Impact Pricing Podcast

#384: Price Optimization in SaaS with Nikhil Kotcharlakota

Nikhil Kotcharlakota is a civil engineer by profession. He worked for Electrolux for eight years where he was head of pricing for almost two years. Currently, he is a co-founder of PriceOps, a company that aims to provide an all-in-one pricing solution for SaaS companies.

In this episode, Nikhil talks about how his experience at Electrolux changed the way he looked at pricing. He also discusses about his company, PriceOps, and how they aim to provide a complete, optimized pricing solution to SaaS companies using different pricing models.

 

Why you have to check out today’s podcast:

  • Learn how usage data can be utilized to optimize billing and pricing
  • Discover the possibility of SaaS companies effectively using outcome-based pricing models
  • Learn the difference between per-user model and per active user model and when to use them

“Having the focus on price and getting value out of what you’re offering is a very important thing.”

Nikhil Kotcharlakota

Topics Covered:

01:30 – How Nikhil got into pricing

03:01 – The work that Nikhil’s company, PriceOps does

05:59 – How PriceOps plans to utilize usage data for billing and pricing

07:05 – PriceOps’ biggest challenge: using outcome-based pricing model for SaaS companies

11:19 – The other pricing models that PriceOps is eyeing besides usage-based and outcome-based

12:24 – How PriceOps aims to recommend whether to use per-user model or per active user model

15:12 – What Nikhil learned as he shifted from traditional pricing to subscription-based pricing

18:38 – Why Nikhil loves pricing operations

20:17 – Without execution, pricing strategy does not matter

20:50 – Nikhil’s pricing advice

22:02 – The revenue point at which businesses should hire a pricing person

23:54 – Connect with Nikhil Kotcharlakota

 

Key Takeaways: 

“The best part about pricing is it’s always at the center of the strategy or you’ll get to work with a lot of teams; product management, sales, accounting, finance, I mean, literally every team in the company.” – Nikhil Kotcharlakota

“Companies have realized the consumer is king. So, they’re trying to build an experience for the consumer so they continue to buy the same product over and over again.” – Nikhil Kotcharlakota

“If the operations are not set up properly or if there are no processes for the pricing team, a strategy might be there, but they may not be able to execute on the strategy, which will then result in loss in price or price leakage.” – Nikhil Kotcharlakota

 

People / Resources Mentioned:

Connect with Nikhil Kotcharlakota:

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.)

Nikhil Kotcharlakota

Having the focus on price and getting value out of what you’re offering is a very important thing.

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 direct relationship between them. I’m Mark Stiving, and our guest today is Nikhil Kotcharlakota, and here are three things you’d want to know about Nikhil before we start: He spent a lot of years as the head of pricing at Electrolux, so he’s got tons of pricing experience. He’s currently the co-founder of a startup called PriceOps, and I’m looking forward to hearing what he’s doing. And he is proud to be a dad of a three-year-old with another on the way, which means he’s probably not sleeping all that much. Welcome, Nikhil.

Nikhil Kotcharlakota

Thank you, Mark. Thanks for having me.

Mark Stiving

You’re very welcome. How’d you get into pricing?

Nikhil Kotcharlakota

Well, to be honest, I stumbled into pricing. I was a civil engineer a long, long time ago, then I moved to the U.S. to do my MBA. And as soon as I got done with my MBA, the first job I landed was as a pricing analyst at Electrolux. That’s how I went into it. Pricing was never my focus, but as soon as I got the role and I started working in pricing, I just fell in love with it. The best part about pricing is it’s always at the center of the strategy or you’ll get to work with a lot of teams; product management, sales, accounting, finance, I mean, literally every team in the company. I just learned a lot about what Electrolux does about how pricing can impact the bottom line. I just fell in love with it. I’ve been there for a long, long time.

Mark Stiving

I think everybody just falls into pricing. And so, that was a great, great example or story. It’s funny because – I don’t know ever said this before – I have a Ph.D. in pricing. So, the reason I work in pricing today isn’t because of my Ph.D. Well, in a way, it is. It’s because I was the CEO of a failed company and I had to get a job. And so, I could claim to be a pricing expert. I get a job as a pricing person at a company, and suddenly I learn what pricing really is. It was just fabulous to see the entire scope of pricing as we go through this.

Now, I’m really curious, what does PriceOps do? I take it you haven’t released the product yet from what I’ve seen on your LinkedIn page.

Nikhil Kotcharlakota

Yes, it’s not out yet. We’re actually in the building phase and we’re pretty close to an MVP or a launch maybe mid-January to end January.

