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Because of AI, pricing models are changing fast - and they're not just disruptive to incumbents, but also to how teams operate.
With Kyle Poyar, we discuss new pricing models focused on outcomes and units of work - and what ramifications they come with.
With Kyle Poyar, we discuss new pricing models focused on outcomes and units of work - and what ramifications they come with.
Check out Kyle's article on the new pricing models here.
This episode is brought to you by by Fullcast, the only AI-powered platform that streamlines your entire sales lifecycle — from plan to pay. With modules like territory and quota management, routing, and capacity planning, Fullcast adapts to your unique needs — whether you need one solution or an all-in-one platform.
Ready to see the difference? Visit Fullcast.com and mention the Revenue Formula Podcast to unlock an exclusive premium gift, just for listeners!
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Creators & Guests
What is The Revenue Formula?
This podcast is about scaling tech startups.
Hosted by Toni Hohlbein & Mikkel Plaehn, together they look at the full funnel.
With a combined 20 years of experience in B2B SaaS and 3 exits, they discuss growing pains, challenges and opportunities they’ve faced. Whether you're working in RevOps, sales, operations, finance or marketing - if you care about revenue, you'll care about this podcast.
If there’s one thing they hate, it’s talk. We know, it’s a bit of an oxymoron. But execution and focus is the key - that’s why each episode is designed to give 1-2 very concrete takeaways.
[00:00:00] Toni: AI is not just disruptive because of the technology.
[00:00:03] It's disruptive because it creates an entirely new way of pricing.
[00:00:07] Kyle Poyar: Over the last 12 months or so, I've started to see a lot more creativity in pricing. An early adopter was Intercom. So Intercom introduced their Fit AI agent product that autonomously resolves customer support requests.
[00:00:21] And they came out with a pretty disruptive model that says we're going to charge you 99 cents per every support ticket that AI is able to resolve on its own.
[00:00:29] Toni: That's Kyle Poyer. He's the creator of growthunhinged. com and he is an absolute pricing nerd. He shares his take on how new pricing models are changing businesses today.
[00:00:42] Kyle Poyar: If you're only charging based on the work that your product delivers, there can be no shelfware. In your business, right? If the product doesn't work, you don't get paid for it. And so all of a sudden, customer success essentially becomes a revenue generating expense in your business.
[00:00:58] Product management becomes a revenue generating expense, if you're intercom, you're able to resolve 60 percent of tickets instead of 40%, you're immediately generating 50 percent more revenue from your customers without needing to sell your customers anything extra.
[00:01:12] Toni: Before we jump into the show, today's episode is brought to you by Fullcast. The only AI powered platform that streamlines your entire sales cycle from plan to pay.
[00:01:23] Customers report up 80 percent cost savings, 20 percent growth in pipeline, and 30 percent boost in RevOps efficiency.
[00:01:31] With modules like Territory and Quota Management, Routing and Capacity Planning, Fullcast adapts to your unique needs whether you need one solution or an all in one platform
[00:01:43] Visit fullcast. com, book a demo, and mention the revenue formula podcast. To unlock an exclusive premium gift just for listeners
[00:01:53] And now enjoy the show.
[00:01:56] Mikkel: I had one thing prepared, but it kind of slipped my mind, and then it's like, is it really that great of an intro?
[00:02:02] Toni: It's like one of those LinkedIn posts that you think of in the middle of the night and you think like, wow, this is such a great LinkedIn post. I will totally remember this in the morning. And the only thing you remember is like, you had a great idea, but not what it was. Do
[00:02:14] Mikkel: you actually ever have this Kyle?
[00:02:15] I know you write a lot on Growth Unhinged. Do you ever have like, you have this idea and the next day you're like, Oh no, what was it? Do you ever get this?
[00:02:25] Kyle Poyar: I actually don't have that much but I my ideas come in the shower or on walks with my dog and so mostly my dog just gets extremely mad at me for stopping on the sidewalk and like dictating it in my phone or typing in my notes app. He's like, what the hell are we doing?
[00:02:42] Mikkel: No, it must also be embarrassing. Like when it meets the other dogs, it has to kind of explain, Oh, my owner. It's because he has this thing he has to do, you know, sorry. This
[00:02:52] Toni: dysfunction.
[00:02:54] Kyle Poyar: He's posting on LinkedIn
[00:02:55] right
[00:02:56] Mikkel: Yeah, he's an influencer. He's a very important person. Oh, man, that was also good. Then he has something to brag about.
[00:03:04] We are fortunate to have something to brag about. It's you returning to the show. Thanks so much for joining again. I think it's been probably I want to say a year since you last spoke with us. It's been a while. And since then, oh boy, has a lot of things happened.
[00:03:19] One of the things we really wanted to get into with you today specifically was Pricing.
[00:03:24] Yes. We know from the last conversation and also if, if you, the listener have, have read growth on hinge. com, you probably have an idea that this is something Kyle cares about. That's, that's not being too presumptuous on my part. I'm assuming here, Kyle.
