The art and science of pricing | Madhavan Ramanujam (Monetizing Innovation, Simon-Kucher)

1. 0:00 – 6:29

   Madhavan’s background

   1. MRMadhavan Ramanujam0:00

      When we talk about pricing, many people quickly gravitate to, like, dollar figures. That's just a price point, that's a dollar figure. But when we think about price, we think about it as a measure. Like, you know, a liter is a measure of volume, price is a measure of value. And when you think of it this way, it really stands for, do people actually want your product, and would they actually buy it? And that is the whole willingness to pay conversation. And entrepreneurs and companies need to do this much earlier so that they can understand, you know, are they on the right track?

   2. LRLenny Rachitsky0:31

      (instrumental music) Welcome to Lenny's Podcast. I'm Lenny, and my goal here is to help you get better at the craft of building and growing products. Today, my guest is Madhavan Ramanujam. Madhavan is the author of Monetizing Innovation, the most widely read book on pricing strategy. He's also senior partner at Simon-Kucher & Partners, which is the premier consulting agency for companies looking to get help with their pricing. And unsurprisingly, when I ask people on Twitter who the smartest person on pricing is, Madhavan was by far the most mentioned. In this episode, we get deep into all manner of pricing strategy, especially focusing on five lessons, four product teams on thinking about pricing. Enough talking, let's get into it. I bring you Madhavan Ramanujam after a short word from our wonderful sponsors. This episode is brought to you by Lemon.io. You achieve product market fit, you're able to activate, engage and retain your customers, but you don't have the engineers that you need to move as fast as you want to, because it's hard to find great engineers quickly, especially if you're trying to protect your burn rate. Meet Lemon.io. Lemon.io will quickly match you with skilled senior developers who are all vetted, results-oriented, and ready to help you grow, and all that at competitive rates. Startups choose Lemon.io because they offer only handpicked developers with three or more years of experience and strong, proven portfolios. Only 1% of candidates who apply get in, so you can be sure that they offer you only high quality talent. And if something ever goes wrong, Lemon.io offers you a swift replacement, so that you're kind of hiring with a warranty. To learn more, just go to lemon.io/lenny and find your perfect developer or tech team in 48 hours or less. And if you start the process now, you can claim a special discount exclusively for Lenny's Podcast listeners, 15% off your first four weeks of working with your new software developer. Grow faster with an extra pair of hands. Visit lemon.io/lenny. This episode is brought to you by Mixpanel, offering powerful self-serve product analytics. If you listen to this podcast, you know that it's really hard to build great product without making compromises. And when it comes to using data, a lot of teams think that they only have two choices, make quick decisions based on gut feelings, or make data-driven decisions at a snail's pace. But that's a false choice. You shouldn't have to compromise on speed to get product answers that you can trust. With Mixpanel, there are no trade-offs. Get deep insights at the speed of thought at a fair price that scales as you grow. Mixpanel builds powerful and intuitive product analytics that everyone can trust, use, and afford. Explore plans for teams of every size and see what Mixpanel can do for you at mixpanel.com. And while you're at it, they are hiring. Check out mixpanel.com to learn more. Madhavan, welcome to the podcast.

   3. MRMadhavan Ramanujam3:27

      Thanks, Lenny. Pleasure to be here.

   4. LRLenny Rachitsky3:28

      I am really excited to be chatting. You're kind of known as the smartest, maybe most experienced person on pricing strategy in the world. You literally wrote the book on pricing strategy that everyone seems to read and share and talk about. And so I'm really honored to have you on this podcast.

   5. MRMadhavan Ramanujam3:44

      Thanks for the nice words. I'm excited to be here, so.

   6. LRLenny Rachitsky3:47

      To help folks fully grasp the level of experience that you have around pricing and pricing strategy, could you just kind of talk about how many companies you worked with, maybe name some companies you can share, maybe how many people bought the book? Anything that you can share about just the, the level of experience you have in pricing would be helpful.

   7. MRMadhavan Ramanujam4:05

      Sure. So I work as a senior partner in a consulting company called Simon-Kucher. So we are the world's largest pricing strategy consulting firm. We have about 2,000 employees worldwide in, uh, you know, 43 offices. So I work in our Bay Area offices, and I've been here with... for the last 15 years. So I work primarily with tech companies here in the Bay Area, so they're software, internet marketplace companies, et cetera. So I worked with over 250 companies, more than 20 unicorns, on, uh, you know, everything to do with pricing, monetization, profitable growth, and these kind of topics. Uh, so companies such as, uh, you know, Uber, Asana, DoorDash, uh, many, LinkedIn, many come to mind. I think you asked about the book Monetizing Innovation, that I wrote a number of copies, et cetera. I mean, look, when we first launched the book, I used to track some of these copy sales and everything else, and I quickly realized that a book is only good if it actually creates impact, and that's also why we wrote the book. So the way I measure impact for Monetizing Innovation is literally there's probably, uh, you know, someone reaching out on a daily basis saying, "Hey, I read the book. Uh, you know, we could make some impact around pricing monetization in our companies," and that... And to me, that's, that's real impact and that's what keeps me kind of going. Because, uh, you know, when we wrote, we wrote the book, we, we didn't wanna write any marketing, you know, fluffy crap. We wanted to write something (laughs) that was more actionable. And to see that people find it actionable and can use it Monday morning to actually make changes, I think that's real impact. But of course, the book has done well, it is, uh, in, in, uh, still in top 10 categories in many categories in Amazon, for instance. It's been six, six years since we, uh, wrote the book. (laughs)

   8. LRLenny Rachitsky5:46

      Wow.

   9. MRMadhavan Ramanujam5:46

      Uh, and need, need a second edition soon, so.

   10. LRLenny Rachitsky5:49

       (laughs) That's incredible for a software tech-oriented book where they often get really out of date really quickly. Like, I was just reading it and it's amazing how many things still are very true.

   11. MRMadhavan Ramanujam5:59

       The topic is, uh, is one that is relevant in, I mean, in even years to come, so I think, uh...Hopefully it's, uh, robust that way.

   12. LRLenny Rachitsky6:07

       And you talked about the company, Simon-Kucher. I j- I'll just add that any smart product leader growth person that I talk to, they're always talking about how they've worked with you (laughs) to figure out their pricing strategies. It's like the-

   13. MRMadhavan Ramanujam6:18

       Awesome.

   14. LRLenny Rachitsky6:18

       ... company that everyone goes to work with. So.

   15. MRMadhavan Ramanujam6:20

       The company, I like that. Maybe we should rebrand ourselves as the company.

   16. LRLenny Rachitsky6:24

       (laughs) The company.

   17. MRMadhavan Ramanujam6:24

       (laughs)

   18. LRLenny Rachitsky6:25

       Let's do it. Let's, let's talk about rebranding next.

2. 6:29 – 8:02

   How Madhavan got into pricing and monetization

   1. MRMadhavan Ramanujam6:29

      (laughs)

   2. LRLenny Rachitsky6:29

      How did you get into pricing and pricing strategy? How'd you first get into this world and put kind of focus your career around it?

   3. MRMadhavan Ramanujam6:36

      I, I actually happened to stumble in it. I mean, it's classic fashion. I was at Stanford Graduate School, both Graduate School of Business and the engineering school. And, you know, we had a lot of, uh, startup discussions thinking of, like, creating startup, very classic. And I was this guy who was actually in charge of coming up with the, you know, pricing monetization strategy in our, you know, teams when we were actually pitching to VCs. And, and I remember going and pitching our ideas and, you know, and the VC asked me, like, "How do you know you'll actually make money on this innovation?" And, and I pulled up a spreadsheet. I, you know, I showed him all the assumptions and I said, "This is how I'm gonna do it." And I still remember this. He said, "You've labeled them correct. Those are assumptions. How do you truly know?" And I was like, "Ah, I actually don't. I just made stuff up," right? And, (laughs) and, uh, wi- within that same week, I got a call from, uh, the then managing partner of Simon-Kucher, Man- Matt Johnson. And he said, "Hey, we are the world's largest, uh, you know, pricing and growth strategy consulting firm. Do you wanna come join us? We're looking for Stanford grads." And I was like, "Whoa, I didn't even know you, you existed." I joined because I actually wanted to get to understand the science, uh, behind pricing, not just the art. And that's kind of what I've been focusing on, you know, in the last, uh, 15 years. And, you know, also my, uh, education in Stanford was in quantitative marketing. So many of those, uh, let's say, theoretical models I could bring back into a practical industry-relevant sense. So it's been a great journey.

3. 8:02 – 9:43

   ) Why he wrote Monetizing Innovation

   1. LRLenny Rachitsky8:02

      When I think about books that people find most useful and or su- sustain are books that are based on people's real experience doing a thing for, like, a decade. And your book is a great example of that. What made you decide to actually write a book? 'Cause I know how hard that is from my wife's experience.

