The power of pricing as a competitive advantage
Interventi di approfondimento, Revenue and finance
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When it comes to gaining a competitive edge, product differentiation is often the preferred approach. But many businesses are seeing compelling results from taking creative approaches to pricing, too. Learn from businesses that are using Stripe to make pricing a true differentiator in creating value.
Speakers
Sharmeen Browarek Chapp, Head of Product, Revenue and Finance Automation, Stripe
Bill Bedsworth, Head of Pricing, Stripe
Darragh Curran, Chief Technology Officer, Intercom
SHARMEEN BROWAREK CHAPP: Welcome, everybody. So great to see so many faces in the audience. I hope you are all having an awesome Sessions so far. All right, I’m Sharmeen Browarek Chapp, and I lead our Revenue and Finance Automation product team here at Stripe. Over my time here, I have witnessed all types of companies test and adopt unique and innovative pricing strategies. In fact, earlier this year, one example that drew the interest of our team and was also a very lively discussion in our Slack channels was, drum roll, please. Applebee's. Yes, you heard me right, Applebee's. It totally took me back to my college days, sharing a triple chocolate lava cake with my friends. So what they did in this instance was that they created a date night pass subscription that sold out in less than one minute. And normally that type of feverish enthusiasm is made for exclusive drops, coveted events, or in my case, Taylor Swift Eras Tour tickets.
And yes, I did score a pair. And it's not just restaurants that are doing this. We’re seeing all types of companies, like Instacart, for example, is offering memberships that [are] giving their customers perks like unlimited free delivery, lower service fees, getting credit back, and [for] all of this, they’re using Stripe to do so. And beyond direct-to-consumer, we’re also seeing businesses across a variety of segments and geographies who are disrupting their industries with dynamic pricing. As AI continues to evolve, B2B companies are also experimenting with innovative pricing models. Notably Intercom, who you’re going to be hearing from later in this session, recently launched their AI chatbot, Fin, on a resolution-based pricing model. That means that they’re charging customers only when Fin successfully resolves a support issue.
So we know that pricing changes can be difficult, and that's why we’ve built our product, Stripe Billing. We want to provide our customers with the flexibility to accommodate usage-based, seat-based, and subscription-based pricing. And it goes beyond our customers at Stripe. We’re always trying to gather feedback from our users and our sales teams to hear how the market is feeling about pricing. And we’re thinking about pricing a lot, but no one thinks about it more than our next speaker, Bill Bedsworth. Bill brings a wealth of experience in pricing pivots, and I have the pleasure of working with him very closely. Please welcome to the stage, Bill Bedsworth.
BILL BEDSWORTH: Thank you, Sharmeen. As Sharmeen mentioned, I run pricing at Stripe. It's a little bit dangerous to give the pricing guy the stage. I might not give it back, but I’m here. I have the pleasure to talk a little bit about some of the things I’ve learned over the years doing pricing for a number of different companies. I’ve worked over 25 years now in pricing-related fields, starting with some consulting. Then Adobe, I ran the pricing function at Zendesk, and now at Stripe. And if there's one key learning from all those years doing pricing, it's that you’re never actually done with pricing. I find it's a little bit like org structure, in that there's not really one answer. There's a bunch of trade-offs, a bunch of back and forth. You know, you can solve one thing, you create other problems. And so pricing tends to be iterative and something that you’re never quite finished with.
Another theme, though, is that, you know, we all know that pricing can drive [the] bottom line. We used price increases to drive profits, but pricing can actually be an important driver for growth and can help you stand out in the field. And that's what I wanted to talk a little bit about today. So I’m lucky enough to share, kind of, a few lessons that I’ve learned over the years, and hopefully you'll be able to apply those to your own business. The first lesson I want to share is that you should do your best to minimize the barrier to entry. So, this is something that can be really easy to overlook. You know, we always think about, the competitive environment, our own products, the market willingness to pay, but barrier to entry can actually be a really important aspect to consider. When I was at Adobe, we made certainly the biggest pricing pivot Adobe's ever made. Arguably one of the biggest in history when we shifted from Creative Suite to Creative Cloud, which is a perpetual license model, moving to subscription. It seems obvious now, there [are] so many subscription models these days.
