Better Done Than Perfect

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Hello everyone and welcome to Better Done Than Perfect, a podcast for SaaS marketers and
product people. Today our awesome guest is Chris Mele, the managing partner at Software
Pricing Partners, and we’re going to talk about software pricing design today. This show is
brought to you by Useless, an email automation platform for SaaS companies.
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On board, engage and nurture your customers, as well as marketing leads. To follow the best
practices, download our free printable email planning worksheets at useless.com slash
worksheets. Hi Chris.
How are you, Jane? Nice to see you. We’re so excited and honored to have you here because
you’re one of the most qualified people in the world to speak about software pricing, probably.
So for those who are not familiar with your company, what do you do and why it’s historically
important? Well, so it is exclusively B2B software oriented.
So we don’t price, as we call them, the movie planes, trains, and automobiles. And so it’s all
intellectual property, which is a key word for us because it’s not just the product, it’s also your
services. And the firm started in 1982.
So prior to that, there was no such thing as software pricing. So it’s the fourth decade. I’m not
that old, so I wasn’t here the entire time, but I did have a software company in the late nineties.
I was working at Ernst & Young at the time. We started an on-prem software capability. And in
08, during the market crash, we decided to replatform, move to the cloud, and we hired
software pricing partners to help with our monetization strategy.
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And that’s when I learned how many mistakes I had truly made in the product design function,
which was 100% devoid of anything pricing related. It was just all product design. And that was
the big journey.
And that’s also the big journey with our clients is to understand how to design products around
their packaging and pricing and the manner by which you want to charge for the use of the
software. Who is your ideal customer, that company that can afford services like yours to
optimize their pricing and why it’s a worthwhile investment, like why they should do that? Well,
the ideal company is a mix. So we have a fair amount of publicly traded software companies.

We have a good chunk of what I would consider just high growth, 20, 30, 40, $50 million
companies who are trying to get onto their IPO track, if you will. And then we have a good mix
of smaller companies that most are private equity backed and a handful of them are
bootstrapped. And I think when you get into, so I bootstrapped, I had, we don’t have video
here, but in the late nineties and in the early 2000, I had hair that was maybe three times as
long as yours, Jane.
And the reason for that is I could not afford a haircut. I was literally eating generic cereal for
real. And it was very, very tight.
And during that process and the bootstrapping, if you had asked me to invest money into a
pricing strategy, I probably would have laughed because that would be silly. Even though I now
know that that would be probably one of the better investments. And you ideally want to invest
in the science behind making money somewhere after you’ve gotten into product market fit
and are probably approaching a lot of people call them beta, but I prefer to call them early
access programs.
A beta program means it’s free and I have to give it to you, Mr. Or Mrs. Customer for free in
exchange for you, the pleasure of you gracing me with the usage of the software, which you
rarely do because you didn’t pay for it. And early access is the exact same thing as a beta,
except we’re testing price. We’re saying how hard is it to extract a $10,000 deal, a hundred
thousand dollar deal, a million dollar deal.
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You know, how are we going to gear the business? And we want to exit early access with a good
product market fit. And that’s basically what we did. We had $2,500 software and lo and behold,
at the average sales price was more like 450, 500 grand when we got into the enterprise space.
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And that was kind of the journey. So I think if you’re, if you’ve reached product market fit and
you’ve got some science behind how you want to make money and you understand that how
you go about making money for your intellectual property products and services needs to
change and iterate very quickly in that stage is really key versus if you’re high growth, maybe
you iterate the model quarterly. And if you’re publicly traded, maybe yearly, it just depends on
how often you’re putting out product and how often you’re creating more value.
So we see lots of SaaS websites, they have their pricing page in place. You see the first like
couple tiers in the range of, I don’t know, one, two, three, four or $500. But what’s hiding
behind the enterprise plan, the enterprise sales and what problems companies are facing

behind the scenes, like being approached by a large account, having to scale their pricing non-
linearly and other things that just not in the mindset of a very early on founder.