[00:03:36] Kyle Poyar: Uh, Yeah, people probably know I'm a pricing nerd. And now it's, it's actually a good time to be a pricing nerd because there's finally like innovation and it's it's a C level topic.
[00:03:47] Toni: Yeah. Yeah. let's let's start maybe there. You know, why was it, why has it been boring for the last couple of years? You know, what was the situation that, that you saw?
[00:03:58] Kyle Poyar: Yeah. Look, if I rewind the clock to. Let's say 10, 15 years ago that we were still in the wave of the on prem to SaaS transition. So SaaS pricing was itself a relatively new thing, and we were figuring out what it looked like. If you then you know, fast forward to say the 2015 to 2020 era, it felt more or less like a science.
[00:04:19] Most pricing was, Seat based subscriptions, and then you'd start looking at how do you monetize different features into packages so that most companies would have some sort of good, better, best packages or platform fees that were, you know, in addition to the per user pricing. But if you looked at SaaS companies, I'd say about 70 percent of them had some form of good, better, best, and the majority of them had some form of seat based pricing wasn't a whole lot of innovation, right?
[00:04:47] We were debating things like. Could SSO go in the middle package or the enterprise package, right? Not like the most strategic conversations. Now, obviously, infrastructure players came out started, you know, if you look at AWS and others, really uh, saw the rise of consumption based pricing and then saw that move into the application layer as well over the past few years.
[00:05:10] So started to see some real innovation, I'd say, particularly around 2021 period. But now that has accelerated pretty dramatically.
[00:05:20] Toni: No, I remember kind of the time really is about At least in the boardroom, like, how can we, how can we increase pricing? That was the only strategic conversation about pricing, at least that I know of. And this was actually also what the three of us talked about last time, right? If you, if the listener wants to go back and listen to this what, what could be some ways to strategically increase pricing?
[00:05:39] And you should. You should dare to do it and it's much better most of the time and you only hear about the bad things. So, so this was really kind of the, the past and most of the focus actually that's been going on. So, I mean, some of the listeners can probably already guess, but, but Kyle enlighten us.
[00:05:53] What is, what has changed in the last, I don't know, a year or so. I'm not sure, you probably have kind of the time frame better than you had, but what has changed that is starting to make this field interesting again?
[00:06:04] Kyle Poyar: Well, yeah, there's been, there's been a lot of fun changes. So if you think about, you know, chat GPT, really not that old of a technology. But as folks started getting used to Gen AI, seeing AI products sort of pop up anywhere. Initially, we were in a, in a model of, you know, you've got the LLM players that would maybe license their, their products and maybe charge that on a consumption, consumption basis.
[00:06:28] And then you'd have folks that baked in AI to generally augment people, so it was an AI co pilot world. But the last 12 months or so really have seen the rise of AI specific agents. So AI that operates sort of on your behalf or takes actions rather than just augmenting a person. And when you think about these AI agents and you pair them with really specific workflows that they can solve, all of a sudden AI is actually doing the work of people, which is something we've talked about like in the past.
[00:07:00] Being the future for a while. Now it's more and more starting to be here. And so if AI is doing the work of people, charging per human user who logs in, doesn't really make a whole lot of sense. Like as your product gets more valuable to your customers, they're going to be paying you a lot less. The incentives aren't, aren't aligned at all.
[00:07:21] And so we've had to rethink what is the way to monetize AI products, particularly AI agent products.
[00:07:30] Mikkel: Yeah, I mean, so there's definitely a lot of experimentation happening here. You did a post not so long ago where you also shared some of examples. And I think it would be interesting to hear how are people then adapting their pricing with these agents appearing and being implemented in, you know, both for incumbents, but also for new entrants.
[00:07:46] I think it would be great just to get some inspiration of what, what is happening to pricing then.
[00:07:52] Kyle Poyar: Absolutely. Well, so for a while, again, it was a little lackluster, right? Like these companies would have pretty innovative products, and then they'd still charge per seat for them particularly the legacy incumbents that had already charged per seat. They kind of had an AI skew that they charged as an add on.
[00:08:09] So think about like Microsoft Copilot, for instance, just An additional per seat charge. But over the last 12 months or so, I've started to see a lot more creativity in pricing. An early adopter was Intercom. So Intercom introduced their Fit AI agent product that autonomously resolves customer support requests.
[00:08:29] And they came out with a pretty disruptive model that says we're going to charge you 99 cents per every support ticket that AI is able to resolve on its own. And we're going to have some pretty smart metering to make sure that AI is actually resolving this ticket. But you're only paying when AI works.
[00:08:44] And it's like super aligned in terms of outcomes delivered by, by AI. And then over time there's been I'd say a lot of then variability, right? So you have folks that are on the bleeding edge with this true outcome based pricing You know, OpenView where I was, you know, formerly a partner backed a company called Charge Flow which does chargeback managements for anyone who sells online and charge flow, actually uses an AI agent to resolve these chargebacks.
[00:09:13] And bring money back into the pockets of merchants. And they take a 25 percent success fee. So they charge no subscription fees, no software fees, no per user fees. Just 25 percent of whatever revenue they're able to generate through this essentially combination of software, AI, and services.