   2. MRMadhavan Ramanujam8:17

      (laughs) Yeah, I think it probably started with some kind of mini frustration because we used to, like, get calls from, like, companies saying, "Hey, uh, you know, we need a pricing strategy. We need a price, uh, price plan." And they would have invested, like, years probably making the innovation. And, and then we would ask them, like, "How long do we have?" And they're like, "Mm, we need it, like, yesterday." Uh, right? I mean, so it was like, uh, as, uh, time and again, we witnessed this, uh, you know, spray-and-pray approach. And then, you know, we used to ask this simple question, like, "How do you truly know, uh, that people will actually pay for your innovation? When you built it, did you do any studies? Did you actually understand whether there's a product market pricing fit?" And usually the answer was no. And then it had to change. I mean, when we benchmarked, 72% of innovations actually fail from a monetization or, you know, commercial perspective simply because entrepreneurs or companies did not do the check earlier on. Had they done it, they could have probably, uh, you know, pivoted the product, built things in a different way, and, uh, built something that was more meaningful. So we wrote Monetizing Innovation because increasingly, you know, we were working with companies more early stage in helping them design the right innovations that, you know, customers need and what are they willing to pay for, as opposed to just, uh, building a product and slapping on a price. It was crossing that chasm between knowing, uh, I mean, hoping that you would in- uh, you know, you know, monetize through, like, knowing that you truly will. That was the motivation for writing, uh, Monetizing Innovation.

4. 9:43 – 11:27

   Why pricing is a cross-functional discipline, but ultimately a function of product

   1. MRMadhavan Ramanujam9:43

   2. LRLenny Rachitsky9:43

      Awesome. We're gonna dive into a lot of these things-

   3. MRMadhavan Ramanujam9:45

      Great.

   4. LRLenny Rachitsky9:45

      ... that you've shared in the book and things you've learned. One more context-setting question before we get into it all. Which part of the org do you believe pricing strategies should sit in? Is it product sales, finance, marketing, something else?

   5. MRMadhavan Ramanujam9:58

      Pricing by discipline is like a cross-functional discipline. I mean, you can't ta- talk pricing in isolation of product, finance, sales, et cetera. I mean, there's always, you know, touch points. Uh, so it's extremely cross-functional. Back in the day, probably a decade ago, I used to say pricing needs to sit in finance because my view was, you know, finance would be the counterbalance to sales, especially if you have, like, you know, sales, uh, coming up with pricing in a B2B situation. I mean, you can set all the pricing you want. It's a human having a human conversation. So how do you put checks and balance in some of that? And my view was, you know, pricing should sit in finance and it has to report on ultimately to the CFO. I have, uh, uh... Over the last decade, I've been actually advocating that this should sit in the product side. And that was also the genesis of Monetizing Innovation because if we truly believe that we need to build products that, you know, are simply products that customers need, they love, they value, they're willing to pay for, it is a product function because you need to be able to design the product around this kind of information, around what customers need, what they value, and what they're willing to pay for. In short, around the price. If you look at Monetizing Innovation, the subtitle of the book is how, uh, you know, smart companies design their products around the price. So if you take that viewpoint, then pricing needs to sit in the product function or, you know, the founder product and, and sort of report onto this. This is my, uh, strong-held belief, one that probably won't change now.

   6. LRLenny Rachitsky11:22

      Awesome. That's a, that's a great segue to kind of the meat of our conversation.

5. 11:27 – 15:23

   What “willingness to pay” is, and why founders need to have conversations about it early and often

   1. LRLenny Rachitsky11:27

      So most of the listeners of this podcast are product builders and prod-

   2. MRMadhavan Ramanujam11:30

      Right.

   3. LRLenny Rachitsky11:30

      ... and people that grow product, product managers, founders, um, people that work on cross-functional product teams. And, uh, I was reading your book, and I picked five topics that I thought would be especially useful to product leaders to kind of dig into.

   4. MRMadhavan Ramanujam11:44

      Sure.

   5. LRLenny Rachitsky11:44

      And the first is the willingness-to-pay conversations, which I know is kind of foundational to the way that you think about pricing strategy and the advice that you share with people of how to think about pricing. So can you just talk about just, like, what is willingness to pay as a concept?

   6. MRMadhavan Ramanujam12:00

      Mm-hmm.

   7. LRLenny Rachitsky12:00

      And then when should founders focus on these conversations to figure out the willingness to pay?

   8. MRMadhavan Ramanujam12:06

      Yeah, absolutely. So I think, look, most of your listeners are many, uh, you know, most product folks, they probably understand, you know, language like product market fit, especially made famous from Lean Startup and other kind of, you know, literature which is, uh, which is awesome. I think that the, the issue is it's not just about product market fit. It is about achieving a product market pricing fit. For instance, if someone comes and asks me, "Do you like the headset that you're using for this podcast?" I'll say, "I like it. Do you like it at $200?" The whole conversation is different. So if you didn't put pricing as part of your product market fit validation, you're often hearing what you want to hear. It is truly about understanding whether, you know, customers are willing to pay for your innovation and willingness to pay is a proxy for do people actually value your product and, uh, you know, how badly do they actually want the product? This even comes back to, like, understanding what pricing really is, right? When we talk about pricing, many people quickly gravitate to, like, dollar figures. That's just a price point that's a dollar figure. But when we think about price, we think about it as a measure, like, uh, you know, liter is a measure of volume, price is a measure of value. And when you think of it this way, it really stands for do people actually want your product and would they actually buy it? And that is the whole willingness to pay conversation. And entrepreneurs and companies need to do this much earlier so that they can understand, you know, are they on the right track? I mean, think of it this way. It's like, if I have the same sales and marketing conversation that I would have with a customer six months before launch of the product, pitch the whole value, and then ask them a simple question, would you pay for this innovation? And if someone says no, chances are you can put all the perfume you want in the next six months, they're going to say the same thing. And if they do say no, the most important question to ask is why. And you start hearing all kinds of information that you can use to design your product and maybe even pivot your product strategy, you know, accordingly. So it is, it is literally the litmus test of whether people like your product.

   9. LRLenny Rachitsky14:05

      And so if I were to kind of summarize your main point, the idea is have these conversations right as you're thinking about designing the product. Don't try to just launch it, see how people like it, build a huge audience, and then figure out pricing. Your advice is start having those conversations early, right?

   10. MRMadhavan Ramanujam14:22

       Exactly. And the, and the folks at First Round summarizes in four words. I, I thought when they wrote a blog article on, on, on this and they call it price before product period (laughs) , right? So I think that, that probably is succinct, but really it's really that, right? Because frankly, Lenny, as a, as a entrepreneur or company, you actually don't have a choice whether you'll have a pricing conversation with your customer. The only thing in your control is when you will have it. I mean, you can build the most awesome innovation you think is awesome, obsess over the engineering, the product and everything else, and then, you know, slap on a price, throw it in the market, and hope to monetize. Or have this conversation much earlier, pitch the same sales and, you know, marketing kind of, um, you know, uh, pitches and then try to understand whether people will actually pay for it and then design around this information. And you actually know that you will, so you're maximizing your chances for success. It's simply testing and learning. E- everyone in your probably listener base knows test and learn. We are talking about testing and learning, pricing and willingness to pay. Why wouldn't you do that and why would you postpone that till the

6. 15:23 – 18:46

   How Porsche built their SUV around customer feedback and willingness to pay

   1. MRMadhavan Ramanujam15:23

      very end?

   2. LRLenny Rachitsky15:24

      Do you have any examples of products or companies where they had these conversations either way too early, way too late, or, or even just, like, nailed it?

   3. MRMadhavan Ramanujam15:31

      Here's the thing. There is nothing like way too early for this conversation. I mean, I even tell people who are, like, you know, uh, early seed stage or just thinking about an idea, I would say, "Hey, go, go check so- if someone would actually pay for this idea." And there's some high level ways to actually check for this. And of course, this is not about nailing the pricing strategy from, like, get-go three years before a product is launched, et cetera. It's about understanding whether there is a willingness to pay and then repeating this exercise as you go along so that you can refine. And when you're ready to launch the product, you have a much more refined view on what is the willingness to pay. And of course, then you're, you know, launching the product with a lot more enthusiasm because you know this is actually going to have a product market pricing fit. So it's about iterating and learning and sort of refining. So there's never too early. Too late, I think is most of the companies, this is why we wrote Monetizing Innovation, like I told you. 72% of innovations fail. And we also categorize them into why they fail. There are only four failure types and I've written about that in the book so I can leave that for readers to actually go and see it. But all of those failure types happen because the conversation was, was just too late and pricing was an afterthought. Uh, companies that did it well, maybe, uh, you know, one or two examples that I can probably take just to, like, motivate the concept, right? I mean, we talk about, uh, in the first chapter, A Tale of Two Cars, and, and about how Porsche, uh, actually did this. And the example is something like this, right? I mean, Porsche was really looking for launching a new innovation. They came up with an idea, you know, they said, "Okay, should we launch an SUV?" And even before a blueprint was drawn, they basically went and checked with the market, you know, is there a need for an SUV? Would people value it from Porsche? Are they willing to pay for it? And to their surprise, they actually found that. And then what they did next was more fascinating. Every single feature that actually went into the car or the benefit that people had was battle tested with customers and no amount of, like, convincing from product or engineering was, you know, was enough. It had to be battle tested with customers. Things like, for instance, uh, you know, big cup holder was inside because people loved it, needed it in an SUV, would pay for it. Things like six-speed manual transmission, people didn't need it in an SUV, it's outta the window, right? They literally used to bring cars in what is called as car clinics, and they would test for this and they would put people through prototypes before anything is even productized, anything is, uh, in the factory floor, where people would actually even drive around the Porsche and say, "Okay, did they like it? Would they pay for it?" Et cetera. And then they would fine-tune every single thing that goes on, right?So the innovation process is very different from the classic, you know, spray and pray, build something, slap on a price, throw it out. It was really designing the product around customer feedback, around willingness to pay. You know, the outcome of the process could also ... couldn't have been more different than the traditional approach of spray and pray. The, you know, this was, uh, when they launched this SUV, it was called Cayenne, which we all know now. Uh, you know, accounts for more than half of Porsche's profit, and literally one of the, the best roaring successes in automotive history. Right? I mean, this is just an automotive example, but if I switch gears to like more of a tech example or a, you know, software example for your audience,

