SPEAKER_00 0:02

Welcome to the Scaling with Clarity podcast. Most companies treat growth is a rational equation. Create value, explain it clearly, and customers will buy. But unfortunately, customers do not make decisions in spreadsheets, at least not most of them. They rely on shortcuts to take notes, emotions, and perceptions of fairness. Today, behavioral economist Etiota Akbon Lahore joins us to examine what founders need to understand about customer choice, why underpricing can weaken a business, and how leaders can design pricing products and experiences that make decisions clear without crossing the line into manipulation. Welcome to Scaling with Clarity, Diosa.

SPEAKER_01 0:51

I'm excited for the conversation.

SPEAKER_00 0:54

Me too. Me too. The two areas where we see founders struggle the most are ground clarity. And clarity can be translated into what problem we're solving. So how do we price the product? Who is our audience? So the things that you focus on and specialize are extremely important to any founder in any scaling up companies. So what drove you to focus your work on it?

SPEAKER_01 1:29

Yeah, that's a great question. So I'm a behavioral economist by training. That means that I study the psychology behind how people make financial decisions. And so you can imagine for customers, that's everything to do with why did they choose, how do they choose, you know, what are the alternatives, what is actually the how do they process the numbers in front of them? But part of what drove me to this work was I spent a great deal of my career working with banks and investment banks doing financial well-being work. And so financial well-being is all about can the average person feel comfortable with their normal everyday expenses when something dramatic happens, like an income shock, can they absorb an income shock safely? You know, somebody falls ill, somebody listened to an accident, can they absorb the income shock connected to that? And do they have enough to be able to comfortably plan for the future that they want? And so when I thought through building out this company, it became evident that when you're a business owner or founder, your financial well-being is almost like a linear relationship with your pricing. What you price and the amount of value you recoup from what you put out into the world will definitely affect your financial well-being, your ability to take care of your family, et cetera. So it became kind of a good extension of the work that I would have been doing in my career. But also it was just that one area where a lot of people like people would tell me, I'm guessing, I'm anxious, I don't know what to do about my price. So it just felt like there was a need meeting the skill set that I and my team had.

SPEAKER_00 2:56

And so can you for so for any founder that's listening um here, can you guide them through the framework that you would deploy in terms of how do you how do you go about price discovery? What is the ideal price covering your stage? And like there's a number of different methodologies in terms of how do you discover cascading price and filling up and uh but like I'm I'm uh you were the specialist here, you're you're the expert. How do you go about finding the right price for the right customer?

SPEAKER_01 3:29

Yes. So I tell everyone, and the framework that I use to teach people how to do this is think about your pricing as a house, right? So you have your cost floor, which is what do you need to keep the lights on in your business? Your costs also include what does it cost you to deliver a service, right? So it's not just like you know, insurance and et cetera. It's also like actually when I need to go deliver this SaaS, et cetera, what is my AWS cost, et cetera. All of those things matter, right? That's your cost floor. Now you also have what we call the willingness to pay ceiling. That is, what is the maximum any customer that you have is willing to pay for your product, right? And so that becomes the ceiling that becomes kind of like the top, right? So you've got the floor, you've got the ceiling, and then in between, you've got the alternatives and you've got competitors and you've got context, right? So competitors is what are people like you, what are products, et cetera, like you, what are they doing? Whereas alternatives are if your customer was not using your product, what would they be using instead? And alternatives is a perspective that a lot of people miss out on because you're so focused on what are competitors doing. You don't realize that a lot of people are not buying a product because they've hired an intern and they give them Excel, right? So you have to also think about what are the alternatives to your product and what is the context? Who are your kinds of customers? What do they usually buy? What are they used to spending? What is the value they get? All of those things then come together to help you understand what is the most I can price for my service to this kind of customer, what is the least I can expect, what are other people doing, and what is my comfort, my customer, comfortable with charging? That is the entirety of how you think about building a good price.

SPEAKER_00 5:08

Makes sense. No, um, establishing the floor is fairly easy. It's kind of like cost accounting. You you build out the floor based on the the cost of the crew. Um, how do you determine where the ceiling lies?

SPEAKER_01 5:23

You have to talk to customers. And that is the one thing that a lot of founders I find, especially when people come to work with us, just haven't done. It's like you're pricing in a vacuum, you're pricing from intuition. You haven't necessarily sat down with your customers and with your prospects to say, what is the value that you get from this thing, right? Everyone talks about you know pricing with value, scaling with value, etc. Value is quite simply that somebody looks at what you have to offer and they think the benefit I'm gonna get from that is higher than what I would pay for it. And so you want to understand what is the value you get from this? And there's different layers and types of value, right? There's functional value, does it have to help you do? There's also the emotional value, does it make you feel safe? Does it make you feel comfortable? Does it help you save time? What is those kind of levers? And then there's the aspirational value. Does it help you, you know, feel like the kind of person who you want to be in the future, right? So you want to test against the different elements of value and then back that out against, you know, you can use a pricing instrument, like a willingness to pay survey, um, etc., to then try and understand for all of those different elements of value, what are you willing to pay? How would you have to add, right? So that helps you start to get to the next level and the next layer of how does my customer see this and what are the numbers they put around it.

