 So thanks so much for the intro. I don't have to spend any of my time on the intro but I will I will talk a bit why why actually why am I talking about this and I have a long a long history with pricing Both both good history and bad history Well in my first in my kind of the company I found it. We both did some really cool stuff Like we introduced desktop software Subscription 2009 we were one of the trailblazers in our in our industry There was a lot of pushback, but also it was invent very valuable decision but also we did some stupid stuff and We increased the prices to move to enterprise sales or other move to enterprise sales and then increase prices and I'll talk more about Why was it actually stupid right so one of the one of the Reasons for this talk was actually that I considered that this is stupid move But was hard to move back So I'm hoping to prevent others from making stupid moves and at both of course pricing is super critical Like Amazon like other similar providers We kind of we want to provide the best deals for our customers and we want to provide the best earnings from partners Which means that pricing is critical and in fact when I joined bolt Like there was not I didn't have yet a lot of teams So my first kind of job the first thing I took over was pricing that like kind of my first couple of months was spent just getting a pricing strategy right and working out that kind of the Focusing on that area because that was the most meaningful area, right? Okay, and one thing I want to talk about also is what makes actually pricing more important in the in the modern world, right? and it's actually it's actually becoming more and more important because historically pricing was always kind of Secondary thought like if you went to a VC you're raising fund and you're like well What's your differentiation? You know like you have a product you pitching it to the VC and you say well My differentiation is that my product is three times cheaper than the competition and the visa is just like no Like right that was not a differentiation And so it's historically it was always like a secondary thing and the primary thing was always like okay What's your competitive mode? How are you gonna defend yourself, right? And I'll talk a lot about that as well, but we also we experiencing this The the end of the paradigm shift where we kind of went because a tech company You know it became a new thing like Anna Let's say 30 40 years ago where there was such a massive shift first computers networks internet Like there was so many massive Tectonic shifts and how business has done that the new class of companies came to be right and we coming to slowly coming to an end It's not like a binary end But more and more usual companies are becoming tech companies are more and more tech companies act as usual companies So the the differences are holding and like some very interesting examples I see is like there's a Trilio which is like a very big very nice company communication platform company Which made a bet on their competitive mode that they have a great experience for software engineers, right? They have great API is a great platform great metrics and for a while it worked But now I think you know they're guys like info beep which are betting that in the end this is a commodity service and you know and in the end nobody will play One dollar if you can pay 30 cents because they're slightly better API's right So this mode is eroding and this this is going to be very simple Interesting and the same like strippers aside in so we'll be including incredibly interesting to see how this plays out over the next decade And so long term really we are again in a place where normal business Long term if it's possible to undercut you on pricing somebody will undercut you on pricing right at least in efficient markets And and this is also this is something you always need to understand in context that what I say applies to place to markets where products are sold for money right not alternatively monetized right because otherwise There's no point for pricing and mostly as I speak to you about more or less efficient markets Which is where you basically you know what are the alternative prices right because there are markets like where it's really hidden Like oh, they're very efficient markets like stock exchanges where you know what everything is priced at always right So there's a whole continuum there and start up ecosystem is to very mature like we still at Beginning ages when I bolt when I was like kind of trying to put a pricing strategy and trying to understand I basically ignored all of our competition and instead I look at retail guys I looked at Walmart's of the world and so on and Sam's clubs because they've been doing it for like a hundred years They've been having this ruthless pricing competition So I wanted to just learn from them. How do they do that? What is what they approach? And so they had much more to learn from them than I had to learn from other startups So this is something to also understand that if you want to learn from someone Don't look at tech companies look at others because the humans have remained the same humans wants the same thing business fundamentals Have actually remained the same some very specific things has changed and you can account for them And as an angel investor at least five companies which I invested into is purely based on their approach to pricing So the first let's high level talk about price structure and then let's talk about the price itself So high level there's like kind of different ways you can structure the price of consumption transactional subscription uplift sharing But what I want to talk is actually subscriptions Why do I want to talk mainly about subscriptions is because there's a big bias in VC world to subscriptions and it's a very tiring bias And I've been kind of arguing it a lot over my time So I just want to explain you because this I think subscriptions in the again in the kind of tech company world is the most Misunderstood things and there are places where subscriptions are perfectly reasonable and there are places where they're not So talking about some myths one of the myths that persists is that perceive somehow Subscription