As a matter of fact, they wrote a Harvard Business School case about this. I’ve talked to some of the professors, and they mentioned it's a completely useless case for teaching, because students at this point are just asking like, “Why didn't Adobe do this earlier? This seems so obvious.” I can assure you it was not obvious at the time. [As] a matter of fact, the first time I pitched this to one of the key business leaders, he told me this was the stupidest idea he'd ever heard. Obviously we got past that. And the way we got past that was actually less about the transition to subscription and more about this idea of barrier to entry.
So it started with a pilot, as all good things do, in Australia—apologies to the Australians—you probably see all kinds of crazy pricing. But what happened in that pilot, and it wasn't a great pilot, mind you, but what we did learn was that 50% of the people who bought Creative Cloud on this pilot had never purchased anything from Adobe before. Turns out, a couple of thousand dollars is a pretty big barrier to entry for a piece of software, and $50 for our month to try it out is less so. And so this was important at the time for Adobe, because we had kind of saturated the market in terms of the people who needed Creative Suite, had Creative Suite, and in addition, there were a bunch of new products coming out that could do a piece of what Creative Suite could do far cheaper.
And so Adobe was seeing a lot more competition in this area than they had in the past. And so by introducing this new model and reducing the barrier to entry, Adobe was able to get a lot more customers who they never would have had access to before. This is something that we’re seeing now kind of revisited when you think about something like AI. You know, AI is something that is new, and so if the barrier to entry is too high, people aren't going to adopt it or give it a try. And Darragh, who's going to come up and talk in a little bit, has done some interesting things with their pricing of AI and pricing it in a way that it has extremely low barrier to entry and really anybody can give it a try. So, you know, coming back to this idea, minimizing barrier to entry is a really important point. And it doesn't have to be a huge move like Adobe did. This can be something as simple as laddering your products, so that there is a kind of low entry point as well as further points. You know, things like that that help people kind of get into the product.
Second lesson, opt for simplicity. I’m here to tell you, nobody thinks about your product as much as you do. It's just kind of the way it is. And so when a customer comes to you, they need you to tell them how to configure their product and what they should be buying and you should help them. So [for] example here, when I came to Zendesk, Zendesk was employing what I would have called an atomized pricing model, very customizable. There were a number of different products. Each of those products had three or four tiers. There were probably 20 something add-ons. So you could create whatever customer service platform you needed, which is great. The problem is our customers didn't know what customer service platform they needed. And so when they came to the website and saw all these choices, they got overwhelmed. There were 4,000 different combinations of the product that you could configure. Yikes, right? And so in addition to being overwhelming, we would consistently hear from customers, “Oh, we had to leave Zendesk, because you didn't have this feature.”
When in actuality we did have that feature. They had just configured the product in such a way that they didn't have that feature. So in addition to overwhelming them, we were actually preventing them from getting the customer service solution they needed. So, in an effort to be more customer friendly and more competitive, we decided to simplify. So it took a lot of collaboration, a lot of product work, a lot of work with our sales teams. But we went from 4,000 different product combinations to 5. Go to the website at Zendesk, now there are five solutions, five suites. And this was hard, right? Like I said, [it] took a lot of analytics trying to fit 4,000 different combinations of existing customers into these 5. You know, it involved a lot of understanding of our customers and involved some faith. As a matter of fact, when we went live with this, we turned it on on a Friday, and I spent most of my weekend texting back and forth with our COO, who was fairly convinced I'd broken the business.
Luckily that wasn't true for me and for Zendesk. As it turns out, customers loved it. The number one thing that we heard from them is, it's so much easier to figure out what product I need to buy from you. Deal cycles got shorter. Volume on the website went up. It was a huge success. So much so that one of our key competitors copied it probably about six months after we introduced it. So, keep in mind this idea of simplicity, less can be more. Try to help your customers figure out what they need. I will say in perfect transparency and honesty, this is somewhere at Stripe, we’re still working on it, right? You know the idea, you’re always working on pricing. This is an area where we’re trying to improve. Lesson three, sometimes you have to go low to go high. I keep saying this is hard, this is really hard. So how often do you go into a pricing discussion with the idea that, you know what? I think we should reduce [the] price. Just doesn't happen, right?
We’re always trying to increase [the] price. Think about how to increase those numbers a little bit. And so early in my career, I worked at a high-tech equipment manufacturer. They had kind of a twofold business model, right? They sold the equipment and they serviced the equipment, kind of like a car dealership. And so, the service was a little bit more expensive, but you had the brand name behind you. And so you know, this was the model. In trying to grow, the service team had been increasing prices a little bit, trying to drive up that growth. What they found was it was driving that short term growth, but they were getting some diminishing returns. So each individual price increase bought us less. And so, we were trying to figure out why is this happening? What's the answer?
