B2B Product Pricing Strategy

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I’m the host of this podcast show, an Apple top 500 and Forbes top 15 tech podcast. This
program’s sole focus is to define what makes a great product. While it seems like a simple
question, the answers are complex, so I turned to C-VP level product executives and invited
them to host a series of interviews that cover a specific theme of building products, from
maximizing engagement to prioritizing features to encouraging diversity and more.
You’ll hear these product leaders in conversation with peers such as Netflix product VP,
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a time. Are you ready? Let’s hear today’s episode and meet our host and their guests.
Hello and welcome to another episode of Product Talk. This is your host, Nikki Ahmadi, an
engineer dedicated to building products that leave a lasting impact and disrupt the industry.
Join me today as I chat with a fellow product leader to hear their insights and learn from them.
My guest today is Chris Mealy. Chris is a managing partner at Software Pricing Partners. Chris
and his team help B2B software companies build innovative pricing strategies that delight
customers while minimizing risk at every stage of the pricing process.
In his tenure, he’s built and ran a successful SaaS company, software monetization, including
licensing, packaging, and pricing, and has explored the pitfalls of academic-only approaches to
pricing. From small mom-and-pop sales, SMB, to large enterprise software sales measured in
the hundreds of millions. Chris, welcome to Product Talk.
(2:41 – 3:28)
Can you please take a few minutes and introduce yourself for our listeners? Sure. First, thank
you for having me. My name is Chris.
I’m the managing partner here at Software Pricing Partners. I didn’t start my journey thinking
that I would end up in pricing, of all things. In fact, I do remember kind of complaining to my

father about statistics courses and other things.
But I graduated under the computer science degree. Along the way, I started a software
company in the late 90s when I left Ernst & Young. That grew over the course of about 13 years.

In 2008, I hired Software Pricing Partners because we were taking our technology from on-
prem to the cloud. We weren’t really sure what that meant. Software as a service was relatively

new.
(3:29 – 4:41)
AWS and a lot of the service providers didn’t have nearly the structure and influence that they
do now. We wanted to better understand how to put the pricing together. Once I hired them
and realized kind of what was under the hood, that’s actually how I ended up here.
I exited that gig in 2013. One thing led to another. I found myself here at sort of the heart of all
of the revenue models in Silicon Valley.
It’s been a really fun ride. I get to see these companies from the inside out. It’s actually been
one of the most rewarding careers of my life.
Thank you so much for the introduction. Let’s dive right into this series of B2B conversations.
Chris, in your opinion, how can companies formulate their pricing strategies? What are some of
the factors that really go into it? You are trying to craft a strategy to attract a very particular or
well-defined group of customers that we’ll call your ideal customers.
(4:41 – 5:41)
We’ll call that your go-to-market strategy. Often, the go-to-market strategy has been
formulated in the traditional marketing stack where eventually we drive down to a list of names
that we want to fuel a target 100 list, for example, for our sales team or our partner channel. In
doing that, we have to pull those names.
We tend to describe those customers in things that are easily pulled from a database query,
number of employees, revenue size, SIC, industry, etc. The problem with that is it doesn’t really
align us very well to group customers in ways that they are easily seen in a different perspective
as to how they obtain and get value. And how customers get value from your software is
typically from some aspect of using the software.
(5:41 – 6:44)
Herein lies the trap. There’s no database that says, well, can I just pull all the customers that
want to use my API for my new product that I’m launching? It just doesn’t work that way. It
doesn’t exist in a database anywhere.
To formulate the pricing strategy first, and one of the major factors that goes into it is you have