[00:09:31] So that's, that's I would say on the most disruptive But then you've got, you know, this middle layer that's not totally charging per outcome, but isn't charging per seat either.
[00:09:43] And what it often looks like is trying to figure out the units of work that AI is delivering and capturing, you know, that that unit of work and charging based on it. So if you think about what this unit of work might look like, if you're in the AI photo editing space, maybe it's per photo edited by AI.
[00:10:02] If, if you are you know, in a in the CX space, it might be charging per conversation where that you use ai in that conversation in you know, in the case of a, a security product, it, it might be you know, based on specific kind of security issues resolved by AI that you might think of.
[00:10:21] So not going all the way towards the business outcomes generated by the product. But getting to the work that AI is doing, so I think like a great example is 11X, which is a fast growing company in the AI SDR space. They could, there could be a world where they charge for every opportunity, qualified opportunity they generate for you, right?
[00:10:42] Which would be outcome based pricing for an AI SDR. But they also can't totally control that. And an opportunity is worth a lot more for an enterprise business selling million dollar ACV deals than for an SMB business selling, you know, thousand dollar ACV deals. And so if you look at products like that, they, they charge more on this middle ground, this units of work based pricing where they say, We're going to take the work of an SDR and we can kind of break it down into tasks like identifying a company, identifying the people at that company, doing research on them, sending the email, and so we're essentially going to charge you For the tasks delivered by AI and, you know, the conversion rates are going to be what they are.
[00:11:26] But, you know, we're going to charge you for essentially what the AI SDR is doing. And by the way, we think an AI SDR is going to do a better job than a human. They're going to be doing these tasks constantly. They're more flexible to scale up and down and it's cheaper, right? Than a, than a human SDR.
[00:11:43] So I, I found that's really the landing point that a lot of companies are, are, are moving towards. But then the complexity really goes to how do we define a unit of work in our space? And how do we also think about packages or different pricing? So are we just charging per unit of work? Or are we charging still maybe a good, better, best model?
[00:12:05] Or some sort of model where we can differentiate pricing based on maybe different skill level, accuracy level? Speed, you know, there's a whole host of things we could charge more or less on. And so that's sort of that next front frontier as well.
[00:12:18] Toni: Do you, do you think I mean, so some of that pricing model obviously sounds fantastic and, oh, finally, we can connect directly to business outcomes. This is what we wanted to do. You know, the value metric we wanted to impact for years, I feel some of that pricing model is driven though, also by the direct cost, right?
[00:12:36] Kind of using those LLMs cost something, and I don't want to call it cost Plus pricing or, you know, that kind of old, old way of doing it. But there was some inspiration taken from Hey, we actually need to pay per each action, so let's try and kind of melt these two things together. Do you think that some of that might drop away in a potential scenario of those costs just going further and further down, whether or Their will is a different, is a different question. But once those costs are less important, you know, potentially, do you think teams will move away from this? Or do you believe that this way of charging will actually stick?
[00:13:14] Kyle Poyar: Yeah. You know, it's an interesting question. And so as a general rule of thumb, like I think that yes, there are costs with AI, you don't necessarily want to deliver a limited, you know, Right. And then have customers drive up costs and have a fixed price that they're paying and then negative gross margins.
[00:13:32] But most of the companies that I've been spending time with, the margin profile, these businesses are actually better than you would think. And so they're not charging true cost based pricing. Like if they wanted to, they charge truly like. on a consumption basis. So like the compute used or metrics like that but they're, they're not really as emphasizing that cost plus pricing as trying to think about value pricing for the customer.
[00:13:56] To me, it's where things really come down to is how good are you at solving a business problem for a customer? And so if you can be really specific around a target customer. A specific workflow that people would usually outsource or, or hire, hire into. That's, you know, a pain a painful workflow that's attached to business value in some way.
[00:14:19] And you can say, Hey, our combination of software, AI and maybe humans in the Loop is able to totally own this process for you from beginning to end. I think it's a, it's a very customer aligned model to say, Hey, you're not gonna pay for shelfware. You're not going to pay us platform fees or subscription fees, independent of whether our product works.
[00:14:41] You're only going to pay us when our product actually delivers real work for you. And we're going to be, you know, it's going to be low risk in that sense. You're not overpaying. And as your business is successful, we'll share in that success. I think that's a pretty compelling message for customers.
[00:14:57] And I personally, but that's the kind of message we want to keep communicating. Even if our underlying costs go down.
[00:15:05] Toni: So quick follow up question from my side and then, then, then I'll, I'll hand it to Michael, but the I think. What we can currently see in the market, you mentioned 11 acts, there's Writer, there's CopyEye, there are a couple of, you know, and I'm mentioning a bunch of others, you know, I'm not mentioning a bunch of others. You can, from the outside, see the success of, hey, they're closing massive funding rounds with Tier 1. Investors, and that sounds super exciting since, since you're a bit closer to them and you don't obviously need to, you know, mention any names. My very simple question is, does it work right? Kind of in theory, it sounds so good and it sounds super straightforward. But I think what our audience would be interested is like, Hey, you know, is this another hype or does that actually work this way of pricing?
