The magic of subscription pricing

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A few months ago, one of our proposals got rejected because of our pricing. It was on the higher side for this client that was based in Asia. We had proposed a lump-sum payment (aka as perpetual pricing in the Product Management lingo!) for our product license.

The client did not have much room in it’s budget in this year and the next. Our proposal definitely offered a good ROI (Return on Investment) for the customer. But because of their limited budget, the client found our pricing very high.

Upon further probing we found out that the client was keen to consider this as OpEx (Operating Expense). As you may know, the operating expense is the monthly/annual expense that consists of items like salaries, internet and other routine expenses. On the other hand, CapEx or capital expenditure carries a big price tag upfront and with one-time payment. The CapEx typically include assets like computers, furniture, real-estate etc.

Now after our proposal was rejected, we started working on revising it to take it back to the customer. The silver lining here was that client had liked our product. We just needed to work within the client’s budget. Besides this, we also knew that the client was open to Opex pricing.

Here is what we did. Have a look at the following chart. The overall price is around $1.2 million dollars. In the first proposal, the entire amount is being charged upfront and the customer gets to use the product for its lifetime. In the second chart, we split the entire amount into multi-year payments so that the customer starts with a much smaller investment. This is the subscription or the pay-as-you-go pricing as the customer is paying as they go on using our product.

Year 2017 2018 2019 2020
Software License Price (Total) $1,240,000 $0 $0 $0

Table 1 : Perpetual or One-time Pricing

Year 2017 2018 2019 2020
Software License Price (Total) $310,000 $310,000 $310,000 $310,000

Table 2 : Subscription or Pay-as-you-go Pricing

 

In Table 2 above,  as it starts with much lower pricing, it is much more affordable. This offers a much lower point of entry aligned with the client’s budget. This subscription pricing will open up opportunities with customers who have tight budgets, in markets where lower price is key for winning.
Subscription pricing has always been a norm with B2C products. Think about your cable TV, your phone, or the Internet or the video service subscription fees. But with B2B, it is getting more popular now.
There are certain things that one needs to think through before offering a subscription pricing :
  • Revenue Recognition: The revenue recognition from subscription pricing happens periodically. So if the deal is for two years, then only 1/24th portion of the overall revenue gets recognized every month. This is the hardest part of offering a subscription pricing on your product. You and your management need to be comfortable with recognizing only a part of the entire revenue throughout the subscription period.
  • SKUs/Part numbers for subscription: Your ordering tools need to reflect the subscription pricing. The older SKUs/Part numbers will not work with the new subscription pricing. Subscription pricing should reflect the product ID and the period of the subscription. For example, if Apple is offering a two year subscription on its iCloud, the SKU should be along the lines of “iCloud – 2YR”. Without this clear demarcation, a lot of confusion can happen when other teams like operations and finance (that are working closely with you) are pulled into the approval/sales process. Also at larger companies, getting these support teams (Finance/Operations) to release the subscription SKUs is a big challenge for a Product Manager, if the organization has been only offering perpetual SKUs till now.
  • Technical Support: One of the smartest ways to limit the usage of your product beyond the subscription, is to offer product support for the duration of the subscription. For this reason, the subscription SKUs come in handy as they help the support team to quickly validate whether the support should still be offered. Once the subscription period is over, then you can cut back on the product support so that customers will not be able to get technical support, upgrades or updates on their product.

So as you can see apart from the lower entry point, subscription pricing also offers other benefits. But as a product manager you need to understand that it brings its own complexities and processes that you need to be aware of.

What distinguishes the top 1% Product Managers from the rest?

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The top 1% PMs use frameworks.

Frameworks are a tool for systematic decision making. Frameworks help you repeat your decision making process across other seemingly similar problems.

The top 1% PMs have frameworks for everything – for valuing companies, for assessing the market, for prioritizing requirements, for translating vision into execution, for pricing the product etc.

The top 1% PMs are people like Steve Jobs (yes, he is the best PM IMO), Peter Thiel, Elon Musk and the likes.