to get really specific about what it is that you’re trying to attract. Because it’s a game of nudging
and incentives and packaging and structures and things that you wrap around this thing that
we call a monetization strategy that’s trying to get these folks. And if they’re not identified
properly as an input, you’re kind of chasing your tail from the beginning.
And in fact, that’s kind of what happened to us when I had my software company. We were
chasing our tails around and around and around. And after six months, I just said, this is
madness.
And I reached out for help because we just couldn’t figure it out. It was too complicated. It’s
actually not that complicated, but if you don’t have frameworks and things to figure it out, it
feels like it’s almost impossible.
(6:45 – 10:50)
Right? Right. And so based on everything that you’ve told me, what are some of the factors that
actually go into this? What are some of the things that companies should consider when it
comes to their monetization strategy? Well, outside of the sorts of customers that you’re trying
to attract, one of the largest decisions that you’ll make is sort of your stake or claim of that
thing that sits in the quantity field of your contract that you decide to count. Maybe you decide
to count users.
Maybe you decided to count hospital beds. Maybe you decide to count transactions or API calls.
And that set of decisions that you make is extraordinarily important.
And in fact, impacts the end valuation that you’ll see of that particular business model. And this,
although I’m describing it mechanically, is also a different way of saying what’s your stake in
the ground as to the claim of value, if you will. And one of the things that we are swimming
around here on this podcast is that so many of these decisions and inputs, if we really think
through them and talk through them today, are aspects of the product’s design.
And so Software Pricing Partners started in 1982. It’s the first software pricing consultancy in
the world. Many of the constructs that you see today, from subscription billing that was being
done in the 80s to fair use policies that was being done also in the late 80s, to things like the
concurrent user model, et cetera, were defined and put out in the market by Software Pricing
Partners.
And one of the things that you are trying to understand along this almost four-decade journey
is that the earlier you make these decisions, preferably before we put the pizza under the door
and get the code back, and the more that we think through the ramifications of these decisions,
the better. And so from an input perspective, all the way back through your marketing and your
messaging, it’s really important to figure out when and how are you going to charge more for a
particular aspect of use of your software. And so on one perspective, we say, you know what,
just write me a check for a flat fee and I don’t really care what you use.

And in that case, that quantity field mechanically is always the number one, right? Just buy it
and it’s all you can eat and off you go. You’ll never make an expansion sale, by the way, but it’s
the easiest thing to sell and the hardest thing to make money on. On the other side of it, it’s
like, well, every time you log in, I’m going to charge you and the meter is always running.
And if you could imagine a product where up in the right-hand corner, the meter was always
running every time you did something in the software, the product experience would be very
different, right? And so all of these upfront things that we’ll be talking through are aspects of
the design and the earlier that you make that decision, the better. And so, for example, if we
decided to count transactions versus users, you could imagine that there’s all kinds of different
things that would hit into the product roadmap to enable that inside the software. And so these
decisions that we’re making are robbing a bit from the bandwidth of our development team,
because they’re going to be responsible for taking the strategy and flushing it into the actual
product for what we call license entitlement management.
And so the factors that also go in at a high level off of these kinds of decisions are also things
like the competitive set. Now, everybody tends to lean forward in their chair when we talk about
competitors. And it turns out that your competitors probably don’t know what they’re doing
either.
And it kind of is a little bit comical because when I had my software company, I was very wired
into what the competitors were doing. And in fact, sometimes use that as a bit of a beacon or a
guide for what we should be doing. And only later did I find out that, well, they were kind of
doing the same thing, right? And so it’s a bit of the blind leading the blind.
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And so competitive intelligence, provided it’s done ethically, quick sidebar, you can’t call up a
competitor and ask them for their price list and you pretend to be a buyer. I mean, you can, you
just have to know you’re violating the US Espionage Act and you’re going to violate all kinds of
federal laws. And it falls underneath unfair and deceptive trade practices, which is triple
damages in the federal courts.
So competitive intelligence done ethically is really reaching out to customers who happen to
run competitor software and asking them about their experience. So you can think of it as just
customer research. And by the way, you want to get the data from them anyhow, that’s the
customers that’s, you know, getting it from your competitor sales rep is just never a good idea.
When you look at the competitive set though, you’re not looking for what they’re doing
mechanically necessarily, as much as you’re trying to understand how their customers view
both the value and the lack of value. And in particular, the friction points in the packaging and
pricing. So I’ll give you a concrete example, Qualtrics and many customers, many software
vendors in the sort of customer experience space, you know, they want to charge you based on
the number of responses to the survey.

