Latest / Founder Mode / Right-Price Your SaaS with Scott Woody

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Right-Price Your SaaS with Scott Woody · Founder Mode

• 0:00
  The rise of the Internet though, shifted the value of software.
• 0:03
  Software now updates itself. Subscriptions became a thing
• 0:07
  before. Before the Internet,
• 0:09
  subscriptions was not like subscription software didn't
• 0:11
  exist. What I see with AI is now the
• 0:14
  value of software is shifting again.
• 0:16
  Now instead of software being a thing that you consume, the
• 0:19
  software is doing work on your behalf.
• 0:21
  And so AI is fundamentally rewriting the value of software.
• 0:39
  Welcome back to Founder Mode. The show where we talk to
• 0:42
  builders who aren't just chasing revenue, but making it smarter.
• 0:47
  Today we're going to get into what all early stage founders
• 0:50
  deal with pricing. From usage based models to AI
• 0:53
  monetization to fixing billing friction, this episode is about
• 0:57
  how to turn your pricing from a cost center into a growth
• 1:00
  engine. Kevin, do you know how many
• 1:02
  MANUS credits you've used in the last week?
• 1:04
  And what's that credit to cash exchange rate like how many, how
• 1:07
  much should you spend like everyday as you're ripping all
• 1:10
  those apps and. Yeah, I do.
• 1:11
  So I've spent 10s of thousands of credits, not in dollars, but
• 1:18
  yeah. So the the, but exactly how much
• 1:21
  dollars it's so it's, it's a penny per credit.
• 1:22
  So like basically 199 a month you get 19,900 credits.
• 1:28
  But what I've found is that, you know, they've sort of done some
• 1:31
  estimation with pricing and early on they're actually giving
• 1:36
  me a bonus. And so every time it renews, I
• 1:38
  get like a double 19,000. So I actually get like 40,000
• 1:40
  rather than 20,000. And then if you log in at like
• 1:43
  5:00 PM every day, they throw another 300.
• 1:46
  And every time no dynamics. Yeah.
• 1:47
  And then every time, No, no, totally.
• 1:49
  And then every time I do like a one star review, they're like,
• 1:51
  oh, sorry about that. And they give me a bunch of
• 1:52
  credits back sometimes. And so like, I feel like there's
• 1:55
  this, I've never ran out of credits yet I continue to use it
• 1:58
  more. And so at some level I think the
• 2:00
  casino thing plays it where it's like they're getting me really
• 2:03
  used to the product and I like the results that I'm getting.
• 2:06
  And so I use it more. And then they're like, oh, you
• 2:08
  refer a friend and I've, you know, there's a bunch of
• 2:09
  referral credits and I'm like, oh, you refer to five friends
• 2:11
  last month, we'll just give you a, you know, 20,000 extra this
• 2:14
  month. They'll just, they, they
• 2:15
  literally just keep throwing credits in there.
• 2:16
  So I've never ran out. I always have somewhere between
• 2:19
  20 and 60,000 credits available, yet I'm constantly using.
• 2:22
  But you're talking to me like I'm, I'm doing research where I
• 2:24
  have Manus, you know, 500 hundreds.
• 2:26
  They have wide search now, so you literally can run 100
• 2:29
  parallel searches where it sits there and kicks off 100 and then
• 2:31
  does the thing. So it's like, go look up, you
• 2:33
  know, these hundred companies, go look up 100 people in those
• 2:35
  hundred companies, go look up the.
• 2:37
  And it's just like, yeah, it's really been fun.
• 2:39
  And so I mean, but pivoting a little off that, I mean, Jason,
• 2:43
  you pay for a lot of SAS, yes, and a lot of seats.
• 2:45
  Like talk to me about that. Yeah, we have, I mean, we have a
• 2:48
  lot of consultants, right, that are working across a bunch of
• 2:50
  different founders businesses and, and some interesting
• 2:54
  companies. And, you know, we're, we're kind
• 2:56
  of scaling up and adding people all the time.
• 2:57
  But I'm trying to pay attention. I, I never do the annual
• 3:00
  subscriptions. I'm like, no, I'm going to do
• 3:02
  the monthly because when these people, you know, rotate off a
• 3:04
  project and maybe they're in between things, I'm turning off
• 3:06
  the Google and Slack accounts. I'm not paying for that 10/12/14
• 3:09
  dollar a month seat, right? Yeah, like I, I don't know.
• 3:12
  So, you know, that's, that's my take on it.
• 3:13
  I I don't like just like the SAS per seat pricing, which is why
• 3:16
  I'm excited about this conversation.
• 3:17
  Today, yeah. I mean, I think, you know,
• 3:19
  pricing isn't a spreadsheet anymore.
• 3:21
  I mean, it's really like it's your product.
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  And I think like the narrative and your leverage like that
• 3:26
  becomes kind of the everything in a lot of these cases.
• 3:28
  Yeah. And the guest we're talking to
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  actually has built the platform and the playbook for what modern
• 3:35
  pricing actually looks like. Scott's a founder and operator
• 3:38
  who's helped companies transition from this old school
• 3:40
  pricing model to a modern sort of dynamic billing model.
• 3:43
  Yeah, and he's not just talking theory.
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  He's built the tools, he studied the patterns and worked with
• 3:49
  some of the fastest growing SAS businesses that are like
• 3:51
  household names out there. You ready to get into it?
• 3:53
  Let's do it. Scott, welcome to founder mode.
• 4:06
  You've helped rewire kind of modern software companies think
• 4:08
  about revenue from, you know, fixed plans to flexible and now
• 4:11
  to real time billing. We'd love to see kind of talk
• 4:15
  through like where pricing breaks and what founders can do
• 4:16
  to fix it. And so happy you're here.
• 4:18
  Awesome. Well, thanks for inviting me.
