[00:00:00] Kyle Poyar: There's so many different tools out there, but Klaviyo really specialized on that e-commerce use case and the integration with Shopify. And they were very opinionated around the emails that you could send that would drive ROI for your shop. So a cart abandonment email, for example, is probably one of the highest ROI things that you can do. And so they had this really interesting way of linking email with revenue for shops that I think created a lot more pricing power for what they were doing than more of just a generic off-the-shelf email platform.

[00:00:00] Andrew Michael: This is Churn.fm, the podcast for subscription economy pros. Each week we hear how the world's fastest growing companies are tackling churn and using retention to fuel their growth.

[00:00:51] VO: How do you build a habit forming product? We crossed over that magic threshold to negative churn. You need to invest in customer success. It always comes down to retention and engagement. Completely bootstrapped, profitable and growing.

[00:01:05] Andrew Michael: Strategies, tactics and ideas brought together to help your business thrive in the subscription economy. I'm your host, Andrew Michael, and here's today's episode.

[00:01:16] Andrew Michael: Hey, Kyle, welcome to the show.

[00:01:18] Kyle Poyar: Thanks for having me on.

[00:01:19] Andrew Michael: It's great to have you. For the listeners, Kyle is the co-founder and operating partner at Tremont, an early growth capital fund focusing on enterprise software and AI. Kyle is also the writer of Growth Unhinged, and prior to Tremont was an operating partner at OpenView. So my first question for you today is, what motivated you to make the switch from consulting at Simon-Kucher to investing at OpenView?

[00:01:42] Kyle Poyar: Well, yeah, it's a great question, and this takes me back, about 10 years ago now. Good. And Simon-Kucher, I uh started my career there, was there for about six years, really learned a ton of, I feel like, what I still use today. But in consulting, what tends to happen is, as you're successful, you go from working on projects to selling projects, and you start moving to, kind of bigger, bigger pocketed clients that have more money to take on bigger projects.

[00:02:15] Kyle Poyar: And I realized I wanted to go, earlier stage and be much more hands-on with founders and have a relationship where we were both focused on value creation rather than trying to sell a big consulting engagement that might or might not go anywhere. And so for me, my foray into OpenView was on the value add side and actually continuing to be a resource for portfolio companies on all things, go-to-market strategy and monetization. But obviously when you work in a fund like that, you start to get exposure to all aspects of the investment lifecycle.

[00:02:49] Andrew Michael: Very interesting. So your first role then, in venture, was really on the operating side, as you mentioned. What did that typically look like then? So what is your engagement like with startups and how did you typically used to work with them?

[00:03:00] Kyle Poyar: We were investing at generally one to 10 million ARR levels. And so at that point, companies have a product in, market. They have customers that are seeing value from those products. And they have some initial go-to-market repeatability with a handful of sales reps, maybe a first-time head of sales. But it's all about how do we scale this motion that's working? And so at that point, a lot of times, the first step is who's our ideal customer profile?

[00:03:28] Kyle Poyar: We've probably been selling to a lot of different profiles of folks, getting a lot of inbound or getting a lot of founder-led selling, but we should really formalize who is the target customer that's gonna see the most value in our product. Then we need to figure out, how do we professionalize the sales motion and ramp up the sales team or ramp up the PLG motion to really go after more of those target customers.

[00:03:52] Kyle Poyar: And then the next kind of thing that I'd work on with folks is pricing and packaging. So as folks are actually understanding their target customer, they built a lot of new product capabilities for that audience. They realize that they're still pricing the way they did when they were an early stage company without a whole lot of proof points in the market and when they were selling to a whole bunch of different folks.

[00:04:14] Kyle Poyar: And so there's now an opportunity to often uplift pricing by up to 50% or so, but it's not a, you know, across the board price increase, there's an opportunity to revisit things like the pricing model, the packages, as well as the pricing. And so you can kind of tell based on my long-winded answer, there is an evolution of work that happens over time to help folks go from those early stages to the repeatable go to market stage. And it was pretty hands-on work with companies around really specific tactical challenges that were going to help them get where they're trying to go.

[00:04:52] Andrew Michael: Yeah. Now I see definitely, those, that evolution as well, obviously being previously at Hotjar and going through and lean some of those projects myself. I actually recently, as well, put together a course on How to Identify Your Ideal Customer Profile with Leah Tharin. And we have our next cohort actually coming up in January. So for the listeners, we'll make sure to leave them in the show notes if you're interested.

[00:05:10[ Andrew Michael: But definitely one of those crucial points in the startups journey as well at that one to 10 million range where you start to put the puzzle pieces together to figure out how you can scale to 10 million and beyond. And you mentioned pricing being a big one. And I assume that as a result of your time spent at Simon-Kucher pricing perspective as well coming to help startups there.

[00:05:29] Andrew Michael: You recently had an interesting post as well on LinkedIn around how the nature of pricing and packaging is evolving now with the advancements now in AI and new products emerging in this space. Could you elaborate on your thought process there a little bit and where you see things going and maybe even just start off from your experience as well at Simon-Kucher and the pricing and packaging work you used to do with startups?

