tightly do you think pricing fits with product management?
Laura Fay: It absolutely fits with product management. I mean, I think, I kind of think of it as, you know, there’s sort of certainly in as a service, right, there’s an essential three-way partnership between product offers and pricing and product management can kind of ignore any one of those at their peril.
But you know, not all organizations are structured in a way that gives product management in the traditional sense, you know, remit over pricing. And I think, you know, as we, as we look at as a service model, those things are a lot more, a lot more interdependent and driving the top line growth of the solutions.
Mark Stiving: I think we’ll likely get into this in a few seconds, but I think what you just said is amplified when you get to the expansion phase of subscription companies.
Laura Fay: Yeah, absolutely. Absolutely.
Mark Stiving: So was that the answer or is there a different answer? If I were to ask you, what is the role of pricing when we think about subscription type businesses?
Laura Fay: Well, the role of pricing plays a kind of an outsized has an outsized influence I would say. And of course, you know, to your point on this podcast, right? You talk about the interlock or interrelationship between pricing and value and at the end of the day and as a service, if you’re not delivering value, quantifiable value, right, tangible value to your target audience, they’re just simply not going to renew and expand the relationship.
So that tangible value, then you start to have a look at the conversation around how do you price that value and we know there’s a whole post a different business models mean market-based pricing is really what, what the majority of the tech industry is practicing today, which I would argue in some cases doesn’t serve them well. Largely because most of it is not market leading pricing, but market following. Right? And we know that that can tend to be a race to the bottom, which is unfortunate in some cases
Mark Stiving: if we’re going to compete on price instead of competing on differentiation and capabilities, then it’s absolutely going to be a race to the bottom. You’re absolutely right.
Laura Fay: Yeah. And you know, the more we, you’ve seen it, right? The more commoditization starts out as a downward spiral, right? You got more entrance to the market. You’ve got companies now who, I really knew when you see companies putting pricing as a differentiator like our pricing is lower than X. We know, you’re really in it, and then probably a saturated, overcrowded and very challenging marketplace.
Mark Stiving: Yeah. There’s probably room for one low price leader in a marketplace and a, and that is not a fun place for anybody to play.
Laura Fay: No, no.
Mark Stiving: So I don’t know why people try. So what I find interesting about pricing and product management and, and subscriptions and all of this is I, I think, and I haven’t figured out how to articulate this well, that understanding pricing and value is what enables a good product manager to say, this is what my products and offers should look like. Does that resonate with you when I’d say that?
Laura Fay: Yeah. I mean, I think about value is really the, you know, the primary thing, right? And then once you’ve got a differentiated value proposition, then you can think about pricing that value, right? Assigning an economic value to that value. But you know, you could argue actually that product managers should really be called value managers, right? Because ultimately that’s, that’s what their job is. It’s the promise of that value prop is what’s the promise of the product was to put the value proposition, right? That you’re going to realize when you purchase whatever solution they’re defining and building.
Mark Stiving: So, Laura, I have to say, I’ve never heard that before. And the moment you said it, I tingled. That was such an amazing statement. Can I borrow that? Can I use it? Do you mind?
Laura Fay: Go for it.
Mark Stiving: Oh my gosh. I thought that was just awesome. Well, let’s talk about the subscription pricing in particular. What companies do? Look, let’s say, what do they not do well when it comes to subscription pricing?
Laura Fay: Well the one that I’ve seen, to me, that’s sort of the most egregious scenario is where companies, I’ll call them traditional tech companies, long-established companies have names we all probably know very well and they are, they decide, they’re responding to the marketplace pressures and pressures from their investor community says, okay, you got to move to a consumption model, right? We want deferred revenue schedules and we want to see recurring revenue growth.
And so you’re going to pivot to that and they say, great, we’re going to pivot to that. Well, what does that kind of, what does that mean for them? What are some of the typical things they do, which are not great? One of them is they take them, the pricing that they had perhaps on a perpetual license, right? With an attached service contract and they said, okay, we’re going to satisfy this and what I mean by that is they basically take the total amount of that contract. Let’s say it’s a $100,000 and an attached support contract might be $20,000 right. And under a cap X purchase by an IT buyer, the total revenue they’re recognizing that first year is about 120. Well, they’ll say, well great, we’ll just turn that into a subscription.