And it turns out, every time we raised [our] price, our competitors would raise [their] price too, but not as much as we did. And so the gap between us and our competitors was growing, and it was growing to the point where the brand umbrella couldn't support that anymore for some of these customers. And so, the answer in this case was not to have more price increases. It was actually to do a price decrease in certain segments, in certain geos, that actually allowed us to be more competitive. It allows us to balance this accessibility with the premium status. We were able to look at which of the products were more complex that would actually support more of our premium versus less, which geos had more competition. And so we were actually successful in driving growth by decreasing price. Kind of counterintuitive. Again, a lot of analytics, a lot of market intel, and understanding the dynamics in all of these different areas. And again, a little bit of faith.
All right, lesson four, understand your customer's expectations. It's always important to remember your customer expectations, right? If you are pricing in a way that is different from the way your customer expects to be priced, you can expect a lot of questions and probably a lot of pushback, because this isn't what they’re expecting in the market. And so it's important to research, to understand, and to price in a way that aligns with those expectations. This probably is the first and foremost rule of pricing in terms of understanding your customer. But there's a reason that I’ve saved this one for last, and it's because this is a lesson that we are, again, learning at Stripe. And so I wanted to talk a little bit about some of what we’re doing here. And so at this point, I'd like to invite Sharmeen back up to share some of our own experiences with this idea of meeting customer expectations.
SHARMEEN BROWAREK CHAPP: Thanks, Bill. So this is a topic that has been top of mind since I joined Stripe. The thing that I hear the most from our customers is that they want us to rethink our pricing for our billing product. Today, it's based on how we charge for payments, which is a percentage of volume. And that's not how our customers expect to pay for billing software given the market. 80% of you have told us that you prefer to pay with a monthly or annual fee. We heard you, you all are the first to hear in this room right now that we will be offering a subscription based pricing plan for Stripe Billing and Stripe Tax later this summer. And we’ve made this transition to offer a pricing model that better meets your expectations.
BILL BEDSWORTH: Like I said, this is a great example of where we at Stripe are learning the lessons that I’m talking about, right? This is us kind of listening to customers, understanding, and making that change. It also goes back to this idea, like I said, you’re never done with pricing. So it's a constant iterative process. So, to sum up, I talked about a few different lessons, minimizing the barrier to entry, making sure that your customers have a way to get in at a lower price and try your product, simplification, making sure that you are helping your customers figure out what the product configuration is that they need from you, going low to go high, sometimes a price increase is not the answer. And this last one, customer expectations. Making sure that you are in fact meeting the expectations that your customers have in the market. But you know, it's one thing for me to stand up here and kind of talk about these lessons. I know all of you probably prefer to hear from somebody who's actually doing this out in the field. Sharmeen, I think you’ve brought somebody today to talk about that.
SHARMEEN BROWAREK CHAPP: Yeah, we’re going to talk to one of our users who has recently made a big transformation in pricing. Please welcome Darragh, the CTO at Intercom. Welcome, Darragh, thank you for making the trip from Ireland. How was it?
DARRAGH CURRAN: It was great. Yeah, smooth.
SHARMEEN BROWAREK CHAPP: So, you know, our partnership with Intercom is actually the inspiration of this talk today. And you know, we’re going to get into the details, but before we do that, we'd love to talk about how we got here. Can you walk us through how pricing at Intercom has changed with each phase of growth?
DARRAGH CURRAN: Sure, yeah, so to start with, for people who might not know, Intercom's an AI-first customer service platform. We are fighting hard to be the best. And our customers will typically tell us that when they switch to Intercom from incumbents, they deliver better support faster, especially when they embrace AI. Our pricing journey has been colorful. Our company's about 10+ years old, and we started really simple. We were beautifully simple. And then, you know, over the following decade, a combination of our product strategy came quite diffuse. And we were trying to do all things for all people, and our pricing and way of selling our product got, you know, insane and, I think it's fair to say. And the combination of those things I think just resulted in us suffering pretty real brand damage, relating to pricing, and hurt our business.