[00:15:47] Kyle Poyar: Well, I mean, pricing in this flavor has existed for a while in different industries. So like, you might even go back to Michelin tires, for example, that historically charge per tire sold. But I don't know how long ago it was, but they realized, hey, as we are able to get better at building more durable tires maybe we can start putting a chip in the tire and look at how many kilometers that tire's being, being used for and move to essentially per kilometer driven, which if you're buying on behalf of a fleet that's much more value oriented, value aligned for your business because you're making money as you're, as you're taking on more shipments and driving more More kilometers.
[00:16:33] Right. And so if you think about Bridgestone and Michelin and other tire companies being able to do this, probably what, 20 years ago, it's not that groundbreaking in software. And like, I think we maybe overcomplicate things for ourselves in the industry, or only look at ourselves as the alternative when really our customers are buying a host of different products that aren't just technology products.
[00:17:00] But yeah, I mean, to me, there's going to be some challenges, especially around helping customers wrap their head around this model, helping them budget for it, helping communicate the ROI of the product. But I think there's a lot of ways to work around that. And folks like AWS, Snowflake, a host of others had to figure it out.
[00:17:20] And it's just now that more vertical SaaS and application oriented companies are having to figure out for themselves as well.
[00:17:25] Mikkel: I kind of wonder, there's going to be a bunch of listeners. Who are either now implementing AI and then need to kind of figure out, well, what do we In the product
[00:17:37] Toni: or in the In the product, in
[00:17:38] Mikkel: the product. And then how do we then price it out? Like, what kind of advice and conversations, like, can you maybe share a bit some of the things you've worked through with other companies to kind of help those listeners out, make the best decisions basically?
[00:17:51] Kyle Poyar: Absolutely. Well, the So the default for most folks tends to be to look at your past pricing and to look at the, like, competitive landscape. But for many of these products, there isn't that much of an analog competitive landscape. The competitive alternative might be a services firm, right, or doing this in house.
[00:18:12] So what I, what I prefer to do is look at the, essentially, the What's the alternative for the average customer? So what are they doing today to solve this problem and how much does it cost them? And that could cost them in terms of direct costs, labor costs or missed revenue, risk for their business, add up all of that costs.
[00:18:31] And then if we think about what we're able to deliver, what's the before and after around what their business looks like. And so what's that, what's that economic value we're able to create for them. And ideally, you could do that across a few different characteristics of customers. Maybe it's an SMB, handles it X Way.
[00:18:50] Here's what that business case looks like. A mid sized customer, a larger customer. You could start to model that out. So once you understand that, you then want to look at what's the unit of Measure that aligns with how folks are seeing values in your product that you can use as your way of charging for it.
[00:19:10] And that, you know, historically it's been seats, but I think for many folks, they're going to realize, Hey, there's actually a lot of alternatives that might be more relevant for our product. And some might be, you know, you could go all the way to say, Hey, it's unlimited, but we just charge based on the size of company, like based on your total number of employees.
[00:19:27] You could, you could do per seat based pricing. You could have different seat types, you could have usage or consumption metrics, you could have metrics that align with units of work, or you could have outcome based metrics. But you want to basically brainstorm the realm of the possible, and you might come up with maybe 10, maybe 12 ideas that are going to be relevant that you can meter based on.
[00:19:50] And you want to start looking at, alright, what correlates well with this economic value we create for customers, What allows us to position our products in a way that people can really understand how we're different and how we solve that problem. What can we actually measure and enforce in terms of our metering and our billing?
[00:20:08] What feels predictable for customers? And then you're also wanting to look at a metric that ideally is stable or grows over time for the average customer. And so, with that in mind, if you're a cell phone company, you'd be used to charge for minutes of talk on the phone. That wasn't a growing metric.
[00:20:26] Internet consumption was growing. And so folks very quickly moved towards unlimited pricing, but charging more based on gigabytes of data consumed, right? Now, now there's even Future revolutions, but, but it is important to look at where those tailpins are so you can share the customer success. But then from there, it's, you know, it's a, you know, rough t shirt sizing exercise to figure out the best couple of metrics that could be relevant for, for, for your product and for your customers.
[00:20:54] And then it's having conversations with customers, with, with market participants to get their feedback. And I find that you know, product managers, CEOs, revenue leaders. They have a lot of customer conversations, but they rarely ask questions that get them pricing information in those conversations.
[00:21:13] And so it's being willing to have that pricing talk. And we can get into the best ways to do whatever I've written a bit about that. Cause there's an art and a science to it.