[00:05:50] Kyle Poyar: Well, I mean, if we zoom out 15 years ago when I was initially doing pricing and packaging work, there was still a lot of work to do, folks from on-prem pricing to SaaS pricing in the first place. And then there was a really a 10 to 15 year period where, you know, you could do consulting work for a company, but pricing was relatively straightforward. The norm was subscription pricing, you know, minimum annual contract.

[00:06:17] Kyle Poyar: But you know what? You try to get multi-year commitments. You generally sell based on the number of seats folks needed to buy regardless of who consumed the seats. And then you maybe would think about packages and design a good, better, best set of packages to be able to have an affordable price for folks that were new, and then be able to upsell folks and monetize the new capabilities.

[00:06:39] Kyle Poyar: There were obviously always folks that were doing things differently. There were some of the usage-based pioneers, especially AWS and Snowflake. There were also a number of folks that were kind of pushing the bleeding edge, but a lot of the pricing and packaging look very similar across companies. But I think if I fast forward to the last couple of years, and AI, products have started to really change the nature of the value that we're able to offer customers, instead of providing a technology platform and essentially providing access to technology that people can use to be more productive or be better at their job.

[00:07:19] Kyle Poyar: Now we're saying, hey, actually we can take this workflow that we would maybe need to outsource or hire people for, or it would be a pretty broken process. We could essentially hire AI products to go do that work for us. And so if we're hiring AI to do the work, we can't charge based on the number of seats that that customer has access to. That doesn't make any sense in this model, but maybe we can charge more based on the actual units of work that's completed by the combination of AI plus software, or even on a success-based model, thinking about the impact of that work.

[00:07:55] Kyle Poyar: And so I've been noticing this is still a gradual shift, but these are conversations happening just about every company I talk to that has some AI innovation, especially not just an AI co-pilot, but more of an AI agent that can own the workflow.

[00:08:11] Andrew Michael: Yeah, absolutely. I think there's definitely an evolution. I think, to your point earlier, is all around like everything pretty much, looked the same. Honestly, I think that's, like a result of the way startup founders, like how much effort they put into pricing and packaging at the start. It's like, okay, what is the competition doing? Let's do that plus or minus a little bit. And that's how, like most startups, start out their pricing and packaging.

[00:08:34] Andrew Michael: And then I've come to realize as well as they get to this end point where like that now they've almost like. held hostage by the decisions they made in the past. And it's very difficult to change because they're scared to make those changes. And that's why we're seeing a lot of new disruption, I think, in the space from new entrants, because there isn't that historical way of pricing and packaging or risks that the business needs to take.

[00:08:54] Andrew Michael: And there's few examples now where some companies like Salesforce and they're taking bold new moves into this area of pricing and packaging, but for the most part, this is happening now with these new entrants into the markets and really disrupting things.

[00:09:08] Kyle Poyar: Totally. It's very hard, to your point. So it's relatively easy to change, price point. Like if you were to raise price 20% and drop price by 20%, there's some work to do, but it's relatively straightforward. Changing the pricing model is extremely hard to do at any sort of scale because you… imagine if you're charging per seat and then you charge for the units of work delivered. If you look at your customer base, you're going to have some customers that would end up paying you like a fraction of what they're currently paying because they're buying all these seat licenses that aren't actually doing a whole lot of work for them.

[00:09:43] Kyle Poyar: And then you'd see other folks that might be paying three or four X what they're paying now because they're seeing so much value that you're not monetizing. But then if you change the pricing model, they're at a massive churn risk because the price increase would be so great. And so what I tend to find is folks think of pricing as something that they don't need to spend a lot of time on in the early days. They want it, do something that's competitive that buyers will understand, that will get them those early customers.

[00:10:10] Kyle Poyar: But what they don't realize is, those decisions around things like the pricing model are decisions that are fixed through a lot of your future trajectory and so you actually do want to spend more time on it upfront than you think.

[00:10:24] Andrew Michael: Yeah, I think there's a lot of interesting aspects on the pricing and packaging models that are moving forward now though as well to that point is that it's a lot closer tied to value now than it was in the past. And like a lot of these consultancies pushing the value based pricing approach and really trying to tie as close to value. I think it also, where there's concerns for churn risks, because there's like now this increase in price or decrease on the one end, having it more closely aligned to the actual value that the customer is receiving, there's actually an inverse where you'll see less churn as a result of it.

[00:10:58] Andrew Michael: Because ultimately customers come to you with a problem. They need a solution. If your product is solving it for that solution, they're not going to churn. I think it's where we get these imbalances in pricing and packaging where, and you can almost like map your user base out on a four by four matrix where you can have on the X axis, like the money spent or the time invested in your product and on the Y value, the value you received.

[00:11:18] Andrew Michael: And typically like where you want your, most of your audience is top right. And what a lot of times is this imbalance and trying to figure out pricing and packaging with this new way of pricing and packing is really like, did we deliver value? Yes. Pay us. Didn't we? You don't pay us and I'm a fan of it, but I can see as well, like a lot of startups being scared now to make this big shift because of the… of these risks. So are you speaking into, company, any companies at the moment deciding on this, managing this as well? And what are those discussions like if you're–  

[00:11:48] Kyle Poyar: Well, I think, I mean, so you brought up a great point with these models, there's really no shelf where, which is, you know, amazing and terrifying at the same time, essentially every day, the customer could, in theory, choose to stop using your product and essentially be at risk of churn, which means every day you need to go out and kind of win their business all over again. But if you're consistently delivering value in ROI, the customer, I think, is very motivated to keep the product.