Well, most of the time what hides behind the enterprise edition and maybe even the first two

editions that you’ve attached a price point to is likely chaos in the form of maybe your list price
for that package is, let’s say, $10,000, but you don’t get anywhere near that. And in fact, you’ve
sold it 10 times, let’s say in the last month, and you’ve sold it everywhere from $50 all the way
up to $9,000. And so that chaos, the inability to predict where the net price is being extracted
and your inability to extract a consistent net price is actually the thing that’s going to hurt you
the most.
And I really did lose millions on that, Jane, in my journey because we are all onboarded into the
software world in a product market fit orientation. When I was onboarded, you just built it and
they came. And then later product management became this wonderful discipline.
We have MVPs and all these other frameworks we can use. And it’s the same thing with
monetization. The earlier that you can get the revenue stream baked and a little bit more
consistent and predictable is just the better.
And often what happens is in the chaos as you grow, sort of like you said, tucked behind the
enterprise edition, for me, what happened was I had a summit for all of our largest customers.
And there was a woman named Judy, and there was a gentleman named Brad. And Judy and
Brad had bought the same thing from us.
Now we had an ERP system. So there was a bunch of different modules. So I said, you know,
what are the odds that some are going to have the same exact configuration of the modules?
Well, it turned out they did.
We supported, you know, six different design systems that we would ingest the bill of material
of what was designed and then blow that through sales and purchasing and shipping and
receiving. So what are the odds that they would have the same design system? And well, it
turned out that they did. And then they could carry any number of like over 100 catalogs and
interior and exterior products.
So what are the odds that they would have the same catalogs? And lo and behold, they did. And
then finally, you could interface with 40 different accounting systems. So what are the odds that
they would both be running QuickBooks? You know, oh shit.
And they did. And one paid 2x the price that the other only paid x. And they compared notes.
We were at the place in Charlotte called the fast, it was called a fast track summit or whatever.
And it was in the Charlotte Motor Speedway. And we all get to drive and experience the Richard
Petty experience. And everybody’s having a blast and everybody’s bonding.
And I got out of my car and I took my helmet off and I saw Judy and Brad there talking and Judy
looked up because she was the one that unfortunately paid 2x. And when I met her eyes, I
knew that we would never have her as a customer again. And that really was a big wake up call
for me.

And so in the chaos behind the scenes, is your brand, and it’s your philosophy of how you want
to treat customers. And I would say that in general, most software companies put their
customers at the center of the universe, as we often do. And then I would just gently challenge,
well, if, you know, you and I, Jane Komen, and buy the same product, and you paid twice what I
did, how pissed off would you be? And if we compared notes, how upset would you be? And
then, am I, are we really having the customer at the center of the universe if we’re kind of
taking advantage of them on price? And that doesn’t mean that we’re malicious about it.
It’s just that tucked under the chaos is exactly what happens. And over time, I see wonderful
companies, brands get destroyed. And as they get destroyed, the symptoms that occur is the
buyer says, you know what, I’m going to stick you through an RFP because I don’t trust you.
The buyer says, you know what, I’m just going to buy at the end of the quarter. And then all of a
sudden they say, you know what, I’m just going to buy at the end of the year because I know
I’m going to get a ridiculous discount. And then these ecosystems emerge that are really
dysfunctional.
And all of a sudden, we’re trying to move product and we should be closing in two to four
weeks. And it takes three months to close a deal, right? And so these inefficiencies is what’s
really hiding underneath that enterprise offer. And there’s a lot in there.
And there’s a lot of reasons for that. And there’s a lot of dysfunction. And it all sources back
from that simple concept of it wasn’t designed.
It wasn’t designed upfront. It was made up. So what can we do better? How has your own
knowledge about pricing changed since you ran your own company towards what you know
now? Well, anytime that you are launching a new product or service, and this might be the
market where a lot of new offers are coming into fruition, you want to first have some system
or process or function that gives you a perspective on your price.
And so I would tell you that over the decades here at the firm, the biggest lesson learned of
them all is customers really aren’t interested in paying you anything more than slightly under
your costs, provided, provided, provided that you will answer the support line and support their
investment. And so they don’t really care how much money you make. And they really don’t
care about your cost structure or any of those things.
And so if you put the customer at the center of the universe and what they say rules the roost,
just know that you’ll never get paid fairly for your value. So you’re going to need some manner
by which for you to understand the competitive set, not to copy competitors, but to understand
the market, its ecosystem, the alternatives. Sometimes the biggest competitor, by the way, is I’ll
just go build it myself, right? It’s not even another named entity.
And so you’re trying to get a perspective of what you’ve built and your value. And early on,
that’s really hard. And you just have to know that early on, when you develop that perspective,