• 4:20
  I'm super excited to talk. Pricing is like one of the, I
• 4:23
  would say, the harder parts of running a business and it's
• 4:26
  something that we get to spend all day every day working on.
• 4:28
  So I'm excited to chat about it. Yeah.
• 4:30
  So you've said that pricing was always the pain point.
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  What was that kind of irritation or or thing that sparked this
• 4:37
  whole journey for you? Yeah.
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  So before I started Metronome, I actually worked at Dropbox for a
• 4:42
  long time, for about 7 years and I ran what we called
• 4:46
  monetization engineering. So that kind of think what
• 4:49
  happens when you sign up on the website and then how do you get
• 4:51
  through the funnel and then ultimately become a paying user.
• 4:54
  We owned that entire journey and one of the things that we
• 4:57
  realized very quickly was that experiments in that journey like
• 5:01
  around pricing and packaging could meaningfully Dr. revenue.
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  So, you know, we would like optimize the checkout page, we
• 5:07
  like change a few words and boost conversion rates by like
• 5:09
  10% and make millions of dollars.
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  And so it was really cool because like pricing and
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  packaging is a huge lever for the business.
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  But the flip side was actually those edits like in the
• 5:20
  fundamental billing system meant that like even a very simple
• 5:23
  pricing change, which sometimes takes months, there are certain
• 5:26
  pricing models that were completely off limits just
• 5:27
  because of the technique technology behind the scenes
• 5:30
  couldn't handle it. And so that was the spark.
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  It was this idea that like we should be moving much faster.
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  We can't, we can't because this infrastructure doesn't work very
• 5:38
  well. Well, and that was like thing
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  like like, OK, let's go solve that problem and figure out how
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  to like actually make it so companies can move much, much
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  faster and treat pricing more as like a weapon rather than like
• 5:48
  kind of AI don't know, like a like a, a reluctant thing that
• 5:52
  you have to go do. Yeah, it's a long time Dropbox
• 5:54
  Easter. I've definitely moved through
• 5:55
  plans a bunch, and sometimes you get stuck where I'm like, hey,
• 5:57
  how do I just get more of whatever I want, more people or
• 6:00
  more storage? Was there like a specific test
• 6:02
  you remember back in the day that was like, wow, that was the
• 6:05
  one that was really like so frustrating and you're like,
• 6:07
  this is broken. I need to leave and go do this
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  thing. Yeah, I think it was an
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  agglomeration of things. But like, So what we do now is
• 6:13
  we really focus on consumption based businesses.
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  And at Dropbox, there's a lot of our products that you could have
• 6:19
  thought of as being like usage based.
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  Maybe it's the amount of like actions the product can take on
• 6:25
  your behalf, things like that. Those we were just not even
• 6:28
  allowed to try because basically do a price, a usage based
• 6:32
  pricing model inside of the current architecture would have
• 6:34
  taken, I think it was quoted at like 4 years to go build out.
• 6:37
  And we were just like, well, there's literally no way that
• 6:40
  that's mixed. Engineers, am I right?
• 6:41
  I. Know exactly.
• 6:42
  So I was like, that was the kind of thing I was like, OK, well,
• 6:45
  there's there's something about this usage based thing that's
• 6:47
  uniquely hard. It's like, you know, I'm not
• 6:49
  getting three months, 6 month quotes, I'm getting year quotes.
• 6:52
  Let's go study that problem and then go figure out why is that
• 6:55
  so hard? What is different about usage
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  and consumption and, and, and can you make that faster?
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  Because if you can, then you'd unlock this entire new business
• 7:03
  model set. So you made the case that like
• 7:06
  this traditional seat based pricing, like I love as you talk
• 7:08
  about usage and consumption, it makes so much sense to me.
• 7:10
  But like there's still so many products that build that way.
• 7:15
  And now we're in this AI era where we've kind of moved to
• 7:17
  credits and tokens like traditional pricing.
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  I think you even have said like it's not going to survive the AI
• 7:23
  area. I would love to hear more about
• 7:25
  how you how you think about that.
• 7:26
  Yeah, The way that I think about it actually is if you take a
• 7:29
  step back to like the 90s and you remember I'm like old enough
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  to have gone into Newegg and like bought software.
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  Like a physical disk. Like install it on a computer
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  and you pay 60 bucks and that's it, right?
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  And there's no updates to it. And then you like buy an
• 7:45
  expansion pack or something like that.
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  And that was how software in the 90s worked.
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  And like business software was bought same way.
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  But instead of you installing it, it's installed on a rack in
• 7:53
  a server. But it cost, it costs a fixed
• 7:55
  amount of money. You like own the bits.
• 7:59
  The rise of the Internet, though, shifted the value of
• 8:02
  software. Software now updates itself.
• 8:04
  You know, like you log into Asana today and you log into
• 8:07
  tomorrow and the product actually changes like the the
• 8:11
  because the Internet allowed a continuous delivery of new value
• 8:14
  to the product, it forced the creation of a new monetization
• 8:17
  model. So subscriptions became a thing
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  before before the Internet subscriptions was not like
• 8:22
  subscription software didn't exist.
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  So seats and subscriptions was born during the Internet.
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  And the cause of it was that the fundamental value of software
• 8:29
  was shipping from something I buy and install to something
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  that continuously updates itself and it's value scales and the
• 8:35
  number of people in my org have access to it.
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  And so like actually, the subscription model was a
• 8:40
  contingency based on the fact that the Internet came along.
• 8:44
  And what I see with AI is now the value of software is
• 8:48
  shifting again. Now, instead of software being a
• 8:51
  thing that you consume, the software is doing work on your
• 8:54
  behalf. So if you're familiar with like
• 8:55
  intercom, those agents actually reply to emails on your behalf.