Mark Stiving

And what are you doing? What is PriceOps going to do that other systems aren’t doing today?

Nikhil Kotcharlakota

PriceOps, we’re actually building a tool that’s focused mainly for SaaS companies where we provide the entire pricing process in one location, essentially starting with willingness to pay studies, price strategy setting, price modeling, which could be multiple price models that’s out there – and even these are just a few price models – price analytics, and price execution.

Finally, the price execution is providing the APIs and do the websites or connecting with the ERP systems or even connecting with the billing system. So, we are trying to provide this full end-to-end process for pricing and that’s kind of what pays off to do it, especially for SaaS companies.

Mark Stiving

It feels like a big thing to bite off. Pretty big.

Nikhil Kotcharlakota

It is, Mark. And that’s why the MVP of what I call it, like something that we are about to launch has been slightly pushed down the margins just because we’ve been trying to build as fast as possible and spend a lot of time here. But it is a lot. It’s a huge chunk to bite off, but that’s what we are trying to build though. So, let’s see how it goes.

Mark Stiving

So, there are a lot of companies like Chargify, Chargebee. These guys do SaaS billing exceptionally well. They’ve been doing it forever. And so then, they’ll give you your SaaS metrics on the back end. But what they’re not doing is helping you figure out what’s the right price point for your product or what’s the right pricing model for your product.

Nikhil Kotcharlakota

Exactly.

Mark Stiving

And what I heard I just heard you say “That’s what we’re going to focus on.”

Nikhil Kotcharlakota

Yes, absolutely. The price modeling like that, that will be the core engine, Mark. That’s what we are building. And actually, the even better product is as you keep using the product and as the data comes into the product, the idea is we will consume the data and suggest a good price model. Meaning, more SaaS companies today probably use the per-user price or flat pricing to go with, and they focus less on price just because again, there could be several reasons: Lack of expertise, lack of time to go to market, or whatnot. So, per-user is the most commonly used phrase model but what we are trying to provide is usage-based pricing, outcome-based pricing. Even custom pricing, for example, because certain companies do create their own price metric and build a custom model. And so, we are trying to provide that and give us additional information based on the data, say, “Hey, you’re using per-user, but here’s what you could use to maybe make more revenue and more profit depending on what the optimization is.”

Mark Stiving

One of the things I find, the companies who are born in the cloud seem to do really well, but companies who aren’t born in the cloud, they don’t do that much usage-monitoring because I’d often ask them, “Do you have usage data?” And they’re like, “No, not really. I know how many times someone logged in.” And that’s it.

And so, what I just heard you say is that “We need companies who are collecting usage data of different features, different capabilities, so we can then correlate that with the rest of the billing and the pricing that’s going on.”

Nikhil Kotcharlakota

That’s right. To your point, it is if our customers of the companies are figuring out their usage metrics or how their features are being used, then yes, we can provide the best usage-based pricing model or the price level that can optimize their revenue.

We did go down the rabbit hole of figuring out if we can add in a usage-based metering feature, but that’s something that’s going to come down the line. For now, it’s focused on price optimization.

Mark Stiving

And there are so many companies who do that. You just need to get that data. You don’t need to go compete with them.

Nikhil Kotcharlakota

Exactly.

Mark Stiving

Similarly, you don’t need to go compete with Chargebee, Chargify, or Zuora. Let those guys do billing, then we’ll manage the pricing piece of that. That makes a lot of sense to me.

You said a word that excites me, but I’ve never seen it work successfully with the exception of financial worlds, and that is outcome-based pricing. So, can you think of any time when outcome-based pricing works other than a company like PayPal?

Nikhil Kotcharlakota

To be honest, I think that’s where the struggle is. Outcome-based pricing has been there for a while and I guess some folks have used it and want to use it. But where I think it can really help is even in the SaaS world, like even if you take our tool for example, we want to actually go live with the outcome-based pricing model. And I’ve been racking my brain on what’s the best approach. But ideally, we have to define what the outcome is, and be able to measure it. But I think that’s where the challenges are. Depending on the customer, outcomes can vary. Depending on the company, the outcome could vary. So, that’s where a little bit of challenge is. But as a pricing optimization tool, we can provide maybe maximizing revenue or revenue increase year over year. That could be an outcome that we can use.

So, SaaS companies can probably be a great example that outcome-based pricing can be executed. For example, you can take anyone like Calendly and all these organizations software, it’s less about the number of meetings, but maybe how easy it made your life to schedule the meeting. That could be the outcome. However, again, the challenge, of course, comes down to how you measure the outcome and how you monetize it. But I think SaaS companies are a great example. Another one is consulting, just consulting experts, even as a pricing consultant or any consulting management consultant for that matter. When we work on a project, it’s less about the number of hours you put in and more about the outcome of the project that we deliver.