SPEAKER_00 6:44

I agree, agreed. Um so what are you looking at? Um the the the the value. Um I mean, value is uh highly subjective because like different people, different different uh um attributions of value. So this one aspect, one aspect is looking at the substitute of product, the other aspect looking at uh uh adjacencies or other kind of like the one options we do not do anything. What should be the price differential or the value that's being perceived for um for an existing company company to overcome the status quo or to overcome or kind of like overcome the switching costs to go from another company to a new company? Is there like a specific rule that you can apply or how should founders think about this?

SPEAKER_01 7:37

So essentially what you're saying is I'm already working with a company and I want to, you want me to come work with your company, how do you demonstrate value to me?

SPEAKER_00 7:47

Yes.

SPEAKER_01 7:48

Okay. So in that instance, first of all, it's important to understand, again, the different levels of value, right? A great salesperson will come in the door and have a conversation, and they're not only asking about price, they're asking about how often does the machinery break down? How how much of your sales, how much of your team's time you spent, you know, manually doing this workflows because of the tool that you put that you bought, or the person you're working with doesn't help you do that very well. So you're trying to understand what are the other areas of value that I can lean into, I can push on, right? Because it's never just the functional, the thing that's supposed to do. What is the experience of working with it, right? So there becomes a great salesperson who starts to uncover, okay, there's pockets of value here, our two works much faster, our two works, it's easier. But the thing you have to understand with when you're trying to get somebody to try you out, two things. Number one, people are we don't like uncertainty. We would rather lose money and know it's a sure thing than take a gamble. We really don't, in general, we don't like uncertainty. And so when we're faced with a decision we're not sure about, we tend towards inertia, the devil you know, basically, than the one you don't know. And so when you're trying to get somebody to come over to you, you're thinking about how do I reduce uncertainty for them? Whether that's your highlighting, here's all the value that you get working with us, or you're saying, we're gonna de-risk this, right? Why don't you try us out for a month, try us out for X, Y, Z number of weeks, help you get a feel for it. Or if it's the switching costs are super high, insurance companies do this really well, right? You're switching from progressive to Geico, progressive might say, just click on this button, we'll send Geico a letter on your behalf down, and then we don't want them anymore, right? So they're thinking about how do we bring the switching costs down? So those are all levers that you can pull that before you even get into the price conversation are ways that you can start to help your customers see or your prospects see why they should be coming over to you and making that process easier, do risks with less uh uncertainty involved.

SPEAKER_00 9:53

Is there a specific framework that that uh a company can follow? Like do you guys have a propriety framework in terms of how they think about this? And and almost like I find that some of the like of it like in business, a lot of it is art and science. And and in art is kind of like the gut feel and and but but a huge importance um has to be attributed to the science part. So kind of like on on the science, is there a framework that somebody can follow to say, okay, well, this if I'm thinking about pricing, these are the these the things that they I ought to consider in terms of determining the price, but also the value, the switching cost, the inertia, like whatever. Yeah.

SPEAKER_01 10:35

Yeah, so um we have a proprietary framework, uh pricing framework. It's got four steps. So the first one is um what we call mapping and monetization zones. That's basically you're looking at your entire customer segments and you're fencing them, you're deciding, you know, maybe enterprise needs a different kind of experience and a different kind of pricing than your small to medium businesses compared to your individual users. So you're segmenting them and saying we're gonna treat these three groups differently, even though the core product we offer is the same, right? So that's the first one. You're mapping the areas of your business that you can monetize within your customer segment. You take out of that and then you move it into the second step, which is with the willingness to pay research, right? That's where you want to establish that ceiling we talked about for all of the different customer segments, and that's why you're asking questions about alternatives, competitors, context, you know, switching costs. That's where you're really going in and sitting with the customer and extracting all of that information from them. That's going to give you a pricing range for each one, what's too high, what's too low, etc., what feels sensible to them. Then you can move that over into the third step, which is where you really think about how do I frame my pricing. For example, we um we know from the research, and this is something I teach all about small businesses, a lot of people have been coached to only offer one price. It's like show them one price, and you know, they can take it or they can leave it. The research shows that when you only offer one price, 90 to 93% of prospects will choose to look around because we make decisions relative to a reference point. We like to compare things. That's how we choose, that's how we decide. We need a comparison. And so if you don't give your customer comparison, they're gonna halt the buying process so they can go find the comparison outside and make the decision between you and somebody you can't control. So, in the framing step is where we might do things like, oh, you need a comparison for your folks. So create a new package that it can compare your actual original package to. It might be where we say things like, you have a couple of different prices in here and you bundle them up. People actually um convert more and have higher intent to pay or to buy when you can break out your pricing. They see that as being more transparent and fair. So let's break it out for them. But let's do it in a way where they won't haggle with you and say, Oh, I don't want this, why do you want that? Right. The framing is where you're bringing a lot of that science and the elegance of pricing into the conversation. How do I get people to accept and understand the price? And then the final step is our testing phase, which is where we say pricing should be a feature and not a reaction. What that means is that you're, as you ship more value, you're constantly going back to your price to understand what we can change here. Are we still pricing aligned with the value or delivery? It doesn't mean that you're going to change your price every quarter or every half year, but it does mean that you are aware of this is a new value that we have shipped out, and this is the what our willingness is, this is how it's gone up or this is how it's higher. And we see that with AI companies like Anthropic, you know, every so often you see them change their pricing model, they are reacting to things that happen in the market. That's good price and discipline. It looks like they're always like, you know, it feels a bit like what's going on, but actually it's good price and discipline because as you're discovering how people are interacting with their services, they also are then going, how do we make sure bottom end is not suffering for this? So those four elements kind of come together to make up the framework.

