“Raise prices.” Regular listeners of our podcast have heard this advice more than once. But why is this so key and yet so hard for many technical founders? And how should startups go about raising prices — or more specifically, creating value — for their products?
In this episode of the a16z Podcast, former sales VP Mark Cranney (and head of a16z’s EBC and go-to-market practice for startups) and former startup founder (and general partner focused on all things infrastructure) Martin Casado talk to managing partner Scott Kupor about pricing for startups … especially for category-creating businesses. It’s not all “pricing, pricing, pricing” though — there’s another important “p” in there too!
- Why it’s important to price aggressively from the outset [0:43]
- Using salespeople to gather information about the marketplace [10:07], and how to choose the right salespeople [16:50]
- Discussion around packaging products [20:57] and how to handle pricing errors [25:51]
- Scheduling pricing reviews and other sales strategies [29:16]
Sonal: Hi, everyone. Welcome to the “a16z Podcast.” I’m Sonal. Regular listeners of the podcast have probably heard us say more than once that entrepreneurs should raise prices. Why? And the other question that comes up often is, how? On this episode of the “a16z Podcast,” we talk all about pricing, packaging, and more. Joining the conversation, our general partner, Martín Casado, who was formerly the co-founder and CTO of Nicira, which was later acquired by VMware. And most recently, he served as a general manager for one of their major business units. Also joining is Mark Cranney, who heads up our go-to-market practice and our EBC, or our Executive Briefing Center. And he was a former VP of sales. And moderating the podcast is managing partner, Scott Cooper.
Scott: Hello, everybody. This is Scott Cooper. I’m here with Martin and Mark. And we are here to talk about pricing.
Martin: One of the reasons that this podcast, in general, is so important is, I think that pricing is one of the least intuitive things for technical founders, having been one. And it certainly was my bias, you know, coming out of, like, my Ph.D and doing a technical startup, that you almost always want to, like, take whatever your technology is and get into everybody’s hands — and then you kind of assume later on that, like, you can somehow monetize it. Ben Horowitz was on my board at the time. And I was explaining, I said, “Well, I think that we should kind of enter at a very low price, and that way we’ll have more people that use it.” And he looks at me with his very stern look and he says, “I want you to be very careful, because no single decision will impact the valuation of your company more than the decision you’re about to make on pricing.” And so, that kind of started my foray into pricing.
Scott: As long as you’ve got the mic, I mean, let’s start there. So, what’s wrong with that? So, why not be cheap? And then, why can’t you just raise prices later? What’s the problem?
Martin: So, there’s an interesting thing, especially if you’re dealing with pre-chasm-type markets. So, pre-chasm means you’re bringing a product to market where there isn’t a market yet, or the market is very immature, right? So, there may not be a budget. There may not be a buyer. They may not know how to think about it. And so, here’s the fallacy that many technical founders have, and I had as well. I think if you build technology, there’s intrinsic value to it. This is worth so much money because it’s intrinsically valuable. And that’s not generally what happens. What happens, just in human psychology, is actually, like — [people] will set the value on whatever they’re getting based on how they acquired it. And so, in early markets, nobody really knows how to value what you have. And so, it’s very important for you to establish the value in the market. Otherwise, you end up devaluing yourself right away, and you’ve just cannibalized your top-line revenue almost immediately.
Mark: The scenario you described to begin with is extremely common. And the reason it’s common, over and above what you’ve outlined is, in a lot of cases, that technical founder has not put themselves in the buyer’s shoes to understand what that prospective buyer needs to go through. Because like you described, they don’t know what the criteria is, and how they should look and/or evaluate your solution. They might not even know it’s a solution, because they don’t know there’s a problem. That’s kind of the job of sales and marketing — is to go put yourself in that buyer’s shoes, understand what their as-is environment is.
Answer those questions along that sales process of, “Why should I even do anything, to even evaluate you or look at you?” And then “why you” and then “why now?” The “why now” piece is the piece where the pricing really starts to come into play, and that’s where you’ve actually gotten enough information out to understand what their return would be — what an ROI would be. And if I can’t go show what that value is, and not have that deep information about what that prospect’s costs are gonna be or what my impact of their business is gonna be, then, yeah, it’s easy to say, “I’ll give it away for free and we’ll monetize later.” So, that’s where that comes from, that natural inclination to, “I’ll figure this out later.”
