Treat Pricing Like Product Strategy – Chris Mele

[Speaker 1]
Well, you could immediately tell salespeople we’re having trouble moving product. So they
would say, hey, Vince, listen, land and expand, right? Why don’t we just try this?
We’ll just kind of go ahead and get it started. You’ll fall in love with it. A couple months later,
you can go ahead and sign up.
And of course, those signups weren’t occurring. You would never see that. It’s not really
necessarily going to be in the talk track.
You might hear it from a salesperson saying, oh, we’re trying land and expand. But you
wouldn’t associate that with the mechanic of a shorter term, which isn’t really in the playbook.
It’s sort of the salesperson going off script because they’re just trying to make their numbers
rightfully so.
[Speaker 2]
Welcome to FutureFuzz, the digital marketing podcast. All right, welcome into FutureFuzz, the
digital marketing podcast. I’m Vince Quinn, and today we’re talking about creating clarity in the
pricing process.
And joining us for this conversation is Chris Mealy. Chris is the CEO at Software Pricing Partners.
Chris, welcome to FutureFuzz.
[Speaker 1]
Yeah, thank you for having me.
[Speaker 2]
So first off, just give people a little bit of a background of what you do at Software Pricing
Partners.
[Speaker 1]
Well, we build pricing strategies for nothing but software companies. So it started in 82. I was a
former customer when I had my software company in the late 90s and into the 2000 time frame
and then ultimately ended up here because I fell in love with pricing as a discipline and sort of
the missing part of the business model that I wish I had known back then what I know now.
[Speaker 2]
Wow. Okay. So I love that.
So what was that? Did you have like a moment where you’re like, oh, this is just like, I’m really
gripped by this and I need more. What was that like?
How did that happen?
[Speaker 1]
Yeah, we closed a deal at probably one tenth of the value and I got really frustrated. I left a ton
of money on the table and we were converting from on-prem in 08 during the market crash to
the cloud, rebuilding sort of 10 years worth of tech. And a board member recommended that I
seek out pricing help.
And honestly, I kind of laughed the first time I was just like, I didn’t even know that that was a
thing. I didn’t even know there were companies that did that. And there weren’t that many and
still aren’t that many that do it.
And so in reaching out and learning about that and learning kind of the science behind how to
make money, I thought, oh, this is pretty interesting. So we would spend the next probably four
to five years wrapping pricing into more of a process and less of an event. And that’s ultimately
what made me fall in love with it.
[Speaker 2]
Wow, I love that.
[Speaker 1]
It’s fun to make money.
[Speaker 2]
Well, yeah.
[Speaker 1]
And obviously, that’s not much fun to lose.
[Speaker 2]
And that’s why it’s such a fascinating thing, because it is such a precious and agonizing decision
to figure all of this out, right? Obviously, pricing is, on some level, the root of everything. It’s
connected to everything that you’re doing, what your margins look like, the kinds of
investments you can make, just all of it.
So when it comes to pricing, on the simplest level that I could possibly ask this, why is pricing so
hard?
[Speaker 1]
Well, it is really hard in a lot of ways because of what you just said. The decisions that you make,
I’ll give you an example. Just a couple of weeks ago, there was a client who, in a meeting,
decided that they wanted to change the moment at which they start discounting.
So they were just after a higher, larger transaction. And then you would start to earn some
structured incentives. And there was a programmatic structure there that we were putting in
place for them.
They were surprised we have our own software platform when we showed them, hey, this is an
$8.5 million decision. And everybody was like, holy. I just was moving from this number to that.
And those are very sobering when you start to realize just these really small, innocuous
decisions that you would process in a meeting as if you were just talking and having a beer
have real financial implications. And of course, if you don’t know that and you make that
decision, all of a sudden you do some damage. And those are the stories that get told and
retold.
And so there’s a bit of a haunting that has followed, I think, people’s footsteps here a bit like,
oh, gosh, if you change this and you make a mistake, you could be doing a career-limiting
move. And that, of course, is what also makes it not just complicated, but very fearful.
[Speaker 2]
Yeah. So, I mean, for you to get involved in these kinds of things and have these conversations
with companies, I mean, typically, what does the situation look like when you tend to get
involved?
[Speaker 1]
Shortly after an investment. So what we would call at the front of the holding period. So
typically private equity would hold for five years and then sell.
It turns out they don’t really want to mess with much near the end of the period because it’s
being prepped for sale and there’s just too much downside risk. But in the beginning, that’s
kind of a natural time. Other natural times are a new executive team, a new product launch,
some new competitive threat that is emerging, whether it’s from a new AI startup or just some
sort of competitive phenomenon that you need to respond to.