And you could academically kind of work through that and be like, well, that makes a lot of
sense. I mean, that’s the point at which you get value. And then that sort of is a consumption
strategy.
And, you know, we could spend a long time across many podcasts talking about all the pros of
that, but at some point somebody’s going to step back. They never do, by the way, but at some
point we would say, step back. And now you’re a buyer at, I don’t know, take one of the big
fortune 100 companies who’s running 20,000 surveys next year.
How on earth are you as the buyer going to understand what your bill is going to be when you
have a variable number of respondents across all of those surveys? And it just doesn’t work.
And so these decisions that we make and the factors that go in, when you’re looking at
competitive intelligence, it’s very important to again, understand the experience, the
customer’s experience off of some of these strategies. And I think sometimes we get really
bound up in the mechanics and the, and the endless discussions and breakout workshops
about how all of this stuff is going to work, but very rarely do people step back and be like, wait
a minute, like how is somebody going to know that number? And if they don’t know that
number, the first thing that’s going to happen is they’re going to perceive a ton of financial risk.
And then they’re going to say, I don’t really feel like buying. Can we run a pilot first? And that
may not be what you want. I mean, it might be what you want, but it may not also.
So part of those inputs that now we’re segueing into is the inputs of the outcomes that you
want to achieve. You know, for example, if the outcome is you really want to do pilots and you
really believe in your land and expand strategy, even though many land and expand strategies
just have a land and there is no expand, but you know, if you, if that was your goal, you could
imagine that the outcome of all of this would be very different than if your goal was like, I don’t
want a pilot, you know, I don’t want anything to do with a pilot. And so part of the factors that
go into that as sort of back from the beginning of the discussion, if you’re trying to nudge
customers in the right direction and you want to nudge them away from a pilot, well, that
would warrant a very different outcome.
And by the way, these are why these black box processes don’t work because what you’re
injecting into the process is your goals and outcomes. And that sometimes means very different
strategies need to be employed in very different types of analyses need to be done. In
summary, you know, the inputs are very broad qualitatively.
And then I’ll just wrap by saying the most important input that you can do, if you happen to
have customer transactions, is that quantitative data. You need to get down in this business to
the SKU level and understand how revenue is flowing all the way down to whether or not I gave
you a special discount or a free month or what exactly happened. And in larger companies, this
is extraordinarily difficult.
I mean, some of our customers have thousands of SKUs. And so you could imagine that it’s a

very complicated picture to put together. But if you don’t, if your end result is to put a bunch of
stuff in a PowerPoint slide, that’s very different than saying, here’s the strategy and I’ve run all
your transactions through this new strategy and here’s the revenue outcome.
And that turns out cannot be done in Microsoft Excel. And so we have some pretty
sophisticated tools that do that. But that’s the idea of one of the factors that go into it is if you
want to be successful, then you better understand how these recommendations impact the
economics of every single deal, whether new business, renewal, partner, whatever, in whatever
country, whatever currency.
I mean, you really got to understand the dollars. Chris, early on, you used one term few times
that I want to explore a bit more. And that term is value.
What is it meant by value-based pricing? And how can companies go about delivering that? So
this is a great, great conversation and a great question. I think that value-based pricing is
largely misunderstood. And what often is interpreted by that term is how do I get the most out
of every transaction, which leads us down a bit of an ethical quandary in the opposite of the
world today that demands transparency on the buying front.
What that ultimately gets us down the road is, well, if you and I were to buy the same thing
from HubSpot, for example, and I don’t have any data on HubSpot, I’m just using that as an
example. So sorry, HubSpot. But odds are, you know, you and I would buy the same thing at
two different price points.
You’d pay X, and maybe I’d pay half X because it was the end of the quarter, or there’s some
other reason, or maybe I just negotiated more, or maybe you negotiated more than I did. And
so value-based pricing rapidly becomes a conversation of, well, if I’m selling this product in
version A, and then I’m going to switch from manufacturing to pharmaceuticals, well, gee whiz,
pharmaceuticals make a killing right now. They have a bigger willingness to pay, so I should
charge them more.
And that’s not value-based pricing. That’s used car sales is what that is, actually. It is.
I mean, I’m familiar with the case study. You know, there is a wonderful case study at Harvard
on Basecamp. And Basecamp did a price test.
And you’ll be surprised to learn that they took a cohort of customers. You’ll be surprised at
what happened. I’m joking.
But they took a cohort of customers, doubled the price, and guess what? Not that many people
bought, right? But nowhere does anybody really discuss, well, all those customers that paid
twice as much, like, what happened? Did they just get taken advantage of in that test, or were
they set right? And so it brings up these just all kinds of issues. And in the world of competitive
intelligence, everybody knows everything. In fact, buyers today will just go to the software
company’s website, see the logos of their customers, reach out to those customers, engender a