Scott: Mark, so, you’re kind of describing, kind of, value-based pricing, right? So, does that mean in those early days, then, that you kind of iterate on the pricing with the customer, or are you suggesting that people do that analysis and then present that to customers, or is it really just iterative.
Mark: Well, I mean, a lot of it depends on what exactly your — you know, what is your value proposition. If there’s some kind of standards that are out there, and the customer is used to acquiring a solution, you know, and your solution is gonna be similar, there’s models you can bounce off as far as what’s going on in the as-is world. What Martin is talking about — what he was doing was so transformational, it was hard for a customer or a prospect to get their arms around. And Martin maybe didn’t have enough of, you know, the “as-is” — just intuitively, having been in these larger environments, to really, you know, early on understand what that would mean. And there’s a long development cycle before that value would even be delivered. Right? So, the value-based pricing, I think, is for sure true. But part of it’s just — you gotta go through a whole sales process before you can start to get comfortable and have pricing control.
Fast forward a little bit, you know, where you’ve gotten or you’re down the path of getting product-market fit, or you’re beyond that — you know, I see a lot of entrepreneurs that kind of get stuck in the mud on their pricing, or they’ve gone in too low, they’re not sure how to go start to raise pricing. A lot of that is more in the packaging. What is your roadmap? What sets of functionality has the prospect or the customer already realized value from? And then where are you going with the product? Is that something you wanna just charge the same price for, or do you need to start chunking that up, because they might be buying different ways?
The customer or the prospects asking for additional, you know, features and functionality, or scalability, or architecture <inaudible>, that shouldn’t be the same price. So, I need a different type of packaging and a different pricing model to go build on that. And then there’s the option of, like, “I wanna start a la carte,” versus, you know, in a package all at once. Some customers might not need the whole product when you’re first starting out, or they don’t need it in a user workgroup setting. But the enterprise, as they adopt, will. So, you’re holding some functionality back and waiting for them to want that, and then go establish that value to do it.
But I totally understand where Martin is coming from early on, because I see it over and over and over again. And it is, in a lot of cases, the value of the salesforce. The other thing I sensed in his initial answer was, you know — I don’t wanna go, you know, spend the time or the money. And a lot of that is putting the boots on the ground or, you know, inside in the marketing to go, you know, pay for that. But you’re paying for it either way. Right? You’re paying for it by giving everything away for free, because you’re not investing in sales and marketing — or you’re gonna have a channel partner do it, which you’re giving your margin away. Somebody is paying for it. And if it’s something that’s just so new and differentiated and not defined, and it’s gonna require, you know, the customer or somebody’s gotta go in there and kind of really tease out, “How are you doing things now? What is the pain?” They don’t know there’s a better way of doing it. That’s kind of our job as entrepreneurs, and/or as a sales and marketing organization, to be the translator between, you know, kind of the old world and the new world. And that’s where you start to understand, you know, how to piece this thing together from a value-based standpoint.
Martin: I think you can roughly, like, dissect the world into two pieces. You’ve got, you know, market category creation. Your constituency, whatever they are — they wake up in the morning and think about everything, but not your thing. Right? It’s not even something that, like, they consider. And there’s mature markets where you’re entering an existing market where pricing has already been set through, you know, a lot of transactions that have happened. And so, I think in the, kind of, post-chasm or mature market world, I think that there is existing pricing. There are comparables that you can work. But in the pre-chasm world, the thing doesn’t even exist. So, not only you’re describing that your thing exists, but you’re actually trying to attach a value to it. I’ve gotten so many times the question — it’s like, “Okay. So, how do you set that initial price?” You get a lot of these PMM types, they wanna go do this market research, and, like, all the stuff. But it’s very difficult to do research on something that doesn’t exist.
I mean, if you think about a lot of pre-chasm work from the technical side, you’re really being prescriptive, like, you’re not really asking the customer what they want. So, here’s my experience, you know, over a couple of products. The only way I’ve been able to establish pricing in a pre-chasm market is, you start pretty high and then you let the salespeople shake it out. You’ve got really, really good salespeople that go in there, have the dialogue, have the discussion, understand it. And it’s this really iterative process, where you’ve got the sales guys piped into the nervous system of the product development side, and then you get a sense for, kind of, what the market will bear. I don’t think you can have, you know, a bunch of MBAs out there doing research, because this is so new. And so, I don’t know, Mark, like, this is something you’ve done a lot of. I’d love to know your thoughts on that?