7. 18:46 – 23:50

   How testing helped a marketplace company avoid building something customers don’t value

   1. MRMadhavan Ramanujam18:46

      right? I mean, there was this company which, uh, take ... Think of this as a two-sided marketplace. And I, and I'll just keep the ... keep it a bit abstract, but I'll tell you the details, right? I mean, two-sided marketplace. Think of this as they were already monetizing on the, uh, you know, sale side, um, and the CEO said, "Okay, let's go and build a product for the buy side and, uh, that, you know, people will buy." Right? So the buy side monetization product strategy. So in classic fashion, all the product folks, product managers, et cetera, they went offsite, generated thousands of Post-It notes, design thinking, yada, yada, everything, right? And then they said, "Okay, we can't take all of these, uh, you know, so many ideas to the CEO. Let's prioritize it somehow." And they prioritized it to like 40 ideas, and they took it to the CEO and said, "This is what we want to build." And the CEO asked a simple question, "How do you truly know you would monetize?" It's the same question the VC asked me, like, uh, you know, back in the day. And they s- simply didn't know, they were just guessing. So what happened next was they took, you know, wire f- wire frames, blueprints. They took, uh, you know, product concepts and they started testing this with their customers and prospects. So, you know, stuff that they actually thought was exciting often was like way down in the list of priorities, right? And if they didn't do these kind of tests, they would have probably built the product around this. Like one ... To give you an example, you know, one of the features that they were building was called ... Or, or the, the, the number one feature that the internal team thought was w- you, you know, that was awesome, they called it highlight connections from Facebook. And everyone in the company thought that people would pay for this, it's an awesome feature, they need it, they love it. And the thesis was something like this. If as a buyer, if I'm buying a, you know, this ... the product from the same seller and someone in my Facebook connection has already bought that product from that seller, that's credible information in lieu of reviews and everything else, and, you know, people would find it acceptable and pay for this. When they went and tested this and pitched the idea, they got all kinds of reactions. So there was one customer group I remember which said, "So, yeah. You, you know, so you're telling me that I can't pour through hundreds of reviews and make my own determination?" Uh, that, that's like, uh, you know, unacceptable. I ... That, that, that, you know, spoils the fun out of like actually doing research on products. There was another group of customers who said, "Uh, you ... Do you like it?" "Yeah, I like it." "Would you pay for it?" "Hell no." And then there was another group which even said, "I don't even want anyone in my Facebook circle to know that I'm buying this product," because there was some, you know, like let's say premiumness associated with this, and, um, and, and everything else. They could not find a single, uh, set of customers or a segment of customers who said, "I love this feature, I would pay for it." If they hadn't done this exercise, they would have built the entire product around this and it would have been a disaster. But because they actually did this, they could prioritize what they were building. Literally, I mean, for your product folks, the number one lesson, and I hope this is the biggest takeaway for your, uh, audience, you cannot prioritize a product roadmap without having a willingness to pay conversation. I mean, if you're just prioritizing based on what you think or what you feel or technical resources, you're getting it wrong. Literally, you can prioritize what you're building based on what customers need, what they value, and what they're willing to pay for it. And you can actually do this test and say what should you be building? The funny thing that I've actually always seen, always, across these hundreds of companies that I've worked, 20% of what you build drives 80% of the willingness to pay. It's a classic Pareto, right? And if you don't know this, you're probably over-indexing on like one or the other. It's much better to find out what is this 20% so that you can focus on it, nail it, and focus on all of the, you know, usability around it, and make an awesome product. Uh, as opposed to like not knowing what drives the willingness to pay and just trying to put everything out there, right? And, and at the worst form, often what happens, Lenny, is this 20% is the easiest thing to build. And what companies do is they will build it, they will throw it out, and they'll say there's an MVP, give it for free, and then they're trying to chase their tails building, you know, 80% of stuff that is driving 20% of value. So you al- already lost the battle. So as a product person or a product builder, you need to prioritize your R&D roadmap based on willingness to pay conversations, exactly like what the two-sided marketplace did. Exactly like what Porsche did. And this is the crux of, uh, everything that we are talking about.

   2. LRLenny Rachitsky23:16

      Amazing. What's interesting about the second example versus the first is, in the Porsche example, they started with, "We want to charge this much. Let's build a car that we can sell for that much."

   3. MRMadhavan Ramanujam23:26

      Yes.

   4. LRLenny Rachitsky23:26

      And the second case, they had like a product they were trying to build and then they figured out which things to build. So-

   5. MRMadhavan Ramanujam23:32

      Exactly.

   6. LRLenny Rachitsky23:32

      ... it's interesting that this c- can come kind of along the journey at different places, but the main takeaway is do it early and earlier than you think, right?

   7. MRMadhavan Ramanujam23:41

      Correct. Either productize to a price point and a willingness to pay, or at least use willingness to pay as an a- axis to prioritize what you're building. Either way, you will

8. 23:50 – 33:38

   Several methods to use to learn willingness to pay

   1. MRMadhavan Ramanujam23:50

      get it right.

   2. LRLenny Rachitsky23:50

      Okay. So let's actually talk about how to have these conversations. I imagine that's what a lot of people are wondering right now. They're like, "Yes, I'm convinced I will have these conversations." (laughs) But then, you know, the classic issue with customers, you ask them what they all do and they never actually ... You can't trust their, uh, stories of what they'll actually do. So what advice do you have for folks when they have these conversations? What questions should they ask? What-... word should they use? I know you have a few frameworks that you suggest.

   3. MRMadhavan Ramanujam24:14

      Sure.

   4. LRLenny Rachitsky24:14

      Can, kind of talk about that?

   5. MRMadhavan Ramanujam24:15

      Yeah. We can go deep into this, and you can pull me back or ask me to go deeper, whatever.

   6. LRLenny Rachitsky24:19

      Let's hear it.

