Subscribe
Share
Share
Embed
Raw, unfiltered notes on pricing, monetization, and value of AI products. From pricing expert, Maciej Wilczynski, Ph.D., from Valueships. Perfect for product creators, software entrepreneurs, and everyone who needs to speed up their monetization game. Topics include: token economics, outcome-based pricing, migrations from subscription to usage-based - the mechanics nobody tells you about. Solo-engineered on my own, always keeping it below 20 minutes. New episodes every week.
(0:00 - 6:24)
Hello everyone, welcome to the new AI. Monetization and what I'm going to break today is effectively about something that is coming from the World Cup and the insights that we kind of observed with Chris on how football was evolving, how it has changed in time and literally how, you know, old school play like Ronaldo and Messi, even though he managed eventually to get into the finale, didn't really work that well in the modern world and I believe that there is one coach, one football coach that is actually a good example of the modern way, a person that is changing the way football should actually look like, so one and only Jurgen Klopp, for those who are not aware, he is a very accomplished German coach who just took the German team, but before he was a coach of Borussia Dortmund and also a coach of Liverpool and he invented a style of football as he calls it called heavy metal football and heavy metal football is all about speed and ferocious pressure, gegenpressing, always counterattacking and basically outpacing the competitors, outpacing the other team and effectively coming with an idea that you need to score more points than the others and while I generally hate this kind of analogies like what Jurgen Klopp told me about B2B sales and everything, I believe that analogies are powerful to understand a certain topic and the overall dynamics in it, so with this in mind the heavy metal football as he currently called it is something that we can label today as heavy metal pricing to be honest because heavy metal pricing is what I would call a rapid constant process of changing and adapting to market circumstances. At ValueShips we call it always work on pricing, but right now with the current market environment, with the current AI speed and currently what's changing, I would call it that this always work on pricing needs to be taken to the extreme and I don't want to get into details, I have a whole kind of substack article written about that, yet I believe that we need to ensure to properly identify the tight guys, the time, the market time that we currently live in, so in this episode I'm going through what is actually changing on the market and what the players are doing, what their tactics they're applying and how the pricing agility governance framework works and how you can use it very quickly to determine what is the best pricing strategy for your company without overthinking it, without overdoing it, but rather using the speed, the agility and bold decisions to win on this super hardcore competitive field that we currently call software. Without further explanation, basically the idea, this high intensity aggressive style of play, relentless pressing, quick transition, ferocious counter-attacks, so this is what football will be in upcoming years, so something that we have observed in the final match for the third place actually between England and football was the final outcome was like six to four, many scores and compared to the final that was kind of played in the old school way, but the key theme we have observed there was agility and change, and coming to the pricing topic in itself is what's currently happening on the market, right? I remember when we started ValueShips, we had a slide which was going somewhere along these lines.
You need to change pricing, you need to think of your pricing four times a year and change pricing two times a year, and at that time we thought about this as very revolutionary. It was not available for most players at all due to many reasons. One of them was, hey, our customers will hate pricing changes.
Second, we are afraid to increase prices. Third, we are afraid that we lose our customers, and fourth, our customers have been with us since forever and there was a whole loyalty thing and generally addressing the kind of insecurities many founders had regarding their overall businesses, but as the time progresses and as we go further in time and with what's happening, we have observed that the problem of customers leaving us is solved, but in a completely different way. So within AI, your customers might leave you eventually, no matter what you do, because this is simply how the market is trying to push into the SaaS field and try to disrupt it.
(6:24 - 7:16)
And in other words, you're already facing this risk. So at the same time, and this is what Kahneman would teach us, if you're facing this risk, you're already facing this risk, so you're kind of already suspecting a certain loss, and with a loss of version, we know that we are into making bolder decisions, right? So what previously was revolutionary and evangelized by pricing experts like us, now it's a market standard. A good company, like a few years ago, changed their pricing once a year and maybe two times a year did something like a smaller change or some tweaks on the pricing page or maybe some analysis where we are, some positioning exercise.
(7:17 - 9:03)
But now the best players that we're observing in the field are literally changing the prices, sometimes even like six times a year. Lovable does that every six weeks, if I recall, and even the old school players like Salesforce, they're experimenting a lot with new models. So kind of what is changing right now is the journey towards the value chain and approaching a new way of value capturing.