So now it’s going to be purchased with an OpEx from an OpEx budget, but they’re going to include support in that and they’ll basically say, we’ll give you since the perpetual licenses recognized over roughly five years, we’ll just divide that by five. So we’ll give you a subscription annual subscription for $20,000 and what’s the problem with that, is many, are there many, many problems with that? They got no attention to what is the value proposition.
Mark Stiving: I mean that’s not subscription pricing. Just dividing it by five and saying here’s your annual price.
Laura Fay: Well they might change the contract, right? So now different contracts, but the main point actually is right, that you look at what’s the value proposition. The reason they’ve probably done this is that their products are good. Becoming is getting commoditized, right?
They haven’t thought through what is the offer, what is the value proposition associated with this new subscription offering? They’ve basically just done a math exercise and turned a, you know, the pitfalls of course of this are many, right? They’ve basically taken a random price point to a commoditized technology offering with no consideration to the risk shift that’s now occurred, right?
The risk has shifted from the customer to the supplier because now I have to pay attention to and care about customer adoption in a way that I didn’t before. And in many countries, I may have a cloud offering. So now I am taking the expense of the hosting associated with that cloud offers, which perhaps I didn’t before. So I have additional costs, they have additional risk, but I haven’t thought any of that through.
And what is the new value proposition associated with this? So I consider this kind of a bit of a lazy approach and it has actually proved out very well in the, in the numbers and this is where the research comes in where you can, we can look at some of these scenarios and show that they are generally not profitable. So the foundational dependencies for an effective as a service monetization strategy just really haven’t been addressed or haven’t been thought through.
Mark Stiving: Yeah, it sounds to me like it isn’t, it isn’t really a subscription in all the things we think about subscription with customer success and making sure usage grows and it isn’t a subscription, it’s just a contract that we’ve changed the terms of the contract.
Laura Fay: Yeah, I mean that’s right. And it’s essentially what should be in a complete business model shift, right. With all the things you just mentioned there. You know, basically not factoring for that and just making it a math exercise and saying, we’ll give you access to the same stuff, you know, but now we’ll do it annually. Oh, by the way, we go in support as well.
Mark Stiving: Yeah. Quick question. I always heard 36 months as the number instead of five years. Do you see five years? Well, I’m just curious?
Laura Fay: No, I have experienced that over my career ranges anywhere from, I would say three to five.
Mark Stiving: Yeah. Okay. Okay. Excellent. Any other big pitfalls in subscription pricing? That’s a huge one by the way. The transition.
Laura Fay: Well that anyone who’s in transition, that’s big, right?
Mark Stiving: Yeah. Well, I’m sure before you answer the next question, for some reason I’m of this belief, and you can correct me, I’m of this belief that everybody has already transitioned.
Laura Fay: Not True. Nope.
Mark Stiving: What percent do you think of businesses have not transitioned that it will in the next five years?
Laura Fay: A great question, so I’ll answer that in two ways. One, you know we keep a tab on this through an index of companies and a series of annual surveys and the current estimate is that any, somewhere between 30 and 35% of the revenue in the technology sector in general, right. Is, is subscription revenue. There are huge, and obviously born in the cloud companies, that’s a 100% right.
Who tends to get, by the way, more media and air time. So it sort of feels sometimes like there’s more in subscription, but there are some really, really large companies that still get the majority of their revenue from what we’ll call asset-based licensing, right? Perpetual licensing, both hardware and software companies.
So it’s probably somewhere around a third of all of that revenue today is subscription revenue. And that changed the last time, you know, like a… But in the last 12 months, that’s probably, that’s up about 10 points. So it went from literally like the mid-twenties to, you know, round a third over the last year and [inaudible]. So
Mark Stiving: yeah, we’ve had a lot of growth in the last year, but there’s still a lot of doing.
