Innovative and actionable monetization strategies with Madhavan Ramanujam and Alvaro Morales

Sarah Goomar

Orb recently teamed up with leading pricing consultancy Simon-Kucher to host a round-table discussion on actionable monetization strategies.

Orb Co-founder Alvaro Morales joined Madhavan Ramanujam, author of Monetizing Innovation, to discuss product-market-pricing fit, the importance of flexibility and segmentation, and much more.

Below is a recap of the discussion and the main takeaways for ensuring successful monetization.

What is a segment?

The concept of segments is critical when it comes to pricing models. Moderator Eddie Hartman explained, “A segment is a group of people who want to pay the same price and see the same value in something and are different from another group of people who see a different value and are willing to pay a different price for potentially the same thing.”

Madhavan also stressed how a slow death for companies can result from neglecting segmentation. Building a product and trying to cram in as many features as possible only “fool[s] yourself that one size fits all” when, in reality, one size fits none.

He pointed out that water is priced and marketed differently depending on whether it’s from a fountain, in a bottle, behind the bar, or in a product: “It’s just packaged and productized differently because people have different needs, and if you didn’t recognize it, you would just have one water for everyone…. If water can be packaged and productized to meet different needs, then I would challenge that any SaaS product can easily take that route.” 

There’s no “average customer,” and making that assumption can hurt your business by failing to consider different segments in your pricing strategy.

Alvaro’s introduction to pricing at Asana

Alvaro talked about his early days of joining Asana as an engineer when he was tapped to help with pricing changes. He thought he would walk into different financial models and analyses, write a few lines of code, and be done. “Instead,” he said, “what I discovered was that this discipline was incredibly product- and customer-centered. It’s really about understanding segments and customers and meeting them where they are.”

After six months of cross-functional collaboration, working with multiple teams to ensure their new price matched customer value, they ended up raising their seat pricing from $9 to $10. On the surface, this may seem like a straightforward change, but in reality they needed company-wide communication and had to learn the pricing logic and how everything worked together on the engineering side. In the end, it was a successful initiative that greatly contributed to the business.

Alvaro noted the entire process of changing their pricing brought immense pain for engineering and finance but was also immensely revenue-generating for the business. This observation would eventually lead to the creation of Orb to resolve that pain on the back end.

Understand consumer willingness to pay

As businesses get off the ground, one of the most important considerations when determining price is how much consumers are willing to pay. That willingness is baked into Orb’s foundation, with Alvaro and his co-founder being mindful of restricting their building to only what they could validate with paying users:

“My co-founder and I were both engineers by training, and as we were embarking on the journey to start Orb, it felt very tempting to start building product — just diving into and coding up some of the great ideas that we had … and we told each other that was going to be one of the last things we did. So, we were going to validate product-market fit, go out and try to find new customers, find paying customers, before we would acquiesce to that engineering itch.” 

Systematically check for product-market-pricing fit

According to Madhavan, the last seven years have seen a greater focus on understanding product-market-pricing fit. He’s observed more companies saying, “I want to go beyond a product-market fit. Is there a willingness to pay for this product?”

This mindset shift was a wake-up call for many entrepreneurs, who realized they had to price strategically, and how they build products has to align with what customers are willing to pay. That’s become critical amid the emergence of AI, which has directed many companies’ focus back to product and enabled quicker shipping “to such an extent where the 72% of [business] failures will still happen, but at a much faster rate.”

AI has accelerated the speed of failure along with production, making understanding your product-market-pricing fit even more important at the onset of your company. Building comes with hard costs, and monetization must not be an afterthought.

Be mindful of how you charge

Pricing and monetization are key to business success. Matching cost to the value your product delivers facilitates growth and sustainability, so your pricing models must demonstrate the worth customers receive.

As an example, Madhavan offered a story about a salon SaaS moving from subscription-based pricing to usage-based over the Covid-19 pandemic, when salons had few in-store customers. Coming out of the pandemic, their new pricing model helped strengthen their business and value proposition among their target audience. “The pure seat-based model in the next five years is going to be dead,” Madhavan declared.