Back in the days, the SaaS business, as it is, was heavily underpriced because it created so much, tremendous amount of value, and I was referring to that in the other episodes, that you simply didn't have to care about pricing that much. Maybe when you grow enough and the pace stalled eventually, you wanted to play a little bit with the existing customer base. Maybe when the private equity fund purchased you, maybe evergreen funds like Constellation, you had to do something with the pricing just to boost on the existing customer base.
But right now with the disrupting force of AI, it's literally the new play. So for instance, we see cloud, SAP, ServiceNow, Clay going into the consumption where you pay for inputs, tokens, API calls, all this stuff. But the best players, and I would say this is like above 75, maybe 80th percentile, are going into credits with a certain floor price point.
(9:04 - 10:57)
And this is interesting because what they're doing is they are taking the best of the worst. They're taking the recurring revenue that they managed to get from subscription to secure the floor to get the recurring revenue and to get all the benefits of actually enjoying the recurring revenue. But they are also tapping on the reoccurring streams.
And this reoccurring streams is interesting because when I have written the post, it was even highlighted that this world is not existing that much. And I believe this will change in the future, that we'll have two streams, recurring and reoccurring revenue. And Lovable, Notion, Figma, Canva, Fin.ai from Intercom, they are already having a small cap down on the pricing subscription.
And you pay for the tokens usage once you manage to use them all. And while it's absolutely not, I would say, well, it's not surprising that Lovable, the Gen AI player, the disruptor on the market is doing it because obviously they were not a SaaS business before. They were not the incumbent.
But Notion did exactly that. They started to monetize their AI through an add-on. Later on in the whole cycle, it became a part of the premium subscription.
And now it's becoming a part of their base offering. And it shows a very good gradual journey of what most companies can do, given the overall market changes. So you don't necessarily have to be a Gen AI player to apply the consumption model.
(10:57 - 13:04)
But if you're an incumbent player, you need to think of this as connecting the two worlds. And I think this is the most important insight, connecting the two worlds of what we're having from the goodness of subscription and the additional margins and additional AI monetization that you can get from the credits. And I believe that for most companies, credits in some way are a good way of monetizing AI.
And obviously, I know that the best players in the world are even like this 90th, 95th percentile are trying to push for outcome-based pricing. So you actually pay for what the AI managed to do for you. But I'll be completely dishonest with you if I said that this is the new way of doing things.
Absolutely not. I believe that this is actually available for only a few particular use cases. First, when you fully understand the value and you can quantify it.
And for many SaaS players, especially with the wide range of capabilities, it's not possible. And secondly, you have a very, very hard time attributing it to the actual success. Because it's not that easy, if you ask me, to say, hey, our platform did this, not you did this with our software.
And these are like two different ways of looking at this problem. Because in most cases, companies can't really show this attribution. I'm not saying that this is not possible.
But I try to apply it for the wide range market. And I always try to call it like a five minutes ramen and noodle soup, instant soup pricing. That if I am to create a pricing for a player that already has some subscription model and wants to do something with AI, I would probably not recommend outcome-based pricing because it's hard.
(13:04 - 27:02)
But it's still not yet ready. And probably, you have a hard time explaining it to the customers anyway. But credits has been with us for a very, very long time.
They are already adapted by bigger players, like OpenAI, Anthropic, Gemini, even though if they're called tokens and we just call them credits, whatever it is. But the general motion is already understood. And it's a kind of like risk-free bet of implementing them to your current AI model.
And I believe this is something that credits plus floor should be a new market standard. In the same way as we had good, better, best. Now we have some way of good, better, best, but experimenting with credits and floor and all together.
So the hybrid model right now is winning a platform with credit fees on top. There are a lot of advantages to it. Like buyers, they get a moderately predictable bill.
And vendors, they get cash upfront and also additional streams which protect the margins. So kind of how to do it right instead of just basically making it as a cost-based pricing token. Effectively, these credit systems are not like just a token with a markup margin because it's like selling apples for a more expensive price.
It just doesn't make sense. You need to really define your value metric. So basically this is the same play as we had before, but now you're just trying to package it into a more usage-based offering.
So the play we always had, define your value metric, be clear about where your value is coming from. It is still existing, but you need to do it on a more consumption-based level. So basically this is kind of like decoupling the price from the seeds and recoupling it to the actual value delivered, not necessarily the outcomes.
This is critical. Probably one layer before the actual outcomes is, for most cases, this is a generally good way of doing it. So proceed to consumption as inputs.