Peter Thiel, for example, has shared a framework he uses to value the companies in his book “zero to one” – it consists of the following components:

  1. Identifying whether the business is a monopoly
  2. Is it scalable ?
  3. Does it have a network effect ?
  4. Is it a brand ?

Frameworks help you to focus on what is important and eliminate the noise. This becomes very essential as the complexity of the problem grows and there are so many factors that come into play, many of which you cannot control directly. For ex. if you are to launch a new phone model, you have to focus on manufacturing capabilities, market size, competition but you can certainly leave out the macro-economic conditions. This becomes your framework.

Frameworks have been in use for a very long time. Management consultants use it all the time, frequently advising the executives with strategic insights.

There are many such frameworks available to a Product Manager. Examples include the technology S-curve, Porter’s five forces model, SWOT analysis. There are a must in the arsenal of an effective Product Manager. You can always develop our own framework or adapt any existing framework to your needs.

What’s not so good about being a product manager?

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There are a few things that are not so good about being a Product Manager:

1. Getting things done from people you do not have authority over: A PM role is a highly cross-functional role. It requires you to work with many people across multiple groups. As a PM, you have to keep the needle moving on your tasks. So you have to get the work done from these team members without having a real authority over them. It is not difficult given people understand their roles and are mostly willing to help. But it is just those one or two people , who might be super-busy or may not an idea of what you are trying to do or are not interested in helping you for whatever reason, that cause a big hurdle. Then you end up spending a lot of time, explaining a lot to get the ball rolling again.

2. Always moving to the next thing: As a PM you hardly get the time you want to focus on the things you want. This can mean that your pricing would have been better or your competitive analysis could have been more in-depth. Even though you want to do that , with the stuff piling on your plate continuously, you may not get time to do things the way you want.

3. Budgets are not available for good projects: You see a good market potential, you see customer demand and you build a business case only to know that for this quarter, your budget has gone to some other project/product.

There are few other things that are not good about a PM role, but those are more subjective (ex. public speaking, travel). I have left those out intentionally. I am sure I am missing on a few more. I will add as I recollect them.

All I know is coding. Can I become a Product Manager?

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We get this question a lot. This is very typical of someone from a technical background (ex. Currently in engineering or related area) thinking of moving to Product Management.

We have all heard about leveraging your strengths. It is applicable in this scenario as well.

Not all Product Managers need to be business savvy. There is opportunity to be fully technical in a Product Management role.

Similarly, if you are coming from non-technical background (ex. Finance), you can also contribute to high-tech Product Management, although the focus will be much different.

In this article, we will explore the two broad categories of the Product Manager role.

As you can see in the picture, these categories are inbound and outbound Product Management.

inbound-outbound-pic

This division between inbound and outbound PM duties is much more pronounced at larger companies. At a smaller company or a startup, usually one person plays both roles. So if you are looking to get experience in both these areas, it is best to do it at a smaller company or a startup.

You can also use the above picture, if you want to grow into the other area. For ex. If you are an inbound PM, you might want to take steps to get into an outbound PM role.

The Inbound PM role:

As an inbound PM, your role is to develop the product or the platform. You work closely with engineering team, define and document the requirements, attend the scrum. You also develop the roadmap and address the product development as per the roadmap. You work with alpha, beta customers and release the field-ready product.

The Outbound PM role:

As an outbound PM, you do the market research. You identify the target market, the market size, you build out the initial vision of the product. You work with Marketing to define the customer profile, you work with business development to do sales training and enablement. You define the pricing of the product. You lead the overall Go-to-market effort. You define a high-level roadmap of the product.

Overlap of the two PM roles:

At some point, the duties of the inbound and outbound PMs overlap. This is not contradictory but rather complimentary. The product development should happen as per the market requirements, which is why when it comes to the product vision, the roadmap and the requirements, both inbound and outbound PMs are stakeholders and should be aligned.