Mark: Well, I definitely agree with the start high. It’s way easier to go down than it is go up. When you talk about pre-chasm, the first thing you wanna do is really segment and target and get to those point-of-the-spear-type prospects. They’re gonna be quicker to understand that there’s probably a better way, and maybe have gone down that build-it-yourself-type path where they’ve got the recognition that there is another way. That’s where, you know, maybe kind of one of the first places is to start, from a segmentation and targeting.
They’re gonna be those early type customers, as you’re going through that product-market fit, where you need to be able to understand what it could mean financially, and to also partner with them on what that pricing could be — because they’re the ones where you’re gonna get the most information and input, as far as what the value is gonna be. And it’s always gonna be involving — from a pricing standpoint, in some cases, we may be lowering the price of, like, the foundational piece of our technology, because the market is changing, right? Things are gonna get more commoditized, but we’re racing upstack and charging for new things that are more valuable. I mean, if you think about the whole lifecycle of pricing, you know, in a lot of tech companies, it’s not just where it starts, you know, it’s something you’re constantly — should be looking at.
Gathering intel from salespeople
Scott: So, just to put some meat on the bones, then. So we’re saying, “Look, start high,” you know, to Mark’s point, which is, “Look, it’s always easy to go down.” It is an iterative process. But within that context, there is some framework for how to evaluate the value-based pricing, right? So, in the Nicira case, presumably there are things that engineers can now do in terms of changes to the network that they couldn’t have done before. And that has demonstrable business value, or there’s either fewer resources that are required. There’s some kind of framework where we can begin to work with the customer to say, “Hey, the value that you would get in the organization, either in headcount cost reduction, or flexibility, or new product rollouts or other things, equates to some portion of that being captured through the software.”
Mark: Well, one thing, maybe there, just to keep in mind is, from a pricing standpoint, you know, if you think about a large enterprise — if you break the audiences down, you know, the pricing to, like, a user, like, say in Martin’s case, you know, like, the early people — he was probably talking to network engineers. That kind of intel is gonna be completely different than if you’re up at the top of an organization with the CXO that has a wider view and, you know, is gonna understand a bigger story. And they’re also gonna understand, you know, when you get into headcount reduction, or you get into, you know, different types of ROI-type modeling, you know, what you’re getting credit for around productivity from a financial standpoint or a pricing or a value standpoint is gonna be completely different with mid-level managers across multiple functions, all the way up to a CXO with higher-level initiatives. So, that’s something that maybe a first-time founder, that hasn’t had to go through that whole process — it’s not gonna be intuitive right off the bat.
Martin: Just to add to that. I think it’s just really seductive to think that like, “Oh, I’m an analytical person, and so I can do some basic research. And based on my research sitting in my, you know, offices in San Francisco, I know how to set the pricing, because I’ve got comparables and yada, yada, yada.”
Mark: I have my buddies, too, that’ll tell me.
Martin: That’s right. I could talk to my friends. They’ll tell me, like…
Mark: Not a bubble. I mean, it’s not a little bubble out here. I mean, everybody is gonna…
Mark: …like this, right?
Martin: And that’s actually kind of where I was initially, seriously. I am such a convert for a couple of reasons. One of them is, like, the value of a sales team is certainly to sell and bring in a number. But in my experience, when it comes to setting pricing and understanding what the market will bear, like, there’s nothing that can do it except for sales. This is just my experience. It’s not market research. It’s not marketing. It’s not the entrepreneur. I don’t believe, if you’re doing real category creation, you can just build an ROI tool. I don’t think it’s that simple. Depending on who you talk to in the organization, you’re gonna get, like, two different understandings of what the value actually is.
Mark: Some people aren’t gonna wanna be held to that ROI, right? They’re taking a risk. As you go up in the organization, they’re gonna want a bigger potential return for making this type of a bet, and the risk profiles are gonna be completely different as well.