   7. MRMadhavan Ramanujam24:19

      It doesn't matter, right? So, and we have written an entire chapter in the book, chapter four. It's called How to Have the Willingness to Take Conversation. (laughs) If there's one chapter, just read that. That is, uh, I mean, it's quite detailed and goes into how to actually do this. But, look, I mean, if you go and ask someone, you know, "How much should I charge for this product?" You're actually gonna get garbage back. That's your job, right? I mean, no one is supposed to tell you how much to charge, and that's the worst way to have the conversation. There are some really interesting and nuanced ways of having the conversation, where you still tease out what people are willing to pay for without, you know, directly confronting someone as to, like, what you should be charging. So let me go into, like, a few methods, and, and, and, and, and I can pause to see if you have any questions. So the first one is, um, you know, what we say is, uh, frame the question in a more relative manner, right? Because, uh, you know, and I... And, and sometimes I say tongue in cheek that people are absolutely meaningless, relatively, relatively super smart. You know? What, what I mean by that is, if you go and ask someone, "How much should I charge?" You'll get a meaningless answer. But if you actually ask it in a relative way, people actually give responses that are meaningful. So like for instance, if you're a B2B SaaS company, okay, and you're trying to see if your product actually has willingness to pay, one way to have that conversation is to say, okay, hey, to your customers, you know, "Do you use, uh, products like Salesforce in your install base?" "Yeah, I do use." "Okay. If Salesforce was indexed at 100 in value, where do you think we are in terms of like the value that we bring to your, uh, let's say, day-to-day business operations?" That people can answer all day long. They might say 80, they might say 120, but depending on whether you're more or less compatible with, like let's say what a Salesforce can do, which is an established install base. And then if you say, "Okay, if Salesforce was indexed at 100 in pricing, where do you think we should be?" That also people can say. Okay. If they say 110, what they're saying is you can be more premium than that, and we would still pay for it. At least you've gotten some information that is meaningful at a very basic level, right? So this is some, uh, relative ways of asking these questions are, are, uh, are the most basic ways of actually doing it. Then we have questions where, you know, we, we, where... There's some methods where we actually want to understand are there some psychological thresholds or budgets when it comes to like, you know, willingness to pay. So the, the way to do this is let's, uh, you know, take your product that you're going to launch, pitch the, you know, value to your customers, have that exact sales and marketing conversation that you'd have after you launch the product but before, and then you ask them, "What do you think is an acceptable price for this innovation?" Look, I mean, everyone would like, uh, you know, would like to lowball. They'll negotiate with themselves. Let them give an answer, clock it, then ask them, "What do you think is an expensive price?" And then follow that with, "What do you think is a prohibitively expensive price?" And now across thousands of projects that we have done, what we have come to realize is, acceptable price is the price where people not only love the product, but they also love the price. (laughs) If you're in true growth mode, maybe you can put it there as a no-brainer price, no friction, et cetera. The expensive price tends to be the price that is value-priced, as in, you know, they don't love you, they don't hate you, they would pay you, but you know, there's a neutral reaction. Prohibitively expensive tends to be the price that they will laugh you out of the room. Right? And if you do this at scale, what you'll start seeing is that there are some cliffs in these kind of demand curves, where suddenly when you cross from, let's say, 99 to 101, you know, 20 or 30% might say, "It is expensive, or it's expen- or it's prohibitively expensive." And that's what we look for to see if there are some psychological thresholds that if you actually cross, you know, you have a perception of being expensive. So hiding behind some of these psychological thresholds become important, right? The... Rahul Vora from Superhuman actually read the book, and he's... He talked about this in an A16Z podcast. He actually used this method to come up with his $30 price point for the Superhuman app. And I think, uh, that's a quick and dirty, uh, way to actually get to, you know, what is a willingness to pay, and what's a psychological threshold? So I think that's a interesting method that you can do Monday morning. But the key here is to not just ask the question, "What would you pay?" But have that sales and marketing conversation. Tell people where they actually might get the benefits. Basically, exactly everything you would do after launching the product to create, you know, awareness and showcase the benefits, do it, and then ask these questions so that you're priming them to the value that your product gets, and you're not just having a, you know, random conversation. There are other techniques that go more and more, let's say, rigorous. For instance, uh, purchase probability questions. So if you ask someone, "Okay, would you buy this product?" That's like a meaning- meaningless question. At least if you ground them on a scale and say, "On a scale of one to five, would you buy it?" One is, "I'm not at all interested," five is, you know, "Most likely I would buy it or I would buy it for certain," and four is like, "Most likely," for instance, and three is, uh, "I'm neutral." What we are actually seen is, even if people say five, you know, they are probably only like 30 to 50% sure about whether they will buy. Now, I mean, yeah, so like you can start... Uh, and if they say four, it's like 10 to 20%. If they say three and below, they're never gonna buy it. So you can start... If you do this at scale, you can start coming up with, let's say, a demand curve and then say, "Where is the price optimal?" Et cetera, so you can understand purchase probabilities. And if someone says, let's say, uh, three for a certain price point, then you can, you know, lower the price and say, "Okay, would they actually move their ratings to a four or a five?" So I think these are some simple ways to understand purchase probabilities and elasticities. Two more, if I may. I think, uh, another one is what we call as, um, you know, most and least kind of questions. And the thesis behind this is if you go and ask people, "Okay, I give them a list of 10 features," let's say, and I say, "Rank them one to 10," most people will find that exercise painful, horrible, because there's always this messy middle where everything is great, they all look the same, right? I mean, there's a lot of psychological theory that people are very adept at identifying the extremes. When it gets in the between, that's when things become tougher.So what we do is if you have a list of 10 features that we want to understand whether people have willingness to pay for when we are prioritizing the R&D roadmap for our clients, we would take a subset of let's say six or so features out, out of those 10. And then they say, "In this set of features, identify the most important for you and the least important." And the most important is defined as like, you know, must have, I will pay for it. Least important is I don't need it, I won't pay for it kind of connotation. This people can do all day long because they're just picking the two, right? And then we will change the set of six, another combination from the 10, and ask that same question. So if you do this a few times, you would be able to, uh, you know, prioritize the entire feature set in a relative fashion and truly understand what drives willingness to pay. The last method, which gets into more advanced methodology, is what we call as more trade-off exercises. So here what we do is we put people through actual buying patterns or actual buying scenarios and say, "Okay, if you had this packaging and pricing," for instance, "for your software product, you know, what would you do?" Which is akin to a real-life question, like you know, you put all the features, all the price, the number of plans, et cetera. Then we would change that and say, "Okay, if you change the features and the price, how would you react? Would you buy any of these products or would you say, 'I won't choose any of these'?" These are, you know, more like shopping scenarios for your products, but it's realistic and it's akin to real life. Based on how they choose these products, what we are trying to reveal is the mental models and rules that people use to make decisions. So for instance, if I add certain amount of features and increase the price, people say, "You know what? I'm not gonna buy anything more." What that actually tells you is like the addition of those features, people are not willing to pay the addition in terms of price. So they would actually opt out of the, you know, lineup that you actually have for your customers. So these kind of things, you know, you can... If you do these kind of exercise, you can get more precise on things like price elasticity, you know, build some simulation models, try to understand how the market would react, et cetera. And different methods are actually applicable at different stages of a, a product and, uh, different stages of a company. You know, if you're very early stage, let's say just an idea, just have the conversation. I mean, just even asking, "Would you pay for it?" is a good question because if someone says no, then ask why. Then you'll hear a lot of good information. If someone says yes, ask them, "Why would you pay for it?" They would articulate back the value that they understood and that should be in your value messaging, right? So that's just a simple question. If you're somewhere in middle, then maybe some of these, uh, if you're in the series A or seed stage, maybe some of the, you know, uh, purchase probability questions, all of these things can actually be a quick and dirty way to at least get to an answer and a point of view. Or if you're launching a product and it's in late stage or, uh, late stage in the product or the company lifecycle and you need to get more precise in terms of like your pricing and packaging strategy, then some of the methods a- around trade-off exercises, most, least, all of these things become incredibly relevant. Sorry it was a long answer, but there's-

   8. LRLenny Rachitsky33:11

      No, that was-

   9. MRMadhavan Ramanujam33:11

      ... so many methods. It's all summarized in chapter four. So just one chapter to read in the book.

   10. LRLenny Rachitsky33:15

       That was perfect. Thank you. Amazing. You mentioned that you want to ask why a lot, and that's something you talk about in your book a bunch. I think something like 50% of your questions should be why after the answer to these questions. Is that right? Right?

   11. MRMadhavan Ramanujam33:29

       That's absolutely right. Yeah.

   12. LRLenny Rachitsky33:31

       Cool.

   13. MRMadhavan Ramanujam33:31

       I was tempted to ask you why, but that would have not been very relevant. (laughs)

   14. LRLenny Rachitsky33:35

       (laughs) Nope, not on this question. We might-

   15. MRMadhavan Ramanujam33:37

       Not on this question.

   16. LRLenny Rachitsky33:37

       ... pick it up

9. 33:38 – 37:08

   When and how the willingness-to-pay conversations happen

   1. LRLenny Rachitsky33:38

      later. Can you talk about like logistically, how are you asking these que- Like, is this a meeting specifically you set up with a potential customer to talk about pricing? Does it come at the end of, "Here, I'm pitching you on this product," or, "I'm trying to get desirability user research feedback." Like what's, what is that meeting-

   2. MRMadhavan Ramanujam33:53

      Yeah.

   3. LRLenny Rachitsky33:53

      ... set up for on behalf of the customer?

   4. MRMadhavan Ramanujam33:56

      It's, uh, usually, uh, either a one-on-one conversation with the customer, a much early stage you're a founder and you're having a conversation. It's basically you're pitching the idea and trying to understand not just product market fit but a product market pricing fit. Let's say if you're a bit more late stage and you have a cross-functional team, this could be a conversation that the sales teams could actually be having along with the product teams to actually understand this. That's also what happens in companies like LinkedIn, for instance. When they launch a new innovation, you know, the, the team has to like book in a credit card or lock in a budget from a customer for pilot POCs and everything else. And if they don't, they don't necessarily go down the route of productizing it because they didn't... I mean, there, there was no final verdict on whether people would actually pay for these kind of innovations, right? That's, that's kind of how I see it. So it's, it, it depends. If it's early stage, more like founder led early conversations, if it's more late stage than a cross-functional conversation, but usually it's, it's a one-on-one with m- Uh, one-on-one as in with the company, it could be multiple decision makers. Increasingly in B2B SaaS for instance, it's not just one person deciding on a software budget, it's like a team. So it's usually done with a team having that kind of conversation. Uh, it can also be done in terms of like focus groups where you bring in, you know, a set of customers and then you sort of mediate and moderate, you know, uh, answers and trying to get to like what is the right thing to do. And often we also do a quantitative version of this where we are doing more test and learn through either, you know, A/B testing or most importantly through controlled surveys that we would actually have, you know, invite participants to actually participate and then they would give their opinions on these various concepts that we are actually testing. And then we try to understand, you know, what is the willingness to pay in the market based on those kind of responses. So from a basic qualitative one-on-one validation all the way to a more quantitative testing using other instruments.

   5. LRLenny Rachitsky35:45

      So this is usually a part of a larger customer development product market fit discussion. Like here's a product we're thinking, here's... Like classic user research-

   6. MRMadhavan Ramanujam35:54

      Yes, um-

   7. LRLenny Rachitsky35:54

      ... desirability discussion, and at the end you kind of talk about willingness to pay stuff. Is that right?