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  The software is doing work. Humans are, you know, maybe
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  they're setting up the agents, but they're not doing work using
• 9:05
  the software anymore, at least not in in a lot of number of
• 9:08
  cases. And so agents, AI is
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  fundamentally rewriting the value of software and much like
• 9:13
  the Internet, the change in value of the Internet positive
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  business model shift. What is happening in AI is the
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  value of software is changing and that is forcing a new
• 9:21
  commercial model to come in. And the only commercial model
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  that really makes sense is something in the usage based.
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  It could be hybridized with seats.
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  But basically the idea is how do you monetize work being done?
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  And the historic way is you pay for the work and that could be
• 9:36
  measured as credits, it could be measured as tokens, it could be
• 9:38
  measured as outcomes, whatever it is.
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  But it's a very elastic measure. And it is and like, and it is
• 9:44
  also anti seats because basically the more agents you
• 9:47
  deploy, like you should be hiring fewer people.
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  So like the seats should go down.
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  And so actually the only incentive aligned business model
• 9:54
  that makes sense in the AI era is something that looks more
• 9:57
  like a consumption model. I still think seats will stick
• 9:59
  around in some form, but mostly as like a platform fee and less
• 10:04
  as like the kind of core scaling metric.
• 10:06
  How do you think about these hybrid models?
• 10:08
  Like for us, like we take phone calls and so there's like a cost
• 10:11
  to take the phone call. And then there's like if the
• 10:13
  phone call was successful, you get paid more where there's like
• 10:15
  still the cost for taking it if it doesn't as not as successful.
• 10:18
  Yeah. Have you, have you seen that
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  very much where there's like a kind of a fixed or sort of
• 10:22
  recurring cost for sort of doing some amount of work and then
• 10:25
  almost like a Commission or prize for doing something
• 10:27
  better? And how do you guys sort of
• 10:29
  think about that in your business to apply that?
• 10:30
  Yeah, I think the dominant model so, so think if you think of a
• 10:34
  pure usage based business, think like AWS, OK, that works for
• 10:39
  infrastructure businesses because when you build on infra,
• 10:43
  you're not making changes that often to it.
• 10:45
  You know, there's a certain amount of predictability in it.
• 10:49
  You know that customers will show up tomorrow and use your
• 10:51
  service. Now they make it a spike and so
• 10:54
  you have to pay a little bit more.
• 10:55
  But like you're banking on the fact that the infrastructure is
• 10:58
  is there the whole time. And so a pure consumption model
• 11:01
  works really well for businesses that are kind of operating as
• 11:04
  like the scaffolding for the rest of the business.
• 11:07
  Why the token model, the LMS charge this way for the APIs,
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  but when you move one layer up into the application layer, a
• 11:14
  pure consumption model has this like fundamental
• 11:17
  unpredictability to it. Think of like Facebook for some
• 11:21
  reason was like you paid for every profile you feed or
• 11:24
  whatever. Like the variability on anyone's
• 11:27
  usage is extremely high. But also the consumer doesn't
• 11:30
  want to be faced with like if I click this button, I have to pay
• 11:32
  money, even if it's a fraction of a cent.
• 11:34
  It's like it incentivizes the wrong behavior.
• 11:36
  And so in these more SAS businesses or take Asana or
• 11:39
  Dropbox or whatever the the right way is like it's like pure
• 11:43
  usage is too much variability month over month.
• 11:46
  And So what you want is you want a term in the equation that's
• 11:48
  kind of more stable. This is where it's used like
• 11:51
  seat based fees fit in. So then a CFO knows roughly
• 11:55
  they're going to make at least this amount of money and then
• 11:57
  they can build these nice product flywheels around usage
• 11:59
  base. Maybe it's like, you know, this
• 12:00
  call based thing that you're talking about.
• 12:02
  If it's successful, you pay a little bit more.
• 12:05
  If it's not, you don't pay anything.
• 12:06
  And then what that does is it gives them predictability, but
• 12:09
  also upside preservation. And the upside side is tied to
• 12:12
  an outcome that the customer cares about.
• 12:14
  So they're totally happy to give you that extra money.
• 12:16
  And so that's kind of the way that I see the world, which is
• 12:19
  that the hybrid is more stability plus upside.
• 12:22
  And I think that aligns incentives like everyone wants,
• 12:25
  you know, customers actually do you want the stability because
• 12:28
  they want to roughly know how much they're going to pay, but
• 12:29
  also they want to know that you're going to be in business
• 12:31
  in two months if they don't use the product.
• 12:33
  And, and so the stability is fine, but then the upside like
• 12:37
  kind of usage comes in through the upside capture.
• 12:40
  And, and I, as long as you can map the value of that
• 12:44
  incremental usage to actual outcomes for them in some way,
• 12:48
  they're totally happy to pay for it because they're, you know,
• 12:50
  presumably if they had to do it themselves, they pay a lot more
• 12:52
  money to get the same. Aligning incentives makes total
• 12:55
  sense to me. Let's talk about early stage
• 12:57
  founders and, and the mistakes that they often make when
• 13:00
  they're setting prices, you know, maybe for the first time,
• 13:02
  you know, how, how do you advise them?
• 13:04
  A lot of the folks that are listening here, you know, are,
• 13:05
  are founders. Like what would you say to
• 13:07
  somebody who's like trying to figure out their pricing and and
• 13:09
  how to course correct once they've maybe gone the wrong
• 13:12
  way? Yeah.
• 13:13
  I think if you're early, there's a lot of actually benefits,
• 13:16
  which is that kind of what you price.