Laura Fay: There’s still a lot to do. And the largest majority of that is large traditional technology companies who are on the journey to as a service. So they may have some offerings and as a service, but there’s significant way to, well, way to go. And certainly a lot of the technology companies in, um, things like industrial equipment and in health tech, they’re a little bit earlier in that transition curve as well.
Mark Stiving: How’s The podcast going? Are you getting value? Research shows the people don’t really value what they get for free, but I’m hoping you’ll prove this research wrong. Please demonstrate to us and the entire world that you value this podcast. Would you please pause the podcast? Subscribe if you haven’t already done so. Rate the podcast and leave us a short review. You’d be doing a huge favor and research shows, if you invest this little bit of time, you’ll probably like the podcast even more. Win-win, pause. Do it now. We’ll wait for you.
Mark Stiving: Now back to the question I interrupted you while you were answering again. Sorry. Do you have another pitfall for subscription pricing?
Laura Fay: So, you know, I kinda think of one and as a service for simplicity is really, really important, right? And anchoring, pricing two things, finding a value metric to anchor to so that what the customer values is the same thing that the company is ultimately gonna make money on. Right. And cause those two things then become aligned.
So one of the pitfalls that we see, and I’m sure you see it as well, is price complexity, right? So you know, we’ve all seen this in B2B, you know, sales needs a PowerPoint deck to explain the pricing model to a customer, right? And you know, the quote to price a B2B solution has, you know, a formula-driven spreadsheet or you know, another example could be is we’ve seen it where you know there’s, you want to have a portfolio of solutions and we want to have certain things to cross-sell, upsell and cross-sell, but it gets to a certain point where you could be, can be viewed as you’re really nickel and diming the customer.
So I think all of these things and there’s a number of examples out there where your pricing is based on, you know, the number of users, the level of feature functionality, the browser platform, the, you know, size of the data stored and so on and so forth. Oh, the number of API calls you to have to make, et cetera. And so those are examples where I think customers often get frustrated by that, but also it starts to muddy the waters on, you know, on just kind of really aligning that value metric to what the customer cares about and driving all factors in that direction. That would generally be my thought process around it and trying to keep it simple.
Mark Stiving: Yeah, I agree completely. Two companies that jumped to mind at opposite ends of that spectrum, I would say Go Daddy has got one of the most complex pricing schemes, everything has all occurred, and then the company that I love their pricing. I love LinkedIn’s pricing. I just think they do a fabulous job because it is so simple for someone to understand and yet behind the scenes, you know this is as complex as heck.
Laura Fay: Exactly. Well exactly right. So being able to, that’s where the real value comes in and being able to keep it simple externally and hide the complexity right behind the scenes and perhaps automate that.
Mark Stiving: Yeah. Quick question. I use two different words, value metric, and pricing metric to mean two different things. To you. Is it two different things to you or is it the same thing?
Laura Fay: Well, I think there’s probably, maybe there’s different terminology I use. When I think about pricing, I think about the pricing model itself and then the anchor, right? And the value metric would be one of the anchors. Does it make sense to you?
Mark Stiving: Yeah. I think I’m with you. I use the word value metric to mean what does, how does a customer measure value? I really like your product because why blank went from blank to blank.
Laura Fay: Yes, exactly the same. The same thing, right? So it is value. What’s the value delivery and then the one example, well there’s probably a few, you know, most of the marketing platforms, I’ll just take Hubspot, as one example.
They, their value metric is the number of emails capture rates. Every marketing executive, they’ve email campaigns or they’ve marketing campaigns rather. And their goal is to maximize the number of contacts that they acquire through those campaigns. And Hubspot’s pricing is aligned to the volume of emails captured. So that to me is sort of, that is a value metric, right? That the pricing is anchored on.
Mark Stiving: Yes. Yes. And so let me, let me give an example. I’d love to hear your opinion because you used to work there, Salesforce for a second, right? I think of Salesforce, if I could say the value metric to Salesforce, it would be a company’s sold more, right? My revenue went up. But I would say the pricing metric that they use is the number of users, number of salespeople on the, on the system.