   8. MRMadhavan Ramanujam35:58

      Yeah, exactly. I mean, I would think of it as, uh... I, I wouldn't say necessarily user research. It's a bit before that. Um, I mean, user research probably gets more into usability and how people actually use it. This is a one step before conversation where you're trying to understand, you know, testing and learning whether people, uh, buy into your idea, do they see the value, is there an ROI?And frankly, what needs are you actually solving in the market, right? These people can articulate all day long like, you know, what, what is their jobs to be done or what is their needs pain point. Uh, what product to build is your job in some way as a product person. But when you showcase the product and say, "Okay, this is the product that I'm building which will actually meet this need," you want to see if people's eyes light up. And that's also when you need to have the willingness to pay conversation, because it's not just about saying but actually meaning what you say, and that can only be brought in if you actually use willingness to pay in the conversation. Otherwise, it's a bit of an em- empty, self-fulfilling conversation often, right? So ... And then when you actually do this more and more, like I said, re- like, you know, uh, iterating or refining things, then you can bring this into other pieces of the conversation and, and gets more smarter before you launch the product.

10. 37:08 – 38:13

    How many customers you should be talking to

    1. MRMadhavan Ramanujam37:08

    2. LRLenny Rachitsky37:09

       Do you have a rule of thumb of how many people you should talk to at least to get a pretty good sense of maybe we've gotten some...

    3. MRMadhavan Ramanujam37:16

       Yeah, I get this question (laughs) all the time, and I say, "At least talk to one person," right?

    4. LRLenny Rachitsky37:19

       (laughs)

    5. MRMadhavan Ramanujam37:19

       I mean, jokes apart, um, because most companies are not even doing that, but jo- I mean, in terms of willingness to pay conversations. But, uh, you know, I mean, if you're, let's say, a B2C company, of course you have scale in terms of reaching customers. You might have, you know, hundred thousands and millions of customers, consumers. In those kind of situations, a more of a quantitative validation might be easier to run, so if you get even a thousand, 2,000 responses, that could be statistically significant and easy to do and pull off. If you're like a B2B SaaS company and you have, uh, you know, you're focusing on, let's say, 20 to 30 accounts leading 80 to 90% of your business, try to talk to as many of those as possible. So like, at least, uh, you know, in the 20 to 30 kind of ballpark. And often in these conversations after a point, you start hearing stuff repeatedly. I mean, if 20 people tell you the idea is horrible, it is horrible. You can test it all you want, right? I mean, so when you start hearing these kind of things, then you pivot.

11. 38:13 – 39:20

    When to revisit pricing

    1. MRMadhavan Ramanujam38:13

    2. LRLenny Rachitsky38:13

       And then once you have your initial thought on what pricing should be, how often do you suggest folks iterate on their pricing strategy?

    3. MRMadhavan Ramanujam38:21

       Yeah. Usually we say at least every six months, pause and think whether you should revisit it. Within, uh, you know, 12 to 18 months probably there is time to revisit, especially given market dynamics in most, uh, you know, industry verticals that people are in today. And also, there are some pivot points where it will make sense to think about this, like you're introducing a new plan or you're, you know, introducing some new features. All of those kind of moments in time from a product journey standpoint would necessitate having this conversation.

    4. LRLenny Rachitsky38:51

       Got it. Final question on this topic, which we've spent I think half an hour on, which is awesome, 'cause it's probably the most important to start with, but this is gonna be a deep episode.

    5. MRMadhavan Ramanujam38:59

       (laughs)

    6. LRLenny Rachitsky38:59

       What's the first thing that a founder or PM should do to go down the route of willingness to pay, if they were to start something on Monday?

    7. MRMadhavan Ramanujam39:06

       First of all, start educating yourself that there is a science on this, uh, topic. It's not just an art. Get confidence that people have done this before, not only just startups, but like companies like Porsche, you know, and then read chapter four and do it.

    8. LRLenny Rachitsky39:19

       Okay.

12. 39:20 – 42:42

    Segmentation strategies

    1. LRLenny Rachitsky39:20

       Topic two, which I know is really, uh, a big deal to you and a core part of the way you think about it in addition to willingness to pay, and it's segmentation.

    2. MRMadhavan Ramanujam39:29

       Mm-hmm.

    3. LRLenny Rachitsky39:29

       Thinking about how to segment your customers and product. So can you just talk about broadly why is this so important to think about, segmentation, when you're thinking about pricing?

    4. MRMadhavan Ramanujam39:38

       Look, segmentation as a topic, again, just like product market fit, is a well-understood term for many of your, uh, listeners. Like, when we go and ask companies, uh, you know, "Do you have a segmentation strategy?" roughly about 60% would say, "Yeah, we have it." And then when we check it, probably 10% of them actually have a meaningful segmentation strategy, right? What I mean by this is most people think of segmentation as a demographic or persona exercise or, you know, How do I position this product to, like, different personas and things? And they get it horribly wrong. I mean, tongue in cheek, I'll give you this example. If you think about a person who's 70 plus years old, lives in a castle, incredibly wealthy in the United Kingdom, you'll probably think about Charles, but that also fits Ozzy Osbourne. And I would (laughs) probably wager that both of them have dramatically different tastes, you know, need different things, value di- things differently, and are willing to pay for things differently, right? I mean, if you just base things on persona, you often get it wrong. Segmentation needs to be based on what customers need, what they value, and what are they willing to pay for, and how do you productize package to different segments? So the key lesson, uh, that I, I want your listeners to take away is, you need to be able to productize to segments. If you're trying to build a product and try to position it to different segments, you already lost the battle, because segmentation comes down to needs and understanding needs and building products based on those needs and willingness to pay so that you can treat your customers differently. Because if you build a same product and want to treat everyone similarly and say you have a segmentation strategy, you actually don't have it, right? I mean, uh, take a simple example. You know, if you think about, uh, the water that we drink, in a fountain, it's free. In a bottle, it's $2. You put gas in it, it's $2.50. Throw it in a minibar, it's $5. It's the same damn water, but it's packaged, productized differently because people have different needs. I mean, I'm price conscious. I want it in a fountain. I wanted to carry it around. I probably take it in a bottle. I like the taste. I take gas in it. Or I'm just simply ultimately lazy and I would pay the $5 to, like, get it out of the minibar and not go down the hotel lobby and get it for free, because that's my need, right? I mean, if you don't understand these kind of needs, you will never be able to productize to those needs. So you will just build one product and try to position it to the different needs-based segments and you won't get it right for anyone, right? And we work with all kinds of industry verticals. We have not found a single vertical where, you know, our customer, where their client's needs are homogenous. It is heterogeneous whether you want to accept it or not, and, you know, if you accept it, then you would start getting into the heart of segmentation and say, "Where is that heterogeneity? How do the needs differ in the market? How does the willingness to pay differ in the market? And what can I productize to different needs and willingness to pay, you know, segments?" So productizing to segments as opposed to building one...... and positioning it to different segments. I mean, usually when I walk into these companies, they'll say, "We are building a one-size-fits-all." I would quickly correct them and say, "One size fits none." So it's a bit of that. That's why this topic is deep, because people get the definition of segmentation wrong.

13. 42:42 – 44:33

    Why you need to act differently to your segments that have different needs

    1. MRMadhavan Ramanujam42:42

    2. LRLenny Rachitsky42:42

       So segments are something that people hear often and, I think like you said, sort of understand, and they... and to your point, they think they've kind of done segmentation.

    3. MRMadhavan Ramanujam42:52

       Yeah.

    4. LRLenny Rachitsky42:52

       But, again to your point, a lot of times they do it wrong. You have this framework that is really interesting, this, like, one phrase they use, "You can act differently," to help you think about whether a segment makes sense and how to think about segmentation. So, can you just talk about, like, what's a sign your segmentation is correct versus not, and maybe how to think about this framework?

    5. MRMadhavan Ramanujam43:12

       So the three most important words in what you said is, "You act differently." So you, as in, you know, your product teams, your sales teams, your marketing teams, your finance teams. Act as in, come up with new products, build a business case, come up with the product marketing messages, sales strategies. Differently, as in there's no point in doing segmentation and having the same reaction or, or treatment to everyone. You need to be able to act differently. So, what that means is, if I know what you need, what you're willing to pay for, you know, and what you value, then my conversation with you will be different than someone else who needs something else, a- and is willing to pay something else. So I productize something for Lenny, and I productize something else for, for the others. And the key here is to understand if there is a significant, uh, let's say total available market or size of the market, where the needs are similar and they're willing to pay. As in, let's try to find all the people who would want to drink water in a fountain. Let's find the people who want to drink it in a bottle. Let's find the people who want to drink, you know, that have gas. Would they pay for it? And then when you understand these segments, then you can say, "Okay, what do I build for these different segments?" And then focus on that segment when you launch the product, have the marketing message for that segment, and target that segment, as opposed to just building one thing and hoping that somehow these four groups will sort, sort themselves out into your product. And that's the

14. 44:33 – 47:49

    When to think about segmentation

    1. MRMadhavan Ramanujam44:33

       key thing.

    2. LRLenny Rachitsky44:33

       When should early stage founders think about segmentation? Do you suggest it's like right from the beginning, the first product should have multiple segments, or does it come later?

