Mark Stiving: When we sell a traditional product, we have to sell it completely on customer perceived value. What do they believe is going to be true when they buy our product? When we sell a subscription, we got to get them into our subscription using perceived value, but once they get into our subscription that they now get real value.
They now get to know what it is that our product really does for them. And if we've put the right metrics in place, we can measure that, we can help them understand how much revenue they're making, how much money they're making, because they're using our product.
Lindsay Duran: Welcome to B2B Reimagined. My name is Lindsay Duran, and I'll be your host for this episode. I'm joined today by Mark Stiving, chief pricing educator at Impact Pricing and the host of the Impact Pricing Podcast. Mark, welcome to the podcast and thanks so much for joining.
Mark Stiving: Oh, thank you Lindsay, this is going to be a blast.
Lindsay Duran: Excellent. Well, Mark, I was lucky enough to join you on your podcast, Impact Pricing back in April and in that show, among other things, your listeners learned some interesting facts about me, that I was an intern for the Pittsburgh Steelers at one point. Even sat next to Mean Joe Greene on a flight once. I'd like to return the favor.
So what's something fascinating or surprising about yourself that you can share with our listeners?
Mark Stiving: Sure. Lindsay, quick story that I rarely tell people, but I love this. When [00:02:00] I was younger, I loved adrenaline sports. I still do. So I scuba dive and mountain bike and road bike and dirt bike and whitewater kayak and hang glide and paraglide, and I always wanted to try sports like golf or sailing or flying airplanes.
I said, those are really sports that I can do later in life after I don't need my physical body. So I broke the world up into young man sports and old man sports. A few years ago, I was mountain biking, had a pretty big crash, cracked a couple of ribs, spent about six months healing. And then I was up paragliding in a field and the paraglider caught the wind the wrong way.
It flipped around and it was pulling me along the ground… picture an old Western movie where they're dragging the guy behind the horse. That was me being dragged by my paraglider. I stood up, my ribs were killing me, and I am not joking, I said the words out loud: “It is time for old man sports.” [00:03:00] And so I took up flying airplanes.
Lindsay Duran: Well, you pre answered my next question. I was going to ask you when you know it's time for old man sports. And that seems to be when, so thank you for answering that one. I have to say your fascinating stories are far more interesting than mine. Perhaps I'll have a better one to share the next time you have me on your podcast.
Well, we're thrilled to have you on today to talk about subscription pricing in B2B. This is of course, a growing area of focus for many companies, particularly ones that have not historically had subscription pricing as a business model. And are beginning to diversify how they think about price, how they think about how they'd like to sell and recognize revenue.
So you literally wrote the book on subscription pricing called “Win, Keep, Grow.” Can you tell our listeners [00:04:00] how the book came together and the frameworks that you lay out in it?
Mark Stiving: Yeah. Let me start with how the book came together. I've been teaching pricing forever. Let's just put it that way. And I had been teaching a class and students started asking the question, well, how is this different for subscriptions?
And my answer was kind of flippant, but in truth, it was real. And that was well subscription pricing is the same as all the rest of the pricing. It's still about value and how much a customer is willing to pay. And I was absolutely right. Except the nuances I missed completely. I left the company that I was working with and doing all this teaching and decided that I was going to dig in and understand the subscription thing.
And I was so fascinated by all of these nuances and how subscription is truly very different. I call it a traditional business. You might think of it as a transactional business, but the differences are so huge. [00:05:00] I was having “aha” moment after “aha” moment, after “aha” moment. And I said, I gotta write these down.
I got to put this in a book. I could describe that book is my list of “aha’s” or trying to take all these “aha’s” and trying to make sense out of them as I'm figuring out what does it really mean to run a subscription business? So that's where the book came from. To me, it was shocking. Sometimes I feel like the book doesn't say anything because when I think about someone who was born in the cloud, who works at LinkedIn or who works at Salesforce, I feel like they should know everything that's in that book already.
And I didn't say anything at all new. And yet when people read it, they're like, “Oh my gosh. Now I understand what subscriptions are about.” So I have this love/fear relationship with that book in that, I think it didn't say enough, but sometimes I think it says just everything that people need to know.
Lindsay Duran: So you lay out in the book three different approaches to the revenue buckets that are prevalent [00:06:00] in subscription businesses.