it’s going to be wrong.
And so it has to be validated. And then you have to iterate very quickly. And then for those
companies, and by the way, this is why you don’t copy your competitors.
Even if they have similar features in yours, you just don’t copy a competitor’s pricing. You need
to understand what is in the evaluation set of the buyer, but you don’t ever want to go look and
see what the competitor is pricing and go figure out how they’re pricing and how they’re
packaging and copy that because it’s not going to work. Every model that is built, every
monetization design carries with it a blueprint of risk.
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And so when you copy somebody else’s blueprint, you copy their unknowable blueprint of risk,
and that might be really bad for you. That might not even work for you. It might not even be
sellable by your sales team, right? So you really want to develop this from the inside out, not
from the outside in, from the inside out.
You still want to get outside inputs to help validate, but this is you developing your perspective
because you get what you demand in the marketplace. And the second piece is everybody
wants to value-based sell. So let’s define value-based selling.
Value-based selling is getting paid uniformly, fairly, and consistently for your value. Value-based
selling is not, Jane is really under the gun right now and she has a little bit bigger budget than
Chris did. So Jane is going to pay a lot more for the software this week that I just sold exactly
the same thing.
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That’s not value-based pricing. That’s used car sales, right? That’s completely different. And you
can still do that.
You just know that that’s a friction-filled nightmare at scale. So value-based pricing, it means
that you better be able to enumerate, list out your value, right? Like what value are you
providing through your products and services? And you would be amazed, publicly traded
companies, privately held, bootstrapped, across the board, cannot enumerate their value. They
don’t have it.
So they can’t equip their sales team with it. And I think when you’re selling your software, often
people demand that the salesperson has to be tougher on price, which I think is a real
disservice to salespeople because often what is really wrong is the model. And it probably has
to do something with packaging.
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And so, for example, if I give you an all-in inclusive business management solution and you

show up and say, I love this, this is great, but the thing is, I’m not going to use the API layer and
I’m not going to use the enterprise reporting. And I already have an accounting system. So I
don’t need your built-in accounting system.
I’ll close today. I’ll write you a check, but I need 40% discount because I’m not going to use 40%
of the software. So defending price, price point is not being tough on price.
It’s having really good packaging that is harmonized with what the buyer wants to take down.
And as soon as somebody shows up with a partial use argument, that’s like the ninjas to your
sales team. I mean, they’re going to get decimated because a partial use argument creates
empathy and a salesperson never, they want to build a good case referrals, et cetera.
And at least when I was selling, I sold everything from tens of millions of dollars of software all
the way down to $19.99 a month. And I’ve also raised a lot of capital and I understand those
dynamics very clearly. And I can tell you that you build empathy and relationships.
And if somebody showed up with me and said, they’re not going to use half the software, they
weren’t being malicious. They just literally weren’t going to use half the software and it wasn’t
right to charge them for the full road. So guess what we did? We would discount to handle that
scenario.
So put another way, we would discount because the packaging was poor. Now there’s lots of
reasons that people discount and it’s not always because the salesperson sucks. It actually has
more to do with the fact that the company didn’t give a good monetization design to make the
sales team or the partner successful.
In fact, 99% of the time, that’s the case. Now I’m not saying salespeople aren’t driven by price in
some scenarios, and that is the weakness of many of us in sales that have to learn how to
navigate through that. But often there are many other things behind the scenes that really
haunt you when you’re trying to move product in the marketplace that have little to do with the
negotiation process and much to do with how you put the design together, the monetization
design.
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I have a value-based question and that is going to be based on the example of our own
company, Useless, which is an ML marketing platform. And like many other ESPs out there, we
help our customers manage their customer relationships. But among our customers are SaaS
companies, which are B2B, high-value, each unit, each customer is worth thousands of dollars.
There are B2C companies, and the LTVs are way lower. And there are freemium companies who
just churn over thousands, millions of users every month. And obviously they don’t really have
the same value perception for the same exact activity.
Sure, in the ideal world, the freemium companies should have an understanding that this is