[00:12:18] Kyle Poyar: Their spend is obviously, right size to the value, so they don't necessarily need to make a new purchase decision or sort of re-underwrite a long commitment. It essentially just becomes part of the way they operate. And so it's both a kind of a terrifying change, but also I think creates a better customer experience and a much more aligned business model with your customers.

[00:12:38] Kyle Poyar: But yeah, sure. Certainly when I talk to folks, they're trying to figure out where's the right balance, because if you go all the way to success based pricing, you're maybe taking credit for things that you don't have control over. And so let's imagine you're an AiSDR. There seems to be like a dozen of these AiSDRs who take on the work of an outbound SDR rep. And they may be, do cold email, cold LinkedIn, and maybe even cold calling increasingly.

[00:13:04] Kyle Poyar: And so for these AiSDRs, your customers probably want to pay you for every opportunity that you're able to generate for AEs, which would be an interesting model. If you charge that way, you could probably charge a fairly large amount of money per opportunity. They might also want you to pay or only pay you when that opportunity closes and turns into revenue for them.

[00:13:27] Kyle Poyar: There's obviously a lot more risk for you in that model because you then have to be dependent not only on acquiring that opportunity, but then that, handing it off to the sales team of your customer and making sure they're able to close it. And so with these models, they're more aligned with value, they're lower risk for the customer, but all of a sudden there's a lot of conflict around attribution and where you have control and where you don't have control.

[00:13:53] Kyle Poyar: And so on the flip side, if you just charge for access and you say, hey, our AI agent product costs 50 bucks per sales rep that wants to use it, and you can use it as much or as little as you want, that's providing the least alignment with the value that customers are seeing, which I think means less pricing power. But also it's something that you have total control over.

[00:14:14] Kyle Poyar: You've given the customer access to use it and it's their job to use it or not use it. But what I'm trying to work with folks on is finding that middle ground that's somewhere that's not all the way on one side or the other, that aligns with value, reduces risk for the customer, but also is able to be something that's a little bit more under your control while still being predictable for the customer to budget for.

[00:14:38] Andrew Michael: Yeah, I think that's a great point. I think you definitely don't want to be in the position where you're relying on some third party actions to happen for your success metric to be made true. And ideally like it should really be directly tied to the software or the agents itself and the outputs of it. The other thing I think that's also interesting when it comes to, sort of, these models now is there's this concern of a predictability, whereas like the traditional seat based model, there was a little predictability in the system.

[00:15:05] Andrew Michael: And now moving to this model, you're, you won't be able to understand, like where things will lie. And I think actually, this was my thought process going into previously and the more conversation we're having with founders now, like James Hawkins previously from PostHog on the show, we discussed this and he said, you'll be surprised how fast things normalize to the point where it becomes predictable, especially in these types of models and within a couple of months, you already have like a baseline and you're there.

[00:15:29] Andrew Michael: So I think like, these are one of the concerns I think founders have thinking about like, okay, I'm going to switch to this model now. It's not going to be a traditional SaaS business anymore. It's more success based. What are you seeing on your end speaking to companies?

[00:15:42] Kyle Poyar: Yeah, well, there's, I mean, there's a lot of things you can do. I think the number one thing is helping customers understand the relationship between more usage and therefore more spend on your product and the results they're going to see. And so let's imagine your Twilio, which is kind of one of the pioneers of a usage based model, they're going to charge based on SMS messages set, which could be really unpredictable. But if your sales are up, you're going to try to understand what's the use case for SMS.

[00:16:10] Kyle Poyar: All right, it's appointment reminders. All right, well, what's your no-show rate right now? What does a no-show cost you? If you could do, an SMS message to customers the day before, how would that reduce your no-show rate? And then therefore, how much is that saving you? And ideally, if you're able to do that, have that conversation and have it really land with the customer, they're going to see that the more usage they have, the better it is for their business.

[00:16:35] Kyle Poyar: And that's going to basically frame this unpredictability in a really positive light, because it just means greater ROI as they're spending more. And if they're seeing less ROI, they're spending less. So I love to try to land that conversation if at all possible. But still, CFOs or enterprise procurement teams don't always see it that way. And so then there's other things you can do. One is having more of a proof of concept model for the customer to be able to estimate their usage before they're locked in to a big amount of spend. Another is looking at ways to turn usage into some sort of subscription.

[00:17:10] Kyle Poyar: So even though you're paying based on usage, you pay like a subscription so you feel like it's predictable. There's a few different flavors of that that we can talk about, but one that's my favorite right now is essentially the, like annual gift card model where you take usage and you essentially say, hey, you can use the product as flexibly kind of as you want. You're just buying for a gift card or like an annual retainer of usage that you can draw down over the course of a year.

[00:17:38] Kyle Poyar: If you use it faster than a year, that's totally fine. You can just pay some overage on an on-demand basis or do an early renewal. And in some cases, if they don't spend all the way through the gift card, folks will often let you roll that amount over to next year, assuming they renew at that same rate. And so that can feel for the customer a lot more predictable because they have time to sort of manage and estimate their spend.