SPEAKER_00 13:58

Makes sense. Um how actively should a company be monitoring and examining their the pricing vis-a-vis substitutes, alternatives, uh anything else? Like, should they have um a person that's dedicated to to pricing and kind of like are you able to group it kind of based on the size of company? Because obviously a small company, um you wouldn't have a dedicated person, but it may kind of do it ad hoc, haphazardly, but a bigger company. So just kind of get me through some of that thinking.

SPEAKER_01 14:33

Yeah. So a couple of ways to think about the first one is that I tell people that if your pricing is 100% based on what your competitors are doing, you're gonna make every mistake your competitor is making, right? And I tell this to founders because I've I had um a year or so ago, I was at this investor event, like a VC event, and the founder was telling me about this great platform they had built for like defense tech or something. And I was asking them how do we gonna monetize it? And she was saying that uh the plan was to undercut competitors by 10% to grab market share, and then they would go from there. The problem with that is that you don't know your competitor hasn't made any mistakes in downpricing, they might be underpricing as well. You blindly follow them, you're also underpricing. We also have a bad habit of saying that we all do the same thing, especially if you're in a pool where you're not properly differentiated. So you say that your SAS helps with scheduling or it helps with, I don't know, with rev-ups, right? Everyone says the same thing, except you're delivering way more value compared to your competitors, but you're charging what they're charging. And so your customer is guessing just you know, you're not reaping the full benefits that you should be. So those are like, you know, some reasons why you don't want it to be like a one-to-one kind of movement with your competitors, they move, you move, they move, they move, you move. You also don't want to get into a price war. That said, you do want to be aware of who are your customers comparing you to, right? And how do you make sure that if you are not able to, you know, be the best on some other margin outside of price, right? If it's not like I want to go with you know, Volkswagen because they've got incredible margins of safety, they're a bit a bit more expensive, but they also have the safety thing, and I will pay a premium for that. If it's not that kind of conversation that you're having, you also want to just be aware of what is your what are your competitors doing, and that then can help you inform and determine, okay, their price at this level, but these are the other attributes that they have that you know we don't have. Maybe we need to innovate in that way. So you do want to keep an eye on what you're on what your competitors are doing. You just don't want it to be a one-to-one relationship. You also don't want it to be that your competitor is setting the price for the market and you're constantly having to chase after them. Do you see what I'm saying?

SPEAKER_00 16:49

Yeah. How do um so you talk about differentiation quite a bit. Um to me, this is this is positioning. So, how do you differentiate yourself? How do you position yourself differently from competitors or even alternatives in such a way that um you can you you can commend the right price? You you don't become commoditized or you're not don't enter uh a red ocean or kind of create the blue ocean strategy. Like you talked about, uh you can have a product that that may like that may have more features. So how do you commend higher pricing in this case? Because like um how many how many people do actually take the time to actually compare the product on apples and apples comparison versus apples and oranges comparison?

SPEAKER_01 17:46

Most important thing is to understand what does your customer care about? What do your prospects care about, right? That sets the foundation for any kind of differentiation you want to draw, any kind of direction you want to lean into, right? Um there's this quote about how um if was it Ford said if he had asked people what they wanted, they would have told him to build a faster horse, right? And people look at that as like don't talk to your customers, but no, the intuition behind that is that people wanted something faster until he built a different mechanism that was faster. So it's important to talk to your customers because they will show you this is what I want and this is what I'm willing to pay for. Perceived value, all of those other like metrics we use and talk about, nothing matters if you don't know what your customer wants. So you start differentiating from what does the customer want, and then you can lean into it and you can lean into it in your position. You can also lean into it from how you niche down, right? Um, a while ago, I had some folks who convinced me to leave my CPA to work with them because they knew that I invest in real estate, and they said, hey, we are specifically focused on the real estate market, we only work with investors who have XYZ in their portfolio, blah, blah, blah, etc. Um and I was with, and they were more expensive, but I was willing to give them a shot because I thought that, okay, there's going to be value I get from working with people who actually understand the tax code as related to real estate and could get me some benefits that my regular CPA cannot, right? That was my intuition. And so by them understanding, okay, this is somebody who's in real estate, they're an investor, they probably care a lot about, you know, this different elements of value. Let's speak to them about that. They could try, they could poach me regardless of the switching costs involved. I will say they ended up not being very good. I know it had to go back to my regular people. So it's important when you do differentiate that you can actually deliver.