Mark Stiving

Although I agree with everything you just said, I find it really, really challenging. Because here’s the biggest problem I’ve always had: Even as a pricing person. I walk into a company and I say, “Look, we’re going to tweak pricing and you’re going to make 5% of your revenue in additional profit because of the pricing changes we’re going to make.” And so, let’s say that you actually deliver that, and at the end of the next year, you’ve got an extra 5% of revenue that went straight to the bottom line. And the salespeople stand up and say, “No, no, no, that was us, right? We did a better job selling.” And the marketing folks end up “No, no, no. That was our new marketing campaign that we just put in place. That wasn’t pricing.” And so, it’s just so hard to decouple pricing in particular from anything else that I find outcome-based pricing really challenging.

Nikhil Kotcharlakota

You’re spot on. You hit the nail on the head there. There are so many things that can affect the total revenue or even the total price gain. We can launch a new product with a higher price, but that can actually be because the sales team did a great job selling the higher price skew or a model or even a product. So, you’re absolutely right. And that’s where the challenges are with outcome-based pricing. But that’s what I was trying to play around with and use different examples to figure out if that can actually be right. Because I think that’s the next step when you go value-based.

Mark Stiving

If you’re open to some advice, I would focus on usage-based now as you put your MVP up because it’s something that we all see. It’s real, right? No one can say, “I didn’t use more of the product.” And ideally, that is highly correlated with the value your customers are getting with the product.

Nikhil Kotcharlakota

Yeah, absolutely. That is right. And that’s where we are focused on, too, meaning we’ll obviously launch with a few models and usage-based pricing is one of them. Outcome is something that’s almost like a pet project of mine because I’m really interested in that. But that’s something that we are not going to stop the MVP for. So, you’re absolutely right, Mark. And any kind of advice, I am more open. No worries.

Mark Stiving

What other models besides usage based or user based, what other models are you thinking that you’re looking at?

Nikhil Kotcharlakota

Flat rate, of course. It’s like the simplest one, I guess, but flat rate and per active user, or one other thing which we thought about was for persona rate, like depending on the user persona that the companies actually define, there could be a different pricing based on that. Just because different user personas use the product in a different way and they actually extract value in a different way, that could actually be another model as well.

Mark Stiving

The example I would use for that is Salesforce.com. The salespeople probably get a ton of value and sales administrators get value, but nowhere near the value that salespeople would get.

Nikhil Kotcharlakota

Absolutely. And the same thing with pricing optimization softwares, right? Like, pricing managers or pricing teams are probably the teams that’s going to use it the most, but there is product management, there is sales and the CFO is the finance team. So yeah, each one could be price different.

Mark Stiving

Fascinating. So, do you have recommendations? I mean, part of the issue with the software is you have to come back and say, “I’m going to make a recommendation on how to do this.” And so, I’ll just ask you the question. How do you recommend the difference between per-user and per active user? And so, I’ll ask it in the following way: Sometimes per user probably makes sense, sometimes per active user probably makes sense. And how would the software make that an algorithm?

Nikhil Kotcharlakota

That’s something that we are actually trying to again right now figure it out. But the idea is our customer or the companies that we’re going to provide this solution for are tracking that, meaning how many active users are there, and how many users are there. So, as we get that information, we are going to continue to consume it. We will have a revenue target or a profit target to go optimized for, and that’s what we will play around and suggest which ones is better based on the number of customers you have and the number of active users or total number of users, which gives you the revenue in the fastest on the simplest way. Or what is the price point for you? Like, what is the price point at which you can use or you can achieve your revenue target in a per-user model, or what’s your price point at which you will achieve your target in the per-active user model. And so, the idea was to suggest those and see which one makes the most sense for the company.

Mark Stiving

And that assumes we have a revenue target. And I certainly like thinking about pricing from a value side. What’s the value to my customer? How does my customer think about what I’m offering? Because I know that Salesforce.com doesn’t charge a different price for administrators versus salespeople.

Nikhil Kotcharlakota

Yeah.

Mark Stiving

Just down the street per user price. Which, I got to say I used to be a customer of Salesforce.com a long time ago, and I hated that. It made no sense to me that they would price that way because we didn’t get as much value from those people.