[00:21:22] Toni: So one thing that stuck out for me, you were also talking about you know, how does it correlate to what the customers are doing right now and what are they paying for that right now? Right. Especially once you go into really the outcome driven piece. And to a degree for me, it makes it so much easier to run through this ROI calculation and so much. Less BS to have an RI conversation. Right. And I, and I think in this example of Intercom where kind of this charging $2 per outcome or I'm not sure what the numbers or $1 nine, I don't know what it was. But you know, and maybe, maybe it's, maybe it's a silly question. Do you think that people buying Intercom for this purpose now, do you think that they're now going, okay, so I have. 10, 10 employees, total ballpark. This is what they cost me. And I have so many completed or resolved tickets per week, per month. Oh, actually this is how much I'm paying per Resolve ticket and then comparing it to what, what Intercom is charging. Do you think that this way of pricing it out is also changing how companies are looking at their own cost structure and then making decisions like that is, is a bit of a convoluted question.
[00:22:30] Sorry for that, but like, this is kind of changing the mindset of people are going about this, I feel. And I just wanted to know if, if you see this actually happening like that.
[00:22:39] Kyle Poyar: Well, this is, I mean, The goal should absolutely be helping the customers figure out how to budget for and pay for your products, right? And how you charge often influences how people think about, you know, what budget your product comes out of. If you were charging a seat based subscription in your intercom, they're going to think of this as technology spend.
[00:22:59] More analogous to other tech tools they hire, they bring on in CX or other spaces. If you're charging more based on the work that your product's delivering or the outcomes of that work, you're looking more at offsetting hiring. And so then the alternative for your customers becomes more about, you know, maybe how much they pay for outsourced.
[00:23:19] Vendors to do CX, because a lot of CX isn't just done in house, it's, it's through third parties, or how much you're doing in house. You might want to do a pilot, right, to be able to measure that it's actually working and actually allows you to To maybe displace headcount because you might not believe the the, the story on your own and you don't normally want to see that to make your own business case, but yeah, I mean, in general you want to help really help the customer understand how your product's going to be delivering a significant ROI for them around and, and they're in it, not just being theoretical ROI based on theoretical time savings for salary employees, but helping them actually realize that.
[00:24:02] ROI, which is, I think, a missing link for a lot of companies, and then the more you can position your product as ROI positive, so the more they use it the more ROI they get, then it makes that lack of predictability around pricing actually a benefit because it's, your, your incentives are aligned, it's win win.
[00:24:20] And I think about, like, an example that comes to mind for me is if I'm Twilio, right, in the SMS space Twilio charges per SMS message sent. If I'm a sales rep for Twilio, I probably don't want to say, have the conversation of how many SMS messages are you going to send? All right, here's your bill. Take it or leave it.
[00:24:39] I want to go. Alright. Well, well, all right, so one of the most important use cases for customers like you is appointment reminders. What's your no-show rate today? Oh, it's 25%. What does a no-show cost? You cost your business. Oh, it's $50 a no-show. Well, we found if you text your customers the day before and then maybe an hour before your no-show rates can go from 25% to 20%.
[00:25:03] Well, here's the ROI that's able to bring you, and here's how much that costs you, essentially per no show, based on the number of SMS messages that we'd send. This is an extremely positive ROI story for you, and you're going to make more revenue because you have fewer no shows, you're able to charge them full price.
[00:25:21] You can imagine that's a very different conversation. And so I think one of the most important things with this is that people need to internalize is. Yes, we're talking about pricing, but you need to make sure that this isn't treated as a pricing decision. It's actually treated as a company strategy decision because it influences how you run your sales motion, the kinds of profiles and AEs you hire, how you think about rep compensation, kind of like a whole host of aspects of your business.
[00:25:48] Toni: I just, I don't have a question, Mikkel, sorry, but I just wanted to kind of wrap on and kind of point out that that's, it's a pretty cool insight to think about your pricing strategy as a way to direct out of which budget is might coming from, right. Come from, from the, from the customer side. So the, the one thing you mentioned, like, Hey, you know, this might come from the hiring budget for CX, obviously might run a, run a pilot to make sure, you know, shorts trusted. And the other case you, you know, it's probably going to come out of the sales budget and not out of the technology budget or whatever. Right. So I think that's a really cool insight for everyone, you know, thinking about pricing to use this, to help direct where, where's that money actually going to come from.
[00:26:25] Mikkel: Yeah. And I
[00:26:26] Kyle Poyar: budgets are a lot bigger than the tech budget, by the way.
[00:26:29] Mikkel: yeah And we want to tap into those if we want to tap into those for you I think the other interesting piece other than this being a strategic conversation is also you kind of Hinted at some of the challenges and there will be a bunch of incumbents now Kind of embracing this new way of pricing because they either build AI or force to. What are some of the challenges they're going to face? You mentioned comp plans. What, what are some of the problems? Maybe we should talk a bit about that because that's also something they need to kind of be aware of and solve in this process.
[00:27:00] Kyle Poyar: Absolutely.
[00:27:01] Well, you know, I think one of the things that's just really critical to emphasize is that if you're only charging based on the work that your product delivers, there can be no shelfware. In your business, right? If the product doesn't work, you don't get paid for it. And so all of a sudden, customer success essentially becomes a revenue generating expense in your business.