Laura Fay: Yup.
Mark Stiving: Would you?
Laura Fay: Well yeah, that’s exactly kind of how that’s exactly how they do it. And in terms of the anchor there, it really features function access by the user.
And that’s a very common, as you probably have seen that, right? It’s very common in subscription pricing. It’s actually kind of a legacy holdover from the perpetual licensing days in tech because it was very, you know, you had a perpetual license and, and it was, the volume was based on by the user.
And so now that’s just been sort of moved over into the subscription world. But to your very point, Mike, it’s not aligned with a volume metric.
Mark Stiving: Yeah. I think they’re correlated, which is a good thing. But there, but they’re not tightly correlated.
Laura Fay: That’s right.
Mark Stiving: And there are probably times where it makes a lot of sense to have users as the pricing metric but I do think it’s just easy and that’s why people use it. They don’t think through it long enough.
Laura Fay: Yeah, I think it’s easy and perhaps it’s simple to going back to our simplicity conversation, right? Easy for the customer to understand, easy for the customer to budget, right? I know how many users I have, employees I have and I want to have all those employees on the system so I kind of, you know, it’s going to be predictable and what my spend is going to be, et cetera.
And another interesting thing is that this pricing anchor per user is most typically associated with market-based pricing models in tech, which is really interesting because it’s, as you say, it’s correlated, maybe not highly correlated… With the not highly correlated with the value metric and therefore potentially more perhaps arguably more susceptible to downward pricing pressure, particularly when the category starts getting crowded. Right.
Mark Stiving: Yeah. That’s interesting. You probably do end up with more pricing pressure because of the correlations not as tight there.
Laura Fay: Yeah. Yeah. It’s, it’s more focused on feature function versus yeah. Value.
Mark Stiving: Nice. Hey, not that I’m putting any pressure on you, but do you have one more pitfall for us?
Laura Fay: Another pitfall? Boy, there are plenty, um, you know, I think the timing would be, the timing of, you know, when does product management really start to think about pricing? And I think there’s two, two parts of this to this timing. Then when I think about them, one is in the stage of the company’s growth, right? Um, in the early stage is, well before I say that, so one is in this stage of the company’s growth.
The other one is in the during the value creation process. When do you think about pricing? So in the first, you know, if you’re a startup company and your goal is really to just grow the top line, aggregate users and figure out how to monetize them later, then you’re probably not thinking a whole heck of a lot about pricing except to be, you know, make that as low friction as possible it’s probably below market or it’s, you know, it’s nominal.
You’re not putting a huge amount of energy into that. What our data shows though is that SAAS companies that kind of get over that hundred million mark start to think about how they monetize different parts of the portfolio, specifically the services portfolio that they may be giving away services for free to grow the top line.
So they start to put more energy and effort into pricing. In those scenarios, I would say, I would argue that it’s really worthwhile for companies to start thinking about pricing a little bit sooner than you know than that 100 million marks. So because you want to have a point of view, it’s never too, I’m sure you would agree, it’s never too late to have a conversation with customers and prospects, largely customers, about willingness to pay.
I mean doing that research and understanding the value proposition that’s being delivered and really, really getting to into those level of detail, of understanding the customer process, how they use the product so that you can start sort of doing that alignment of value and pricing. You know, it’s not something you can turn on a dime overnight once you suddenly decide to do it. So having a point of view on that earlier in the game and evolving it is pretty critical.
I see some companies waiting until they’re so much bigger and now they’re, you know, they’ve got companies and customers hooked right on the low-cost drug of whatever their product is and then it’s hard to, it’s hard to change that. So that’s one timing thing I think is a mistake. I know the timing thing is only thinking about pricing at the launch phase and not thinking about pricing during the product design and the offer design phase because they are interdependent.
You might choose to move things around and how you put your packages or your solutions together, how you put your product suite together and what, what features and functions and capabilities and use cases and value go into each element in the portfolio. And that’s gonna pose how you price it. But if you don’t think about that until the very end, you’re probably missing an opportunity.