Nikhil Kotcharlakota

That’s another kind of a rabbit hole or actually something that we explored. When we actually talk about that, Mark, and again, you’re absolutely spot on is; How do you actually then do value modeling and monitoring value? And I know there are a few companies out there and you have to then connect with them to figure out what’s the value modeling and how you define your value metrics. But once you defined that, then you can say, “Okay, this is your value” and then you optimize for that.

Mark Stiving

You are you are in for a for a wild ride here, Nikhil.

Nikhil Kotcharlakota

I know. I’m looking forward to it and I’m riding it at the same time.

Mark Stiving

We had a very brief chat before we started and one of the things we were talking about was the difference between traditional business and SaaS. What did you learn or what were your big aha moments as you were starting to make this shift from more traditional pricing into subscription-based pricing?

Nikhil Kotcharlakota

The big aha moment as I said, there are a few, like 1) the biggest aha I see is how the skills are transferable between traditional to SaaS. I’m a big believer that pricing is a mindset. So, when someone works as a pricing analyst, pricing manager, whether it’s in the traditional role or one of the subscription or SaaS business, it’s a mindset that you develop where you’re focused on working with different parts of the company, learning what they do, learning what the product is and what value the product delivers to the customer, and then come up with the price point. So, all this skill set, the soft skills that we can learn through the jobs here, I think that’s a skill that’s completely transferable between traditional and SaaS. So, I think that’s one of my major ahas. There’s a lot of skill set that can be transferable between the two.

There of course are major differences as well. Like what are the different pricing like? SaaS has different pricing models, right? We talked about – it per user, or active user, usage-based, outcome-based, and so on, which obviously don’t exist in a traditional setting. It’s mostly per-unit. I know some companies are getting into subscription, but again, it’s per unit pricing and it’s completely different to the SaaS side of it. But again, those are some differences. The reporting is very different. You do it per SKU. Here in SaaS, well, of course, there’s a lot of metrics that can tell you whether pricing is effective or not, like meter retention, the churn, ARR, MRR. There are so many metrics and insights that those metrics can provide in SaaS.

Mark Stiving

When I made the transition – I shouldn’t say transition – but when I made the leap to learn about it, I would say the single biggest learning I had is the title of my book: Win, Keep, Grow, and that is that we’re managing three revenue streams, not one revenue stream. And traditional, it’s always “We got to go win new customers, got to go with new customers, got to go with new customers.” And as soon as we go to subscriptions, “We better keep our customers and we better grow our customers.”

Nikhil Kotcharlakota

Yeah. And one other shift I have actually seen is my journey at Electrolux as well, and some of the other companies, even on the traditional side and manufacturing side, they’re now focused on the customer experience. Like from the lifecycle of when the customer comes on board, or a consumer for them, through the time where they actually go buy another product. Because what’s happening there too is companies have realized the consumer is king, right? So, they’re trying to build an experience for the consumer so they continue to buy the same product over and over again. So, actually in a traditional setting too, the key piece can be a very key revenue metric, like how do you retain customers because customer lifetime value is going up and so on. And so, I think again that there are definitely similarities and differences there.

Mark Stiving

I think the keep in a traditional business really depends on how often someone buys a product from you.

Nikhil Kotcharlakota

Right.

Mark Stiving

Because if they’re not going to buy, then every five years, you’re probably like, “Okay, it’s just a new purchase decision after five years.”

Nikhil Kotcharlakota

Yes.

Mark Stiving

You also said, “I want to talk a little bit about pricing operations.” Why do you love pricing operations? I used to work with pricing operations teams. I get it. And they’re very valuable. Very useful. But why would you want to talk about them?

Nikhil Kotcharlakota

What I felt – again, this is more in the last ten years in my role in Electrolux and different things I have learned – most focus is on price strategy. Because that’s very important. That’s a very key part of the company strategy, having a price strategy. But where I see a lot of companies struggle or face some difficulty is actually going and executing that strategy. If the operations are not set up properly or if there are no processes for the pricing team, a strategy might be there, but they may not be able to execute on the strategy, which will then result in loss in price or price leakage. And I’ve seen this happen. I’ve learned it firsthand as well, and I figured out the importance of that operations piece, having processes, having a good set of operations to go execute in the ERP systems and so on. So, I think that’s where my love of operations comes from, because I see the importance of operations to go execute on the strategy.

Mark Stiving

I agree 100%, price execution is really important. And typically, what we would do is we would be watching scatter plots of deals that come through. We would find the deals that are way out of the norm, figure out what caused it, see if we can tweak our processes to fix that, whatever that happens to be. Or we say “That was a good decision.”

Nikhil Kotcharlakota

Exactly.