[00:27:23] Product management becomes a revenue generating expense, where if you're able to solve at a higher rate, right? If you're intercom, you're able to resolve 60 percent of tickets instead of 40%, well, you're all, you're immediately generating 50 percent more revenue from your customers without needing to sell your customers anything extra.
[00:27:40] Right? So it's it, it emphasizes really this, this customer success mindset, which we've talked about in SaaS a lot. But I think we've talked about it more than we've actually internalized it as an industry. And I think this is an interesting evolution. It's, you know, when we moved from on prem to SaaS in the first place, Yeah.
[00:27:58] Customer success, you know, formed as a function because we had to, you know, hope the customer would actually renew with us as opposed to, you know, buy for that year and then, and then churn. But this raises the bar. It's not about quarterly check ins or, you know, setting up some onboarding and then coming back at renewal.
[00:28:16] The bar is a lot higher. So I really want to underscore that, that aspect. And the second thing from a, from a sales standpoint you know, we used to celebrate that commitment. So let's, we're closing the sale. We're getting that 50K, a hundred K contract, ideally with a multi year commit, and then sales is pretty much celebrating it, maybe hit their quota or, or they're gonna, you know, have that added to their quota and then they're passing off that customer to the next team to go manage.
[00:28:48] And these kinds of models you generally don't want to oversell the customer ahead of what the product's delivering. And so there might still be an upfront commitment level, but that's more right size based on actual consumption. And generally you want to give the customer some flexibility of starting small, Proving value and then growing as they see success because they, they probably mean you don't even believe of what AI can do for them right out of the gate.
[00:29:14] And so in this world, you know, reps need to not actually slow down deals and try to oversell up front and then set up a customer for churn or downgrades. They need to be working really hand in hand with a customer to identify the most immediate use case. Get the product rolled out and then, you know, start generating revenue with that customer and then expanding the customer over time.
[00:29:38] And what that tends to mean is compensation that's more tied to ongoing adoption and spend rather than that initial commitment. But then, you know, obviously that's a very different type of compensation model for a rep and, and it often a different profile of rep that that attracts. And then the third thing to just highlight is that This all changes the financial kind of management of a company quite a bit, so, if you're, if you moved into this sort of more flexible, unpredictable spend that's tied with customers consumption or the work your product's delivering, there's more seasonality.
[00:30:14] It's not necessarily kind of classic annual recurring revenue. It's more like an annual revenue run rate type of model which confusingly is also ARR
[00:30:24] as an acronym, but you're thinking about like, ARR, you know, becomes what the classic ARR becomes less relevant. And you have to look at different measures to understand the health of your customer cohorts and how to communicate the health of your business to potential investors.
[00:30:40] Toni: So there was a lot of stuff in there that I almost want to kind of jump onto. What, what, what are the things that stood out for me? So we, we talked about the usage based pricing and the sales process, and this might fluctuate, hopefully it goes up. And you know, generally speaking, I think a lot of people, a lot of CFOs will be like very scared of this.
[00:30:58] Not, not because of the you know, bean counting that needs to happen, but Oh, what if, what if it goes the other way? Right. And in connection to that, what we have seen from folks like Snowflake and AWS and so forth, right? In the beginning, it's, it's on the credit card. And then you have those fluctuations, you have the flexibility and all of this is great, but then at least, I don't know, at least we, you know, always ended up doing a, a full on deal, like a annual commits, annual upfront, or however kind of then the payment was. Was done, but it felt more sassy than it felt usage based pricing. So help me a little bit understand, right? Because it's, is, is usage based pricing, is this approach actually. Almost predominantly like an acquisition tactic. It's like, Hey, you know, no risk, no, no, no gain, no, no, no pain. And then eventually it will turn into actually a proper commitment and grow into, you know, the, the trustworthy revenue that, that we all like.
[00:31:55] So really kind of, is this, is this an, an acquisition play potentially? Yeah.
[00:32:01] Kyle Poyar: It's a great question. Well, so I guess the way I think about it is often it is there is an element of maybe pay as you go or being able to start on a low commitment that is an acquisition play because it lowers the barrier for customers to try out your product. There's really a low barrier and very low risk for them, right?
[00:32:19] They're not paying for shelfware. And then, yeah, to your point, the general trend is, you know, folks see value, and then maybe they, they want to expand their adoption, maybe instead of a departmental rollout or pull out for one workflow, company wide rollout, might want discounts associated with that larger volume commitment, they like the predictability of a bigger like the predictability from a, from a budgeting standpoint, right?
[00:32:43] And yeah, you at that point have a better estimation for what that usage actually looks like, because you don't necessarily want to charge the customer, let's say, for your intercom for like a million AI resolutions. At the end of the year, you deliver a hundred thousand, and the customer's like, what happened?
[00:33:00] You just way overcharged me. I'm either going to churn, ask for a refund, or like, Have a massive downgrade at renewal in this model. You already know what that usage is looking like, you know, where it's trending and you can estimate what that commitment should look like in the future. So I think it's a, there's an acquisition play.