So certainly acquisition, retention and expansion. I like to think about that from the perspective of Zilliant’s business, where we are a subscription business, more traditional in that we're in the software space. But I think obviously this is applicable to other more traditional businesses where that's not been part of their business model before.
Can you talk about how companies should approach pricing when it comes to those three different buckets?
Mark Stiving: Yeah, I think this is a really big topic, but let me start with the three buckets are the first of the “aha’s” that I had, you eloquently said the words, acquisition, retention, and expansion, and a lot of subscription companies know those words.
They think those words, but I don't think they truly internalize those words. And so the title of my book is “Win, Keep, Grow,” which is me using non consultant speak to say acquisition, retention, and expansion. I think of those as three revenue buckets [00:07:00] that as a subscription company, you have to go manage.
And you can't just lump them all together as one and say, here's our product, here's our business. You literally have to think about how do we go win new customers? What is the product that we're going to have so that we can win new customers? What's the pricing that we're going to use? What's the marketing and the sales techniques we're going to use, and then as soon as we have a customer, then you have to focus on how do we keep that customer?
What's our customer success plan? Look, like if we're going to end up raising prices on customers, how do we make sure we don't turn too many out? How do we watch what the churn rate looks like and keep those people in line and almost all subscription companies realize they have to do those two things.
They may not separate them dramatically. And then the third bucket, I find very few subscription companies do this well or intentionally, and that's growing customers. We really, and truly have to grow our customers. The companies who focus on growing [00:08:00] customers grow so much faster than companies who don't focus on growing customers.
And by growing customers, I simply mean if a customer paid us a hundred dollars last year, how can I get them to pay me more than a hundred dollars this year? And so those three revenue buckets is the first of the three frameworks that I talk about all the time. And that is as a company, to literally focus on each one of those three buckets separately, where in a traditional business, all we really cared about was winning customers. In fact, one of my favorite “aha” moments was when I realized that traditional companies - and I apologize to all the traditional companies I'm about to upset, right. But when I realized that traditional companies didn't really care if their customers use their product. What they cared about was that the customer bought the product and then they were done because we got the money totally up to you now, what are you going to go do with it?
In subscription, that's very different because if we're not caring, the people are using our product and getting [00:09:00] value from our product, they're not going to stay with us. And they're certainly not going to grow with us.
Lindsay Duran: Well, Mark, I might stick up for some of the traditional businesses here for a moment and challenge you on one of those points.
I think about businesses that are in more of a traditional realm, but recurring revenue in that companies make repeat purchases of the same items. So, we work with food service distributors and auto parts distributors. And those folks are ordering the same items. Their customers are ordering the same items over and over again, and really are needing to find value in the product or in the delivery of the product or equate the cost of the product with the value that they're getting in order to keep ordering from that particular supplier.
Otherwise they'll go and buy from another vendor. And so there is that element in traditional business of needing to provide that value. Just framed up a little bit [00:10:00] differently. It's not necessarily in use of the product as in, value from buying from that particular vendor.
Mark Stiving: Yeah, I actually agree with you a hundred percent Lindsay.
I think one of the problems we have with the subscription world is the difference between subscription and recurring revenue and in truth, running those two businesses are almost identical. If I can get a recurring revenue stream, a great example of that is Uber. Uber is not a subscription business.
But it's a recurring revenue type business where I need you to use me every time you're traveling. Every time you go out, whatever that happens to be. And so just like a subscription business, they're focused on the usage, the experience. Am I really delivering value to my clients and they should be thinking about those three revenue buckets, win, keep and grow.
I think recurring revenue and subscriptions are so, so similar in that respect. So I agree with you.
Lindsay Duran: Do you see companies that have traditionally been recurring [00:11:00] revenue companies, trying to shift to a subscription model in order to lock in that customer for a longer period of time and not have to handle the resale every time?
What trends are you seeing in the market as it relates to that?
Mark Stiving: It's funny because companies don't really understand what they're selling and why. And the key for all of this is to figure out what is it that our customers are really buying from us. And then we can figure out what we should be selling.
For example, if I'm going to sell a component that goes into a product that someone's manufacturing, and there's a recurring revenue there, because they're going to continue to manufacture the product, they're going to continue to buy from my company. But they truly are buying the components.
If I want to go subscription, that doesn't matter because that's not what the customer wants to buy. On the other hand, I might have recurring revenue from a service function that I'm providing to keep a piece of factory equipment up and running, [00:12:00] and I charge you every time I come out and I want to make sure that you're really happy with me.