SPEAKER_00 19:34

Yeah. Makes sense. Um, it I mean, that that's another common challenge for um both startup and scale-up founders. It's kind of like how do you do well customer discovery? And customer discovery is not uh once and done, it's a continuous journey that you have to continuously do. I mean, that's why you have very successful CEOs like well, Jeff Bezos is no longer the CEO of Amazon, but like being customer obsessed with customer focus, understanding kind of like what the customer needs because ultimately that prevents you from building out things that the customer doesn't value. Yeah. So I couldn't make any more, yeah.

SPEAKER_01 20:14

And that also ends up showing up in pricing. We recently worked with uh a SaaS company that had built this platform and they kept shipping more and shipping more and shipping more until the CFO said we should probably see what people we should probably see what we want to price with that. And it turns out in their minds, they thought this would be like, you know, I'm approximating here. They thought that the size of companies saw it going after would be willing to put in six figures for the tech that they had built, you know, annual AR. Um, turns out some companies that we talked to weren't even willing to go up to 25% of that. Yeah. And this was a company that had just been shipping and shipping and shipping new features. If you're not talking to customers, it's hard to miss, or it's it's easy to miss what it is they want and then what they're willing to pay for. So before we get caught up in the build, and I think as founders, we're creators, we're inventors, building is very easy. But we make it seem like it's a difficult thing. When you're building, you're being creative, it's exciting, you're debugging, it's fun. Yeah, but if nobody's gonna pay for it, you've wasted a lot of time. So you have to do both to your point in tandem.

SPEAKER_00 21:17

Agree. Um, now the the podcast is called scaling with clarity, and the key word here is uh scaling and clarity. So, how should founders use pricing as a leverage to scale?

SPEAKER_01 21:34

When you're moving across the pricing curve, and there's kind of different elements of the value curve that you're tapping into as your company grows, right? A lot of companies, you might come in, you're a smaller company, you're still trying to figure out what is the value that I offer to customers. You might also not be in the right rooms where you can really charge what it is you're worth yet. You haven't really bought that credibility. When you're starting there, you might be going with more of a lower price, more project based. You're trying to figure out what does the market, what would they accept here, right? As you mature, you're moving from that kind of exploratory mode to more of like a stable price. You move up that curve, you're moving to kind of the more defensive place with pricing. And I find that that's where a lot of companies stop innovating with their pricing. That's when they go, it's always been this place, it's always this is what it costs. We would rather see if we can like lower our fixed costs than you know play with the price and because we're worried that if we touch price and everybody's gonna flip the table and our churn numbers are gonna go through the roof, right? However, as you mature, as you get to that place where it's tempting to get, like, you know, we have all the customers, we have error we're comfortable with, we don't want to touch pricing. That's really when you have the opportunity to innovate both in your pricing, but also, of course, innovate in your product. You're thinking about our customer has matured with us throughout the journey. Are there new ways to serve them? Are there new ways to deliver value to them? Are there new things we can put in front of them, even if we're not overtly changing the pricing? But that's kind of how the mindset shifts, right? You're going from more of an exploratory mode in your early days and moving up the curve towards now we want to really defend our price. The instinct still has to be how do we innovate? How do we make our customers feel and understand the value that they get from us? And how do we make sure that we are not mistaken the fact that you know our customers, there's no churn, there's no, you know, that we're not mistaking inertia for customer satisfaction, basically.

SPEAKER_00 23:29

Yeah. So when it comes to um inertia, there's different things that that drive inertia, and that doesn't necessarily mean price resistance or or stability. Um inertia is amazing for incumbents because it's really hard to displace incumbents. Um what if if if if a company is not an incumbent in the space, how would they um use pricing as a strategy to outcompete the the incumbent? Because the chances are that the incumbent in most cases, due to scale or a lot of factors, would have um pricing power um or relationship they have. So how do you compete if you are number two, number three, number four in a particular industry or sector vis-a-vis vis the incumbent?

SPEAKER_01 24:32

The default position definitely should not be we're gonna be cheaper. That's how you start price was that you may or may not win. Um the way that you compete with regards to pricing is that you first of all go back to that question of like, are there elements of value that are not being delivered? Yeah, we can lean into, and then can we price those elements of value? Can we segment that out, right? We might be maybe the incumbent has fast, flat price or fixed pricing. We can come in and we can institute outcome-based pricing, right? We will only pay us every time we get this solution resolved for you, right? Or you pay us a portion of whatever it is we divide, we help you recoup um on this cost, uh, on this cost transaction, etc. So you can play with pricing by thinking about is there a different pricing model that would seem both intuitive and fairer to the customers I'm going after. You can also introduce new metrics, right? So if your incumbent is charging per seat, maybe you come and say, put as many seats as you want. We charge based on usage, on actual usage. So think about can we be innovative with the price and model rather than can we get cheaper?

SPEAKER_00 25:42

So when it when it comes to pricing, um how customized should companies be um uh like I mean, if if you look at kind of like mini design, uh often it's uh like the the contravening force is uh choice, uh choice theory, right? Like if you have too many options, then the customers can can decide. But on on on the like one of the points that you raised at the top of the conversation is that you definitely don't want to provide just one price because they they show for alternatives uh and because they need a reference point benchmark. Um how custom should the pricing be?