Or really, I think if you want to know what’s kind of changed in the last couple of years, this sort
of inflection point where it’s no longer like growth, it’s more around profitability. And so I think
since 1982, the firm has largely, Software Pricing Partners as a firm has largely preached, you
know, you really should treat pricing as a discipline and everybody is like, yeah, well, you know,
I’m growing. And then really until 2022, when the private equity started to dry up because
everybody was doing kind of debt financing and that whole sort of twerking of the industry kind
of emerged into some layoffs as well as refocusing on and demanding profitability is really
what’s kind of encouraging people during this inflection point to refocus on, OK, like I need to
show the board like we’re making money, like we’re not just losing it.
[Speaker 2]
Yeah, I mean, on some level, like how does this happen? I mean, it just sounds like such a
colossal oversight, just like across the board that people aren’t so invested. Like you said, one of
the few companies that focuses on this kind of thing.
It’s just kind of stunning of how little attention is paid to it.
[Speaker 1]
Well, so I so I’ve reflected on that a lot. So I would tell you that when I was on boarded in
software, there’s no talk of this. I mean, you build a great product, you spend the dollars on the
product.
And in fact, even in the boardroom that I sat on, it was all around product expenses and
customer acquisition and conversion rates and all that stuff. But I often like wonder if a board
member was to say, well, hey, Vince, that’s a great idea. But like how much money did you
spend on the science behind designing how you’re going to make money on this thing that you
build?
You would largely hear crickets. It’s just not it’s not in the curriculum. It’s not in the onboarding
process.
It’s not in anything that an entrepreneur would learn to treat this as a science and a discipline.
And in fact, I think it goes one step further. Many people would underappreciate the science
and say, well, that’s just like a bunch of black magic.
Like there’s a black box. These guys charge us a ton of money and they come out with this
magic stuff. And then supposedly it’s supposed to work.
And there is a very high failure rate on 200 page PowerPoint decks. And here’s what you need
to go implement. And then the software company, the executive team just can’t quite get over
the hurdle of the late nights and the worry about doing damage and the downside risk.
And so it just becomes shelfware. But it is it is an emerging science that’s still relatively new.
And if you ask me, the most inefficient structure of deploying software, it’s the software sales
transaction.
What happens to actually deploy software where pricing kind of intersects with the sales
dialogue is not a pretty picture.
[Speaker 2]
Yeah.
[Speaker 1]
For most.
[Speaker 2]
And so thinking about this then, I mean, because as you mentioned, people see it as this black
box, black magic, like kind of winged conversation at a bar. All of those kinds of things and the
weight of these decisions. I mean, in your experience, how have people actually then made
these decisions?
Like what has the process looked like at a company level to go and decide what the pricing
looks like?
[Speaker 1]
Well, so that would vary by size, but let’s say at the smallest level, it’s typically a handful of the
executives that are in a meeting debating. And I would say that the debate is not grounded
necessarily always in the quantitative science part of it. It’s more like, hey, should we move this
minimum out?
Hey, do you feel good about that, Vince? Yeah, I feel good about that. Let’s do that.
And then you don’t really understand the ramifications. And then a couple of months later,
you’re like, hey, I know I said I wanted to do that, but can we go back to the other way? Because
that’s terrible.
And then they kind of, you know, thrash a bit. As you get into larger organizations, you’ll start
to see it begin to dissect between over on the CPO side. If you have profit and loss profitability,
pricing will kind of segue or fall under that purview.
You’ll also see it under marketing, but it largely is delegated, which I think is a mistake. I mean,
it is the revenue model. I think that connects directly to the CEO and sort of his charge for
profitable growth, if you will, or her charge for profitable growth.
And that delegation down into the organization, as you then get bigger, gets deeper. And so
now all of a sudden you might have a miniature pricing team that’s horribly understaffed, has
no tools except Excel, and just doesn’t have the equipment to do the job and largely is doing
the job of a hundred people rather than one person. And in many cases, really just becomes a
glorified deal desk rather than a pricing function, I think.
But it’s that delegation down, that sort of saying like, this is not an important function, so I’m
going to push it down, I think is a huge problem of that effect that you’re seeing, which is lack
of ownership and no tools and no real cohesive team to pull it together.
[Speaker 2]
Yeah. Is there also like a fear element to that in the sense of maybe I have no idea what I’m
doing with this, so I’m going to delegate it because I’m just like scared to grapple with it?
[Speaker 1]
Maybe. I think a lot of the executives are very sophisticated and obviously operating with the
board, know the metrics, know the business inside and out. The issue with pricing is the
nuances matter.
So for example, you might be used to taking averages of things and the problem in pricing, if
you just cross the first bridge, is these are not normal distributions of deals. You typically have,
let’s say, if you were focused on SMB, you’ll have a tranche of mid-market enterprise deals that
are just way off the market. They’re like 10 standard deviations off the norm.