[00:18:04] Kyle Poyar: Then there's also other things you can do with, like usage calculators or having controls that you put in the app that, you know, allow you to put a cap on, on the overall spend within a month or the spend within a certain user or department level. And so there's ways that you can make that usage feel really predictable for the customer without having to change your pricing model to a seat based model.

[00:18:28] Andrew Michael: Too much. In other ways, it sounds very similar as well. The model you described as being your favorite to the way like analytics products price today, where they charge per event, but then they typically put you in a specific bucket on annual contract for X number of events. And if you exceed that, you pay for overages. I don't think they're that kind to let you roll over the things, the events that you didn't use the previous year, but for the most part, I think that model has been proven and it works and we know CFOs are happy with buying into that notion.

[00:18:55] Andrew Michael: So it still gives you one way of, like, focusing on the success based metrics, but then also having a little more stability and security in the revenue generated upfront. I like that. I think the point as well to the Twilio example is an interesting one too, because this is where, like the value based pricing notion comes in and understanding the audience. And I think this is where, like vertical sauce, has the opportunity now to be huge from that perspective.

[00:19:18] Andrew Michael: Because in the case of Twilio, it's quite hard to argue for, like an increase in per SMS sent because they're such a generic product being sent to everyone. But if we think about, like an example being a doctor's room where the average like a visit may be costing $100 or more and reducing no shows, like even if it's like 10% whatever, you can really tie, like an ROI to that.

[00:19:44] Andrew Michael: And then you can understand, okay, if we're charging 20% of that, that's maybe like five euros in SMS or $5 in SMS, $10 as opposed to maybe like the five cents or 50 cents, whatever it is that Twilio is able to charge just because of the differentiation, the focus on the product and the experience that gets built around it. How are you having these discussions?

[00:20:04] Kyle Poyar: It's a great call out. Yeah, and I think that it's part of, it's the vertical nature and then part of it is that you could say, hey, look, we can actually leverage AI to write the messages. We can optimize campaigns based on what we know performs best in this specific industry. And you know, the ROI, it generates for that specific industry and how to tie into the budgeting cycle. So it's essentially designing a whole customer experience and product around a need that exists in the market.

[00:20:32] Kyle Poyar: And that's, I think, a lot more powerful right now than just offering, kind of a more generic horizontal platform where the customers have to DIY on it. Although, you know, maybe things will change back at some point. But yeah, I think that it's a great point. And to me, that's where Klaviyo was such an interesting winner in the email marketing space, where I feel like there was a lot of skepticism of does there need to be another email marketing player if we have Mailchimp, we have HubSpot, ActiveCampaign, Marketo, you know, you name it.

[00:21:06] Kyle Poyar: There's so many different tools out there, but Klaviyo really specialized on that e-commerce use case and the integration with Shopify, and they were very opinionated around the emails that you could send that would drive ROI for your shops. So a cart abandonment email, for example, is probably one of the highest ROI things that you can do. And so they had this really interesting way of linking email with revenue for shops that I think created a lot more pricing power for what they were doing than more of just a generic off the shelf email platform.

[00:21:36] Kyle Poyar: And I think that is, to your point, that is the way a lot of these new AI products are moving, is that they're finding a specific workflow usually in a vertical where there is a very tangible economic value that they can message around. And one of my favorite examples is a company that I've been working with, is a company called Chargeflow. So they're in the chargeback management space.

[00:21:59] Kyle Poyar: And if you think of it, it's like if you buy something on an e-commerce store or even like a digital subscription that you receive, but you maybe regret purchasing it, a lot of folks, instead of reaching out to the vendor themselves will dispute the transaction on their credit card to try to get the money back. And so merchants spend tons of time on trying to recover these disputed transactions and what paperwork they have to go through.

[00:22:24] Kyle Poyar: There's this whole long wait time to get their money back from being held by these credit card companies. And if you're an SMB, you probably don't have a team that has this expertise and, really hard to automate. So Chargeflow just said, hey, we'll integrate with your systems like your Shopify, your Stripe, and we'll go, resolve these chargebacks on your behalf. And then we'll only charge you 25% of whatever money we recoup from you. And with AI, we can get you a better win rate.

[00:22:51] Kyle Poyar: We can do it without you having any headcount devoted to this. It could just be fully on autopilot and fully success-based. And the business has grown super well because it's a very aligned model. But I don't think they would be able to have that alignment if they weren't as focused around a specific pain point they were solving for customers.

[00:23:08] Andrew Michael: Yeah, absolutely. I think it's a great use case and, great example. And definitely something like we've talked about on the show before. It's definitely a common problem that's like, especially, I think for smaller startups as well, where, as you said, they don't have the resources to be able to do this. And sometimes it can be significant revenue. They get lost just to these chargebacks themselves.

[00:23:28] Andrew Michael: The thing that you also mentioned, it triggered another thought as well. Previously on the show, we had Heidi Gibson from, when she was a GoDaddy at the time, as head of growth there. And this was something they also realized, like when they were focusing on their activation metrics and sort of aligns as well with the pricing and packaging is that they had this website builder product and they were trying to figure out, like what the activation metric should be.