SPEAKER_01 26:20

It depends on what it is, right? It depends on what it is and what and what your customer is used to. You still want to, it might be if it's uh utilitarian good and you haven't been able to differentiate it in any way, shape, or form, maybe you need to play around with the pricing model, and that's where you bring the innovation in, right? Um I think it really depends on what it is that you're selling. Uh for a lot of service-based businesses, I think there's a there's a fair amount of customization, naturally, because you know, we've talked to the customer, we've done deep discovery, we can say this is tailored specifically what you've told us. So I feel like that it really depends on what industry you're going after. Um there are also ways, you know. I I think that even when I think there's always a benefit to putting custom pricing in front of the customer because it shows that, hey, we listened to you, we understood the problem, and we've right sized the solutions or putting in front of you the options for solving this in front of you, they're right size to the specific problem we heard you say. They can sometimes be uh they can sometimes be uh negative perception, not always, depends on your you know market, but it can sometimes be a negative perception of like, oh, this is our price, take it or leave it, or like here's our pricing sheet. It's usually better if you can kind of customize it a little bit to what you heard them say during discovery. But again, really depends on the industry.

SPEAKER_00 27:44

Yeah, I mean the the key takeaway that I'm taking from our conversation is that you have to know your customers intimately well and tailor the messaging and pricing to them. Um what I'm I'm I'm curious to I've seen I've seen some companies use this very successfully, but I'm I'm curious from a big behavioral economics perspective, what role does transparency play in pricing? Like some companies kind of show like, well, this is my build up. Like um in some cases, in some industry, it's kind of regulatory requirement. If you work with government, it's God blast, right? Like so yeah, kind of walk me through what what role does transparency play in pricing?

SPEAKER_01 28:24

First of all, there's studies that show that more transparency, both operational transparency, but then also more transparency in the sense of you partitioned out your price and shows what you know how that final price, how you got there, it can be seen to be fairer by customers and it can increase intent to buy. So transparency can be a good thing. The question, however, then becomes do you have a moat that's big enough to withstand any price wars that you might get into because your competitor saw your price and undercut you by 10%, right? Um that's on one, that's on one side. I think the other side is that transparency has to go hand in hand with other things like are you well differentiated? Are you touching the elements of value in your markets and their customers care about, right? If you have a big enough moat where you know that people will choose to work with you because there's just the efficiency, they'll choose to work with you because you are the only one who, you know, who really understands it, kind of break it down for your customers in a way that they get. You're the only one who can ship as fast as they need to. You're the only one who's like, you know, compliant in whatever way they need. Even with all of that, if you have that differentiation set in there, then it's easy to kind of align that with that sort of um, with that sort of innovation, with that sort of pricing, is what I would say. So I think it really depends. It has to go hand in hand with we're transparent, but we have a big enough moat to withstand any kind of like attempts to push our customers being to have that transparency.

SPEAKER_00 29:53

Yeah. So it's not for the faint of hearty. You you have to have confidence that you can uh um sustain that price.

SPEAKER_01 30:01

You have to have the confidence that you have priced well, and you have to have the confidence that it's something that is going to appeal to your customers, right? Like trust and transparency go hand in hand. There's a big body of literature around people, the more transparency you are, the more you can increase that trust. But transparency doesn't mean that you open, you know, like it doesn't mean you open up the windows of your house and tell everybody what's going on inside the house, right? It might be the people who are qualified, you're more transparent with them. There has to be some sort of judgment there.

SPEAKER_00 30:31

So this is actually a real case scenario. We're working with a company, they're entering a new market. Um the the common price, it it's highly competitive, but the growing rate seems to be established. Um revenue in this case, it's it's roughly 15% of revenue is the is the going price. Now, our client has the ability to go down all the way to to 5%, a break-even at 5%, and obviously between 5% and 15% is a big delta. But the going market rate is 15%. How should I think about this? Because they absolutely have the ability to offer low pricing, but everyone in that market is offering the same price.

SPEAKER_01 31:22

So let me let me tell you a study. Um in France did a study a couple of more than a decade ago now. They basically took a bunch of folks, they hooked them up to a fMRI machine so they could measure brain activity, and they had them taste these bottles of wine. And the only thing that was different between bottles of wine is the same bottle everyone is tasting, but just the prices are different.

SPEAKER_03 31:47

Yeah.

SPEAKER_01 31:48

Price is the only indication they have. And what they found was that when people were drinking the more expensive wine, the medior orbital frontal cortex of the brain showing way more activity, lighting up more. That's the part of our brain that's uh uh related to value, way more activity compared to when they're drinking the cheaper one, it's like eh, whatever, right? So I call this the tyranny of low prices, which is that sometimes when you are too low, people think there's something wrong with you. That's why you're so low.

SPEAKER_02 32:17

Yeah.

SPEAKER_01 32:17

So if you've undercut to the point where there's like that kind of like massive differential between you and everybody else, is there a chance that people look and go, why? Right? And I'm sure we've all experienced this. There's probably borrowers that you wouldn't go into because you're like, I don't trust, I'm not sure about that. There's people who you're like, it's just so cheap, I cannot, I can't do it. I don't trust it.

unknown 32:37

Right.