their marketing expense, but that’s not usually the case. They’re like, oh, we’re freemium or we
haven’t even started monetizing yet. We’re not getting any revenue.
You’re too expensive. And then a B2B company can have 100 users inside Useless, have
amazing results from their automation. And sure, some analytics companies attached to
revenue, they have a luxury of being attached to money.
So they have a more direct relationship and understanding who they are serving. We don’t, and
many other companies don’t. So what do you do with this kind of diversity in your customer
base? Well, the question is what groups of… So we call these customer classes.
They’re not customer segments. They are conceptually, but they’re not an SIC. They’re not a
firmographic.
They are groups of customers who take down values similarly. And I’ll give you an example.
Let’s say we have a client that serves heavy equipment rentals, and we have a client that serves
that same software over the years attracted wedding planners.
It’s inventory management software. And if you look at the similar needs, if I have a big old
forklift that’s taken in thousands of dollars of rent each month, well, it’s going to be rented for
many months at a time. And inventory management is like really important to me, right?
Because that is a big revenue generator.
Well, if I’m an event planner or a wedding planner, I have an unbelievable… I have thousands of
pieces of parts, chairs, candelabras, tables, et cetera. And I turn that stuff like really quickly. So I
share a very similar value extraction there in the need to track my inventory, know where it is at
all times, and of course, rent it out just in shorter intervals and a higher velocity of those
intervals or higher volume of those intervals.
And so if we showed up to the party and said, well, you know, wedding planners are completely
different than, you know, heavy equipment renters and forklift operators. At least they have
different names. In our case, it’s the same exact SaaS person just working in slightly different
models.
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Well, the question is, are they doing exactly the same thing in the software and extracting that
value in exactly the same way? And I don’t know unless we dug into the details, but often you
can find some differentiation there for how they’re using the product or how they’re organizing
their workflows around their product or something that might spawn the ability to have a
different offer for that group of customers, a slightly different offer. Now, if you can’t find that,
and they truly are the same person B2B and B2C, then you might hunt back and say, well, what
is the manner or the basis by which I’m charging for the software? And so if I, let’s say was
charging for my software based on location, just, I’m going to charge you based on the number
of physical locations that you have in your hospital, for example, then by definition, I’m saying