Martin: Yeah. And I think something that entrepreneurs underestimate is large companies’ appetite to learn from startups. Very often in a hot area, say, AI or deep learning, you’ll have these, like, really smart entrepreneurs that have done their Ph.D, maybe they just peeled out of Google or something. Companies will pay to engage with them. They may pay 100k or 200k for a POC. And so, the entrepreneur is like, “I’ve got product-market fit. These guys are talking to me. The pricing is set.” But the reality is that it makes total sense for the company to do this and to learn from them. And so, I mean, one thing I really learned to appreciate about, you know, setting pricing aggressively early on, is you start to get real market feedback. You can’t delude yourself anymore. People aren’t buying it to learn about it, they aren’t doing this because you’re super charismatic. You get real signals. And the reality is early on in a company’s lifecycle, you really can only take on so many customers anyways. Setting pricing high really helps that.
Mark: Fast forward a little bit. Let’s assume we’re getting past POCs and our first 5, 10, 20 customers, but, you know, I see a lot of situations that we’re getting stuck in the mud with a lot of companies. And the reason they get stuck in the mud, particularly dealing with these bigger companies is — a lot of earlier stage companies, they haven’t thought through what the rest of that deal is gonna look like if it expanded throughout the entire environment. I see it time and time again and I constantly press.
I say, “Look, in almost any proposal-type situation, you want it to have not only your initial pricing per unit set, but you need to go model and understand what would happen if that customer adopted throughout their entire enterprise.” Now, early on, it sounds like a pipe dream and, “Oh, my gosh, I can’t think that far ahead.” But you’ve got to go, literally — kind of, model these things up, because that’s what the customer is gonna be asking themselves. “All right. If I do this proof of concept for 100 nodes or 100 users, but I have 100,000 in my environment nodes or users or whatever the model is,” they’re gonna be thinking ahead, because they’ve been through this game before.
So, when you’re starting that quote process, to take a lot of friction out of the whole buying and selling process — to be able to, kind of, give them, you know, in the quotes, “Here’s what the small deal would look like to get started <inaudible>. Here’s what a medium-sized deal [would look like] with multi-BU. And then here’s what a large deal would look like.” I’ve technically validated it. I know I can scale. I know I’ve got the architecture or whatever. And I know I’ve got the security and things. But I also, I can actually back that up from a — you know, business case standpoint.
Martin: You’ve talking about pricing, which is great, but there’s organizational issues. Obviously, they’re incredibly important in selling.
Mark: There are different models. Right? I’m replacing something that’s been on-prem — now we’re offering SaaS. Two different accounting — I mean, we’re accounting for things different. In the old way, I capitalize it. In the new way, it’s coming out of operating. And so, that slows people down in a lot of cases, just from a financial chops standpoint, and dealing with the customer — and it changes the budget. The other thing that’s different is, I mean, that might have been centralized before with, you know, IT, but the whole world’s changing because it’s a line-of-business-type sell. People get stuck in the mud all the time,
Martin: I think it’s really worth underscoring the point Mark is making, which is, like, you work so hard in a startup, like, moving the ball an inch that often you don’t really consider, like, the macro success scenario. Because I would go in saying, “Oh, boy, wouldn’t it be great to get to the POC? Wouldn’t it be great to get to the initial sale?” But in reality, they’re trying to evaluate the full-on risk, which assumes that they like the technology and they’re gonna adopt it, which means they’re thinking all the way through it. And so, if you don’t walk in having thought through, “What would it mean in the full success scenario?” it’s much more difficult to have the conversation. And this is a trap, I think, entrepreneurs fall in all the time, not just in sales, but generally just trying to be incremental in the way that they build things.
Mark: That kind of goes into — it’s a competence and a confidence-type situation as well. And I might have technical competence around, you know, whatever my solution is, but I don’t have that customer knowledge competence. In a lot of cases, we’re trying to just throw a number out there, because we don’t have any data for that number. We don’t have any confidence in what it’s costing them, or what it would mean to them from a transformative standpoint. So we’re kind of guessing. And some of that might just be a lack of knowledge, and/or lack of willingness to go invest in, you know, the people and the processes that would, you know, be able to bring that to you. But you see it even with companies that do have sales and marketing organizations. And so, I’d be a little careful to say, “Hey, any sales and/or marketer is gonna be able to figure this thing out for me?” Because it does take somebody that’s a little more intuitive that it isn’t taking shortcuts, you know, somebody that wants to go understand and create the value.