SPEAKER_01 32:37

So I call that the tyranny of low prices, and it's something that people need to be aware of because on the spreadsheet, it makes sense, right? There's a demand elasticity you go down, maybe we see supply go up. Demand elasticity does not always take into consideration psychology, which is you go down, people go, ah, what's wrong with it? So that's just something they need to consider.

SPEAKER_00 32:56

Yeah. Makes sense. Um, now think thinking about psychology. Which behavioral biases become more dangerous as the company scales? Is it loss of virtue and is it confirmation bias? Is it status quo bias, kind of like sound cost thinking, something else? I'm just looking to get your perspective.

SPEAKER_01 33:16

I think it's confirmation bias. And the reason for this is that our brains are so insidious that we will see what we want to see, and we end up living in a world that is aligned to exactly what we think is, but not aligned to what our customers want. Think about Nokia, massive giant, confirmation bias. Who wants uh who wants an iPhone? Right? Blackberry, even the president uses a Blackberry. Why would we, you know, right? Yeah, it's confirmation bias, and the reason that it's so insidious is because you're right. Because you're looking for data to prove you're right, you're only going to find data that proves you're right. Of course, of course. So you end up walking out. We have all the data, we have discretion. The data says we're right and we're well positioned in this market. We did not look for data to prove that we are wrong, we did not look to data that undermines our fundamental assumptions, and so therefore we didn't find it, and so we missed the wave that was coming and took us out. So confirmation bias, I think, is the most insidious because it just really creates a world for us that you know can lead to dangerous things for the business.

SPEAKER_00 34:18

So I mean, the number of academic institutions have uh done studies since trend comes from diversity, and so in confirmation bias, um um obviously having diversity of thought would lead to better outcomes, but how do you overcome confirmation bias? So that you're mindfully thinking that this is something that can become a gotcha.

SPEAKER_01 34:41

Yes. I I'm a fan of uh pre-mortem, which is before you launch the product, before you ship the feature, you stop and go, if this fails, what went wrong? Yeah, and we list all the things that could go wrong, and what will we do instead, right? If this fails, could it be that actually there's a different kind of demand that we did not touch upon and we do not quantify? Right. Maybe we should go talk to more customers who are listening different from our norm, right? So you want to do that pre-mortem to just kind of understand this didn't work, what went wrong, what can we solve for now that we have the ability to before we have to kind of be in a reactive mode?

SPEAKER_00 35:21

Makes sense. Um how many companies actually I'm I'm I'm leaning Six Sigma. How many companies actually go into pre-mortems or even post-mortem? Like how many, yeah.

SPEAKER_01 35:35

It's hard because if you think about it, you're a company, you exist to be active, have enough activity that then somehow generates enough value that keeps you going. A company exists to be active. An average per person working at a desk is trying to prove to their boss that they're active enough and the activity generated some sort of value and they should be promoted for it. Right? A pre-modem is saying, so just in any company, there's just any everybody's gonna say there's too much going on in every company, right? Priorities are just we have 10 priorities. A priority should be two things. Have you ever met a company with two priorities? It's very difficult, right? So every company just exists in this world of we need to do stuff to generate value, we're running hard, we're running hard, we're running hard. It becomes very difficult to the person be the person in the room saying, wait, hold up, let's stop and let's think. And also let's think negatively, right? It's very difficult to sell your boss on that. So not enough people do it, I don't think.

SPEAKER_00 36:32

Okay, it's okay. No, it's uh it it it it it's it's very true. Um, and and when you find a leader that's uh truly receptive of fresh new ideas and and and um it becomes super powerful. I mean, like I've I've adopted a saying from Scott Galloway that the greatness is in the agency of artists, and so you want to welcome that diversity of thought. Um but speaking of of kind of like changes and kind of like what what how the world is evolving, now we live in in an AI economy, but also trust has never been higher in its importance. So on one hand, uh with AI, we can produce things faster, cheaper, and and and in many cases better. And you and you can actually have all three at the same time, where it's like yo, the agile, like you can have two of the three, but not the all three. It's no longer true. How should companies price their AI-enabled service? Because now every company is an AI company. Is should the pricing be based on effort, UFCH, time saved, risk transferred, results delivered? Kind of like what the new pricing looks like in an AI economy.

SPEAKER_01 37:44

So we work with an AI native um firm and they were doing uh their AI does research for PE firms. So right away you can imagine there's a lot of there's a lot of other people who are trying to do the exact same thing that they're doing. And they were trying to understand can we be innovative with how we price this, right? We can't be the cheapest, we don't want to compete on like you know, the same thing everybody else is competing on. What pricing metric should we use? And what we came up with was aligning it to analyst hours because that's how the firms think about how much effort went into this thing. It's a natural intuitive metric. So we ended up having that be part of their um their pricing package. The guidelines I can give with regard to how do you price AI or AI in your work? First of all, don't price the effort, right? So as much as possible, we're trying to get people from billing hourly, say to three hours we're gonna build for try and move away from that. Try and move towards what is the outcome we're getting with. Are we able to do more research now? Are we able to align and find more elements of value for you now as a customer? Let's try and like we want to price towards that and move away from hourly, move away from effort-based pricing, move a lot more towards a metrics that are intuitive for the customer to understand and predict. And that could be your analyst hours, it could be whatever segment you work in, something your customer is already familiar with. How do you translate your AI work to that? Um, and then also thinking through how do you make sure that as you're introducing this new AI pricing, you're also being able to still preserve and mention and keep on your costs. Because that's also something that we're seeing, you know, and even Anthropic, which is the actual AI company, felt pretty to this. They had somebody who was on the $200 a month plan and had charged about $4,000 worth of like tokens or whatever with the work that they were doing. And so they had to right-size their own pricing model. So I think there's still a little bit of like innovation that's going on in this space. But as long as you think about what's kind of intuitive for my customer, and how do I make sure I'm not just pricing the effort that I put into this, but I'm actually pricing towards the value on the outcomes, you'll be in a better place than most other people on this journey.