dialogue that goes something like this.
(18:27 – 23:04)
Hey there, Nikki, I noticed that you were running XYZ software. We aren’t in a competing
market, but we were thinking of kind of implementing that. And of course, if I’m a brand, Nikki,
you’re taking my call.
And I’m saying, hey, would you mind if we shared lessons learned, and we engender a
dialogue? And somewhere along that line, I say, well, what did you end up getting? Like the
Enterprise Edition? And the whole goal of that whole conversation is to figure out the net price
paid for products and services so that I can tell my team, well, Nikki got a 62% discount. So
guys, you better go get a 63% discount, because there’s no way I’m going to be okay with just a

62. You got to beat that number.
    And this is how that rodeo starts to play. And I think if you’re on this whole trajectory of that
    definition of value-based pricing, I mean, it’s just a world hurt. And I think it’s, and I’ve said this
    before, it’s a lot like, it’s a lot like the 90s style of selling.
    It’s a lot like COBOL, you know, people are still writing COBOL. There’s a lot of it out there.
    They’ll probably will be 20 years from now, but like, you don’t want to be seen writing it, nor is it
    really like that, that much of an attractive career anymore.
    It’s just like maintenance stuff. And I think in this parlance of value, there’s a lot of challenges
    and problems that go along that road. Most specifically is just the aspect of trust.
    You can’t really say that we put the customer at the center of our universe and be okay that
    Nikki got a 60% discount and Chris got a 90% discount for the exact same thing. I mean, that’s
    just not treating the customer fairly, right? So on the other side of value, the other value-based,
    this is the true definition of value-based pricing that says we understand our customers so well
    that we, and that includes their use and how they derive value from the use of our software and
    how they return that value back to their organizations for their customers. And we have very
    sophisticated packaging capabilities to isolate customers into groups.
    I don’t have a million packages, but I have advanced techniques to do that. And that means that
    I can let Chris and Nikki buy the same thing at the same price, but in aggregate across the
    portfolio of customers, I’m optimized to get paid fairly for my value. Such that if Nikki and Chris
    buy the same thing, they earn the same discount.

And that’s really the trick. And that’s a lot harder to pull off than the other definition of value-
based pricing. Thank you, Chris.

And I think this is then a good segue for us into perceived value and really trying to understand
how can companies measure customers’ perception of product value? Well, it turns out that
you can’t, at least not upfront. You can ask people, of course, what you think they’re willing to

pay, but there’s absolutely, positively, 100% no science to that. In fact, the science will very
clearly tell you that that’s one of the most inaccurate approaches on the planet, because we
don’t really know what the value of intellectual property is.
Your AI engine and my AI engine might be two different vectors. And even if I was to show you
a conjoined analysis and an option A and an option B, and option B was 10% more expensive
than option A, so I can get a sense of how you perceive value. The human mind falls into the
very well-documented rat trap of higher price, higher quality, lower price, lower quality.
And of course, this has been known for decades. And so the only real true way to understand
the perception of product value is within the context of the transaction, which means you can’t
really teach pricing as a study, as an upfront thing that we do, and we do it once every three
years. It actually has to be part of the product design.
We have to have mechanisms to have a perspective on our value that we can command. We
have to have an ability to continually understand how that changes, because we have a thing
called a roadmap. We’re not shipping a car.
We have a dynamic product that tomorrow could deliver a ton more value than yesterday. And
in doing that, that perspective that emerges allows us to then test that perspective in the
marketplace within transactions. And that means that understanding product value is that
continuum of, hey, I’ve got some new roadmap items.
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Hey, I think this warrants a list price change or a different calculation of my net prices. Hey, that
warrants us to roll out and gear our organization so we can do that very quickly. Hey, that
warrants us to now have some qualitative feedback, some competitive intelligence, some
customer insights, a review of our transactions in the new world, and compare that to the old.
I mean, it just means we need lots of tools and processes to pull that off. Otherwise, we would
argue you’re largely playing a game of charts and graphs and pretty PowerPoint slides. Pretty
PowerPoint slides.
They can be very pretty, very pretty. Chris, earlier on, you mentioned the scenario where you
got a company that’s got so many different SKUs that they’re working with. Within that
scenario, how can companies keep pricing simple, easy to understand, and effective when
they’re selling more than one standalone product? Well, this is what software monetization’s
goal ultimately is designed to do.
It is the antithesis of an ever more complicated product. As the product matures, we start
bringing in third-party components that have different costs. This Tableau thing might be
licensed by a flat fee plus user that we’re reselling.
This other component over here might be transaction-based, and still this other one might be