all locations are created equal, but they’re not right. Cause we know in healthcare, some
locations are open 24 by seven, like an ER, some locations are open Monday, Wednesday,
Friday, because they’re a satellite office and a County outside of the major city.
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And the list goes on and on and on. So right away we know, Hey, there’s probably something
different about the locations. Now this isn’t packaging.
This is what we call licensing. This is how do you gear the model? And in 1982, we invented the
framework, the concept of a licensing metric, a value metric, like what is it that goes into the
quantity field of the contract? So maybe on the number of, I don’t know, the basis chain for
what you’re charging and the number of emails or the number of users, you know, that may
not be the right call. In fact, we know in many cases, if you’re not in sales enablement, charging
by users may not be the best option there.
It might have to go into this word that everybody throws around called consumption, which I
hate. And consumption is really not a bit flag. It’s not like something we do.
What we’re really trying to figure out is what are the range of quantities? So let’s rewind and
say this idea that, that, that you might charge for the use of your software. You know, we’ve
known about this for decades and obviously you’ve created software and services for a reason,
and your customers are going to use them. So when we started out early and, and everybody
was, for example, tethered to an ethernet port, we knew that it was CAD and engineering
software and we could charge you 60 grand for that license.
It was a single CPU. You couldn’t even pick up the machine and move it for fear you’d bust your
back. And you were tethered literally to the wall with an ethernet port.
And so that model worked great, right? Then some smart aleck came out with the network,
right? So now all of a sudden we can walk around the office and, and then somebody came out
with a network license server. So now all of a sudden charging on a user basis and getting 50
grand a user was virtually broken overnight because all of a sudden companies could dish out a
license on the network. And so if anybody is listening and remembers those days, it was called
the concurrent user model.
We would charge based on the number of people who would access the software at any one
given time. So think of it as a pooling strategy. You have 50 users, but there’s only ever going to
be 10 people using the software at once.
You buy 10 concurrent user licenses. Not many people know that that was invented by software
pricing partners. That monetization strategy was invented by software pricing partners.
And it was over top of FlexLM and some of the technical capabilities of the licensing managers
at the time, which basically disrupted that journey. Now, the reason I’m bringing this up is what

we are talking about is what is in the quantity field of the contract and what are the ranges of
deals that we like to see? Now, prior to that, a lot of this was just all you can eat. You pay a fee
and you use it all you want, right? Because that was the model in this example, before the
network licensing servers came out.
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Well, then as things evolve, right, the model and the ecosystem and the markets, they have to
evolve also. And so when we think about not charging all you can eat, because that’s just taking
down all our value, well, now we have to charge in some manner to take down value. And early
on, Salesforce did a user model, a lot of people kind of copied that.
So consumption and usage base is just a fancy way of saying, if I’m going to count every time
an API fires, and the range of quantities are 1 to 100 million for my customer base, hey, don’t
be surprised when you try to put a bid package together. And somebody can’t estimate that
number, because they have no earthly idea how many API calls they need in the next year. Well,
that’s a very different model, very different sales motion, you know, and that model, you’re
gonna have to pilot and do all kinds of other stuff in the sales motion.
That’s a very different model than I’m going to charge you by users, because why have 500
employees, you’re not going to sell to all of them. So I kind of know what that’s going to look
like. Now, on this model, where I know what it’s going to look like, and maybe the range of
quantities are 10 to 200.
Well, that has a certain economic reality to it in the form of your valuation and your revenues,
the API model, right, or maybe something even lower level than API, like every time we fire off a
PHP worker or something in the guts of the software, all of a sudden, you know, we would
imagine we’re going to be sitting in Mexico sipping margaritas, because we’re going to retire
multibillionaires, but like, you can’t sell it. So consumption and usage base charging for the
value that this idea that I have two different groups of customers using the software very
differently, can often be solved by picking the right way to gear the model by picking a slightly
different license metric, that basically accumulates a different amount of list price for that kind
of usage. So for example, if B2C was spawning emails by the gazillions, and somebody else was
spawning emails, you know, by the hundreds of 1000s, well, now all of a sudden, we have
something that might right size the ship if we have appropriate volume incentives.
Or maybe there’s something else in the software that you want to look at the use, which is a
better surrogate of that, a replacement of that. And often what you can count, we would
recommend needs to be in your purview. You know, it’s not really a great model for me to
charge you as a percent of your revenue when your revenue, I’m not a billing system doesn’t
flow through my software, because I can’t see it.
I can’t measure it. I can’t monitor it. I can’t bill for it gear for it.