And I’m pretty certain that there's some people in this room here for whom you’re familiar with this saga, and I’m deeply sorry. But I’m, you know, determined to fix it. But kind of reflecting on it, you know, when I think back, and I wasn't responsible for a bunch of these, but I was present, almost all the changes appeared rational. You know, there [were] good arguments for them, there was conventional wisdom, but they certainly were all in the direction of complexity and opaqueness, and they hurt us in the long term. So when Bill was talking through his lessons, I was kind of nodding along thinking, yep, we did the opposite, and it sucked. So listen to Bill.
SHARMEEN BROWAREK CHAPP: Yeah, so the first step is identifying the problem. Yeah. Always. And once you recognized that a change needed to be made, what action did Intercom take next?
DARRAGH CURRAN: I mean, quite simply, we went back to basics. We did a whole bunch of research and looked at the customer's perspective of pricing all the problems. You know, it wasn't just pricing, it was billing experience, all of that. And we just delivered something that was much simpler, much closer to customer expectations, far more transparent, and aim to reduce friction. You know, it was a big delta between where we'd been and it required a lot of courage and conviction and a willingness to take a bet, because, you know, there was no sensible way to… like, so much was changing. You couldn't really model it. You had to make a bunch of assumptions, but, and you know, it was hard to iterate to that point. So, it was a big bet. But, you know, early days, it's been really great for us. You know, people are, turns out when you make it easier and fair and simpler, people buy more and stick around more. So, you know, strong lesson on just being more customer-centric there.
SHARMEEN BROWAREK CHAPP: So, Darragh, we mentioned this earlier, but Intercom launched its AI customer service agent last year and it's gotten some great attention for its results driven pricing model. Can you tell us more about that?
DARRAGH CURRAN: Sure, yeah, so to start with, Fin was the little thing you saw animating at the start. It's the pointy end of our AI customer service platform. It will automatically and near instantly resolve on average 42% of the query set that hit it, which [has an] incredible impact for a business. Alongside it we’ve got Copilot, which helps humans be more effective. And then working on analysts. So Fin's part of that system and, you know, it's been our most successful product launch yet. There's tremendous value and people are loving it. And the cliche I think was something, like, you know, better, faster, cheaper, pick two. But with Fin, people see all those benefits, they pick all three.
SHARMEEN BROWAREK CHAPP: So tell us a little more about how resolution-based pricing works. How did Intercom decide on that for the pricing model?
DARRAGH CURRAN: Right, so [for] the resolution-based pricing, we price when the bot actually solves the problem for the customer. So it's based on, you know, really strongly aligned incentives between what our customer wants and what their customers care about. They just want their issue solved. So when Fin does that, they pay and they’re happy to, and when it doesn't, they don't pay. But Fin has helped disambiguate the issue and give humans a headstart when they get involved. You know, how do we get here? We, you know, we didn't know where to go with pricing when it started. We considered a lot of things, and this approach made a lot of sense from, you know, aligning incentives, but it wasn't obvious. And there was a lot of pushback, a lot of pressure internally, a lot of others maybe looking at a cost, like LLM cost-based model, you know, like we do for things like SMS. But I think that meaningfully underserved the kind of value that's being delivered here.
And an interesting reflection here is, like, you know, one of the things we considered was a version of that, but it really fell down in our assessment when, you know, you price on volume but kind of disconnected from results. So an example of that really is, had we exposed our pricing in that way, the reality is the product isn't just a wrapper around, like, you know, an easy to reason about call. There's lots of things going on, and as we try to improve it, we change the internal. So, pricing on that LLM cost would have forced us to constantly resurface a change in price to customers, and it would have slowed down our innovation. So I don't think we really anticipated this ahead of time, but [upon] reflection that's been a big win.
SHARMEEN BROWAREK CHAPP: That's the best type of win. The one that wasn't intended, but ended up being a big one.
DARRAGH CURRAN: Yeah.
SHARMEEN BROWAREK CHAPP: So what type of feedback have you gotten from customers, and how did you gather that feedback and act on it?
DARRAGH CURRAN: Yeah, one nice signal for feedback is, around usage and retention, and like Bill mentioned, how [it's a] very low barrier for entry. Like it, you buy Fin, you don't pay unless you actually use it, you know, so you can use 1 for $1 or 1,000 for $1,000. And the, you know, general signals we’ve seen is, like, people stick and expand their usage pretty significantly. The reaction is they want to spend more, because they see the value, they want to spend more. So, you know, from that point of view, I’ve really appreciated the purity of the model. You can't hide from failure or success. There's no such thing as zombie revenue. It's either delivering value and paying you or not. So that's one thing. But of course we also talk to our customers a lot, very product-oriented company.