Martin: I’ve actually found roughly two types of salespeople that roughly align with the maturity of the market. In a mature market, the customer is already educated. So, like, the type of salesperson that excels in that environment is very different than in the early days. I actually think that the actual competency of the salesperson depends on the size of the market. I mean, different salespeople are optimized for different types of markets.
Mark: I totally agree. One trap a lot of CEOs or founders might fall into here is, “I’m gonna go hire somebody that’s selling something similar to what I sell.” And the problem with that, like in your case — if I wanna go, you know, just hiring all network guys. Remember, I probably screamed at you and…
Martin: Oh, you did. I remember…
Mark: …the CEO back then…
Martin: I remember the conversation.
Mark: …who was — sometimes they are already native. And what you are doing and, in a lot of cases, what other technical founders are doing is so transformational that you’re not even gonna be able to sell that salesperson and/or those teams in a lot of cases, because they’re not even gonna believe it themselves.
Martin: Yeah. But not only that. I mean, this is something that you told me, which is, “Listen, you can’t take someone that’s selling into a mature market and put them in an immature market.” Here’s the big trap that — and I totally fell into this, and I think a lot of first-time founders fall into is — often the mature market salesperson is really compelling.
Mark: Yeah. And I probably might have gotten a little — well, I apologize. Five, six years later, I’ll apologize now.
Scott: Because you’ve changed so much between.
Mark: I’ve changed so much. Actually, I’ve gotten worse. The problem — you’ve really gotta go find somebody that really enjoys and has that intellectual curiosity, and that deep understanding of the customer and/or will tease that out. Somebody that gets excited about doing this exact thing — it’s typically not the one that’s been running in somebody’s playbook. It’s the one that really understands how to go create that playbook from scratch, and somebody that gets excited about this. With the founder and the technical vision, they can go map up to that, and translate that to, “Wow, that could be really transformational.” That person that can take you to those early potential targets and prospects, turn them into customers, learn, stop, put the recipe — you know, take the recipe, make it repeatable, turn that into a playbook, make that scalable. You can’t move it out of the lab, you know, into production unless you’re…
Martin: It’s infrastructure, of course. Yeah.
Mark: …you’re pretty sure, right? That’s a whole different profile than, you know, grabbing someone off the shelf that, you know, has been on a route-sell for their whole career.
Martin: So much of the early customer engagement should be, like, figuring out the product-market fit. So, you really want market feedback that you can use. And if you have somebody that, like, you know, every meeting is a good meeting and they’re using relationships, this and that, I don’t think you get real feedback from the market. But if you got, like, a good hunter that’s looking for the real opportunity and the large deal and will fight for it, I think the business gets that feedback. So, I think it’s so critical to hire the right type of salesperson early on.
Packaging products effectively
Scott: So, talk more about packaging. How do people think about new functionality? How do they think about upgrades to the existing functionality? How does all that play into it?
Mark: It depends on what kind of product we’re talking about. But is that customer early on gonna need everything that’s in the product the way it’s packaged? Or, in some cases — let’s say there’s three buckets of functionality, but in a lot of cases, depending on the user, maybe some buyers only need one. But as it expands, they’re gonna need two, and/or maybe eventually they’ll need all three. So, should we chunk that up to make it easier for them to get started, even though they don’t need the other functionality, or they don’t recognize that need yet? So, there’s — maybe we should have three prices for an a la carte type version, and then maybe we have a package if they get it all up front. But then the other thing is, let’s take the product roadmap and let’s look ahead. Let’s take the feedback we’re getting from the market, understanding what’s coming down the pike, or what we’re thinking about building.
And I think this needs to be a closed-loop process from the field, with product development. As you mature, you have product management, product marketing. All these groups need to be working together and, kind of, challenging each other as, “Is this something that should be added? Is this something the customer is gonna get value out of that we should be charging for?” Because we can put an ROI to it, and we can make it easier to buy early on, and they can grow into it later on with the packaging and/or different options. The other thing is that, you know, one solution in one vertical and/or use case, from a pricing standpoint or a value standpoint can be completely different in another. So, you’ve gotta kinda balance those types of things from a value-based standpoint. You’ve gotta have the knobs just ready to crank. I think a lot of companies wait too long and/or they drop the ball on it.