    3. MRMadhavan Ramanujam44:40

       That's also a- an often asked question, in the sense that as a startup, as an early stage founder, often the excuse is like, "Hey, we don't have time. We're actually like putting stuff out of the wall. We need to get something out there. It's ʻcause our time is of the essence, so, you know, we need to build a product." And, and usually they would say, "Let's build just a product, which is like every awesome thing that we are working on, and then we come back and revisit whether we want to build other versions," et cetera, right? "And we don't have resources to even build multiple products." Well, that kind of logic makes sense when you don't understand the concept of segmentation. If you truly understand the concept of segmentation, you would say, you know what? As a first conversation, when you're having that willingness to pay conversation based on your idea, you would say, "Who's actually willing to pay for this innovation? You know, what do they need? How many of them are there? Can we productize to this first compared to the others?" Then you will start prioritizing not only your R&D roadmap, but your resourcing to say, "Which segment should I start with? And then what segments would I actually add?" And then your value messaging would be tailored to that segment. People will understand the benefits. They will say, you know, your product will be launched and people will get it, and they would actually go for it. So having done this exercise early will tell you how many segments are there, what is the size of these segments, how to prioritize them, which one to pick first, and which product to build first for that segment, and then productize to the other segments later. If you're lazy and sloppy, you'll build a product, you'll slap on a price, you'll throw it in the market and say, "I will attract everyone." You'll attract no one.

    4. LRLenny Rachitsky46:14

       Amazing. So, basically, understand the segments right from the beginning-

    5. MRMadhavan Ramanujam46:19

       Yes.

    6. LRLenny Rachitsky46:19

       ... don't necessarily launch products for every segment.

    7. MRMadhavan Ramanujam46:21

       Exactly.

    8. LRLenny Rachitsky46:22

       Mm-hmm.

    9. MRMadhavan Ramanujam46:22

       That, that, that's totally acceptable because, I mean, it's not like everyone has resourcing to like launch it to five products, five segments, everything else, complexity. I mean, a- and plus you don't probably want to be too complex when you're launching your products. But focus on the right segment and launch it for that first.

    10. LRLenny Rachitsky46:36

        (instrumental music) Today's episode is brought to you by Miro. Creating a product, especially one that your users can't live without, is damn hard. But it's made easier by working closely with your colleagues to capture ideas, get feedback, and being able to iterate quickly. That's where Miro comes in. Miro is an online visual whiteboard that's designed specifically for teams like yours. I actually used Miro to come up with a plan for this very ad. With Miro, you can build out your product strategy by brainstorming with sticky notes, comments, live reactions, voting tools, even a timer to keep your team on track. You can also bring your whole distributed team together around wireframes, where anyone can draw their own ideas with the pen tool or put their own images or mockups right into the Miro board. And with one of Miro's ready-made templates, you can go from discovery and research, to product roadmaps, to customer journey flows, to final mocks. Want to see how I use Miro? Head on over to my Miro board at miro.com/lenny to see my most popular podcast episodes, my favorite Miro templates. You can also leave feedback on this podcast episode and more. That's M-I-R-o.com/lenny.

15. 47:49 – 52:24

    Examples of segmentation done well

    1. LRLenny Rachitsky47:49

       Are there any examples? You shared this water example, which I love. That's 'cause it's really clear.

    2. MRMadhavan Ramanujam47:53

       Yeah.

    3. LRLenny Rachitsky47:53

       By the way, you forgot to mention, uh, Liquid Death, which I think is like $8 water (laughs) in like a can that just looks really cool.

    4. MRMadhavan Ramanujam48:00

       Yeah, keep getting these tweets from Peter. Uh, yes, I mean, uh, I- I love the, uh, product actually. It's like water packaged as, uh-

    5. LRLenny Rachitsky48:08

       (laughs) .

    6. MRMadhavan Ramanujam48:08

       ... an $8 product. So it's, it's great, right? I mean, that's a, that's a segment th- of customers that love that, and...

    7. LRLenny Rachitsky48:13

       Oh, I love that. The, the VC wants you to include that as an example, as you talk about water.

    8. MRMadhavan Ramanujam48:17

       Exactly. (laughs) W- we'll do it from next time. Liquid Death, eight bucks.

    9. LRLenny Rachitsky48:21

       Yeah. Any other examples is kind of (laughs) the premise of my question.

    10. MRMadhavan Ramanujam48:24

        I would probably start with like a few obvious and famous examples so that you just remember the point in some way, and then we can drill down, you know, a few- further if needed.But if you look at, for instance, Apple, right? Uh, let's assume the conversation with Apple was something like this, "Hey, we need to just, you know, build one product, one iPhone, because we need to, like, maximize our market share. And we will throw it out and, you know, uh, slap on a price and hope to get the market." They wouldn't be the most profitable company in the planet today. What did they actually do? There is an iPhone for $299, $399, $499, all the way to $1,499. They have built products to different segments. I mean, I remember walking into the Apple store when iPhone X was launched. I didn't want to part with, uh, you know, 1,000 bucks. I was checking the phone out and I looked at the features. I really didn't want the Retina features and all these kind of, you know, um, benefits. And then I saw that there was a phone without that for $799, and I picked the 8S and I walked out, right? I mean, so I belonged to that segment. Uh, I was not belonging to the, uh, you know, iPhone X. But there's a product that has been productized for different needs, segments. And if you look deeply, Apple has not just priced their iPhones, they've productized to different price points and willingness to pay, and that's where it gets actually fascinating. So I think that's a great example of understanding differentiation, uh, and then sort of, uh, uh, you know, productized to different needs. And I think that's, that's a good example. Another one that comes to mind, you know, where we worked with, uh, this was in, in their pre-IPO days, you know, Eventbrite, which is a, you know, B2B SaaS company. They used to have a one, one product that was actually, uh, servicing all of their customers, and then we went through an exercise of understanding who are their customer segments and how do we productize to different segment needs? And if you look at what they have today, they have, like, three plans, you know, and because they're, like, you know, segments behind this. And if you look at the plans, like, there are plans, like, for instance, the entry level plan has, has something like you can only launch an event with, like, one ticket type, like a general admission, right? Okay. And then if you take the middle plan, it have unlimited entry type. So you can have a general admission, a VIP admission, whatever, when you're actually having events. It actually makes sense, because if you're, let's say, hosting a, you know, your local wine club meetup, whatever event, you probably just need the general admission and that's it. But if you actually are a bit more professional and you needed, like, you know, multiple event types and you're having a event of that nature, then there's another product that actually appeals. But because of doing this, the, the one that has only one event type, that product is cheaper than the other one. So there's an essential product and there's a professional product, and they have enterprise product. So this comes down to truly understanding, you know, what customers need, what they value, and what they're willing to pay for, and how can we productize towards that, right? Maybe another example that is, uh, obvious and in front of us, uh, when we, you know, use our apps, like Uber is a great example of also segmentation, right, because, um, you have different car types. I mean, if they just had one car type, then okay, then that's a very different company, very different strategy. There's an Uber Black, the UberX. We used to even have the UberPool pre-pandemic. I don't know if it's back now.

    11. LRLenny Rachitsky51:35

        I think it's back.

    12. MRMadhavan Ramanujam51:36

        It's back? Great. And, you know, they also launched this thing called Comfort, which is a, a bit between Black and UberX, uh, in terms of both price and also the types of cars. But it comes with certain features, like for instance, you can say, you know, quiet preferred on a Comfort or a Black. And that's literally why I take one of these, because I'm probably working on my Uber ride over and, and I like to, you know, just have the quiet and just work on things, and I'm willing to pay for that. And that's, uh, I belong in a different segment. But of course, if I'm using, uh, you know, let's say, Uber for my, uh, you know, e- e- everyday commute sometime, maybe I do Pool. I mean, so depending on even my point in time or depending on my situation, I might actually belong to different segments. And understanding this and then productizing towards that becomes key.

16. 52:24 – 53:19

    The importance of dynamic segmentation

    1. MRMadhavan Ramanujam52:24

       So the topic that we have been focused with many companies to- nowadays is not just doing a static view of segmentation, but truly understanding dynamic segmentation and how to offer product and services around the fact that people switch segments. So like, if I'm ordering on a Friday night o- on a food delivery platform, maybe I'm thinking pizza. Tuesday afternoon during my office time, maybe I'm thinking of, like, a, a different type of cuisine. So if I know all of these things, healthy choices, wh- what's not, when can I productize what, then you actually start getting into dynamic views of segmentation. And, you know, and the, uh, technology around us actually allows us to take a very dynamic view at segments, and that's very fascinating. So the ʻōʻejoʻol, I mean, there are multiple steps. First, do the segmentation right (laughs) , that's the basic, getting at a static view. Maybe if it's relevant, even a dynamic view at this is the next frontier.

17. 53:19 – 55:49

    The three pricing strategies: maximizing, penetrating, and skimming

    1. MRMadhavan Ramanujam53:19

    2. LRLenny Rachitsky53:19

       What you shared just now reminded me of another really interesting framework in your book around pricing strategy, and you talk a lot about just, like, how important it is, one, to just write down your strategy and why you think this is the right strategy. But specifically, you have these kind of concepts of you either want to be maximizing, you want to be penetrating, or you want to be skimming, and I thought this would be a good time to chat a little bit about that. Can you just talk about what these three strategies are?