[00:33:19] There is this play of kind of growing with your customers who will land and expand motion. And I do think that it's still, it still does go back to more of this consultative sales model. Where the rep has to understand the use cases of the customer and they have to size up those, that use case, those use cases in terms of adoption of the product.
[00:33:37] They need to generally talk about ROI with customers and what are the results they're going to see based on those specific use cases and workflows. And then often what, what I tend to see is that compensation is tied to either that Book of business over time that a rep has, so a combination of landing new customers and expanding existing customers.
[00:33:59] Or there's some sort of estimate for, Hey, regardless of what we sold in terms of the commitment, we're going to estimate what that spend is going to be over the next year. We're going to give reps credit for the estimate, regardless of what's committed or not. And then we'll just true up based on the actuals.
[00:34:16] And so it's, it is, it gets a little bit more sassy in terms of, of the operating model, but there's still some nuances and complexity and, and there's some questions, for example, of like, do you do A gift card model where that usage can consume flexibly over the course of the year, maybe even across products, or do you do it as a high watermark based on a given month, in which case customers go into overages more frequently, and there's some seasonality.
[00:34:43] Like, there's, there's a bunch of these, like, more operational detail that still come into play when you have these alternative pricing models.
[00:34:53] Mikkel: I think my, my brain is kind of going into overdrive right now because, because initially on the surface, on the surface, when we talked about this whole, Oh yeah, you're going to charge on the best basis of a task completed. It's like, Oh, simple. That's a very simple thing. You can just do like intercom and implement that easy, but actually just to maybe summarize some of the points you've made now, it's, well, you know, It's going to change the funding profile, how you basically evaluate the business.
[00:35:20] That's, that's not a small kind of change, by the way. There's no luck at the same level of predictability. Basically, customer success needs to be entirely changed. Maybe the team you have there is not equipped to actually get customers to get more tasks completed. Might, might not be the case. Are you going to be able to calculate custom acquisition cost payback? Are you actually going to be all of a sudden to do that? There's just a bunch of things changing. Yeah. How do you calculate
[00:35:46] Toni: churn? How do you know?
[00:35:48] Mikkel: But now comes the, now comes the kicker, right? Eventually someone will ask the question or get asked. Hey, we're gonna, we're going to do this task based pricing that Kyle talked about on the revenue formula.
[00:35:59] He
[00:35:59] Toni: sounded pretty smart about it. Yeah, he
[00:36:01] Mikkel: sounded pretty smart. It's like everybody's doing it, even Intercom. I mean, we're, we copied their design, so why not, why not their pricing? There's going to be some folks who need to push back and make sure that a strategic conversation follows. So I think there, this is a twofold question. If you're on the receiving end under the C suite. And you get this task of now go do it. You might want to just push back on that and get a strategic conversation initiated. So that's, well, how do we do that? And then how should that conversation unfold?
[00:36:31] Kyle Poyar: Well, I think companies are generally under resourced in terms of pricing and packaging. I think that's true, like, across software companies of all sizes. They usually don't have people that have owned pricing and packaging before, but if they do have a pricing team, it's like one to two people who do a lot of deal desk work as opposed to strategic pricing.
[00:36:51] So there's a lack of, of skills and then they're often not really an owner for pricing inside an organization. It's something that everyone thinks about. Everyone has issues with, no one really wants to take responsibility for it because they don't want to change it and then have it break and be at fault.
[00:37:09] So it tends to come down to honestly, CEOs mandate within a lot of companies. But the best practice in my mind is you have to have an owner for pricing, even if it's just part of their job. Someone who's, who's collecting the data, doing testing, doing surveying with customers and that's going to really make better pricing decisions and de risk any of these decisions before they actually impact the sales team and the customer base.
[00:37:36] So the, the pricing owner. Maybe they fall into product marketing, maybe biz ops, maybe they're just a product leader or a marketing leader. Maybe they're a finance leader. It actually lives often at different places in different companies. I'm less concerned about where it lives than that. It lives somewhere.
[00:37:52] And then you usually want to convene a cross functional group that meets on a regular basis, I would say at least quarterly, ideally more frequently. And that kind of pricing owner is the one who's leading the meeting, but they have to collect input from just about every group. They have to bring in the people that are closest to the customer on the sales team.
[00:38:13] They have to think about where the product is headed. They need to be incorporating kind of customer success feedback as well. And so that group needs to be reviewing, discussing, and then ultimately aligning on pricing decisions. And I think the final thing is generally there's ways to de risk pricing changes before a broader rollout.
[00:38:32] Like one of the hardest things to do is to migrate existing customers who are used to One, you know, way of doing things, one pricing model or one price point. And for them pricing change, especially moving from like a subscription to a usage model is potentially extremely disruptive. You don't really want to do that very many times.
[00:38:51] And certainly don't want to do it when you're not, you're not totally confident about what you're doing. And so I, there's a lot of ways to test. These pricing changes, usually with a couple of sales reps, one to two and working on new customer acquisition before you think about migrating the legacy install base.