Martin: So, you’re doing your company, you’re creating your product, you know, you’ve set your pricing pretty aggressively, you’ve established a price in the market, you’re very happy, but you’ve probably necessarily priced yourself out of some constituencies, right? So, now you wanna go ahead and expand your footprint. You maybe want to go to, like, other areas or other verticals. And you wanna do this in a way where you maybe have tiered pricing, but the risk of tiered pricing is cannibalization. If you don’t know you’re gonna do this beforehand, you may not have the flexibility to actually pull out independent bits of value. And so, now you’ve got — on one hand, either you cannibalize yourself with, like, an over-feature-rich product for the lower price, or you don’t get sufficient market expansion because you’ve priced yourself out of it. And so, like, I think that — absolutely right. Early on, you should make sure that you’re thinking through how you can bifurcate this when you do your market expansion.
Mark: Yeah. Another good example on that is, you know, those early customers sometimes if you’ve really — if you’ve done a good job, you’ve got those early wins, and you gave them a sweetheart, lighthouse-type deal, you’ve really gotta pay attention to not just the pricing but how you’ve gone and contracted. Because later on, I’ve seen it happen over and over again, companies just kicking themselves in the tail because they really gave up the farm.
Scott: Because some of this, you’re right, is a product packaging issue. Have you literally sold everything that you will ever build in perpetuity to this customer upfront?
Mark: Right. Let’s go get those lighthouse customers, but let’s put a fence around the “the enterprise” thing and — a lot of cases, it’s just the startup is marching up to this big bad wolf, and come on in and, you know, I’ll huff and puff and blow your house down. And guess what? Yeah. These big companies know how to negotiate and contract, and they know every trick in the book. And we’ve seen some of these teams walk in with their junior varsity uniforms on, and then there’s a lot of injuries that happen. So, you really gotta be careful. So, how do you solve that? I mean, get some help and make sure you get the right advisors helping you with these early-type deals.
Martin: Yeah. I think it’s important people understand how deceptive this all is, because many large companies have outreach programs to startups. So, if you engage with a finance company, like a large bank, they’ll be like, “Listen, we work with startups all the time.” They have whole groups that will take these things and POC them. That, in my experience, never actually makes its way over to the procurement office. So, while they’re great at, you know, engaging with you, lightweight process, POC’ing, finding value, you meet the technical teams — you even have a deployment scoped out, and a professional procurement person in the room. And if you don’t know what you’re doing — I mean, I’ve been in multiple situations, we were very close to basically getting site licenses to, like, 100,000-person organizations for almost no pricing. And this is when, again, Mark comes in and kind of sets us straight. But it’s very, very important to be sure you know for every one of these large deals what you’re doing.
Mm: It’s pretty out there in the forest, but you will get eaten if you’re there after dark.
Scott: This is all good advice. How do you fix problems or fix mistakes? What if we’ve gone out and we have priced too low, or what if we’ve, you know, discovered that we essentially haven’t ringfenced people and we’ve given them stuff? How do you approach that problem? How do you think about it? Are there things, at least, you know, in retrospect, companies can do to kind of right the ship in those scenarios?
Mark: Yeah. I mean, it’s really — I mean, it’s case-specific. A lot of it is in the language of the agreement that you’ve done. I mean, if you’re doing term licensing or subscription-type deals, you know, that’s different than a perpetual. That’s another piece on this contractual thing. The buyers are saying, “We’re gonna do it on our paper” and that type of thing. The startup doesn’t have any paper. They don’t even — I get these questions all the time. It’s like, “We’re trying to figure out how to deal with these guys.” And they want us to mark up their SLAs and their MLAs and, you know, master license agreements and stuff like that. And we don’t really know what to do. And so the reason you don’t know what to do is you haven’t put the work in to kind of figure out what yours is gonna be. So, the ideal situation, as quick as you can, is you gotta think this stuff through, and you need to have your language. And look, early on, particularly even later on when you’re a big company, you’re gonna swap paper and everybody’s gonna mark it up. But you should know what you need in, from a language standpoint, to protect yourself. As far as redoing the deal, it’s just customer or it’s case-specific.