on some other basis. We start having more complications and broader configurations by which
we begin to sense as a software company that we could get hurt. The natural reaction to that is,
well, geez, we’re bringing DocuSign in and we’re reselling a DocuSign component here, so let’s
just charge by the number of DocuSigns.
By the time you get to 1,500 SKUs, you’re going to have a price book that’s 100 pages long. The
onboarding process for a new sales rep is going to take a year, and they’re still not going to
understand all of the scenarios of how to price this stuff, let alone communicate it out to their
buyers, their prospects. Monetization at its heart is, how do we mathematically understand the
costs of the decisions that we make to simplify things for the portfolio? Remember value-based
pricing at the portfolio.
How do we make the money that we want across the broad array of customers that we serve by
making those decisions not to make the monetization model on par with the complexity of the
product? That turns out to be very challenging work that you do need tools and modeling and
other things to understand so that you can play that game better. Those that truly understand
that monetization is really the intersection of pricing and selling, and the more that we can
make that description of how the pricing works roll off the tongue in a few short sentences is
absolutely crucial to be able to do five deals in the time that the competitor does one deal. That
intersection of pricing and selling, that dialogue is often missed in these kinds of projects and
efforts.
(26:11 – 27:35)
Ultimately, product teams, I would argue as part of the product design process, need to start
having a purview or bringing in the sales teams into their spectrum so that they understand
that the decisions that ultimately are made here are going to make the sales team’s life a little
bit easier. If I have to, on sales, get past my second or third sentences talking about the Chris
Mealy consumption unit and Nikki, let me tell you how that works. It’s part this and part that,
and then there’s this.
On Wednesday, we do this other thing. After the third sentence of that, we just start unraveling
deals. That is unfortunate because I’ve seen a lot of really great technology not make it as far as
they should because the technology is profound and it’s potentially very game-changing, even
on the humanitarian front, but its monetization model has failed ultimately to make that
intersection of pricing and selling easy.
It sounds easy that we could just simplify the model, but the act is to simplify the model and
make the revenues that you still want to make when you simplify the model. That’s hard to do,
so therefore, if we keep the model more complicated, it’s more accurate. If it’s more accurate,
we don’t get hurt, but if it’s more accurate, it’s more complex, and therefore, it’s harder to sell.
(27:36 – 29:42)

I mean, generating revenue, minor detail, Chris. Yeah, minor detail, right. Chris, thank you so
much for being on the show today.
To conclude our talk, what is the one thing you want the product folks out there to remember
when it comes to pricing and monetization? I think that especially with the pandemic, the shift
of how people want to interact with others has definitely accelerated towards transparency. I
also think that if you truly are in business and you care about your customers, then you really
should treat them uniformly and fairly. When we think about monetization, I believe for those
companies whose customers are at the core of their universe, and many of them are, or I
should say many of them say they are, I would challenge to say that they aren’t really until the
monetization approach has emerged to support that culture and promise.
We’re talking about transparency and treating customers ethically, fairly, and it turns out that
this is not a game of philosophy as much as it is just pragmatic. Over time, there’s an end goal
that can be reached where customers can trust that what’s being proposed to them on the
sales front and what’s being presented in their pricing is transparent, it’s real, and it’s fair. For
those companies in the future, after this pandemic, especially, and in the next five to 10 years,
those that go down that road and choose the gearing to put the structures in place to get that
kind of execution excellence and therefore build that kind of trust with their customers, that’s
the key, they’re the ones that are going to win in tomorrow’s market.
(29:42 – 29:47)
Thank you so much, Chris, for being on the show once again. Thank you for having me, Niki. Of
course.