And you’d be amazed how many times people just run an average inclusive of outliers, and they
kind of use that to drive the business. And the challenge with that is it really does torque your
understanding of what’s happening under the hood, and it really does bring you down, I think,
some dangerous paths. And so a lot of that is driven, though, because they don’t really have a
system by which to tease this out.
They have a financial system that’s after the fact, but they don’t really have a system by which
to understand or forecast what pricing decisions might yield and what they might make, and a
marker in the sand that says, hey, am I really tracking on that trajectory or not? And so I think
what happens is fear, maybe lack of confidence, yes. You just feel like, I know I’m going to get
hurt if I do this.
I just don’t know where I’m going to get hurt. And I think that that lack of truth on the ground,
transparency of seeing what’s going on is really important and lacking. And then secondly, that
ability to see the truth on the ground is often really obscured.
Many software companies are kind of beholden to their systems, and the data is really rough.
You’ll have transaction data that’s a bit kludgy. It’s not complete.
Maybe the net price is higher than the list price. Maybe there’s other weirdness going on.
Maybe you have a bunch of credits in there.
There’s all this stuff that takes a huge amount of time to get your arms around, and that’s the
part that, again, I’m not sure it’s scary as much as it’s just like you kind of roll your eyes like,
how do I get there from here?
[Speaker 2]
FutureFurs is sponsored by Salesforce, B2B pipeline management, and sales growth for your
business. Yeah, because for me, that feels like the process like I’m about to go and sell my car
and lease a new one and just beginning to be like, oh, my God, I’ve got to look at it. What’s that?
[Speaker 1]
You just grown.
[Speaker 2]
Yeah, it’s a nightmare because you got to figure out all these different dealerships and the
different kinds of models and what are the safety ratings. And now I got to worry about the
different kinds of percentages that they’re charging me for whatever kind of deal I’m going to
make if I’m buying it versus leasing. And it’s just like your head explodes.
You don’t want to deal with it. And I have ignored a lot of calls and emails from car dealerships
lately.
[Speaker 1]
So well, that phenomenon is a real phenomenon. I’ve been in those meetings and I can see the
point at which the executive team is like the headache factor gets so large, things become so
incomprehensible to get your arms around that ultimately you’re like, I think I’m just we’ll just
do that next year. That’ll be a learning objective or an objective for next year.
But we’re not we’re not really going to touch that right now. It just it reaches a point of too
much to process.
[Speaker 2]
Yeah. And so like if you’re trying to then figure this out and come up with process, where do
you even begin? I know that’s kind of a loaded and wide question, but just from this basic level
of we don’t have pricing or we need to wrangle our pricing and get it to a better place.
How do you get started?
[Speaker 1]
Well, I think the place that you would. So rather than describing what you think the problem is, I
think the place to start is like if you are lucky enough to have transactions to look at, it’s
amazing the wealth of information that’s inside of there. There’s a talk track out that market
that says, oh, you’re doing pricing.
You should greenfield this. I mean, why anchor yourself to yesterday? You know, we’re going
to.
And the problem with that approach is that if you don’t anchor yourself to yesterday, you might
come out with pricing that’s very different than what you have today. And you might actually
not just spook tomorrow’s prospects. You might spook yesterday’s customers when they see
the new pricing and go, holy crap, I’m not going through that with renewal.
I’m out and I’m going to go to a competitor. And there’s real costs associated with
overshooting, I guess. And so if you just were to take the first step that says, well, I’m going to
just get clean deal data.
Like I just want to understand what have we sold at the line item level, the quantities, the list
price, the net price, the discounts. Like many of our companies have hundreds of SKUs, unique
product codes that they sell. Some just have a dozen.
Others have 60,000 plus. And that’s an ocean to boil. But if you can get that clean and ingest it
in some sort of tool that you can visualize and start to see what’s happening, it will shake out a
lot of really low hanging juicy fruit that you can go after.
Like, so for example, in COVID, many of our clients, we have a level setter platform. When you
pull up the data, you could immediately see a hundred percent discounts on a whole tranche of
deals. You’re like, oh, what’s going on with that?
You go look and you’re like, well, we’re selling in year terms. These are two, three and four
month terms. What’s happening?
Well, you could immediately tell salespeople we’re having trouble moving product. So they
would say, hey, Vince, listen, land and expand, right? Why don’t we just try this?
We’ll just kind of go ahead and get it started. You’ll fall in love with it. A couple months later,
you can go ahead and sign up.
And of course those signups weren’t occurring. You would never see that. It’s not really
necessarily going to be in the talk track.
You might hear it from a salesperson saying, oh, we’re trying land and expand, but you
wouldn’t associate that with the mechanic of a shorter term, which isn’t really in the playbook
and sort of the salesperson going off script because they’re just trying to make their numbers
rightfully so. And that’s one of hundreds of examples of little leaks in the game that you want to
pay attention to. If you don’t ground yourself in the reality of what you’ve been able to extract
in the form of net prices yesterday and that action, if you will, then I think you’re beholden to
that which is most recent.