[00:23:50] Andrew Michael: And eventually they sort of just realized, well, wait a second, like people don't come to us to build a website. So their metric shouldn't be like launching the site. They come to us, to actually, if they're a hair salon to get bookings, if they're an e-commerce store to drive sales. And when they shifted there, they focused, to, like enabling people to increase the number of sales or bookings made is when they really saw a huge uptick in retention and engagement for these products, because then they could reverse engineer backwards.

[00:24:15] Andrew Michael: Like what are successful websites doing to get more bookings? Like what does the page look like? What have they set up previously? And I think the same thing then would apply. I think the evolution of that would then be like tying their pricing and packaging now actually to like the number of sales being made through the platform or the number of bookings being done. And then their success metric becomes like, how do we make our customers more successful through workflows and agents that we can provide. Nice.

[00:24:41] Kyle Poyar: Yeah, I think one of my favorite early examples of that, that I think people don't even realize, was HubSpot in the early days, was just a classic subscription plan. So they had a good, better, best model. It was a few hundred dollars a month as a starting point, but fixed subscription packages. And I believe this was about 10 plus years ago. Their net retention was only around 75%, and they moved to this notion of having a contact-based pricing.

[00:25:11] Kyle Poyar: So as you generated more contacts that you could market to, and HubSpot's inbound marketing platform would help you generate more contacts, you would pay more money to HubSpot. And when they implemented that change, and there were some other changes they made, they were able to get their net retention up from 75% to 100%, which is a major driver, but put them on the path to IPO. And I think it's a combination of pricing for sure, but also now there's a North Star for the entire team to rally around.

[00:25:41] Kyle Poyar: How do we help customers actually generate more contacts and grow their business so we can invest in, product that's now a revenue generating expense because it's gonna help customers get more contacts and help us get more money. It also allows you to start to think about, how do you make the business case for investing in customer success and professional services? Anything that you're gonna do that has a tangible impact on that customers' outcomes you get paid for. And so I tend to just love that it allows you to build a much more aligned business.

[00:26:13] Andrew Michael: Yeah, their success becomes your success. And that's ultimately the best place to be. Because everybody talks about, we're a customer-centric company and we have customers at the center of everything we do, but a lot of times that value is not aligned with customers perfectly. And in this case, like, as you described, you see magnificent results, I think. Similarly, at Hotjar–  

[00:26:32] Kyle Poyar: They tell me they're customer centric and then I ask what percentage of your licensed users log in in a given month and it's 20%.

[00:26:40] Andrew Michael: Yeah, it's not customer centric.

[00:26:41] Kyle Poyar: Yeah. Maybe not so much.

[00:26:43] Andrew Michael: Yeah. We also, like, at Hotjar, in the early days, faced a similar situation where we had this huge imbalance of value being delivered on one end to the other end, where smaller businesses were maybe overpaying us and larger businesses were way underpaying us for the value delivered. And like realigning the value, we ended up seeing like a 30% increase in ASP for the business where all other metrics maintained the same across the board.

[00:27:05] Andrew Michael: And I think like, there's many, many cases of this where, like just focusing on what the value is, how you can get that balance right between you and your customers and then have the team focus on delivering that value day in and day out is set you up for big wins. The interesting thing I think I read in your post recently as well, which I wanted to chat about today, was this notion that typically today in SaaS, we have these different products, good, better, best, or plans and certain features through each plan.

[00:27:34] Andrew Michael: And if the notion now is moving towards like the success metric, how do we start to think about how we price and package our plans now then if the goal is to make them as successful as possible and are there things we need to be thinking about then in terms of how we package services today? What triggered the thoughts, any specific example or case that came to mind when you wrote the post?

[00:27:58] Kyle Poyar: Well, it's one of these pieces of conventional wisdom that's sort of in the back of people's minds that there's, framework around. You look at SaaS companies, probably 70% of them or more have some version of good, better, best, where there's a basic version that has the core features. There's a better version that has some more bells and whistles and a best version.

[00:28:20] Kyle Poyar: And usually the differences as you go up are like more premium integrations, more advanced user role management, more advanced analytics. Maybe SSO is in that higher tier package, which I see a lot. And it's more about access to these like premium features that are in many cases disconnected with the core value that the product delivers. It's more about, well, enterprises need these things and they're willing to pay more, or we've spent money to offer customers this, a certain percentage say they want that.

[00:28:52] Kyle Poyar: And so we're going to monetize it. And what I found is, that's pricing, based on willingness to pay. That's not actually pricing based on value to the customer. And if people buy into this world of products taking on a workflow and helping the customer solve it and generating value for the customer, it's essentially, instead of selling your product, trying to get your product hired by the customer.

[00:29:18] Kyle Poyar: And I think what's interesting in that model is that there's still potentially ways to differentiate price. Because if you're hiring someone, you could hire an intern who's a college student. You could hire someone that's offshore. You could hire someone that's a PhD candidate that has 20 years in your field. You're going to be paying different amounts of money for those different types of people that you're hiring.