It’s a mess, right? I have to call you up and be like, Hey, what was revenue last month, you
know, it would be a really messy model. So licensing packaging, and then the price points that
we attach to that is the science behind addressing these problems that you’re having. And, and
my big lesson learned was there are real frameworks, and they’re different.
They’re not marketing frameworks, they’re not buying personas, they’re not you don’t show up
to the table with marketing, content driven frameworks for monetization related problems, you
need a different set of frameworks, a different set of thought process, a different way to bring
those things together and solve it. And there’s enough to be dangerous to read on our blog,
where you can learn to do it on your own if you’re earlier on, but at some point, what you really
want to do is do a nice, comprehensive analysis of the options of how you’re going to license
and package, and the appropriate modeling for what kind of revenue would be generated, so
that you get comfortable that the strategy has a bogey that you’re shooting for. And then when
you roll out that change, if you don’t have that bogey, that this is a 2 million upside this year,
you’re never going to know if it’s working or not.
And so you asked earlier on about price testing, you know, this isn’t B2C. I don’t, I do not
believe that. And our data from, you know, Stanford, MIT, Harvard, it’s all the same, you know,
people don’t know what they’re willing to pay for software.
So asking them in a survey is bogus, it’s completely not reliable, and it can lead you down the
wrong direction, because software is an experienced good. And unlike a car, it’s not going to
buy a car and be like, Oh, my God, this can cook my dinner. This is amazing.
You’re going to buy a car, you know that you can transport yourself coast to coast, you know
what the use case is, you’re not going to fly in it, right. But like, if you get into software, I show
up to the party, and I have 100 widgets in the back, and those are called my workflows. And I
know that you can help me with 100 of those workflows.
So maybe I’m going to pilot out 50 of them, or maybe I pilot all 100. But then I experienced your
software, I realized, Oh, my goodness, there’s actually another 100 workflows in the back, I can
use this for. So my willingness to pay at that moment after implementation, and long after I’ve
been onboarded, is very different, very different than it was at the initial sale, because now I
have experienced all that you can do for me.
And we call this operational entanglement, when you start to entangle your software into your
customers, business systems and workflows, and really penetrate into that account, you you
become sticky, you become necessary, required, you’re into let’s say, the field cruise, etc. That
monetization strategy can stimulate that, right, so that that customer lifetime value just lasts
forever is what everybody’s dream is. But getting that right is very difficult.
And getting that sort of strategy built is kind of what it’s all about. And my, my final comment is,
when you when you look out in the ecosystem of the alternatives, and you see how somebody
else’s pricing, what you don’t understand is that that might be version 73 of their monetization

model. And so here you are on the equivalent of version two or version 10.
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And you go out and copy a version 73. And there’s that template of risk and that whole time
dilation problem that you’re and so what happens a lot in our industry is people go to HubSpot,
and they go take an Atlassian and all these other ones, and they take version, you know, 643 of
the model. And they play it back and say, well, they’ve been doing this forever.
And so therefore, it’s, it works, right? Like I was, I think the 48th customer of HubSpot when
they first started when I had my software company. And guess what, they charged me a flat fee
of $35,000. Right.
And then when they bought performable, I paid another 20 grand on top. And then they
decided that, you know, they were going to charge based on the number of contacts in the
database. And one year, we caught wind of Home Depot and Lowe’s and ballooned our
database thousands, and they wanted to triple our bill.
And then we went to Marketo. So that, you know, that was a heartbreaker, I didn’t want to
leave. And I didn’t want to back out thousands of leads manually to lower my bill.
And so that’s kind of how those things play out. And so, as a cautionary note, don’t copy the
competitors, you know, program, figure it out on your own and get used to getting into the
motion of, well, I’m going to make this change. And this is what I think the response is going to
be.
And it’s going to generate this revenue. And at the end of month one, am I tracking on that?
And am I not tracking on that? If I’m not tracking on that, I want to play my next card, I’m going
to add a couple extra features into this offer to enrich his value because people are pushing
back on price. And there’s a real cadence and a real structure to that.
Just like there’s a real cadence and a real structure to product management and our sprints and
how we put out product. And there’s always a gap from the lab to the field that you then close
by iterating. One of my favorite concerns in regards to testing pricing is that usually running a
new pricing model requires a rework from the engineering side as we sell self-serve software.
But I know you have a different approach to testing, which involves sales. So tell us more about
that.