    3. MRMadhavan Ramanujam53:42

       Sure. When we talk about pricing strategies, you know, we, we hear many buzzwords and it's, it's irrelevant. I mean, so when we take a step back and look at it, there's literally only three types of pricing strategies. And if you know this, then you can follow one of these and, you know, we'll break through success products. The first one is skimming strategy, which is like your Apple, you know, iPhone. They launch at a particular price and the next generation is probably at a higher price, but the previous generation actually goes down. So they launch at a higher price and then they start lowering the price, so they're skimming the market. So it's... And connotation of these kind of products is also it's a premium product, price is a signal of, like, quality, et cetera, et cetera. If you take penetration, that's probably made famous by Amazon. And Amazon, you know, I mean, they're probably operating at, you know, much thinner margins, but they're pla- playing the volume game. Uh, much more harder game to play because you need to have all of your costs in order, supply chain, everything else, and you're fine-tuning towards the volume game.Often I see entrepreneurs who say, "Let's just price low to, like, gra- gain growth." That's a fallacy. I mean, if you don't have a business model that actually supports this compared to Amazon, then you probably don't - shouldn't be in a penetration strategy. And even in a company like Amazon and AWS has a very different strategy compared to their eCommerce marketplace, right? I mean, so within even business units, you can actually have different, you know, pricing strategies. And the third one is just maximization, which is you're neither on these two extremes, but a bit in between, and you're saying, "Okay, what can I maximize in the next couple of years?" I mean, in my opinion at least, uh, Microsoft would probably belong in that kind of category. And if I look at Apple, Microsoft, Amazon, I mean, companies that have reached trillion valuations in our lifetime, probably the only three in some way, shape, or form, they have dramatically different pricing strategies. The point is not about pick- like, just picking one, but it's about executing the one that you actually pick. And that's also what we write about in the book, how to pick one. Uh, not, not just pick one, but how to build your products around this executed live and breathe your business model strategy, which leads to your pricing strategy.

    4. LRLenny Rachitsky55:44

       Amazing. I, I just want to say, I love how deep we're getting into all these topics. This is amazing.

    5. MRMadhavan Ramanujam55:48

       Cool.

18. 55:49 – 59:50

    How to use bundling and packaging to unlock segmentation

    1. MRMadhavan Ramanujam55:49

    2. LRLenny Rachitsky55:49

       One final question on this topic, and then we'll get to the next, and then the rest will be quicker. (laughs)

    3. MRMadhavan Ramanujam55:54

       For sure.

    4. LRLenny Rachitsky55:54

       We're spending a lot of time on each, which I love. You talk a lot about the importance of packaging and bundling and how that alone can help you win a segment versus even the price of the segment. Can you talk about how to think about the importance of that?

    5. MRMadhavan Ramanujam56:06

       The way to unlock your segmentation is to think about bundling and packaging, as in you're configuring your product based on what customers need, what they value, and what they're willing to pay for. Either you put a bunch of, uh, you know, benefits that people like and call it packaging and put that out, or you're taking multiple products and calling it bundling and putting that out, right? So it's a question of, A, that's the way you unlock segments. So you're productizing. It's, uh, like the iPhone X versus the iPhone 8S. Different products, different features, different packages, et cetera, right? The way... The quick framework to think about packaging bundling, you know, we call it the leaders, fillers, and killers exercise or framework. So if you think about the classic, let's say, bundle, you know, like a Big Mac, uh, or a Happy Meal, right? I mean, that's... The Big Mac is the leader product. That's the... In the Happy Meal, right? That's what people go for in a, you know, when they go to McDonald's. When you look at french fries and Coke, those are the fillers. You can put a burger along with french fries and Coke, call it a Happy Meal. And you know, most people who wouldn't have bought a french fry or Coke, but if you just say, "For a dollar or two more, you know, you can actually get this," they would say, "Let's get the Happy Meal." So you're actually bundling it in such a way that with, you know, marginal increase in price, you're also able to sell multiple products, right? Uh, which they wouldn't have if you didn't have it. The killer ca- is the one where if you put it in the product, it just kills the bundle for everyone. So like for instance, if you put coffee along with french fries and a Coke and a burger, that's just going to kill the bundle. No one needs a double dose of caffeine when they're having a burger. But there are people like me, Lenny, who love to have coffee with their burgers. So these are great candidates for selling them as add-ons, because if I actually... I mean, I would pay for the add-on, because I actually want the coffee. So I would take the burger standalone, and I would take the coffee standalone. And that's why it's actually listed separately in the menus, right? If you bundle it, what happens is it just depreciates the willingness to pay across the entire customer base to the point where no one actually wants it. So you need to find pockets of customers who want it, and then maybe only sell it to them. So the rule of thumb that I usually say is, you know, if 10 to 20% of your customers want something and they really want it badly, that's usually an add-on. That's not, that's not something that goes into a package unless you have a advanced package just for them kind of thing. Um, and if more than 50% of people want something, that's a leader product, right? So if you understand all these leaders, fillers, and killers, then you can configure your product in such a way that you're productizing the segments and you'll unlock maximum value.

    6. LRLenny Rachitsky58:36

       Your example reminds me, I just went to In-N-Out yesterday, and how I don't think they've changed their model in ever. Somehow it just works. They nailed it.

    7. MRMadhavan Ramanujam58:45

       It somehow works. I think In-N-Out has a... That's a story for another day. I think it works for, for a different reason.

    8. LRLenny Rachitsky58:51

       Some people. Yeah. All right. (laughs) And then the other thought I had while you were talking is, understanding who the leaders are and the fillers and the killers comes from these willingness-to-pay conversations. I imagine the stuff that people stack rank at the top is most likely gonna be your leaders.

    9. MRMadhavan Ramanujam59:05

       Yes, exactly. So when you do those most and least kind of questions and you stack rank them, the must-haves, will pay, uh, or must-have table stakes would be the leader products or leader features or benefits. You know, the ones that are nice to have and might considering, uh, might consider paying or nice to have, those kind of features are probably the fillers and they don't need other killers.

    10. LRLenny Rachitsky59:27

        Awesome.

    11. MRMadhavan Ramanujam59:28

        Don't need or will not pay.

    12. LRLenny Rachitsky59:29

        Got it. Interesting. When I saw you write about killers, I always thought it was, like, things that it needs to have that would kill the deal if they don't, but that makes a lot more sense, that it kills the deal if it includes it. Interesting.

    13. MRMadhavan Ramanujam59:38

        Includes it, exactly. Maybe we should change the language in the next, uh, sequence to monetizing innovation, but-

    14. LRLenny Rachitsky59:44

        No. It's working. Don't change anything.

    15. MRMadhavan Ramanujam59:45

        All right, good.

    16. LRLenny Rachitsky59:47

        All right. Third topic around your pricing

19. 59:50 – 1:03:30

    Why how you charge is more important than how much

    1. LRLenny Rachitsky59:50

       model. There's something that you talk a lot about that people think too much about how much to charge and not enough about how to actually charge the pricing model. So could you just talk about maybe what that is and why people maybe don't think about it as much as they should?

    2. MRMadhavan Ramanujam1:00:04

       We usually say how you charge is way more important than how much you charge. You know, take a, a quick example and then bring the point home and then we can talk about why this is actually essential. So like taking a non, uh, SaaS or software example, if you think about Michelin, which is like, you know, a tire company, probably one of the most price-sensitive, let's say, markets, because when... Think about it, you actually go into a tire store, you see all of these things, uh, look similar, but they're somehow priced differently. How are you supposed to make a decision? I mean, it's very hard and you need to understand what you're paying for. And they came up with this new tire which was supposed to last 20% longer. It was a true innovation in the industry. And these were tires that were used for, like, moving trucks from, you know, as a, as a... Moving trucks from point A to point B, right?And, uh, when they thought about it, they said, "Okay, if we go and ask for a 20% premium," there's no chance they would get it because it's a price sensitive market, right? If they don't ask it, the tires are gonna overrun and they're gonna cannibalize 20% of their business. So what they actually did was they changed their pricing model or monetization model, and they said, "Okay, we are gonna charge based on the number of miles that a person would drive." The truckers actually loved this model, right? Not, not just because it was pay as you go and, you know, they could pay when they actually use the tires and how and everything else. Uh, that was the obvious reason. But then now, they could also invoice their end customers and say, "Okay, my, uh, you know, journey was 798 kilometers or miles, and that's the amount of tire cost." And they could pass it through because it became a variable cost. And they, uh, people loved this kind of model. And of course, the, you know, tires lasted long. Michelin recouped that more, but more people jumped into the Michelin bandwagon because now they could actually, you know, buy a tire as, on a pay as you go basis. Now, there was... If a tire could be actually... I mean, I mean, the age-old model for tires is on a per tire basis. If a tire could actually be sold on a pay as you go, uh, kind of consumption model, I mean, then obviously most products can actually explore this kind of route, especially in a software setting. But the key lesson here is the how you charge was the most important question. It was not the how much. The how much came about because of the how you charge. Uh, another SaaS example that is probably top of mind for me, uh, is, um, B2B SaaS is Segment. This was before they went, uh, to Twilio. They used to price based on APIs. So like, the number of APIs that you actually have with Segment, that used to dictate which plan you would be and how much you would pay for it. But increasingly, they were also shifting gears towards selling to different personas within companies. And what is an API is a debate. Probably a marketing person does not necessarily understand exactly what an API is, and the how you charge question became very critical. And what they actually did was, uh, we worked with them and we, we, we kind of identified that monthly tracked users were, uh, was a much better metric into how customers perceive value. And that was the more fairer metric for customers. Like, if you're tracking more users, uh, in Segment, you're probably willing to pay more compared if you're tracking less. So the packaging was changed to, like, a monthly tracked user instead of APIs. This is literally exactly the same Michelin per mile kind of models on a, you know, B2B SaaS with its month, number of monthly tracked users, right? So that was a different example. So the how you charge question is super important, way more important than how much. If you don't focus on it and just rush to one or the other, often you're sub-optimizing like crazy.