[00:29:41] Kyle Poyar: And so there's maybe a notion of skill-based pricing where you can have different pricing depending on things like accuracy level, is there a human in the loop, is there a service level agreement in place, the speed at which or the throughput at which you're able to deliver results. It's a really different paradigm around pricing.

[00:30:02] Kyle Poyar: And I think we're still early days in this, but it was just in the back of my mind as I saw yet another piece of advice about how to think about, kind of good, better, best in monetizing premium features. And I was just like, I don't think this is going to apply to many of the newer products that are being built these days.

[00:30:21] Andrew Michael: Yeah. I definitely, like my thoughts immediately went to what you were describing now, sort of these different models, just similar to where like all the model providers work today where they have different versions and each one is better and each one has more capabilities. I see, like, a similar approach in this case. And I think definitely like the good, better, best typically it's like. small business, mid-market and enterprise is normally how they package and then the features normally align in those categories and the willingness to pay and all that like always normally perfectly aligns within those buckets.

[00:30:52] Andrew Michael: But yeah, definitely I see, like, things changing. The one thought as well that I had in that is that perhaps it's not around either like the company size or this like notion of different models, but more around the maturity state of the organization on whatever the specific use cases that you're solving. Cause more than often than not, it's like products are solving four or five different use cases today. And they, more useful to different stages of companies.

[00:31:18] Andrew Michael: So, and that's where I think, like typically the packaging goes, small business, mid-market enterprise. We also try to think, okay, what's more useful on the lower end, what's more useful on the higher end. And, but more around like, if it's that notion of different models, being more sophisticated is also just being like, this is really, really good for the stage of your maturity of your company. This is better and the strategy scale because we spoke about it earlier, like there's three or four things that happen at early stage startups between one to 10 million.

[00:31:45] Andrew Michael: This is what they typically always need. And as they grow, the sophistication grows with them and those needs as well. And I think that might be one way where companies can start to think about, okay, putting together the maturity model of our customers and which stage they are on that maturity path to whatever it is the product or service we deliver to them. Can you give your thoughts on that?

[00:32:05] Kyle Poyar: Well, it's… Yeah, I mean, I think things are evolving a lot. There is an element of its maturity level and then an element of it is tied to the relative value that organization places on the work that you're taking on with them. And so, but yeah, if I think about like a… let's think about an intercom as a hypothetical example, and they've got an autonomous AI agent that helps resolve customer support requests. Their customers that are low maturity might want to say, hey, look, let's just have AI answer the really basic support requests that are coming in, that are things that are in our help docs that they just don't search for themselves.

[00:32:44] Kyle Poyar: We could just have AI resolve those. That maybe gets you 20%, 30%, 40% of support requests. It's the low-hanging fruit that wasn't even that time-intensive for the agent, but it was a lot of the tickets that came in, and it was a distraction for the actual humans. So that's providing low maturity, but some initial value pretty much out of the gate. But now you can imagine there's maybe a world in which AI needs to be trained on more customer interactions.

[00:33:12] Kyle Poyar: There's maybe multiple agents involved in, figure… in kind of triaging the answer to a given question, but you're able to answer more and more complex support questions or support tickets that are coming in. That's a higher sophistication that you're able to essentially provide a product around, more value to the customer. It's probably also for the more mature customer that needs it, but it might also just be for the customer that has a business model where their customers are asking tougher questions versus a B2C model where their customers are asking easier questions.

[00:33:47] Kyle Poyar: And so I think that the key thing for me is that it's aligned with how customers see value and that you're able to essentially have a real clarity around the problems that you're solving for the customer and how your product helps them. And then you're able to capture the right amount of share of that value you're creating for them.

[00:34:11] Andrew Michael: Yeah, I can definitely see that as well. And to see in this example, how it scales and becomes more valuable for customers. I think one of the things as well when it comes to thinking about these success metrics is that sometimes it can be challenged to find the right metric that encourages customers to want more of and not to try to restrict as well. So I think, like there are some times where we get the usage metric wrong and then customers are like thinking there, well, if I get more of this, it's going to cost me more on the other end.

[00:34:41] Andrew Michael: And I think this is going to definitely be a shift now where the focus has to be on success for these actions to work. Because a lot of times as well, when companies got in these bad pricing models, I think this is the case that can happen when we have bad incentives. And the next thing is I'll follow up to that as well. As obviously we talked at the beginning, you're talking to a lot of companies like they may have made these mistakes or they've packaged like in the old traditional good, better, best.

[00:35:05] Andrew Michael: And now thinking about, how do I repackage and reprice my product in this new paradigm. What are some of the tips or advice that you're giving to companies to start to think through this and some of those concerns that you expressed earlier around like what's this going to do to my largest customers, smaller customers? How are you advising companies now to start to think about, shift in process and, navigating this next turn?

[00:35:28] Kyle Poyar: Well, yes, a few thoughts. So to your point around the kind of policing your own usage, essentially the taxi meter effect, you see that with usage based pricing, you also see it with seat based pricing where people hoard licenses. And, you know, like Netflix logins, everyone tries to just keep one Netflix login rather than flying essentially multiple seats. So you see it on both sides.

