 Hi everyone, I am Shreya Kumar Nayar and I'm a Principal Group Product Manager with Microsoft. Today we are going to see some pricing considerations and how to price your product. What are the factors that you need to consider by pricing your product in a SaaS world? Let's get started there. Why is pricing important? A good price of your product determines whether you will be successful in selling the product to the customers or not, and eventually make profit for your organization. Pricing can either kill a product, a great product, or it can just make it to the way that you can start making millions down the line if you do it, if you get it right. So what are the factors that are deciding the final price of a product? Can you take a guess here? Let's take a look. So number one thing that matters is customer value. If you're able to articulate that the customer is going to get value out of your product, there is no other thing that can convince the customer to buy the product regardless of the price. Second thing important is cost per unit. Basically whatever you're selling, how much does it cost to you to kind of produce that product or provide that service product? And the number third one is business model and strategy. What's your strategy that you're going to apply that eventually after you figure those first two things out is also going to be a main factor that will influence the final price of your product. So with that, let's see what are these factors now? So customer value, how do you attribute value or what do you think is customer value? So in simple terms, it's basically the value delivered to customer when they use your product. And quite often customers use the product but they're not able to articulate the value and neither are you able to articulate the value especially if it's like any field of experience. You have metrics like NSAT, NPS and other things but it's always important to kind of measure it in terms of the benefit that the customer is getting. For example, one of the things that I would probably say is something that is measurable and tangible would be the amount of spend reduction that your product is going to do. So just for an example, let's say I have a product called Save My Bills and that product helps analyze customers, cloud subscriptions, cleans up unused resources and saves 10% of the total cloud spend for the customer. Now that's a good story to tell. That's something that customer will immediately say I can probably spend like 1% of this money and get this product and save 10% on my cloud spend. That 1% I spend on buying this Save My Spills subscription is probably still worth it, right? So that's how you will be able to sell this product if you're able to articulate the customer value in much clearer terms and in terms of dollar value or percentage of spend that's a very good story to tell. Another example I have is of like products, a service hero which is mostly doing customer service cases and it helps customers to create support tickets automatically from your emails or from a phone call. So in this scenario it's clear that by just automatically creating tickets you have saved the time for the agent requires to gather the information either from a phone call or from an email or from a chat conversation and you are able to create that ticket thereby reducing the time it needs for resolving the ticket and eventually making that customer's users happy eventually. So the time to resolve thereby probably gets reduced by 15%. That's another good story to kind of sell your product. So you're able to articulate customer value and I'm just stressing on this fact that there is nothing that sells more or that customers are ready to pay more if you're able to articulate the customer value. Okay, now let's look at the cost per unit. I'm going to take an example of a typical SaaS product and what are the elements in SaaS product typically involved that will be used to explain this concept better. So when you talk about cost per unit there is another terminology that you often hear is also COGS. Now there are different terminologies that different financial institutions use and different companies use but I will just use this terminology here to explain anything or any amount of money that you spend that is directly influencing or directly influenced by the unit that you sold or your number of customers. That's something that you should account as COGS. Basically anything that influences your spending on cloud or your spending on the devices that you'll be selling those are some of the things that will be counted as COGS. So what are these cost components to be considered in a typical SaaS product? So let's take a look at them, right? Typically any such product that you buy you would have to store some data and the cost of storage needs to be on the cloud storage that you will use here. Even if your company owns the cloud hostings as a cloud service provider or not that's cost that needs to be accounted for in the unit cost. Then you look at the cost per computer obviously some compute is generated like the AI machine learning or any set of services that are involved or a simple web server that needs to be put as a front end server. Those are the compute costs that you will look at. The next one would be the UI and the apps and other cloud services that I said like any such machine learning models that you need to generate and stuff those would be the other services cost that would come in. So basically break down all the cloud components that are involved in rendering the service to the customer as part of your SaaS product those needs to be accounted as part of this. Then comes something very interesting which is typically the DevOps or the engineering tools cost how many engineers are involved what tools are they using to create the build to deploy the build and to make sure that the service is running 24 by seven so like monitoring cost and all that. Those typically are what I call as DevOps and other engineering tools cost. And then on top of that you also have your engineer salaries and other things that need to be accounted for. Let's we will come to the classification of what needs to be accounted and what needs to be not but let's just look at what are the all the components that come in when you have to factor in or look at all the costs that are incurred in shipping a great product. Then comes your sales and marketing costs obviously for doing the selling going and reaching out to customers doing promotional campaigns and all those things does incur some cost here. Now, which of these do you think should be accounted for in the cost per unit when you're deciding on the pricing for the product? So now obviously ask the same question what costs are influenced by increasing number of users using my product? Obviously the cloud spend data that you see there or the units that you see there like storage compute and other UI apps and services are going to be directly be influenced by the more number of units that you're gonna sell. Then comes like some of the things that they talked about the engineering tools and people's salary and engineer salary expenses and stuff. Those may change or may not change depending on how your product is built or being sold. If your product is more on the servicing side where every new customer acquisition requires you to invest in an engineer and be like for onboarding and for making sure they have a smooth experience then obviously your products are going to be like including these cost as part of your cost. Typically, if you want to have greater margin your engineering cost shouldn't be proportional to the number of users that are going to use the product but that's