The evolution of Inbound and Outbound PM roles:

At some point once the product (or the product line) grows to such an extent that you need additional PMs to handle the sub-areas under each of these. If you do a search on a job board like LinkedIn or Simply hired or Dice you will see the following areas under inbound Product Management:

  1. Platform Product Manager: Widely seen in SaaS (Software as a subscription) type of companies, this person is fully focused on building out the platform.
  2. UX Product Manager: For B2C companies, where user interface design is very important, one (or more) UX PM(s) is completely dedicated to this area.
  3. Analytics Product Manager: Seen more in analytics focused companies, this PM helps build out the analytics related capabilities in the underlying product/platform.

On the outbound side, there are two such roles that are increasingly seen:

  1. Pricing Product Manager: Handles pricing (plans/tiers) across the product (or the entire product line). Also works with the stakeholders like finance or operations to define and execute the pricing strategy.
  2. Go-to-Market Product Manager: This PM role is focused on defining the entire GTM strategy for the product. This may or may not including the pricing, if there is a dedicated Pricing Product Manager.

Depending on the size of the market, the product line, there could be one or more people dedicated to the outbound PM role.

How do I become a Product Manager ?

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Here are some practical tips on becoming a Product Manager (PM) for a high-tech product. This is an excerpt of my Udemy course called – Transitioning to Product Management.

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How you can become a Product Manager depends largely on where you are coming from. If you are a fresher, the path will be different from someone who has work experience. Similarly, the path for someone with work experience in a technical role will be different than others from a non-technical role (ex. Finance, Operations).

Nevertheless, there are certain things you can do in your current role, no matter where you are coming from:

If you are just starting your career:

  1. Build your PM mindset – In our workshops related to helping technical people transition to Product Management, we have often talked about the need to have a PM mindset before you even decide to look out for a PM role. What is the PM mindset? It is about being able to think of the big picture. It will help you start with why a particular product should exist (the vision), how to go about building the product (strategy) and building the product and taking it to the market (execution).
  1. Join an Industry Organization: There are various industrial organizations that focus on the PM as a subject matter. Some of these started in the Silicon Valley and are now available in many other cities and countries. They bring in PM professionals routinely to talk about various PM related aspects – Building Products, Go-To-Market Strategy and execution, Sales, Marketing etc. Hearing the real-world experiences from professionals go a long way for the aspiring PMs. Often there are some membership fees to join these organizations, but the benefits far exceed the fees.
  1. Volunteer: You can volunteer in Product Management consulting companies. This will give you a chance to learn about the actual work that Product Managers do. During one such assignment, I leant about doing competitive analysis and did a real-life SWOT analysis.
  1. Build your own Product: The best thing you can do is build your own product. But since you are fresh out of college, you have to think through this and do it without a lot of overhead expenses. There are ways to build products with a minimal investment.
  1. Watch TV shows like Shark Tank and The Profit: They help in defining the value proposition of a product. You can understand how products are marketed, how are they sold, understand the basic metrics of any product. This will help you in overall improving your PM IQ.

If you have some work experience in a technical area:

  1. Volunteer at your company: You can volunteer at your company within the Product Management organization.
  1. Get into a role where it is easier to get into a PM role: Some roles are easier than others to transition into PM roles. Find such a role as your next move, if you are not into such a role yet.
  1. Become an expert: With more expertise, you get more opportunities into a PM role.
  1. Build your own Product: I have already covered this. Its benefits are applicable even if you are coming from a technical job.
  1. Join an Industry organization: Please look above for this as well. The benefits remain unchanged.
  1. Watch TV shows like Shark Tank and The Profit: Again, this has been covered previously.

If you have some work experience not in a technical field (ex. Finance): 

  1. Join an industry organization: Covered earlier.
  2. Build your own Product: Please refer to the previous section.
  3. Watch TV shows like Shark Tank and The Profit: Again, this has been covered previously.

One more way that I have not mentioned is getting an MBA. It may work or may not depending on where you do the MBA from. Due to its cost incurred, I have left it out from this discussion.

What was your path to a Product Manager role ? Your insight might help others…