• 13:20
  It's like not that risky. It like looks like a one way
• 13:23
  door, but it really isn't because your business isn't a
• 13:26
  one way door yet. You know, you're not big enough
• 13:28
  that it like it's like, you know, if you had to like start
• 13:30
  all over from scratch, it's like, yeah, you lost a couple
• 13:32
  months or whatever. And that sucks, but it's not
• 13:34
  that big. And, and pricing feels important
• 13:37
  because it is important, but it's, it is much more of a two
• 13:40
  way door than most people give appreciation for, especially
• 13:42
  when you are sitting on $0.00 ARR, you know, like like 0 ARR.
• 13:46
  It's like nothing matters honestly.
• 13:48
  And so just move fast. The other thing is you should
• 13:52
  not be innovating on pricing until, until and unless you need
• 13:56
  to innovate on pricing or that's a core differentiator.
• 13:58
  And I think there are certain businesses like we could
• 14:01
  probably talk about Clay, which actually used monetization as a
• 14:04
  differentiation. I think that's super smart.
• 14:06
  But they didn't do that until they had a product that was also
• 14:09
  differentiated. And So what I would say is start
• 14:11
  by focusing like in the early days, your job is to make your
• 14:14
  product differentiated and you would probably exist in a market
• 14:17
  and that market probably has a dominant commercial model.
• 14:20
  Like keep it simple. Just do whatever everyone else
• 14:23
  is doing. The reason why this matters is
• 14:24
  because A, it obviously works for your competitors, and B,
• 14:29
  consumers are comparing you to your competitors.
• 14:32
  If they're comparing apples to apples, that's an easy thing.
• 14:36
  If you have some weird exotic pricing, it's apples to oranges.
• 14:39
  And again, if you're highly differentiated, then that can be
• 14:43
  an advantage. But in when you're small, it's
• 14:46
  like, why are you trying to differentiate on too
• 14:48
  complicated? It's too it's you're
• 14:49
  overthinking the problem. And I think that's to me, my
• 14:52
  main advice is like, keep it simple, move fast, iterate often
• 14:56
  and don't have like like when you're large, there is a like
• 15:00
  sunk cost that you have to pay for.
• 15:02
  But when you're small, like you don't have that.
• 15:04
  So like just be nimble and move fast and no one will remember.
• 15:07
  Like even there's very notable AI based pricing mishaps that
• 15:11
  happened like 2 months ago. I guarantee you no one even, I
• 15:14
  mean you probably name them. I can name them because I study
• 15:17
  them. No one gives a shit anymore.
• 15:19
  Like it does not matter as long as you get to the right thing
• 15:22
  then consumers will forgive you. Like memory is really short.
• 15:25
  Purely, it doesn't take you 4 years to make the pricing.
• 15:27
  Change. Even if you're at 500 million
• 15:29
  ARR, you can move. If you're moving fast enough,
• 15:31
  people will forget and it is fine.
• 15:33
  Yeah, you will. Fine.
• 15:34
  You, you've talked about credits being like a good starting
• 15:37
  point, but not the end game. And I think about like 2 AIS
• 15:39
  that I use a lot. I use a lot of Manus, which is
• 15:41
  very credit based. And then I use chat GPD Pro
• 15:43
  where I've never ran into the limit, even though I use
• 15:45
  probably that a lot more. How do you think about those?
• 15:48
  And kind of like what's your view on kind of credits versus
• 15:50
  not? And then or maybe there is, I
• 15:51
  mean there is a credit, I'm sure at some point if I hit ChatGPT
• 15:54
  Pro hard enough, like there will be a limit, but like it's high
• 15:57
  enough that like probably a very few people hit it.
• 15:59
  Yeah, The way I think about it is broadly, credits are a useful
• 16:03
  kind of meta abstraction for kind of letting a customer
• 16:09
  predict their usage. And then if they go over, they
• 16:11
  can kind of get an overage bill. And it's like kind of a, it's
• 16:14
  like a simple, it's like rather than having to make a decision
• 16:16
  every time they issue a query, they kind of make one decision
• 16:18
  once a month and buy a pack of credits.
• 16:20
  And then if they overspend, they make another decision In AB to C
• 16:25
  business, if you're selling to consumers, you want to kind of
• 16:27
  minimize the number of decisions per unit time that a customer
• 16:30
  has to make. So a, a well designed credit
• 16:32
  system usually has like one decision upfront.
• 16:36
  And then if you're finding a ton of value, then yeah, you have to
• 16:39
  make a a re up decision. But presumably that's backed by,
• 16:42
  well, I made so much more money because I use this thing and
• 16:45
  say, fine, who cares? It's like a deal, I think.
• 16:48
  And and so like in sometimes the ideal credit system is one that
• 16:52
  you understand is there, but you barely you very infrequently hit
• 16:56
  the limits. And when you do hit the limits,
• 16:58
  it's because you're in a you're you're whatever your, you know,
• 17:02
  job to be done is being really well satisfied.
• 17:04
  The worst are when you hit limits and it feels punitive to
• 17:08
  do more. It's like what?
• 17:09
  I'm barely getting any. Like I'm having to use a lot of
• 17:11
  credit because your stuff doesn't work that well.
• 17:14
  Like it's like, it's like, it's like, it's like I'm feel like
• 17:16
  I'm struggling against your system.
• 17:17
  And so therefore I'm kind of pissed that I have to pay you
• 17:19
  more versus like, wow, I'm getting a lot more value from
• 17:22
  this. I'm sending a lot more in mails
• 17:23
  or whatever. I'm happy to pay you more
• 17:25
  because I can do a very simple ROI calculation.
• 17:29
  I'd say for like things like ChatGPT, they all have embedded
• 17:32
  limits. Most of the B to C ones are
• 17:35
  designed so that only the whales hit them.