Because I want you to keep buying from me. So I get this recurring revenue stream going. That's the type of business where you could say what people are buying isn't my time to go fix your machine. What people are really buying is uptime of the machine. So can I sell them a subscription to uptime of the machine instead of selling my hours?
My time, every time I go fix the machine. In other words, the way I think about this really clearly. Subscription. We get to charge a subscription. When customers are buying a periodic stream of benefits, what's the periodic stream of benefits our customers are buying? Once we understand that we could possibly repackage, reconfigure our products.
So that we can now sell that as a subscription and a lot of ways it's because that's what our buyers would prefer.
Lindsay Duran: I think that's a great way to put it. And I don't know that I've [00:13:00] ever heard it framed up quite like that, but that makes a ton of sense. And I think that, that leads me here to my next question, Mark, in that we've heard a lot of, more, I'll say old school or traditional industries are really rethinking how they're doing business, the Rolls Royce engine example, being one that, that often comes to mind in that rather than selling someone, an engine, they are shifting to a subscription for an engine, which is honestly not a thought that ever occurred to me as a viable business model when you're selling something like that.
Can you talk a little bit about how companies are making that transition?
Mark Stiving: Well, the transition itself is amazingly hard to make, and the reason the transition is so hard to make is because you're changing so many things inside your company. As you transition from a transactional product to a subscription product.
So think about Rolls Royce for a [00:14:00] second, they probably sold engines. And so, it's either going to be American Airlines buys the engine or Boeing buys the engine, but somebody buys an engine and then someone has to maintain it and keep the plane running. And what Rolls Royce has decided is look, what people really want to buy is a functioning engine on the wing so that planes can fly and carry people.
Now they can sell that capability instead of selling the engine itself. What all changes inside the company is a lot of different things. Our mindset shifts from, I just sold an engine to, how do I keep these customers happy? Keep these airplanes flying. How do I continue to deliver that value to my client?
Another thing that changes dramatically is cashflow. I can imagine when Rolls Royce sells an engine, I have no idea what they cost, but let's call it a million dollars. I, they can sell an engine for a million dollars, but if instead, they're going to sell a [00:15:00] subscription to the engine, they're going to get a small portion of that per month.
And so now, instead of, my million dollars upfront, I get a 30th of that each month. So it's going to take me almost three years to get my million dollars back. That really hurts our cashflow and we have to pay close attention to that when we're doing that as well. And then lastly, when Rolls Royce sells an engine, they've sold an engine.
That's really nice. And if they never fix it, they never do anything. That's totally okay. But once they sell a subscription, now they're managing three revenue buckets, we sold it, but now we have to make sure that we keep that customer happy. So they don't switch for whatever reasons. And ideally we're going to grow that customer, figure out how is it that we can make more and more money from those individual customers that we've got using our subscription products, as it really changes a lot of things inside the company.
Lindsay Duran: Indeed and creates whole new teams of people that maybe you didn't have in place before, [00:16:00] right? The folks that are servicing those engines on a regular basis and making sure that they're up and running. One thing that strikes me that I think would be the most challenging thing for a company who's looking to make this transition is how do I determine what the price of my subscription should be?
For a product that I'm used to selling and now I've turned into a service. How do I come up with that price out of the gate? And what are the factors that companies should think about as they're trying to establish their first subscription price offering on a good that they've previously sold in a more transactional nature?
Mark Stiving: Yeah, that is such a hard question to answer Lindsay. I think what most companies do is they take what the price used to be, they divide it by 36 and say, that's my monthly price. So that over the course of three years, you get the total revenue back. And if they stay longer than three years, then you've got a [00:17:00] higher customer lifetime value.
And I got to say, when you're first starting out, maybe that's okay. It's certainly not going to be optimal, but maybe that's okay. One of the things I love about B2B subscriptions is we often have the ability to know on a month by month basis, how much value economic value we're delivering to our customers every month.
If I can convince you or demonstrate to you that I'm delivering to you a hundred thousand dollars in economic value above and beyond what you would have without our product, you would likely pay me 10% of that number. So if you were getting a hundred thousand dollars a month, I could probably charge you $10,000 a month for that.