One thing I’d like to add, though, along those lines, though. On the product development side, if you think about this early enough — and it doesn’t have to be right at the onset, but as you grow the product and functionality out — from a product standpoint or there’s things that can kind of turn on and off to help me modularize. You wanna think about how I can do that, particularly — and you get the bottoms-up models. There’s a lot of nuance in that, as well, and there’s always the resistance and/or in the DevOps-type environment on the open-source, as you’re moving up the stack to the premium and/or the enterprise-type pricing and functionality and support, that if you’re not constantly understanding where you’re at with the customers and/or in the competition a lot of cases, you’re probably put yourself at risk.
So, having, on the product side — be able to turn things on and off or be able to measure and monitor and be able to not only establish but measure that value over time. I see a lot of companies, even big mature companies — they’ve done all the front work. They go get the deal. Everybody agreed on, you know, what the value was gonna be. One of the most valuable things is to go back and validate that, and put that into a case study. And the best place to sell something is where you’ve already sold something. Right? So, they’re constantly working with the customer and with the engineering and product development, to kind of bring the best value to the customer — and then measure it and make sure everybody is on the same page. And then, you know, that helps the next 10, 20, 100 customers come on board too from a sureness standpoint.
Martin: Scott, to your question about, like, setting pricing in the market. I mean, the bad news about setting pricing in a market is, it’s really hard and it takes a long time to actually set the price in the market. The good news is, it takes a long time. So, if you enter at too low of a price point, like, it takes a long time for these things to solidify. And so, I do think that there are options to kind of raise price, you know, add differentiation based on functionality — especially early on in the product cycle. So, it’s not, kind of, like a misstep that you wanna do, but if you do it, I do think there’s a lot of time to correct it.
Mark: I agree. I totally agree. There’s gonna be a lot of trial and error in that process.
Pricing reviews and sales strategies
Scott: Yeah. I wanna touch on two other things quickly first. One is just — so we’ve been talking about, kind of, initial pricing and packaging and stuff like that. How do you think about, kind of, the ongoing process? So, how often should CEOs and the VP of sales and VP of product management be thinking about, “When do I revisit pricing?” Is it on a release basis? Is it new competitors enter the market? What are the things that people should be thinking about that give them some guidance as to, you know, how often or how frequently you think about these types of things?
Mark: I think it’s almost constant. Again, a lot of it depends on the stage. But if you’re not reviewing, you know, a win-loss type report on a monthly, at least a quarterly, you know — some kind of fairly frequent cadence depending on what’s going on in your business and in the market — and doing the post-mortems on both sides of that — I think you’re putting yourself at risk. And mapping it up with, “Where am I at with the product?” or, “Where am I at with my customers?” That whole roadmap discussion isn’t just an internal discussion. That’s something that you’re constantly doing with your early customers that may be partway down the journey to fully deploying your solution.
You’re able to check that from a pricing and functionality standpoint. Then, what [does] the competitive dynamic and landscape look like? I might be getting, you know, pressure from below me — maybe it’s from the open-source world, or the homegrown, maybe it’s from lower-end competitors that are just doing small medium, and you’re starting top-down in the market, you know, with the bigger companies. It may be from incumbents that are reacting and starting to, you know, understand that you’ve done some damage to them, and they might be adjusting what they’re doing. So, a constant review, I think, of that is — and, really, a 360-type situation — is something that should be pretty frequent.
Scott: Another question I had was, you guys have also hinted this a couple of times, but the relation between the type of sales organization you can support and what kind of pricing you have out in the market. And I don’t know if there’s any heuristics we can give folks, but, you know, in order to be able to support, for example, a direct enterprise selling effort — which requires, you know, a lot of, you know, high touch — there are probably certain ways you have to think about pricing and what your average selling price is, and what you can get an account, versus obviously something that might be done through an inside sales organization. So, is that something that, kind of, CEOs and, you know, VPs of sales and VPs of products need to think about from the very beginning? Which is, how does pricing relate to the actual mechanism by which I’m gonna go to market? And how should people think about that?