just depending on different practices how they want to account for it. They might do a company level investment into all the engineering salaries and tools that they're building rather than attributing it to an individual product. In such cases you can take it out because that goes against the corporate budget that the company might have reserved for all hiring and other purpose like tooling and stuff like that. And then comes the sales and marketing aspect of it. This definitely is a fixed cost that shouldn't be part of your cost per unit because those are definitely fixed costs that the company's investing in for not just sales, selling and marketing your product but several other products that your company might be building here. And then one thing that's also to be not to be missed is these days when you have devices also that are being sold on top of your cloud services then if there is a device that you are shipping to the customer as part of their experience then those costs have to be accounted for in your product as well. So that's kind of gives a full 360 degree view of what are some of the costs and what typically should be accounted for and not accounted for in the cost per unit calculation. And then the next step comes in wherein you're now trying to decide what will be the selling price of your product that you're going to sell. Let's say it's a subscription based product that you're selling. In that case, we already said the cost per unit is decided, there are some other fixed costs that are coming in and then there are then there is the margin that your company wants to achieve out of this product. Now, you may not start out with these things right out at the get go but at least your cost per unit is somewhat that is very much defined. Margins you may want to kind of go aggressive and go with a low margin just to acquire users depending on how the company wants to operate. And then eventually if you think you're doing well and you're able to justify the value you may want to increase the price and improve your margins later. One thing to call out here, definitely the fixed cost should not be part of the selling price per unit. And that's why just in times he said a lot of people make this mistake of including the fixed cost in every unit price. It just artificially bloats the unit and sometimes prices you out of the market purely because competition is able to sell the same thing or at least a compliment similar product and that will be complimenting your product or maybe even competing directly with your product in such cases it's very important that you keep your price a very low to sometimes even enter into the market. So it's very important to make sure that fixed price does not become a factor in there. Then once the selling price per unit is determined by factoring in the cogs and the margin aspect of it you might also want to kind of multiply your margin by doing some bundling exercises. So for example, your unit price may look to be sometimes at par with your cogs and leaving you with little or no margin, very little margin. In such cases, bundling might be another thing. So for example, you might say you will need to buy at least packs of five subscriptions or something. And then probably by doing so every time you sell five packs your margin at least is not so badly impacted and you're also able to get more usage of your product eventually. Another option is sometimes if there are devices you might bundle them not just with subscriptions but you might also give like devices at a cheaper cost or maybe totally free depending on whatever strategy that your company decides to adopt here. All right, the next one is basically the business model strategy of the company on how you want to sell. So a lot of things depend on basically what your company is promising to their stakeholders or what are the principles. For example, just this is a sample income statement probably the simplest that you will ever see but just to give there's like the top line revenue then you have the cogs that are incurred and then you kind of come to the cross margin or the profit that you're making. So in this example that I have here with $140 million sales you did excellent with selling more but because your cogs are high look at the margin that you're making it's only 29%. Now some companies may be happy with it some companies may not be but I'm just saying in a SaaS world there is definitely scope to go higher and we should always continue to add value to the stakeholders by trying to increase the cross margin of the product. So the other alternative scenario is where you might sell less with $100 million but look at if the cogs is actually going to be much lesser by reducing 40% of the cogs you're able to improve the margins by several many times, right? So that's one example here. Again, I'm not saying this is good or bad it's just that two different strategies that you may be adopting by selling less you're still able to make more by reducing your cogs. Now it also might depend on market conditions sometimes when revenue is not doing well cogs might be the lever where you can pull or to keep the cost low by maintaining the same margin here. So those are some of the examples of how different business model strategies might work and we also covered some of them in the pricing strategy as well where you might sell some bundles with devices being sold for free just to kind of capture the users and the market keeping the margins low but eventually being able to increase the price or just multiply the margins because the way you're selling it is in bundles. So moving on just to summarize here ideally we should be trying to get more users so keep the margin just enough so that you can capture users and actually increase the sales and eventually as the customer appreciates the value you'll be able to kind of have a little more leverage on increasing the price eventually. However, I just wanted to call out that cogs is another good lever to improve your margins especially in testing times when market is not good and you're not able to sell more look at the cogs aspect of it look at aspects that are increasing your spend on the cloud and see if there's opportunity to efficiently re-architect some of the components so that you're spending less money per customer or per unit. For example, identify some of also the product area and see some features that are considered to be very expensive from the engineering side of how we're spending but they're not adding much value to the customer or rarely even used by some of the customers. In those cases you may want to kind of deprecate those features over a period of time because it's not adding value and it's not going to boost your sales in the future. So definitely take a look at all these aspects and then also when you're adding new features always ask yourself as a PM do you think customer will see the additional value that I'm bringing to the table and would he or she be able to justify the additional cost that I'm asking them to pay? So in those cases that's always a question that as a PM you should be asking this new feature that I'm building is there additional customer value that I can add to the existing price? Can I negotiate a higher price because of this? And then if he has the answer is how can I bundle this as an add-on? How can I give this as a premium cut only ship this feature in a premium version of the product or something like that? So those are some of the strategies that as a PM will always help you to price your product well and then of course make more money for the product and eventually the company. All right, I hope you enjoyed the session. That's all I had. Thank you, bye.