This is kind of the most ambitious approach. This is kind of Clay's token pricing, Claw.API rates, all this stuff. Then you can go from consumption to trying to play with with packages and credits.
And this is where the most market will be. And obviously, kind of getting these packages into the actual outcomes, this won't be feasible for most. But as you can see, this is a whole journey and a whole spectrum that is currently happening.
And now we're coming back to the heavy metal pricing and Jurgen Klopp learnings. Because while the market is not converging on the pure usage-based or consumption-based model, this is not like this. It's purely tactical, because right now it's pretty much still unpredictable which model will win in the future.
However, what we know and what we know right now is that the change is happening. And what I'm trying to say here in this kind of short video and audio is effectively that you need to tap on the change itself. My co-founder, Chris Ciszkiewicz, has this kind of labeling theme that he calls always work on pricing, hashtag AOL.
And I would say always work on pricing to the extreme, in a sense that previously you could just find more conversional users, drop a price, add a lower tier plan, go somewhere here, carefully analyze it, where you can find your segments, what are your barriers, all this stuff. This was super important and still is. Having said that, it took time to analyze.
If you needed more margins, discount leaks or raising prices on the heaviest users. This was like a regular play that we did as value chips as well. Maybe competitors launched a promotional campaign or whatever, like tap on the value that you're actually generating.
This was the play that was before and usually there was some thorough analysis that was coming out of it. Now it's rather hard to wait for 16 weeks to provide an actual exercise and then build upon it. It's not that simple anymore because it is simply evolving too fast.
But what you can do and what you can do, and I believe this is kind of like a very good pricing governance framework, it's like you need to treat your pricing as your controllable variable, as a controllable input. It's not like the one number you set and defend forever and not change for the next few years. It's actually the thing that needs to evolve in time.
And why is it important? Because your product ships in batches. It used to take a quarter to produce with a whole product cycle and so on and so on. Now you can ship faster.
Therefore, you're increasing value faster to your product. And with that, you need to take this value back to your P&L faster than just six months yearly price changes or price increases. In other words, whatever happens, it's like because of your product life cycles, because of the market life cycles, you need to iterate the pricing fast as much.
I believe that there are like three main areas that you can tap on and truly defend and truly think of. First of all is obviously packaging. As I mentioned before, given what the players are already doing, if you're looking for a no-regret bet for your current SaaS model, I would do everything to try to tap on the opportunity of a two-part tariff.
It's like the easiest, it's a safe bet to start with. If not on the whole kind of pricing structure, probably you can do it on the add-ons. Add-ons are very good.
Probably I call them like your best friends that you haven't met yet. Because why kill your entire revenue stream if you can simply add more revenue from other streams? Look, this is exactly the same motion that was done by the best companies, like Notion, Motion and Notion. They started as an add-on, added it to the premium packaging, and then put it into base package once it adapted.
But they were monetizing it very early. I believe that packaging is probably like 50 to 60 percent of the actual changes you can make to your model. Look, I didn't even touch the metric itself, which for most companies is quite revolutionary.
Most of the players are quite reluctant to change it. So look at that. You can go into the packaging itself and play with it.
This is one. Second, these are obviously price points. So this is actually interesting.
For years, I was saying this. Don't A-B test prices because your sample is too small, you're optimizing on local aspects of it, you just get the local maximas, not the global ones. Not anymore.
And while you can't necessarily A-B price tests, you can do the actual price changes and market launches. So I believe that you can still test the price point, test the new quotes, try raising prices, reducing them, playing with anchors, magic numbers, observing the overall win rate and conversion, all this stuff. This is very, very, very useful.
And in terms of credits and packages, one of the easiest things to do pricing-wise, it's not necessarily packaging as a whole structure, but rather playing with different price points, is checking how your overall, something that we're calling the metric density, is performing. Let me give you a clear example of that. If you're selling your first package for like a thousand credits, you can do the downsizing and probably sell it for 500 credits in the first package.
It's like the Nutella jar with the dent in it, right? Basically, most customers, they won't notice it changed, but you can check if you actually can do this kind of shrink relation type of a thing that is very useful in order to put customers to buy more, to purchase more and put them into this right motion, right? So this is a good way of playing with price point, not necessarily increasing the whole price, but checking these little small nuances in it and tweaking them properly. Discounts, obviously, this is like the third thing that is coming to my mind. And I'm always hyped about discounts because this is like 4,000 years business that is with us as long as we have trade and merchants from ancient Assyria, effectively, because people always want to pay lower prices and seller always wants to make a deal, right? So this is kind of, the friction is as old as civilization.