Mark: Yeah. I think it’s pricing, it’s packaging, it’s my product-type strategy. If I’m gonna be a bottoms-up, I mean, it’s gonna start with, you know, some marketing and, you know, a freemium to premium type model, and I’m gonna work on that adoption, and then convert them from freemium, more to the premium. And later on, it’ll be enterprise, then that’s — because my transaction and my ASPs are gonna be extremely small, then that’s gonna drive your go-to-market. A lot of it is product-related. If it’s something that requires you to come in high and move left and right, and be agile in organization, as well as up and down — and because of the complexity is — that typically means there’s also gonna be a big outlay, either kept capital end or operating, and that’s probably gonna require, you know, an outside direct salesforce. The pricing better — and the size of the deals are gonna have to map up to support that to go fund that.
So, you can’t have a mismatch. In some cases, you’re gonna kind of have [it] all, right? You’re gonna have, you know, the ability to sell across all. And you might have to put in the layers of your go-to-market, you know, from a sales and a marketing standpoint to build that bottom-up. You know, maybe a mid-market-type or commercial-type teams and more of the enterprise major account type named account situations, and different types of marketing to drive different types of penetration across the board. So, it really hinges around the product. And it also can hinge around what your product development strategy is, and what a competitive landscape might look like. I mean, I can think of tons of examples.
Martin: Yeah. Often in technical organizations, sales basically dominates, like, costs because it’s a variable cost. We need more sales to bring in more money type thing, where R&D is often more fixed. And the cost of, like, an ISR is gonna be much less than a direct sales force, but only certain types of products or markets are amenable to an inside sales model, right? If it’s a very mature market and the customer is educated, it’s probably more amenable than if it’s something totally new. Also, if it doesn’t require a lot of integration, or isn’t super technical, or the product is made very simple to use, it’s more amenable to an ISR. An ISR is an inside sales rep, which is basically someone on the phone which will call, rather than, you know, has a briefcase…
Mark: Lower cost.
Martin: …hops in an airplane. It’s lower cost.
Mark: Inside. Yeah.
Martin: What we’ve seen in our portfolio companies — a number of them — is actually they’ll experiment with both. So, they’ll start with ISR and a couple of fields and they’ll actually play with the model to understand what works best, especially if they’re moving towards more non-traditional buyers for IT. And so, we’ve seen this in a number of companies. And they’re able to determine over time which model is the most cost-effective.
Mark: Yeah. I also see, in a lot of cases, you know, it starts one way and they wait too long to add the other layers in. I mean, it’s very common on the inside-type bottoms-up motion that, particularly as they build out the management, that sometimes they’ll miss moving up market because the VP might not have that skill set, you know, to go build out that next level. So, that’s something I think the first-time CEOs need to understand and be questioning themselves, and get help to question. “Am I slowing the whole company down because I’ve, you know, under hired?” Again, it depends on the stage of the company, but you should look at and calibrate, and look at both, you know, “What does an under versus an over-provision look like? And how much headroom am I gonna have?” because you could damage yourself by waiting too long.
Scott: So, we’re talking a lot about, kind of, first-time CEOs here. And let’s just assume the product is not taking for some reason, it’s not selling. Yeah, we’re missing our plan. As a CEO, how do you know whether you have a product problem, whether you have a problem with your sales team, whether you have a pricing problem, a packaging problem? How do you tease these things apart in a way that actually helps you think about ways to address issues like that?
Martin: The one bit of insider advice that I would give to first-time CEOs or entrepreneurs is, it’s really hard to find product-market fit. And it’s a saga that can last for years and, you know, you’re gonna doubt yourself, and you’re gonna doubt the product, and you’re going to doubt the market, and all sorts of different feedback. And especially if you’re doing, like, serious category creation, I mean, it takes a long time for markets to mature. Markets mature at their own pace. So, I don’t have a simple answer for what to look for, but I do know that you have to be patient and you have to be persistent and, you know, it takes a while. And I also know, having seen it, once you hit the inflection, it’s really obvious. Once you hit product-market fit, you start to get more engagements than the organization can handle, and you can’t scale enough.
Martin: And be aggressive with pricing.
Scott: Be aggressive with pricing. That’s right. Thank you.
Mark: Thank you.
Martin: Thank you.
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