[00:35:52] Kyle Poyar: But I think the big thing for me is what is an input to realizing value or essentially providing access to seeing value and then what is the result of that value you're creating. And the closer you can get to pricing on the results or the output, the better. And so by, for example, like if you're building a tool to help customers automate processes and you say, hey, we're going to only let you build or you're going to pay more based on how many steps are in the workflow that you want us to automate.

[00:36:24] Kyle Poyar: That would seem to align with value, but that's probably gonna stop the customer from building complex apps through your platform. If you instead charge based on how many tasks were executed by that workflow, they're gonna build really complicated things, run them, and then not want it turned off just because they're gonna be paying a little extra, because they know that the alternative of turning it off will mean going back to a manual workflow that was broken in the first place and that incremental cost of paying for that usage is relatively small compared to the alternative.

[00:36:59] Kyle Poyar: And so I think that's the big mental model I think about is more of that input versus output. Yeah, when I'm working with companies, my advice is first, I really understand the value that you're providing customers and try to get as clear as possible. And also try to move beyond just we save our customers time or we replace manual pen and paper or Excel spreadsheets with software, like you've got to have a much more sophisticated understanding of how customers see value and how you're going to be able to measure that. So that's, I think, a quite important starting point.

[00:37:34] Kyle Poyar: Another thing is there are a host of metrics you can use to charge based on. And one of the challenges with these different pricing models is that it's not just as simple as, like we charge based on seats or we charge based on usage. If you're charging based on usage, there could actually be 15 or 20 different metrics that you charge based on. And so I like to try to gather the data that we have available on customer usage and look at things like, how does usage map with current spend?

[00:38:04] Kyle Poyar: How does usage ramp in an account? How is usage changing month over month or quarter over quarter? And is there a lot of sort of seasonality or spikes or is it relatively consistent across the customer base? And the more you can understand that usage behavior and how product usage looks within your customer base, the more informed, of a decision, you can make around pricing.

[00:38:27] Kyle Poyar: And then the final advice I probably have is, if you're gonna launch something, probably test with new cohorts of customers before you migrate existing folks. And I specifically like to find a forward thinking rep who is open to different models and is maybe even pushing for them internally. And if you can work with that rep on a kind of more disruptive pricing model, and that rep starts seeing success with it, all of a sudden, everyone else is sort of trying to get a piece of it because they're seeing that rep close new deals and they want in on the action.

[00:39:04] Kyle Poyar: And so instead of this becoming something you're sort of pushing down the throat of the sales team, it's something that there's a lot of excitement around because people recognize it's so valuable for them to be able to offer. And so those dynamics of how you roll out pricing changes can be in some cases as important as the change itself.

[00:39:23] Andrew Michael: Yeah. I think the rollout is probably the trickiest part of all. Like it's almost in some ways easy to get to the end result of doing the analysis and the research to figure out what you want to do, but then it's all these little intricacies like dealing with the team internally, the kickback from customers, figuring out like, your internal payment and billing systems and how all of these things are going to change and adapt.

[00:39:46] Andrew Michael: So yeah, it's definitely like, it is a big bet, I would say, like moving and shifting pricing models just due to all the complexities that are involved. And as you said, like it is a big risk then as well just to say, okay, all of a sudden, this is our new pricing and packaging and run with that. And there are ways like whether it's in the, like sales led motion of letting one sales rep going at it or in a PLG state, just picking specific cohorts and then seeing the response and conversion rates as a result before rolling out to a wider audience.

[00:40:17] Andrew Michael: I'm sure we could continue discussing for hours on the topic, Kyle, but see we're running up on time. So I want to make sure I ask you two questions I ask every guest that joins the show. The first question is what's one thing that you know today about churn and retention that you wish you knew when you got started with your career?

[00:40:32] Kyle Poyar: That's one thing I wish I knew. I… probably that most of the Churn Reason Codes are BS. If we're categorizing churn is like price was too high or champion left or some of these other things, a lot of times those are more of the, it's more of the symptom as opposed to the root cause of churn and usually most of the causes of churn goes back to, we sold to the wrong customer, we oversold the customer on the initial deal.

[00:41:05] Kyle Poyar: We didn't deliver value fast enough. We weren't sort of offering sticky features or sticky integrations that would become… help us become embedded with our customers and offer the most value. So essentially churn, while we diagnose it based on more of the last interactions that happened with a customer, really the ways to sell for churn are much more upfront in the earliest possible interactions with the customer.

[00:41:31] Andrew Michael: Yeah, 100% on that. I think like, more often than not, most people go to the end and say, like, let's set up a churn exit server and figure out why people are churning, but in actuality, they should be focusing on what are the most successful people doing? What did they do early on in their journey? How can you get more people to that successful state and focus on that? Because ultimately, as you say, like, the reasons for churn are because they didn't have that good initial experience or were sold into the wrong accounts and so forth.

[00:41:56] Andrew Michael: So, yeah, a hundred percent on that. We talk about that on the show quite a bit. Last question then is and I have to think about which way to frame this from, but maybe since the whole topic has been on pricing and packaging, and you obviously have worked with a lot of companies on pricing and packaging. When it comes to pricing and packaging, what's one question that you wish more people would ask, but they don't?