• 17:38
  And, and if you're hitting them, it's more of like almost always
• 17:42
  there is a better package that is better suited to your use
• 17:45
  case, right? So if you're routinely hitting
• 17:47
  the pro limits, then you go to Max Pro or whatever it's called
• 17:51
  and you go to like the suit and, and, and there are features in
• 17:54
  that feature set that are different, like distinguished in
• 17:56
  the package. So it's not just about more
• 17:57
  units, it's about actually a better product for your use
• 18:00
  case, if that makes sense. As a smart packaging design
• 18:03
  pairs the like credit hate, like the spend limits with features
• 18:07
  that incentivizes more spend. It's like so like SAS guys need
• 18:11
  the two extra author like you know, O author whatever.
• 18:13
  Or something. Exactly.
• 18:14
  The negative version is it's like, why do I have to pay 10X
• 18:17
  as much for SSO? That's silly.
• 18:19
  But like smart decisions are like, well, you're using a ton
• 18:22
  of credits. What about asynchronous jobs
• 18:24
  that run at 2:00 AM on Saturday? So it's way cheaper.
• 18:27
  Like that's the smart version. And those features are only so
• 18:30
  you use packaging to get the smart.
• 18:32
  They basically you say actually it's the credits serve as a
• 18:36
  packaging delineation for like this user actually is like a
• 18:40
  power user and that fundamentally is a very
• 18:42
  different need than than than a person who's just using the
• 18:44
  product. I think it's like, I think
• 18:47
  actually the other advice I give to young folks or early
• 18:50
  companies is that people think a lot about price.
• 18:53
  They think not nearly enough about packages.
• 18:55
  Packages is about user segmentation and user
• 18:58
  segmentation is actually the entire game of early stage go to
• 19:01
  market. It's like, are you working on
• 19:03
  the same ICP or not? And packages is a very easy
• 19:06
  litmus test for knowing like if you find that you can repeatedly
• 19:09
  sell the same package to the same profile of customer, you
• 19:12
  probably have an ICP. If every time you hit a customer
• 19:14
  that looks the same and you're constantly like kind of tweaking
• 19:16
  and things and you probably don't have a stable ICP.
• 19:20
  Yeah, I, I love that you're talking about packaging because
• 19:22
  I think so often people just think about pricing and pricing
• 19:25
  and packaging go together hand in hand.
• 19:27
  You know, this is kind of a, a curveball question for you.
• 19:30
  But as you, as you were talking, I'm thinking, man, what you guys
• 19:32
  do at Metronome is so interesting.
• 19:33
  Like have you ever thought about, you know, Open open AI is
• 19:35
  now going after Mackenzie's business.
• 19:37
  They're consulting, right? It's like because this Metronome
• 19:39
  offer consulting services on packaging and pricing.
• 19:41
  You guys probably should. There's a lot of stuff in.
• 19:44
  Your head unpaid. That's like my unofficial job is
• 19:47
  kind of offer on this. Do you think like one of the
• 19:50
  benefits that we have is just because we see all of it, we are
• 19:54
  we are very focused on on providing this to all of our
• 19:58
  customers, make sure that they know the best in class.
• 20:00
  And then we actually host, we're hosting a huge conference in a
• 20:02
  couple days that's like very much just focused on this.
• 20:04
  And we're trying to build community around this stuff.
• 20:06
  Because what I find is that like the true experts that you pay
• 20:09
  and like McKinsey consulting type of thing.
• 20:11
  What I typically find is the industry is moving way too fast.
• 20:14
  And so in reality, what you want is a set of peers who are all.
• 20:17
  Like elite level thinkers arguing and kind of figuring out
• 20:21
  the market together. Because the other thing that's
• 20:23
  happening in the market right now is that the market is super
• 20:26
  dynamic where someone will discover like like the thing I
• 20:29
  always like to say is like if you talk to any founder about
• 20:31
  token based pricing, they're all like, this is not good.
• 20:35
  It is not value aligned, it is not cost aligned.
• 20:37
  It is super confusing. It's really hard to communicate,
• 20:41
  and yet the entire industry has standardized on it because the
• 20:43
  first mover in the space happened to be the biggest mover
• 20:46
  in the space, and they set a precedent.
• 20:48
  I think they set a precedent that worked for them.
• 20:50
  At that point in time, it was very simple.
• 20:52
  But I think what we can all agree on is that it does not
• 20:54
  feel like the right way to encode this stuff.
• 20:57
  And now we're trying to find the right one.
• 20:59
  And when someone does, then like, the industry will
• 21:01
  reconverge. What do you think is the biggest
• 21:03
  risk founders face when they're monetizing AI?
• 21:06
  And, you know, I think in this case of credits and tokens, like
• 21:08
  how can they avoid, you know, leaking value and that they're
• 21:11
  creating with their product? Yeah, I think generally in the
• 21:15
  early days my pretty strong. I mean I got this advice very
• 21:18
  early with Metronome and I think it's important advice is think
• 21:23
  about pricing as a product attribute.
• 21:26
  Am I, am I the Porsche of whatever the heck you do, or am
• 21:31
  I the like yacht or am I the like Honda Civic?
• 21:35
  And it's not to say that that one car is better than the
• 21:37
  other, right? Like if you're trying to drive
• 21:38
  around the city, a Porsche is a pretty bad car.
• 21:40
  But if you're trying to like look cool, it's a pretty good
• 21:42
  car. And I think what people
• 21:44
  misunderstand is that like pricing is a signal to the
• 21:48
  market and it literally determines how your business
• 21:52
  will win. And so when you're thinking
• 21:53
  about pricing, it's like, do I want to be the like, do you want
• 21:56
  to be like Amazon, the low cost player that wins over time by
• 21:59
  compressing margin and basically starving the like low end of the
• 22:03
  market and then give up the consulting fee, blah, blah,
• 22:06
  blah, the huge deep deployment stuff?
• 22:09
  Or am I the opposite? Do I want to be the like elite
• 22:12
  group? And it's like, yeah, you get a,
• 22:13
  you pay a price premium to use our product.