He predicted that with AI, which will make companies more efficient and reduce seats in a company, the seat-based pricing model will need to evolve. He mentioned hybrid models, with a combination of seat and usage fees; pricing based on attribution, where companies charge a percentage based on their results; and subscription models, which give customers the choice to opt into recurring fees and service-level agreements.

Madhavan compelled business owners to give customers the choice as to how they want to pay; as a result, “they’re going to stay for a longer time because they made the decision … retention [will go] up, and customer lifetime value is better.”

The need for flexibility in pricing

Pricing is constantly changing as companies evolve, so updating your pricing models and fee structure can’t take six or nine months every time you need to pivot. According to Alvaro, “It comes down to learning in market with your customers” where, despite the best-laid plans, the world changes and markets shift unexpectedly. That’s where flexibility is crucial, which he said is “[t]he fundamental value proposition of Orb.”

Many businesses come to Orb on the cusp of a business transformation and want help in future-proofing their monetization structure. Pricing and monetization are often built into the foundation of a company’s codebase, so changing one component may have unintended effects on how customers are charged. Unraveling those connections and logic usually takes the most time for engineering teams to ensure new pricing is implemented properly.

When you start to build scale into your revenue and hone your pricing strategies, you need to keep the vehicle behind your monetization flexible and able to adapt to changes quickly. This makes new ideas from product or sales teams feasible and not beholden to how long it would take engineers to build any additional costs or functionality into how you charge.

Alvaro asserted that, when you think of “What does a billing system look like when it's built for change and evolution?” versus “What is the pricing that I have today?” – that's when you can reimagine what's possible within your infrastructure stack.

Speed and price before product

Don’t postpone the pricing conversation because you’re hyper-focused on innovation. Madhavan emphasized that not considering price before product in an AI world means the death of a business because you spend time and resources building your product, and the underlying costs of building an AI application are non-trivial. When pricing is an afterthought, it’s “game over at that point.”

Alvaro added that speed is increasingly important in the competitive SaaS landscape. “Competition is increasing in this environment, and speed and ability to ship product quickly makes a big difference” and enables companies to monetize innovation efforts that weren’t necessarily on the product roadmap.

Agility and speed enable companies to tap into innovative ideas and get them out to market with a cohesive and effective monetization strategy.

Acquire, monetize, and retain

“You need to get customers, you need to make money, and you need to keep them.” — Madhavan Ramanujam

Companies must understand the interactions between acquisition, monetization, and retention. When companies try to focus on only one of these three pillars and think they’ll figure out the other two later, those companies fail — and faster, thanks to AI.

Before AI, the product cycle was longer, allowing enough time to correct and fill in the missing pieces as you went. But because things now move so quickly in a SaaS, there’s less margin for error, so every business should know how they plan to grow, earn, and retain from the start.

It’s crucial to balance these three facets as well; lowering price may increase acquisition, while increasing it may reduce retention; pay-as-you-go, on the other hand, helps with acquisition, whereas subscriptions aid retention. Understanding how all of these elements intersect and maintaining an equilibrium between them is key to a healthy, profitable, and sustainable business.

“[An example of good packaging] strategy balances acquisition, monetization, and retention because you have three packages instead of one. There’s a product for acquiring customers, monetizing them over a period of time, and because you rightsize your customers to the right packages, they also stay, so it also balances retention.” — Madhavan Ramanujam

Look for problems that aren’t being solved

“In the world of pricing, there's so many opportunities to really, truly impact trajectories of business…I want to see more ideas that can truly tie the impact of a pricing team towards the PNL of a company and the trajectory of it. There is so much more that can be done.” — Alvaro Morales

The fireside chat wrapped up with Alvaro encouraging the group to think about how pricing impacts a business, despite how painful it is to adjust pricing.

Want to learn more? View the full video below.

April 29, 2024

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