SPEAKER_00 39:56

Um so I want to continue down, continue down this uh uh way of thinking. So we're talking about AI, we're talking about the enthropic. Um one thing that I'm um struggling to understand is the entropic pricing. Um you have the subscription plans, you have um co-work as part of your subscription, and you have um the API. Um we're super heavy users of of AI, and the cheapest is the subscription. If you're doing tasks through co-work, it consumes significantly more tokens. And if you're doing uh things through API, the cost is exorbitant compared to the subscription. And and we're talking about the same task. So it it it uh I mean in our case, we've actually signed up for multiple plans rather than using the API. So it's it's it's it's um if I'm on topic, like to me that doesn't quite make sense. Like, shouldn't you like and and so the the the biggest uh for me the biggest unlock around AI is um everything we're going from everything being macro or one-to-many to now everything being possible being one-to-one. So if if if if I'm a consumer uh or of a user of a product, I would want my pricing to be based on what I need. I want to be able to pay I want, rather than everything is kind of like, well, you get it all or you get none of it, or maybe you get like like yeah. Walk me through your thinking here.

SPEAKER_01 41:40

Yeah, it's very interesting because I I recently uh re-downloaded Chat GPT to my computer and it defaulted to the work mode, and there was just so much that I did not understand the work mode version. I was like, I need to go back to the I need to go back to the web version because I just need to be able to chat with it then. I don't need it to do any, I cannot give it access to my systems um just based on the kinds of clients we work with. I I can't do that. Yeah. So all of that to say what Anthropic is doing, and I think which is clever, and everyone has to think about this, is they're fencing, right? They're trying to create their person in such a way that customers self-select into what's best for them. So if you're not a developer who actually needs access to the API and needs it running all of these things in the background, you go, okay, it's too expensive for me for the thing I needed to do, you bumped down to copilot. If you're not a knowledge worker who needs co-pilot running in the background, creating your schedule, creating everything, doing things for you, you go, I just need this thing to chat with. I'm gonna bump down to the big subscription model. So what they're doing is they're trying to create fences that make sure you, as a customer, are yourself selected into what's the right fit for you. And I think that it's part is it's clever pricing discipline because you want to look at your customer and not treat them all the same way, right? You want to understand that the customer who wants that a first-class experience is willing to pay a premium for that because they're not just buying the Gimme from point A to point B. So the question really becomes how do you look at a mass of customers and set up the fences in your pricing in such a way that they're going to self-select? And that's where the research comes in. That's where the both the science and the art of pricing come into play.

SPEAKER_00 43:16

Something pertaining to this. Um I think it was like a couple of years ago, or maybe three years ago, um, that uh Netflix decided to go aggressively after revenue assurance. So there's no sharing of accounts. Now, this naturally happens all the time with with companies. Why are companies not more aggressively pursuing revenue assurance, revenue completeness, uh making sure there's no sharing of of accounts? Like it's it's not like it's not like they can detect it. I mean, it's simple, you have two accounts of different IPs, you it you can assume that it's it it it's two different users.

SPEAKER_01 43:56

Yeah. How long did Netflix wait before they do that though?

SPEAKER_00 44:00

How many or six or seven years and think maybe they were in public or something? It was a long time.

SPEAKER_01 44:05

Yeah, because you want to make sure you the switching cost, the moat, you want to make sure you don't go aggressive and then all your customers to camp over to Hulu, right? You want to make sure you train them to come home, turn Netflix on, and scroll on their phones. So when the when it goes up by this bell, you've introduced more friction into that experience. They're too, they're too tired to working with you, they're too used to working with you. They can go, okay, sure, whatever, we'll keep on with you. Right? So if you're going to do things like that, that will introduce or at least cause your customers to look up and go take a closer look at the value you're providing to them. You want to make sure that relationship has been well established, the value they've gotten from you has been well established, and you have enough of a moat and enough of an ingrained behavior that your customers are not immediately going to churn. So I think that companies naturally tend to be more um risk averse, right? So they understand, like, okay, we have this much value that we're going to recoup it. Can we actually push for that much value without risking all the customers? And sometimes the journey we have to take them on is like you might lose a little bit of customer, your revenue will great, will grow by so much, and your profit, more importantly, will also grow. So it's worth doing it. But we have to do the research and the numbers to make sure that our assumptions will hold. So essentially, I think I was using it in the context of if I'm going to take this risk, what am I comfortable losing? Right? If everything goes belly up, what am I comfortable losing? Now, when you are working and thinking about price and innovation, which is a space where naturally nobody everyone is worried, we think the customers are gonna flip the table and all walk away as soon as we change the price. One way of de-risking it and reducing that uncertainty for the company is going, all right, we're gonna run the model and we're gonna see if you introduce this new price, how many people are more likely to leave conservatively? Are we comfortable with that? Right? This is the worst that could happen. Are we comfortable with it? And it's a really neat way to get companies kind of over that hump of okay, we need to change something, but it's also something that is applicable in just everyday life, right? You're thinking about taking a risk, you want to quit your job and start a company, you want to, you know, you're thinking, should I raise more? Should I really lean into bootstrapping? What is the worst that could happen? Can I afford the worst that could happen? If so, then there's your answer, right?