And while pricing and packaging the price points and models, they change how sellers behave. This didn't change at all within the last few years, last thousands of years, to be honest. So are we actually giving the right discounts? Should we give discounts of like 15, 20% for subscription models? Maybe we can cut them out a little bit.
Maybe we can apply a deal desk policy that catches them as we go. Honestly, this is kind of the way I believe is still one of the most powerful pricing levers because it's directly applying on the realized price and something that you can do quite easily, if I'm completely honest with you. So while the pricing structure, value metrics and all this stuff changes a lot, the discount problem is still existing.
And this is something that you can tap on. And finally, the key question in this episode that I want you to think of is like, do we really need to go that fast, Maciej? And I would say yes, but there are certain caveats. For sure, you can't afford to go completely clueless.
So you need to have a certain process and treating pricing as a process. So you're ready for the challenge. First of all, track current listings and current clients.
Check what is feasible in the given customer segments. What we can do in this iteration. Don't think of, hey, we will change the price from 99 to 149 and we'll increase the base to 50%.
I did that in the past. I have case studies like that. When one price increase changed the overall business, it was doubling the business, 50% increases.
It was amazing. I loved it. But it's probably not the right thing to go in one go, to be honest.
So as I said, you should treat the pricing as a process. It is kind of the thing that should be a discussion item. As important as new sales, churn, new product life cycles, simply add the pricing as a new item to your meetings and apply it.
Who is an owner of it? Who will be responsible for delivering this change? What can we do to the overall base or to this sub-segment of our base? So in fact, you don't really need to have the whole data sets for that because you just need a good thought experiment. Let me give you an example. So if I increase a price by 30 or 50%, will I lose 50% of my base? If not, fine.
Probably it's a low risk bet that you can take. But also, does it really hurt to change the packaging? In the example I have mentioned, from like 1000 credits to 700 credits in the first batch, or maybe making it quite irregular. Look, most companies have like this, 1000 credits, 2000 credits, 5000 credits, maybe something like this.
But if you look at the actual usage patterns, you will see that most clients, they don't consume even the first package. So why make an unlimited offer like the telco did that captures 90% of the cases and then price it on a higher basis because unlimited is a value in itself. And most people don't really know what are their limits, right? Also, if I'm building an add-on, should I really be pushing this outcome for like a hardcore outcome based pricing and think of the attribution and how will this affect the actual customer processes? Not necessarily.
(27:03 - 28:59)
It's hard. It's a lot of thoughts, a lot of changes, a lot of like thinking about it. Just go with the credit based system.
Yes. Okay, fine. It's maybe not that ambitious.
100% agree. But at the same time, it's super powerful in a sense that it just does the deal. You shipped it, you iterated, you pushed it to the market.
And in the next iteration, you can always change it. You can have two tariffs, like one for these customers, one for other customers. All fine on that as long as you keep iterating.
So 50% bets were probably not, they are probably not possible anymore. I mean, in some circumstances, they are, but in most cases, they probably won't do the trick nowadays. But 6% to 8% in one go and then compounded interest on that.
Why not 100%? And my client always said, like, if we go wrong, we can always control Z, right? So you can always go back to this. So remember, it's not only about the money, while the money is important, but you're also building something that is far more important. If you treat the pricing as an iterative process, and you iterate fast, you're agile in this kind of like this heavy metal thing.
You're building an organization that is having something that is kind of, you're building the organizational capabilities, the pricing capabilities, something that we call value to pricing. So you're building a winning mindset that, hey, we can sell deals at higher prices, we are not losing conversions, we're making more money out of it. And therefore, you're doing something that at value ships, we call a strategic freedom, you can do whatever you want with this money, right? So kind of this is important that while you will see more revenue, better margins, but this is kind of already a lag measure, right? This is something that will happen.
(28:59 - 29:42)
But what is literally changing in the organization, if you iterate quickly, it's like you're applying the strongest lever possible in the business directly to the market faster than your competition. So it is the way of doing pricing now. So again, that's it for now, folks, like go back to your laptops and Excel, maybe use a little help of Claude or whatever you're using.
But go check this out, go push your pricing agenda to the market in the next product iteration. And I'm hoping to see more pricing changes in August, September, that is upcoming after this episode. Enjoy and see you on the next AI monetization episode next week.
Take care.