[00:42:20] Kyle Poyar: What's one question? Well, I just wish they asked more about pricing and packaging in general, but I wish more folks asked what's the optimal way to price and package given the innovation or given the product that we're offering, as opposed to, what are others doing? I think that a lot of folks immediately look at their peers where they say, hey, we're sales tech, everyone in sales tech charges per seat, Salesforce is the behemoth, that's how we're gonna charge.

[00:42:51] Kyle Poyar: And there's a lot of that comparison or folks looking at analogs of other companies doing something similar. But what I don't think they realize is they're not building their product just to look exactly like everyone else. There's usually some sort of innovation or something that doesn't exist elsewhere. And then if you go back and price the way everyone else does, a lot of folks just think of you as in the same bucket or doing the same thing.

[00:43:15] Kyle Poyar: So a price can, pricing can be a really important part of your positioning and how you're able to communicate what's unique or what's specifically valuable about what you're offering that aligns with your customers. And so often I see some of the most innovative products have an innovation around their business model, their pricing model, in addition to their product. And that's what fuels breakthrough growth or breakout growth, rather than just resorting to what else they see in the market.

[00:43:43] Andrew Michael: That's very interesting as well because as you're talking through it, I would say logically, I would have a counter argument to that in the sense like if you're already doing a lot of innovation on one end on the product front, you want parts of the business to feel familiar to existing customers so that things aren't totally new and you aren't asking them to change all new behaviors.

[00:44:01] Andrew Michael: But on the other end, like you are doing something totally new that would obviously justify a new way of charging and you might be, you’re doing yourselves an injustice by just going with the trade of the [moat]. So I think, like that would be my thought process going into it is like, okay, this is already a new behavior.

[00:44:17] Andrew Michael: We're trying to change behaviors, changing behaviors incredibly hard. And if we're trying to innovate as well in all areas of the business, then like how much behavior we're requesting from users to change. That would be like something going through my mind in these sorts of situations, but see your points as well on the other end.

[00:44:34] Kyle Poyar: Yeah. I think it's, uh, I'm not saying that you go through this exercise to figure out the optimal pricing and it's always going to be something different from the status quo. But I think people don't fully realize there's a status quo, but then a lot of customers don't like the status quo. And so they have issues with it. Like a lot of you have issues with Salesforce's pricing. And if you talk to them, they'll tell you about it really quickly.

[00:44:59] Kyle Poyar: And there's also, uh, when you have this innovation or this change of behavior, you want to be able to communicate that in the best way possible. And so if you are communicating a ton of diff, you know, differentiation and a lot of value, but then the way you monetize feels like, overly familiar or like, feels like it's from the past. People might not fully believe you and what you do because there's a mismatch there. So I think that's what's important to me is, make sure that there's a cohesive story for the customer.

[00:45:34] Andrew Michael: 100%. Yeah. And to the point, I think of people just looking around. Earlier this year, I was looking at building a new product. I actually built the product and didn't launch it. It's ValuePilot.io. And I interviewed maybe 100 different founders and the question was, how did you figure out your first pricing and packaging? And the number of times I got this response, we were like, just lick their finger and put it in the air was probably 30% of the sponsors and the other 30% to 40% was like, we just looked at what our competitors were doing and went to that.

[00:46:03] Andrew Michael: I think out of 100, maybe only three or four people said they did some sort of research that would help them form their pricing and packaging. And to your point, I think everybody just goes with what's out there already. And there's a lot of room for you to actually do the hard work and speak to potential customers or customers and figure out what the others are getting wrong that you can get right with your pricing and packaging.

[00:46:24] Andrew Michael: So, Kyle, it's been, absolute pleasure chatting to you today. Is there any sort of final thoughts you want to leave the listeners with today before we drop off? Obviously, we'll leave everything we discussed today in the show notes for them to pick up with. So do you have any final thoughts?

[00:46:38] Kyle Poyar: Well, just, as you could probably tell, I love keeping up with these next playbooks of how the fastest growing companies are building and going to market. And I'm sharing those insights in my newsletter, Growth Unhinged. And so folks are curious about unpacking these topics and then seeing what the next generation are going to be doing going forward. I hope you check it out.

[00:47:01] Andrew Michael: Awesome. Yes, we'll definitely make sure to leave that in the show notes. Obviously, like we referenced a couple of the discussion points with today were from some of Kyle's posts, a lot of great content in there. So make sure to check it out. And thanks again for joining Kyle and I wish you best of luck going forward.

[00:47:15] Kyle Poyar: Thanks.

[00:47:16] Andrew Michael: Cheers.

[00:47:23] Andrew Michael: And that's a wrap for the show today with me, Andrew Michael. I really hope you enjoyed it and you were able to pull out something valuable for your business. To keep up to date with Churn.fm and be notified about new episodes, blog posts and more, subscribe to our mailing list by visiting Churn.fm. Also don't forget to subscribe to our show on iTunes, Google Play or wherever you listen to your podcasts.

[00:47:49] Andrew Michael: If you have any feedback, good or bad, I would love to hear from you. And you can provide your blunt, direct feedback by sending it to Andrew@Churn.fm. Lastly, but most importantly, if you enjoyed this episode, please share it and leave a review, as it really helps get the word out and grow the community. Thanks again for listening. See you again next week.

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