SPEAKER_00 46:34

Yeah, I agree. I agree, I agree. Um curious, um, what is one assumption about customers that founders need to stop believing before they can scale with clarity?

SPEAKER_01 46:52

I think that you need to stop believing that customers will tell you the truth just because you ask them, right? So I know we've talked a lot about value and talk to customers and get to the truth, you know, what do they value, etc. You have to ask those questions in a very specific way. You have to kind of set it up well. You have to make sure you're de-biasing the customers, the conversation you're having with customers to make sure that they're not just telling you things that you want to hear. So even when you are the 20% of founders who actually will go ahead and actually do customer research, you also want to still think about how do I set it up in a way where I'm not just gonna get confirmation bias back to read out back to me, right? There's a great book called The Mom Test. It's really good at helping people kind of parse out how do I ask those questions in a really good way. Um, so I think that's one of the things is just the notion that the my customers know me, they like me, they trust me, and so therefore, um whatever they tell me is the truth. There's you have to be careful how you ask those questions.

SPEAKER_00 47:57

So it in in the same vein, are there commercially important decisions that founders and companies should not make based on customer survey responses?

SPEAKER_01 48:11

Based only on customer survey responses. Um I would say don't only don't change your price based only strictly on customer survey responses if the survey was not well designed by an expert who knew how to de bias it and run through simulations, etc. Like don't do anything, um don't do any wholesale or wholesale changes based strictly on survey responses until you've been able to validate it. You've made sure you debias the way you access questions, you've led them through simulations, but also you've looked at their context. What are competitors doing? What are the alternatives? You've made sure you've asked enough questions to give you the robustness that builds your belief in the survey. And then also when you then go to implement what you think the right recommendations are, test and learn, right? So a little bit of few customers. Maybe we test a new price with prospects first, see how they react to it before we then you know test about everybody else.

SPEAKER_00 49:03

Makes sense. Um, is there a question that I didn't ask you or copy that we didn't address that you think it would be super important to cover as part of like the audience of like scaling out founders?

SPEAKER_01 49:18

I don't know anything. No, I think we covered a good deal of it.

SPEAKER_00 49:28

Yeah. Amazing. Um I like to close my interview with a choice of a question. You can choose to answer one or both. Um the my my closing question is what is the best advice you have ever received, or what is the nicest thing that somebody has ever done for you?

SPEAKER_01 49:52

Best advice I've ever received is to bat for myself. And what that means is basically you have to have there's gonna be there's gonna be a lot, there's gonna be a lot of days where you hear the applause and people are cheering you on and championing you, and you know, you're excited about what you're doing because everyone around is excited about what you're doing. But there's many more days when the only voice in the room is you, and you have to learn how to be the person who champions yourself and cheers yourself on and pushes to keep going. And I think that as founders, a lot of times our brains are so focused on the work in front of us and the gap, right? We haven't done this, we haven't done that, we didn't hit this revenue goal, et cetera, that we can become a little bit more self-defeating and we're not taking the risk that we need to take, and we don't have the confidence to go into the rooms we need to go in and do the pictures we need to do, all of those things. So when we say bat, or when I think about batten for myself, it's really like you need to be the one who knows how to share for yourself the loudest and point to you got that right, you got the other thing right, like well done, let's keep going. So I think that's the best advice. It's it's very simple, but very, very powerful actually.

SPEAKER_00 50:56

So, how do you go to bat? Um, like, do you have like at the end of the day, do you have like gratitude uh minutes meditation? Like you're writing in journal. Like what is your what is your process?

SPEAKER_01 51:10

Um, I have an app every day. Um I write three good things that happen that day, and the app prompts me every day at the same time. You know, nice what is the progress you're making, and then you can go back and look up for it over time.

SPEAKER_00 51:22

Nice, nice, amazing. What's the app?

SPEAKER_01 51:25

I am gonna say it's called I want to say it's actually called three good things, but let me let me pull it in. It's called Three Good Things. Yeah, it's called Three Good Things. Yeah.

SPEAKER_00 51:35

Amazing. Um it was an absolute pleasure having you on and and sharing your insights and knowledge and expertise on on pricing and and customer behavior. Um really enjoyed having you on. Um thank you.

SPEAKER_01 51:49

Thank you for having me.

SPEAKER_00 51:51

My pleasure.