• 22:15
  And that's because it's packaged with great services and it's a
• 22:17
  better product. And I think if you don't think
• 22:19
  about pricing very, very early, like it's, it's inherent in your
• 22:23
  business design because it informs what markets you're
• 22:25
  allowed to go after. It also informs what people will
• 22:28
  pay and it also informs your margin, right?
• 22:30
  Because basically if you are, if you are like pricing as the, if
• 22:35
  you're an infra, like a near infra player and you're pricing
• 22:37
  at the low end, know that your margin will always be rager thin
• 22:41
  and you'll have to do the Jeff Bezos thing of every, every time
• 22:43
  I earn margin, I need to pass it down through as cost cuts.
• 22:46
  And you're doing that because the long term strategy is to win
• 22:49
  the whole market and to just be ubiquitous.
• 22:52
  And and then, and you shouldn't be envious of like the AI
• 22:56
  company that's premium priced that has like 90% margin.
• 22:59
  You like, you are not the same business.
• 23:00
  Like you are playing totally different games.
• 23:02
  And so I think one of the things that I advised folks early is
• 23:05
  like, think about where are you premium?
• 23:09
  Are you like super low cost? Are you somewhere in the middle?
• 23:13
  And how does that fit into your like ICP and what you're trying
• 23:15
  to buy and, and trying to become as a business?
• 23:17
  And then what are your competitors going to do?
• 23:18
  Because so basically I think you have to kind of like, it's like
• 23:21
  a, you have to play that chess constantly.
• 23:23
  And it's not to say you can't make a decision later that's
• 23:26
  different, but I actually do think that what how this
• 23:30
  manifests is people kind of like they're way too especially like
• 23:33
  technical entrepreneurs, they're way too timid to ask for the
• 23:37
  value that they're providing, right?
• 23:38
  And so they asked for way too little and they get way too
• 23:41
  little. And what we did in contrast, is
• 23:44
  like, you know, thank you to our early customers, but we would
• 23:47
  sell a deal and then the next deal, we'd be like double the
• 23:49
  price. And like, we just kept doing
• 23:51
  that until we found the upper bound and then couldn't double
• 23:53
  it. And then and then we're like,
• 23:54
  OK, well, like, here's what the market price is.
• 23:57
  And I think that attitude of like really kind of using price
• 24:01
  as a signal value was really important to us because if we
• 24:04
  couldn't charge at least, let's say, 6 figures for what we're
• 24:07
  doing, we didn't think we could build a business.
• 24:10
  Like we just like, fine, then this is non viable.
• 24:12
  I'd rather learn that in year 1 than in year 10.
• 24:14
  Like, that's a much better lesson to learn.
• 24:16
  You talked about like price as sort of discovering like the
• 24:19
  value of your product. Was there anything in that like
• 24:21
  early customers that helped you shape the infrastructure of like
• 24:24
  actually how you built the product and what like features
• 24:26
  you needed and like how you needed to design, like the way
• 24:28
  you interface with these customers?
• 24:29
  Because I think about like pricing is so crazy through a
• 24:33
  product and then you guys building a product for that like
• 24:35
  it's got to touch a lot of things.
• 24:37
  Yeah. We started by kind of assuming
• 24:40
  that, yeah. So we, we basically the problem
• 24:45
  with pricing and monetization is that literally you could
• 24:49
  probably, if you were like name all the components, I could
• 24:52
  probably name like 100. Like you have to have a tax
• 24:55
  support and you have to have this kind of discounting like
• 24:57
  you just like literally could spend like an hour talking about
• 24:59
  it. And So what we realize is like
• 25:00
  we're a small startup. We cannot build 100 things to a
• 25:03
  good level of depth. So what we had to do was
• 25:05
  identify the narrowest possible subset that would actually
• 25:09
  satisfy market need. And so why we started with
• 25:11
  consumption pricing was because that part of the market had no
• 25:15
  vendors and it had these like 3 problems that were super deep
• 25:20
  and super narrow. And if we just solved those 3
• 25:22
  problems, we'd be able to like sell software and it let us not
• 25:26
  build the other 97 things. And, and that was like a way to
• 25:29
  get into market early, get validation and start really,
• 25:32
  really narrow. And so we basically
• 25:34
  deconstructed the product space like if you like, you know,
• 25:37
  literal sense Metronome doesn't do billing in that we do not
• 25:40
  send invoices to end customers. It's like that's not a billing
• 25:43
  system. I'm like, I agree, it is not a
• 25:45
  billing system. We are a monetization infra.
• 25:47
  We do this narrow set of things. Now over time, we like do more
• 25:50
  and more and more. But the point being that we
• 25:52
  purposely designed the business to be very narrow targeting only
• 25:55
  engineers focus on the hardest technical problem that they did
• 25:59
  not want to do. And and then we are completely
• 26:02
  coherent with them owning the like front end of the experience
• 26:05
  and and the kind of end user experience of of purchase
• 26:08
  product pricing and packaging. And we kind of just took the
• 26:10
  hardest, most annoying jobs that they all hated and caused them
• 26:13
  to be on call all night and we did those and then we and then
• 26:18
  they paid us for that and then they were able to like re staff
• 26:20
  on the more sexy things. Yeah, I don't want to be on.
• 26:24
  So what do you think, what do you think pricing looks like 5
• 26:26
  years from now Scott? Like is it consumption only
• 26:28
  outcome based, something else? What's your?
• 26:30
  What are? You, I think it looks like all
• 26:32
  of it. Like I think honestly the
• 26:34
  history shows us that like basically pricing and packaging
• 26:37
  just gets more complicated over time.
• 26:39
  My meta theory of software is that it's a relatively young
• 26:43
  category. Like, an analogy I like to make
• 26:45
  is like, toothbrushes have been along around for like 200 years,
• 26:49
  OK. And like, mechanical
• 26:51
  toothbrushes existed in the 60s, and yeah, then there was like
• 26:54
  slightly fancier ones in the past 20 years.