Now the question becomes, can we truly convince our buyers they're going to get that? And one of the things that's interesting, many things that's interesting about subscriptions is when we sell a traditional product, we have to sell it completely on customer perceived value. What do they believe is going to be true [00:18:00] when they buy our product?
When we sell a subscription, we got to get them into our subscription using perceived value. But once they get into our subscription they now get real value. They now get to know what it is that our product really does for them. And if we put the right metrics in place, we can measure that, we can help them understand how much revenue they're making, how much money they're making, because they're using our product.
And that in turn is going to help us later. Even if we didn't price it correctly, upfront. Once I can demonstrate to you that I'm making you a hundred thousand dollars a month. If I increase your price, you're still going to pay it because you want the hundred thousand dollars a month. So setting that initial price, like everything, is pretty hard to do, but I love the fact in B2B, we can usually measure the economic impact of what it is we're delivering to our clients.
Lindsay Duran: Indeed. What would you say are the advantages of companies trying to shift some of their revenue streams to a subscription pricing model? Why would a company want to do [00:19:00] this?
Mark Stiving: There's several amazingly good reasons. And I'm glad you made that plural, because I don't think I could say this is the single most important reason.
Oh, one really big reason is let's assume that you've got an all subscription revenue type column. On day one of your fiscal year, you've probably already booked 70% of that year's revenue, because those are customers that you've won previously, and they're going to continue to buy from you. And maybe you have 30% churn over the course of the year, which is a reasonable number.
Maybe it's pretty big for B2B, especially enterprise B2B, but you've got 70% of that revenue already before. And now any new customers we win is incremental revenue. Any customers we can grow is incremental revenue. So we started this big number, this big chunk. We also find that we get higher customer lifetime value.
If we make sure we're winning the right customers, that we can truly deliver value to. They're going to pay us forever. So our customer lifetime value ends up being much [00:20:00] more than had they bought our product and used it forever. So that's really nice. Probably the single biggest reason that companies say they want to go subscription though, is the valuations they get in the marketplace, whether you're a startup company, whether you're a publicly held company.
Valuations tend to be 10 times higher for subscription-based revenue than for traditional transaction-based revenue. And that's probably because of the things we just talked about, where you get higher customer lifetime value, much more predictable revenue streams. It's easier to grow.
Lindsay Duran: Excellent. And those all sound like great reasons for moving to a subscription pricing model, but what are some reasons that companies might struggle to, or what are the challenges or roadblocks that would prevent a company from being able to execute on this type of pricing strategy and frankly, business model strategy effectively?
Mark Stiving: I think we already covered those, but I'll touch on them one more time.
If you don't mind. Probably the single biggest one for companies that exist [00:21:00] today is cash. If I'm used to going out, if I have to spend my sales resources to go out and win a million dollar contract, and all of a sudden I'm going to shift that to subscription. And instead of a million dollars, I get $30,000 that first month that's painful.
That hurts a lot. So cashflow becomes a really big deal to us. What we may be thinking about if we're going to do something like that is how do we ease our way into subscriptions, as opposed to saying, let's turn everything to subscriptions tomorrow. And that way we can at least share some of the upfront traditional revenue that we get.
Some of that cashflow with the subscription side that says I'm not going to get the fast cash flow today, but three years from now, it pays off dramatically because I've got a lot more. The cultural issues are huge. As we mentioned, the company has to suddenly focus on, are we truly delivering value to our customer?
You had mentioned that we build new departments and probably the single biggest, most important department that [00:22:00] subscription companies build that traditional companies don't have is one that's called customer success. So we've all heard of customer support and technical support. And these guys are there to, to respond to questions and problems.
Customer success is there to be proactive. We are watching our customers. We're watching how they use our product. Are they using our product? How can we help them use our product better, faster? We suddenly care about time to market, how fast from the time they adopt our product until they're truly getting value from it, because that's a really risky time that we might lose them as customers.
And I don't want to do that. And then as they're learning and using more and more, are we teaching them, oh, this is what you could do next. Or here's how you get more value out of our product, depending on how many customers we’re managing. You could have individual people watching customers, and you could have algorithms that are doing this across thousands of customers saying, oh, these people all behave similarly, but that culture issue is a really big [00:23:00] deal.
And then there's the whole pricing, billing management of this all. It's kind of easy because in the traditional world, we get an order. And when we get an order, we know that we invoice based on that purchase order. Life was really good, but what happens in subscription? That someone didn't pay their bill.