[00:39:11] Toni: One kind of just down to earth kind of comment or thinking about this, right? And I just wanted to have your, your opinion on this. So there, there are those AI first companies that are doing, you know, we talked about action, taking action versus augmenting a person. I think it's great way to put this. And the whole product is about taking action. And then you have 98 percent of the rest of the technology market right now that has been basically built around the older SaaS model of augmenting what a person does. And now you will have some of those guys and, and, and, and the ladies, obviously they will start adding some of the AI functionality that is going more into the action space.
[00:39:47] Right. So number one, if at least from my understanding right now If you as a company don't have anything that does actions, I think doing this outcome based pricing is going to be silly for you. So my, my question is like, do you. Do you think we will be moving more than augmented? So, well, augment is kind of now the wrong word, but a blended approach and pricing.
[00:40:08] So you will still have some software vendors that are charging obviously for the seat, because that's what they do. And it still makes total sense to do it, but now they have some AI features as well that can also deliver outputs. Do you think that they will blend those two worlds together over time?
[00:40:24] Kyle Poyar: Well, so yeah, I mean, I, I tend to call that hybrid pricing
[00:40:28] Toni: There you go.
[00:40:28] Kyle Poyar: potential Frankenstein combinations of pricing that's certainly been on the rise, especially for companies that they're multi product companies. And I'd say the, the benefit is it, it does recognize there's real differences around the value proposition of different products.
[00:40:46] I think the challenge is from a sales standpoint, it gets complicated from a customer communication standpoint. It, it feels really hard to wrap their head around, around the bill. Might feel like they're being nickel and dime because there's so many different ways they're getting, you know, charged extra.
[00:41:02] But that is, that's often the, the landing point or like the kind of Goldilocks zone, where it's like going usage based or outcome based is too extreme. Staying subscription doesn't really make sense given what the product does, so they land, land somewhere in between. I think one way I would, I would get people to think about it is that if you're going to that model, A different flavor of it is to more think about like an enterprise retainer where you're basically getting a commitment on spend and the customer can use that spend pretty flexibly across different units or credits.
[00:41:38] So maybe they're buying a million dollars in credits. And an action is one credit, a seat is 10 credits a month. Now obviously that, that has its own challenges but models like that can allow you to have a kind of more simplified conversation with the customer and help them kind of understand like, well, how it all, how it all comes together, as opposed to worrying about, all right, I've got a hundred actions that I needed to figure out exactly how many actions I needed and how many seats I needed for this product.
[00:42:10] How many seats of that product, how many marketing contacts I wanted to use. It's just a little bit easier because it brings it all together.
[00:42:18] Toni: It's the end of the year now we're recording this, what, two weeks before Christmas, I think what's your, what's your prediction for 2025, Kyle?
[00:42:25] Kyle Poyar: How much time do you have? Uh, You know, I've got a lot of predictions for the year on, on pricing. You know, I don't think you ever see things change overnight with pricing. So I think we're going to see a lot more innovation with some of the new entrants that are able to take this disruptive pricing model and use it to get a wedge in a, in a market where there's a lot of legacy legacy software companies that are solving kind of a lot of the jobs to be done, but at a surface level, but can be augmented, you know, with, with these AI native products in specific areas.
[00:43:03] You already saw it, you know, Sierra CX, which was the company of the former co CEO and of Salesforce and OpenAI chairman. He said that they're going to be all in on an outcome based pricing model for their their CX agent. So you're going to start to see some more and more innovation, I believe from, from the new entrants.
[00:43:21] But then I think just in terms of like broader predictions, it, it feels to me like it's. It's easier and easier to build software products and AI products for that matter, but harder to build a moat around the business and also harder to distribute products in a pretty competitive and noisy landscape.
[00:43:40] And so I think a lot about how folks are going to go about standing out. You know, a few predictions there. Like we used to think about optimizing for SEO, right. Being found in Google searches based on different searches that would come up. I think now we're going to be thinking more about how do we get found more in like Gen AI engine optimization.
[00:44:01] So when Perplexity or ChatGPT are giving us product recommendations, how does our product actually get to the top of that list which is going to be a fun challenge for marketers. And then I think for, from a brand standpoint, we're used to B2B brands being a little bit boring and unoriginal uh, very safe.
[00:44:20] But when you look at like all of the AI generated content out there and just like where, where the market's headed in general boring and safe actually kind of feels AI generated and fake these days. And so I think there's going to be a premium on personality originality and authenticity, which is a lot harder to fake and helps really have humans stand out for what's human generated versus AI generated.
[00:44:47] And so, some of the winners are going to not be afraid to take risks, especially on things like social media and personal brand
[00:44:54] Toni: Yeah, Kyle, thank you so much for spending some time with us, enlightening our, our listeners and hopefully some viewers as well on how to integrate their their pricing, basically kind of also maybe with Gen AI and so forth. So really cool for you to spend some time here. Thank you so much. And thanks everyone else for listening.
[00:45:11] Kyle Poyar: Yeah. Thanks for having me on.
[00:45:13] Toni: Cheers. Bye.