• 26:56
  But like a toothbrush is a toothbrush.
• 26:58
  Pricing and packaging for a toothbrush has changed
• 27:01
  dramatically. You can buy it on a
• 27:02
  subscription, you can buy it in pieces.
• 27:04
  You can buy it, you know, in bulk, in giant things.
• 27:06
  And like, actually the battleground for toothbrushes is
• 27:09
  only about pricing and packaging.
• 27:11
  And so my theory of every product, but basically is that
• 27:15
  overtime, as the categories mature, the battlefield shifts
• 27:18
  to pricing and packaging. Think hard drives, right?
• 27:21
  Hard drives. For a long time they competed on
• 27:23
  features like, you know, this is flash storage or this is like
• 27:26
  whatever a disk and this is, you know, all this stuff that I
• 27:29
  don't know that much about. But basically like for a long
• 27:31
  time it was a feature battle. And then in the 20 tens, it kind
• 27:34
  of stopped that way. And now it's like market share
• 27:38
  is won or lost based on pricing and packaging.
• 27:40
  And is it in the cloud or is it on Prem?
• 27:42
  Is it all this stuff? And, and so I actually just
• 27:45
  think that over time, what's going to happen is all of
• 27:47
  software kind of will get held to like every other product in
• 27:50
  human existence, which is that pricing and packaging actually
• 27:52
  becomes the dominant form of competition.
• 27:54
  And, and I think the good thing about software is it's
• 27:57
  constantly evolving. So you'll always have some
• 27:58
  newness in there. But broadly what I think is
• 28:00
  going to happen is that pricing and packaging is going to become
• 28:03
  the battleground. So I think what's going to
• 28:05
  happen is you're going to see seats, you're going to see
• 28:06
  hybrid, you're going to see consumption, you're going to see
• 28:09
  like outcomes, you're going to see flat fee licenses, you're
• 28:12
  going to see everything and and it just gets it's kind of like a
• 28:16
  one way complexity engine. I don't think it ever re
• 28:19
  centralizes something simple. I think in some sense SAS like
• 28:23
  seats and subscription, it was the was was like very simple
• 28:28
  because software as a SAS software as a market was very
• 28:31
  immature. And what you've noticed actually
• 28:33
  you can see it even now seat based software is actually very
• 28:36
  complex now. It has like complex
• 28:38
  entitlements. It has complex like, you know
• 28:40
  like Slack will have like usage based seats.
• 28:43
  So if you don't sign in on a Saturday, you don't pay.
• 28:45
  It's like in 2009 when the stuff was invented, it was like all
• 28:48
  the same. And now it's actually rightly
• 28:50
  complex. And I think the main thing I
• 28:51
  would just say is complexity increases as industries age.
• 28:54
  That's like my main prediction. And I do think the good thing
• 28:56
  about usage is that there's nothing really more fine grained
• 29:00
  than that that I can think of. Like outcomes are just a flavour
• 29:03
  of usage. It's like your outcome is my
• 29:05
  usage. Like it's not these aren't,
• 29:07
  these aren't different, they're just the same.
• 29:09
  And ultimately it kind of redounds to this like stream of
• 29:12
  things that happened in your product that you and I agree on.
• 29:15
  And I choose this, I value them at this and you charge me that.
• 29:17
  And it's like kind of what will that's to me, like the terminus
• 29:20
  of all this stuff, is that it will all be that and then it
• 29:22
  will be reconstructed in fancy packages.
• 29:25
  Awesome. So last question, you didn't
• 29:27
  talk about pay what you want and we've seen a couple of these pop
• 29:30
  up. Is that just the hype thing like
• 29:31
  a marketing thing, or is that something that actually has
• 29:33
  staying? Powerful.
• 29:33
  Wait, what's an example? You know, somebody comes in and
• 29:36
  says, hey, the price can be whatever and I've like you join,
• 29:38
  I've seen memberships where you join a membership and you can
• 29:40
  join from $10 or you can join for 400 right more.
• 29:42
  Common in like communities, creators like Patreon.
• 29:45
  Yeah, it's like a. Donationist kind of thing or how
• 29:47
  do you, it's like they're sort of saying, how do you value it?
• 29:50
  I don't even think the V1 pricing stuff had this right
• 29:52
  where it's like, oh you can buy this software and download it
• 29:55
  once and pay us whatever you think.
• 29:56
  It's these devs that are like more open source guys.
• 29:58
  Indie building the indie dev model had it for a bit totally.
• 30:01
  Yeah. I think of that as like, yeah,
• 30:02
  it's almost like tipping in a way, right?
• 30:04
  There's some base fee and then you're like tipping on top and
• 30:08
  you know, if you get a ton of value, you get a lot.
• 30:09
  I think that makes a lot of sense in places.
• 30:12
  Like basically that kind of pricing works.
• 30:14
  Like it's interesting actually. There's different types of
• 30:16
  pricing that work depending on your trust model.
• 30:19
  So this is a high trust model, right?
• 30:21
  Because basically I'm going to give you a lot like I am
• 30:24
  trusting you, the community to take care of me, the creator.
• 30:27
  And basically the more of a relationship with me, the more
• 30:30
  you're going to pay, the more you have more money in your
• 30:32
  pocket, you're going to give me more.
• 30:33
  I think actually outcome based price is another very high trust
• 30:36
  model or it only works in high trust environments because
• 30:39
  basically outcome based pricing in theory is like I am paying
• 30:43
  you for some business outcome that occurred.
• 30:45
  Let's say that like there's some magic sales bot and it drove
• 30:48
  sales. OK, In order for that to be
• 30:50
  priced as outcome, the following conversation has to happen.