Mark Stiving

And we’re watching ASPs. But you’re right. Pricing strategy is fun and interesting and hard, but without execution, it just doesn’t matter.

Nikhil Kotcharlakota

Exactly. And that’s what I see: A lack of focus as well for certain companies lately. And I spoke to a lot of them. It’s like when you see that their focus is on strategy, but operations get neglected just because it’s operations and it’s a little tedious to do, but I think it adds a lot of value.

Mark Stiving

Oh, and we know what 1% adds, right? It’s a huge number. Operations can easily drop a percent or two just from not doing a good job.

Nikhil, we’re going to have to start wrapping up, but I’m going to ask the final question: What’s the one piece of pricing advice you would give our listeners that you think could have a big impact on their business?

Nikhil Kotcharlakota

Well, there’s a lot. I think, one, having a pricing team, dedicated pricing team that’s focused on executing your pricing strategy and going one step further, having a pricing strategy in itself, I think those are the two very important things. And even for early-stage start-ups, right? Sometimes, folks forget like, “Okay, early-stage startups, create a product, go to market, offer it for free.” But they’re essentially leaving a lot of value on the table, lot of money on the table. So, I think having the focus on price and getting value out of what you’re offering is a very important thing.

Mark Stiving

I think that’s great advice. Now, you happen to be a pricing expert or at least aficionado, as you said. And so, I’m sure you haven’t hired a pricing person in your company yet.

Nikhil Kotcharlakota

Yes. But I mean, because I’m still there. Yes.

Mark Stiving

Well, but here’s the question. At what revenue point do you think it makes sense to hire a pricing person? And by the way, I’m not trying to put you on the spot. I’ll share my answer after you get done.

Nikhil Kotcharlakota

To be honest, it’s difficult to say, Mark. Like, what’s the revenue point or whatnot. But just to simplify, you try categorize companies in such a way, maybe even if it gets to a $2 million or even a $5 million, for many of our standpoint, you’re already getting to a point where you’re leaving money on the table. I think maybe that’s when someone should start thinking about having a dedicated person or a team focused on pricing. But again, it really depends.

Mark Stiving

Yep. Well, let’s go through the math real fast. If you’ve got a $5 million revenue company, and let’s say that by focusing on pricing and value, you could boost 5% of that revenue, which doesn’t change your costs. So, it’s $250,000, which would easily pay the salary of a pricing person. I think the problem we have at that point is that the pricing people who join $5 million companies aren’t the best pricing people. They may not be able to get that $250k. And there’s so much demand for pricing people nowadays. But I don’t disagree with the process at all. What I tend to see is a company’s probably 50 to 100 million before they start focusing on pricing. Which is probably too late.

Nikhil Kotcharlakota

Yeah, exactly. I think that’s where you’re right. And that’s the reason why a lot of companies – and I spoke to a few recently as well – they don’t publish their pricing on their Web pages and whatnot because it’s easier for them to then make a deal offline and not worry about what’s the impact of pricing for them for their bottom line.

Mark Stiving

Awesome. Nikhil, thank you so much for your time today. If anybody wants to contact you, how can they do that?

Nikhil Kotcharlakota

They can contact me via LinkedIn. Pretty active there.

Mark Stiving

Okay. And we’ll put your l your LinkedIn your URL in the show notes. And my guess is you are the only one with your last name. So as long as we spell it right, we’re in good shape.

Nikhil Kotcharlakota

Yeah, absolutely. Thanks a lot for having me.

Mark Stiving

Oh, you’re very welcome. And to our listeners, thank you so much for doing your job listening. And if you enjoyed this, please leave us a rating and a review. The easiest way is to go to ratethispodcast.com/impactpricing. A person named Sarnblad on Apple Podcasts figured out how to leave a review and said:

“Pricing genius. I started listening to impact pricing after meeting Mark at a conference. It takes a special kind of brilliance to have a vast knowledge of your subject and still be able to break it down so that it’s simple enough to be both understood and instantly useful. Thanks, Mark. I will keep listening.”

Thank you, Sarnblad. And the check is in the mail. No one ever writes that nice things about me, so I appreciate it.

And finally, if you have any questions or comments about this podcast or pricing in general, feel free to email me at mailto:mark@impactpricing.com. Now go make an impact.

Mark Stiving

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

Mark Stiving

Don’t forget to attend our workshop. “How to Fearlessly Raise Prices Now” go to impactpricing.com/rpn.

 

Tags: Accelerate Your Subscription Business, ask a pricing expert, pricing metrics, pricing strategy

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