You go into an executive team, the CMO is like, well, let me tell you what happened yesterday.
And it happens to be a one-off, but that like dominates the discussion. So now you’re going to
react or want to change something based on that story.
And that takes you away from, I think that science that puts you more into sort of gut check and
feel and that thrashing that we talked about earlier.
[Speaker 2]
Yeah. And when you think about it, I mean, a lot of times there’s this truism, I guess, or I’ll say a
hermoseism, if you will, of like this idea of you solve some of the biggest problems. Those are
the things that also give you the most success, like those things you’re most afraid of or have
the most anxiety about.
Like you get those things done. You’ve made major headway. And I feel like pricing is one of
those.
And so like for all these people that are having all these different decisions with not analyzing
the data, burying their head in the sand, punting on it, whatever it is, when they finally get this
together and have a process, have the right data, start being more scientific about it. I mean,
you mentioned casually earlier, for example, how a certain decision offhandedly was going to
change $8.5 million. So, I mean, what are some of the…
[Speaker 1]
Some decisions are more…
[Speaker 2]
Yeah. And that’s what I’m curious about is like some of the weight of the results or really the
quality of the results when people get their pricing right.
[Speaker 1]
Well, there’s no doubt about it. There’s an enormous upside with getting pricing right. I mean,
you can imagine a world where everything was manual, paper, pen, and you and I were
bringing automation to the scene.
And this was the story of my previous software company. We would take purchasing
departments down from 40 people to like one in a backup. Your ROI is exquisite.
In fact, one would argue your ROI is so large, people won’t believe you. So if you come across a
market like the B2B software space where historically pricing was never treated as a discipline,
you just can accidentally make money. I mean, it is very, very easy coming off of a total lack of
discipline and installing just some basic discipline to move the needle significantly.
So it really is a large moneymaker. It’s just hard to take the recommendations as they flow out
to the sales dialogue with the sales team, as they flow out to your sales operational systems
and supporting backbone, as they flow out to how you’re going to market, as they flow out to
the code base and how you’re going to control and license entitlement and management and
billing and like that stuff is the stuff that makes people’s head hurt.
But in reality, there are very nuanced things that you can do that move the nozzle in a really
large way or move the needle in a really large way. And when you, for example, let’s take an
example like we have a business model that historically has never done any sort of volume
pricing. Like they started in B2B, the price is the price.
It’s X dollars per user, X dollars per token. I don’t care. It’s just the price is the price.
And then they start to attract very, very large customers. Those very large customers will expect
some sort of volume treatment. They’re like, hey, I’m showing up.
I’m 100 customers in one. So what are you going to do for me? Just instituting some structure
for that really greases the skids for those kinds of companies or those kinds of customers that
are coming on board.
And those are, we have a client who historically sold to a university over in London. It’s a
development license for $1,250 every three years. They just finished their project and closed a
deal, 10 year term, 300 grand a year.
That gives you kind of just a little bit of a meter as to how much money can be left on the table.
And now the founder’s like, hey, I really feel like I have a business. Like, cause that really is no
longer a business.
And that’s what I mean by most software companies do not get paid anywhere close to their
value. And in fact, if pressured as to why they created the price they did, there’s no reasonable,
rational answer to that because the customer, the software company hasn’t even produced that
yet. So a salesperson can’t even talk about that.
And that just means if I’m asking you for a million, you’re probably going to close me at $10,000
because I just have nothing to lean on. And I think that putting that back into the software
company ecosystem by saying, hey, pricing is a discipline. It needs to have some people
assigned to it, or at least a person, or at least a dedicated fractional time from somebody in
your organization.
And we’re going to need some supporting tools, not just Excel, but other supporting tools. And
we need a good process to do this, puts it on par with product management and other
disciplines. And you’re probably a little bit younger than I am, but I still remember when
product management came online.
I’m of the era where you built it and they just would come. And thankfully, they came. But many
people built it and nobody came.
But now we would laugh at that and product management as a discipline. If you fast forward 10
years and rewind to this particular podcast, you’ll see pricing on par with product management
as a discipline. It’s just very new.
[Speaker 2]
So Chris, for all the people that are hearing you explain all of this and are desperately looking
for that science and structure when it comes to pricing in their business, what is the best way to
get in touch with you and software pricing partners?
[Speaker 1]
Softwarepricing.com.
[Speaker 2]
All right. Easy to remember. There you go.
So go check it out. And Chris, thank you so much for being a part of the show. Appreciate you
being here.
Thanks for having me. Thanks for tuning in and making the choice to listen to this podcast. If
you liked what you’ve heard today, please don’t forget to subscribe.