• 30:54
  You and I agree this bot did some work and but you know, I
• 30:58
  objectively made $5 million this quarter.
• 31:01
  What percentage of that do I attribute to the bot versus the
• 31:03
  humans that are involved? And, and what is the uplift?
• 31:07
  The only way to even have that conversation in any way that's
• 31:10
  saying is if you and I have a deep level of trust.
• 31:12
  And so of course the way we see outcome based pricing actually
• 31:14
  working isn't like, let's take that exact example.
• 31:17
  What would happen is you do a three month trial of the
• 31:19
  software and basically you baseline the pre bought revenue
• 31:23
  and then baseline the post bought revenue.
• 31:25
  You can say, look the spread is this and we're going to charge
• 31:28
  you X percent of the spread. And then and then and the next
• 31:32
  quarter we're going to true up, we're going to do the same
• 31:34
  experiment and we're just going to basically goal ourselves on
• 31:36
  increasing the conversion rate or whatever.
• 31:38
  And but think about that entire like journey, I have to trust
• 31:43
  that your revenue number is real and you're not like hiding I
• 31:45
  don't have access to your systems.
• 31:47
  And so it only really works in these more high ROI use cases
• 31:51
  like call center replacement. This actually works pretty well
• 31:54
  because the deployment cycle is 6 months and I'm on site with
• 31:57
  you and I'm seeing that you're literally not hiring people.
• 31:59
  And so I'm like, cool, that headcount never appeared on your
• 32:02
  PNL. I'm going to charge you a
• 32:03
  fraction of that. That's why I like Palantir kind
• 32:05
  of gets to this level of of thing, but it really does
• 32:08
  require a deep trusting relationship.
• 32:10
  And so for me, I actually think one of the interesting things is
• 32:13
  that like depending on the trust level between you, consumer and
• 32:16
  vendor, you can actually get to very different outcome outcomes,
• 32:19
  but also just different pricing models.
• 32:20
  So yeah. Makes sense.
• 32:22
  Where can people follow you Scott?
• 32:24
  How can they find you online and and where?
• 32:26
  Where can we send them to learn more about Metronome?
• 32:27
  Yeah, so I'm like primarily on LinkedIn, I think like I spend
• 32:32
  my time in the cringe cringe factory, but but it's fun.
• 32:36
  And then the other is just our website, ismetronome.com and
• 32:41
  yeah. Offer for like founder mode
• 32:42
  listeners companies that are looking to definitely just.
• 32:44
  Send me, send me, send me a note and we'll make sure you get the
• 32:47
  the founder mode. We can include include the Scott
• 32:49
  e-mail in the show notes so they can reach out to.
• 32:51
  You sure, fine What it's fine. I'm a founder or you know, I'm
• 32:53
  used to it, but or you can e-mail, e-mail sales at Metro
• 32:57
  NEMA mentioned in founder mode and there we go.
• 32:58
  We'll do that. Make sure we'll make sure you
• 33:00
  get taken care of. I think like, you know, I think
• 33:02
  especially if you're early, we have pricing that's really
• 33:05
  designed that it's like frictionless pricing.
• 33:06
  Nice. And so if you're like very
• 33:09
  early, what we typically say is it's nice to get these systems
• 33:11
  set up, but our core scaling value metric is you should make
• 33:14
  more money. Obviously, if you're at 0 ARR,
• 33:17
  like, you know, zero times the number of 0, it's fine.
• 33:21
  We'll make sure that it works for you and that you actually
• 33:23
  find value. And our goal in that first stage
• 33:24
  is to help you discover repeatable product market fit
• 33:27
  and use pricing as a part of that.
• 33:29
  So our goal is not to monetize you.
• 33:30
  So, but yeah, we're super excited to work with companies
• 33:34
  from public companies down to like two people in a garage.
• 33:38
  We have customers of all stripes.
• 33:39
  Awesome, thanks for being here. That was super sharp and
• 33:41
  appreciate it. Sweet.
• 33:42
  Thanks, Scott. Thanks.
• 33:44
  That was an awesome conversation.
• 33:46
  So good, Scott, sure is how pricing isn't just math, but
• 33:48
  it's really just a critical part of your strategy.
• 33:50
  Yeah, and he reminded us that billing, when done right, isn't
• 33:53
  invisible. It's a product and a growth tool
• 33:55
  and a competitive edge. Kevin, what were your top five?
• 33:58
  Yeah. So I think the big one and and
• 34:00
  we're seeing this, you know, AI sort of drives this usage and
• 34:03
  sort of outcome based pricing hybrid is going to become more
• 34:06
  common, right. It's this really like, you know,
• 34:08
  seats plus usage and that gives you this stable base, but also
• 34:12
  the upside when things go right. Yeah.
• 34:14
  And then for early stage, it's really just copy the market,
• 34:16
  right. Don't try to invent yourself,
• 34:18
  don't try to do anything crazy and then just be willing to
• 34:20
  iterate fast. Yeah.
• 34:22
  Packaging is sort of bigger than price, you know, to really
• 34:25
  understand segmentation and like are you selling and have you
• 34:27
  nailed your ICP? And then price really is that
• 34:31
  kind of long term positioning test like testing that ceiling
• 34:35
  daily, like are you actually understanding where you fit in
• 34:37
  the market and what the value that you're closing?
• 34:39
  If this helps you rethink pricing or made you realize that
• 34:42
  maybe your billing system could use a little work or is holding
• 34:45
  you back, send this to your CFO or your product team.
• 34:48
  And if you're enjoying founder mode, drop us a review, like
• 34:50
  subscribe or comment and send this to somebody who you know,
• 34:54
  thinks about dollars and cents. That's it for today.
• 34:56
  Because in SAS, what you charge is just as important as what you
• 35:00
  build.