Well, now we need to have a process for that. We're going to turn off their subscriptions. Maybe they just had a credit card that didn't go through or failed. What happens when they want to upgrade? Well, now I've got to be able to easily have some system that says, yeah, they wanted to upgrade their billing or their product into this.
So now I've got a different price. So be able to change the price that we charge them monthly, relatively easily. What happens if we're going to negotiate prices, which in B2B, we do often. I may have every single customer at a different price point. And so now I'm doing monthly billing for every customer at different price points.
It just takes more automation and thought to make sure we do this smoothly and not cause problems for our marketplace.
Lindsay Duran: Absolutely. I [00:24:00] think those are all key points. And I know that when Zilliant transitioned from an on-premise software model, years and years ago, to a SaaS subscription model that we certainly underwent a lot of those changes that you just described, particularly on the internal process changes and establishing a customer success function.
So I think I've uniquely seen firsthand many of those challenges. And if you can do it effectively, it certainly sets you up, I think, to not only add value to the value of the company, but also really add more incremental value to your customers because your success is directly tied to the success of your customers overall, which I think is really one of the key benefits of this type of model.
And that it's a win-win for both the company and the customers in the end.
Mark Stiving: Can I ask a quick question? Sorry. Did anything surprise you while you were making that transition?
Lindsay Duran: That's a great [00:25:00] question. I think initially what surprised me was the lack of comfort that many companies had with having a system in the cloud, that many IT organizations didn't necessarily trust that. In the last five or six years, however, that has really gone away.
And most companies now prefer to not have to manage and host a bunch of servers as long as proper data security protocols are in place. So that was something that I think is unique to the software space and companies like Salesforce really helped get everyone's comfort level up quite a bit, as it relates to having things sitting outside of your firewall.
Mark Stiving: Yeah, that's interesting. And then actually that brings up another one of the challenges of moving to subscription is how do you move your customers who bought a perpetual license and is paying you a maintenance fee into the subscription platform. This is a little tricky. [00:26:00]
Lindsay Duran: Indeed. And that was a multi-year effort at Zilliant and we completed that effort back in 2016.
We've been through that transition for a while, but certainly it's not for the faint of heart as our CEO would like to say. He wouldn't wish that on his worst enemies, but certainly once you're through to the other side, it provides for a really great customer experience in the end. So Mark, before we go, could you tell us a little bit more about what Impact Pricing does and how you help companies?
Mark Stiving: Sure. Our company exists just to provide advice and to educate other companies on pricing issues and value issues. And we spend a lot of time with companies that are trying to move to subscriptions or companies that have a subscription, but it's not going well for them. And usually it's just because they haven't thought through these fundamental frameworks that we talk about or think about all the time and they just need an outside view to say, yeah, let's take a look at it this way.
One of my favorite things, I had a chance to teach an [00:27:00] ISP, an internet service provider. They've been around. They used to be a telco - they'd been around for 50 plus years. And I was terrified because I was going to teach them about subscriptions. And I thought no way. There's no way that these guys don't know everything I'm about to say, but it was surprising because when we got done, they were thrilled with what they learned and they could go implement new things, new ideas.
And it was just a matter of stepping back and saying, yes, there really are frameworks. I think people who grow up with subscriptions kind of have it ingrained in them, but haven't thought through, this is why we do what we do. And once they see those frameworks, it really does make a difference in what they can get accomplished.
So my world, my life is all teaching companies and helping companies be successful.
Lindsay Duran: Excellent. And if companies are interested in talking with you, what's the best way to get in touch?
Mark Stiving: Well, they can email me mark@impactpricing.com.
Lindsay Duran: Perfect. Well, Mark, I want to thank you again for joining us today. This has been a really insightful conversation, so we appreciate you [00:28:00] sharing your perspective with us.
Mark Stiving: Thanks Lindsay. Some of those were pretty hard questions.
Lindsay Duran: I didn't promise to make this easy on you, Mark. Well, I'd like to thank all of you for joining us for this episode of B2B Reimagined, we're certainly committed to your success at Zilliant. And if you are interested in learning more about how we help companies price, please reach out to us.
Visit us at Zilliant.com. This concludes this episode of this podcast, please rate and review the show as it helps us to continue to put out great free content. We hope you will join us for the next episode of B2B Reimagined.