And the Fin product was in the hands of many beta customers before we'd even figured out pricing. So that was a great opportunity to talk to people who'd really felt and seen the value of the product and get their kind of feedback at that point. And then, of course, we later, as it became publicly available, we would do a bunch of research and talk to people who either bought or didn't buy or who were happy or who churned, etc. So, you know, you'd never go wrong talking to your customers. In terms of actual feedback, [a] whole range of things. But kind of two themes that jumped out, like one relating to usage pricing in general.
And I think there [are] elements to this in the announcement around subscription pricing. Like, it's hard to predict the usage pricing. And people are worried, particularly in a customer service org, where they’re maybe quite tight around their ability to spend, they’re worried about predicting their spend, they have to budget very carefully. So, you know, one partial thing to help with that is, you know, building a lot of transparency and control so they can see what's going on and they can limit it. And that's been quite helpful. The other one is around scrutiny of the metric itself. So there's an element of subjectivity here. Not all resolutions are as hard or perceived as high quality or as, and as a result you have people who will interrogate and say, “Hey, over here it feels great. I'll happily pay $1 all day. But over here this feels not great”, and that's just a hard one and one of the kind of accepted trade-offs of the simplicity of the model. But we definitely made [an] intentional effort to try to reduce [the] bias against creating situations where delivering lower-value resolutions.
SHARMEEN BROWAREK CHAPP: So, this next question I have to ask, right? We all know that a brand new pricing strategy can be extremely difficult to execute, and I'd love to hear how Stripe helped you do this more effectively.
DARRAGH CURRAN: Sure, so to kind of give a little bit more background here, you know, we’re as well as our pricing being quite messy. And I gather this is not uncommon too… the systems that underpinned are, you know, billing and a go-to-market machine in general was pretty awful and unloved. And the consequence of that [was that] it was actually very hard for us to move and iterate and build new models or try things or even deliver a quality of service that was [in] any way acceptable. So we effectively declared bankruptcy on the part we'd been on, we wanted to do too much change that we felt, you know, we could afford to bet on that part. So we instead chose Stripe as our future platform there, made a triple bet on a system change, a model change, on this new AI product. I don't recommend that necessarily, but we had insane time pressure and so we optimized for speed.
We didn't test our way into this, we just wanted to move as fast as we could to the end state. And you know, I think as evident by all this stuff you'll hear in this event, Stripe [has] a super high bar, very ambitious, move fast, and we strive for the same. So we bet on that kind of trajectory and that mindset and it's paid off. But I do look forward to being able to do some of the more methodical, targeted, you know, testing with the Australian market, for example, when we get to sort of more calm, stable base.
SHARMEEN BROWAREK CHAPP: So Darragh, do you have any closing thoughts on AI pricing for the folks in the room?
DARRAGH CURRAN: Sure, so first off, I think, accept it's a new world and how you might have thought about or auto-completed on pricing decisions in the past are likely not right. AI has a potential to deliver insane value, like the products you build become way more than a tool, they do work too. And you should think about the value of that work and then kind of, you know, the answer will be different from every kind of different variety of things people are building here. But some general questions I think are relevant are like, you know, how much will this define your product or business? Is it like the thing or a little bit on the side, how differentiated it is versus you know, what is easy for others to do, what usage level you might expect and how that changes over time? And of course cost as well. Like I know that's all pretty high-level, but they’re the dimensions to poke on there.
SHARMEEN BROWAREK CHAPP: Absolutely, so we are at time, so I’m going to wrap this up super quickly. Based on everything you’ve heard today from both Bill's expertise and Darragh's firsthand experience, there are three main takeaways that we want you all to have. The first one is to get creative and experiment with your pricing models. The second one is that good pricing is a strategic business lever when simplified. And the third one is to determine your trade-offs based on what is most fair to your users. And in the words of Bill: “Don't forget [that] you are never done with pricing.” And I’m just going to jump up and say if you’re interested in learning more about Stripe Billing, we have a Billing booth in the expo hall, and there [are] also tons of folks from our team who are in the room right now. So just come find us, talk to us, and if you want to see what we are building next, stick around right here in this room.
In 15 minutes, we’re going to have our Revenue and Finance Automation product roadmap talk. So please hang out and we hope to see you very soon. Thank you all for coming.