20. 1:03:30 – 1:07:40

    Subscription vs. usage

    1. MRMadhavan Ramanujam1:03:30

    2. LRLenny Rachitsky1:03:30

       It's interesting that both your examples are usage-based models winning, and it feels like in general, usage-based is kind of where people are trying to go more and more, or maybe not. So maybe two questions. Do you feel like that's the future of SaaS pricing generally, and roughly, do you feel like that should be a default way of approaching when you're building, say, a B2B SaaS company, or is it still seat-based?

    3. MRMadhavan Ramanujam1:03:52

       I would say it this way, is like, most B2B SaaS companies follow what is actually in vogue at that present point in time.

    4. LRLenny Rachitsky1:03:58

       Mm-hmm. Mm-hmm.

    5. MRMadhavan Ramanujam1:03:58

       You know, if subscription is in vogue, then they'll say, "Oh, subscription is the best strategy." If usage is, you know, made famous by Snowflake and others, they would say usage, right? I mean, so I think usage is obviously, uh, let's say envo- uh, right now. I think it comes down to really understanding based on your business situation, does subscription make sense or, uh, should you be usage or pay as you go if you're a SaaS company, right? I mean, there are different markers which actually identify this. If customers demand, let's say, predictable bills or usage is very similar month over month, as in, uh, if, if you're subscribing for Tide pods, for instance, not like you're gonna wash more clothes one month versus the other, the usage is the same month over month. Or, you know, when the usage is highly variable, which is, you know, changing quite a lot between month over month, and if you price based on pay as you go, then your bills are also gonna be dramatically different month one versus month two versus month three. So you're gonna have a very tough conversation with your customers. In all of these kind of situation, a subscription actually makes a lot more sense. Or it could also be like, you know, usage is, um, intermittent, but the value delivered is ongoing, right? I mean, like LifeLock is a great example. Uh, it's a product that you probably have to protect your identity theft protection. The value is ongoing. The usage of the product is only episodic when your identity theft gets compromised. I mean, if they say, "Okay, I'm gonna price based on usage," that would be dramatically wrong pricing model, right? I mean, so in those kind of cases, subscription makes sense, or simplifying the pricing conversation is to your advantage, you know. Uh, let's say the Spotify was a good example, right? If everyone wants to listen... Uh, everyone used to listen on a per song basis, but having a subscription actually made sense, it simplified the pricing conversation, same as Netflix, all of those kind of situations. So don't r- don't- don't just rush to something like usage just because. Understanding that is key. Usage makes sense when people want low commit or less friction, so, like, making it easier to buy like an AWS kind of thing. You know, you onboard people and then you grow with the product, and I think those kind of situations make sense. Or when customers would demand transparency and fairness. Uh, note, uh, please note that... Don't mix transparency and fairness with being predictable. Those are very different things. Transparency and fairness just means that you charge for the product right. For instance, if you don't use a subscription for a few months, is it fair that you're being charged for those months? That's fairness. That's nothing to do with being predictable. But if they're demanding fairness and transparency, often a usage-based pricing model could make sense. Or, or alternatively, you know, usage is intermittent or episodic, and the value delivered is also episodic and not ongoing. Like, you, for instance, book the movie theater ticket or you book the flight, there's also intermittent usage, intermittent value. So the pay as you go kind of makes sense, or maybe there's even some underlying cost that scales with usage, like an AWS pay as you go can make sense. Or even probably lastly, if there's some, uh, most important thing for pay as you go, Lenny, is you need to have clear metrics.... that you can actually track and identify an attribute value, and your customers would agree to that value generation, then pay-as-you-go would make sense. If you can't track what you are charging on, often it's a really bad idea. And the- of course, you can also be more hybrid sometimes, and that's also a winning model. Like for instance, if you take HubSpot, it's a hybrid model between a pay-as-you-go and a subscription, and it actually works well for them because there's a certain component on, on a fixed monthly basis. And then if you exceed those kind of quotas and limits, then you actually get into a pay-as-you-go model. So I would urge the readers not to rush into one versus the other based on what is in style at a given point in time, but give it a deep thought and say, you know, what is your business? How are your customers? How are they situated? What are you servicing? And, you know, what makes sense between the two

21. 1:07:40 – 1:10:22

    Pricing options and structures

    1. MRMadhavan Ramanujam1:07:40

       models?

    2. LRLenny Rachitsky1:07:41

       Awesome. On the, on the point of being able to even track usage, I've seen like five startup decks of startups that help companies with this 'cause it's so complicated to know what to charge.

    3. MRMadhavan Ramanujam1:07:50

       What is it?

    4. LRLenny Rachitsky1:07:51

       What to charge on usage-based models, where they basically plug into your systems to help you figure out how much every company owns, owes you. Maybe a couple more questions on this topic. One is just, like, what's like a simple way of thinking about the options, say, a B2B SaaS company? There's like seat-based pricing, there's flat-based, uh, annual contract pricing, there's usage-based. You could lop on freemium to make a free version of it. Is that the four? What's kind of like a way to think about your options?

    5. MRMadhavan Ramanujam1:08:18

       For B2B SaaS, I think those are probably the options. I mean, you know, either subscription, pay-as-you-go, freemium, these kind of things. And of course, the price metric that you actually pick-

    6. LRLenny Rachitsky1:08:28

       Mm-hmm.

    7. MRMadhavan Ramanujam1:08:28

       ... like what measure are you charging on and then how do you structure. The price structure that you pick is important because, for instance, are you flat for a certain amount of time and then it becomes variable? That's a structure, right? I mean, and then the, uh... Or for instance, can you be two-dimensional in your structure on two metrics? So like, the more people actually use your product and take actions that benefit you, the better price you get. I mean, this is something we call as a value matrix. For instance, I mean, in, in B2B SaaS companies that actually want, want to achieve like wall-to-wall adoption. I mean, it... In many companies it's still a pipe dream. I mean, it's, it's just, yeah, you can talk product-led growth, but if your pricing model, it actually incentivizes product-led growth, that's a whole different conversation. So what we would do is like, for instance, on one axis you have seats, and on the other axis could be the number of departments that the product is being used at. Departments as HR, legal, et cetera, right? And then the more users and the more departments, you get a better per-user price. So you've automatically built an incentive to actually say, "If you want the better price, sure, sure. You drive the right behaviors, which is get more people on the product and put it in the hands of more departments." So people can self-govern their pricing as opposed to just, you know, you come up with a price and you're just negotiating, right? So when you think about pricing models, you have to think about first picking pay-as-you-go subscription freemium, then thinking about the metric, and then thinking about the price structure.

    8. LRLenny Rachitsky1:09:52

       Awesome. And maybe one more example. Say marketplaces, basically if you're taking a fee in almost every case and it's a question of how much you take and then there's maybe a subscription piece on top of it. Is that roughly right?

    9. MRMadhavan Ramanujam1:10:04

       Yeah, that absolutely. So you could take a rake on the transaction and there's probably a platform fee or a subscription fee. So that comes down to, again, a hybrid or a structure. So there is a portion that is predictable and then there's a portion that is the usage-based. It's a bit... It's, it's not a rake-based model, but it's similar to the HubSpot model in principle.

22. 1:10:22 – 1:12:06

    How to run tests to see which pricing model works best

    1. MRMadhavan Ramanujam1:10:22

    2. LRLenny Rachitsky1:10:22

       Okay, one last question on this topic. So you wanna test different models. Say you're, say seat based and you wanna try usage based, or you wanna, you're usage based and you wanna go seat. Is that possible? If so, how do you do that?

    3. MRMadhavan Ramanujam1:10:32

       It's definitely possible. There are ways, ways to test this. It's a science. I mean, this is also what we do with many of our clients for a living. But maybe the, the easy Monday morning thing that I can actually, uh, ask your listeners to do, uh, is what we call as a breakeven exercises. So let's assume that, for instance, uh, let's, let's take a marketplace. Let's say you are selling a dollar, uh, a hundred item. And, and I mean, as in your, your customer is selling it. If you ask them, you know, what should the pricing model be? 3% transaction fee on the hundred dollar item or one and a half percent transaction in dollar 50 cents or $3, or are you indifferent? This is a basic question because if you do the math, uh, all of those numbers are the same. So an economic human being rational, uh, everything that business school taught us would say, "Okay, people will pick the indifferent option." I mean, I've done this thousands of times. I've never seen the, you know, indifferent actually win. It's always people would pick one or the other. So then you actually start understanding what kind of model might make sense. I mean, same thing with B2B SaaS companies. You would say, uh, let's say you have a hundred seats and I would charge you, let's say a thousand dollars and, uh, $10 per seat. Uh, or I would charge you $2,000, uh, flat or I would charge you, you know, $500 and the rest of the seat based amount that, uh, equals 1,500. It's all the same. People would say, I li- I mean, I like the lower platform fee and the variable, or they'll say, I like the fixed or... So the indifferent never wins. That's an easy way to like test, uh, you know, pricing models, what makes sense.

Episode duration: 1:38:32