Mark Stiving: The sad thing is that’s not only true with subscription companies. That’s true with pretty much every company.
Laura Fay: That’s right. Yeah. That’s a universal one for sure.
Mark Stiving: Yeah. Yes, yes. Hey, do you ever use the word pricing roadmap? And if you do, what does it mean?
Laura Fay: I use that to some degree. So when you use pricing roadmap, Mark, what’s, what’s in your mind for that? Cause I think it means different things to different people.
Mark Stiving: Yeah. I think of the fact that let’s say that we’re in the expansion stage, we’re trying to figure out how we’re going to tweak our packages or we’re going to add new market segments. Every one of those decisions that we have to make isn’t really a pricing decision. It’s really a big business decision that we have to make. And, and so there’s a, an implementation that goes on inside our company more than just, Hey, look, I changed the price on this.
Laura Fay: Yes. Agreed. Agreed.
Mark Stiving: And, and so I think of it as how do I let the entire company know what’s happening so that we can go build this just like I would a new product and have a product roadmap, right?
Laura Fay: Yup. Yup. Yeah. And we see that you know, as part of the ongoing governance, right? On the offers on the portfolio, the modeling that goes along with that. And you know, when you iterate it in the market and it all feeds back, this kind of gets back to what I was talking about earlier, which is this, this three legs of the stool product offers and pricing.
And you, you can’t decouple those effectively and have any kind of an effective optimized solution for value prop.
Mark Stiving: Yeah. Yeah. Excellent. Laura, I have had so much fun talking to you, but unfortunately, we’re out of time. I do have one more really important question. What’s one piece of pricing advice you could give our listeners that you think could have a big impact on their business? And you can repeat something you’ve already said if you want.
Laura Fay: You know, I think I would say kind of talking to customers is a big deal, right? There’s, you can do, you know, some spreadsheet modeling, et cetera, but if you really gonna build a pricing model on the basis of your value proposition, you’ve really, really got to understand at a deep level how the customer is getting value from the solution.
And the deeper you go with that, you know, the more articulate you can be about the value proposition, the associated price, you know, should really kind of fall out of that. I mean, if you do have tangible value and you can do essentially an ROI type calculation for the customer on the delivery of that tangible value, you know, the pricing should follow fairly straightforwardly, but it’s really getting to that understanding.
Mark Stiving: I’ll just say amen to that. That was beautiful.
Laura Fay: Yeah, you know, I think one of them, just going back to, I know we’re out of time here, the mistakes, I think some companies, I see them looking at an important data points like historic purchase data, right? To me to, you know, feed that in. But yeah, of course that’s looking in arrears and it doesn’t take into account some of the inevitable biases that exist in that data, like sales ability to communicate value and discounting practices and various other things.
But I think it’s, you know, the remit of product management to really kind of understand how the customer is perceiving that value that they’re creating and then leverage that in the, into their pricing design.
Mark Stiving: Absolutely. Almost every one of my mentoring clients when I asked them about customers and with how they perceive value, almost every one of them don’t do that. They have no idea and I was talking to one the other day, they said, I talked him into going out and calling a bunch of customers and they came back and they go, oh my gosh, I learned so much. That was fun.
Laura Fay: Yeah, it’s pretty amazing.
Mark Stiving: I don’t know how you make decisions without this information, so Laura, thank you so much for your time today. If anybody wants to contact you, how can they do that?
Laura Fay: You could send me an email, Laura.firstname.lastname@example.org or you could find me on Linkedin and ping me that way.
Mark Stiving: Excellent. Excellent. Well, there went episode number 26 okay. My favorite part was valued manager instead of a product manager. I’m a, I’m stealing that one. Thank you so much. What was your favorite part? Please let us know in the comments or wherever you download and listen and while you’re at it, please give us a five-star review. It would help us out a lot. If you have any questions or comments about the podcast or about pricing, feel free to email email@example.com. Now go make an impact.
Tags: pricing strategy, value-based pricing