is somehow more predictable. It is not your users will either buy your service or they won't buy your service How you structure the pricing doesn't fundamentally change it The only the only subscriptions that are more predictable is maybe they you create like churn of it at longer term Like for example annual subscriptions, obviously you just kind of prolong your term, but they'll be still churn It won't it won't matter right it if they're paying like Amazon famously in AWS Unbounded because previously you paid for server you rented it by month and you pay as you go And it was actually great right and it was it's actually more predictable like that in many ways And in reality the the candidate the counterweight to this predictability is actually ability to optimize right so again looking at AWS Like the best part about it is that I have full control over the costs and I can do optimizations So if I can literally figure out, okay, how can I reduce my AWS bill by 20% if it was a subscription? I wouldn't have any control right so this control is actually very very valuable for users and subscriptions can take it away And then the other thing and the same for consumers like very nice example There is like scooter passes like you know Everybody uses scooters now e scooters nowadays and you can either pay by minute or you could buy a pass and pass sounds great from the point that That kind of I get the fixed price But at the same time and I'll talk about the unit economics of those are very shaky And if you had if I would actually charge you only a monthly price if I would give you an alternative consumption based prices Actually, I would take away your ability to optimize that price Anyway, so the important bill lesson to learn here is that you need to align with a business and customer fundamentals first You know and sell it to investors not the other way around investors are rarely smarter than you At least they look actually to say it more correctly There are definitely investors are smart in you But nobody they will never know your market better than you if they know your market better than you Something is really really wrong in that equation And then the kind of the the thing to the final thing to understand about subscription Fundamentals is that subscriptions work really well if your business is mainly driven either by fixed costs or by Decreasing variable costs, right? Why is that well? Because basically if if you Mainly because of elasticity of demand so a classical example like long time ago at Bolt when I started we kind of discussed Why don't we do an unlimited subscription right like it's very like we just sell a seller pass for some money And you can write as much as you want. Well, the problem is That the guy the elasticity of demand here is massive. So a person who now does for rides a month will now be doing 40 Because essentially it's unlimited all of the like there will be no calculation like every incremental ride is now free for them But it costs money for us right so for us to for us to make money on that It's like would be really really hard would have to price it like like basically at the top of the market And it's like and it's it's basically pointless like instead. We can just Pay pay trip right and this is similar in other places where the best subscriptions work really well Like we're fixed cost dominate like software or software as a service, right? You have a fixed cost it mainly research and development support that like kind of like relatively fixed costs which scale Kind of scale slower usually than the the month software at the same point and the same Time kind of the rental the rental way the subscription is really aligned with with how users get value They get value over time because if you stop updating your software it starts decaying, right? This is kind of natural thing In the software engineering world. So it's so it's like super aligned It's super aligned with on every stage right and it took some time for for maybe to understand it for everybody But once understood that was clear Then the other great places were cost scale with size. So if Netflix pace Pace basically fixed amount per movie their license or per per series, right? And every incremental subscriber that movie becomes cheaper and cheaper on them on a relative base basis, right? So the more subscribers they spread it over the cheaper each subscriber pays for each of the movies Spotify it's a bit it'd be trickier But what they have is that the most subscribers they have the better deals they can negotiate with the music labels so again over time the cost scale down and And then the the the last kind of classical example is when variable costs are unevenly spread So like insurance basically insurance like products, right? Like if you have like at the extreme events either over time or over population then it's like where subscriptions works really well anyway, and Finally finally on subscription just to kind of finally as a final illustration very often Amazon Prime is brought as an example of Hey, this is subscription working really well But if you look how it's structured then everything they structured really smartly and very very very Misunderstood that all of the stuff that they include into a dam as a point. It's either a fixed cost for them Honestly today delivery. I think it was not a cost for them at all. They literally prioritize something It's just was a it's it a prioritization engine in the software I don't even know if it cost them anything Maybe some minor incremental cost right because something has to ship first and and they just basically prioritized the prime stuff Now now it's probably more cost but now they optimize to the point where like almost everything can get to today delivery if it's fulfilled by Amazon So and then like music video photo storage this all either fixed costs or that decreasing variable costs So it's really aligned with that model and that's why it works so well Okay, so this is about price structure and specifically about subscriptions. Let's talk about the actual price value so scary scary formula on the on the on the slide We're gonna take it one at a time. So there's three dimensions to pricing the user dimension the business dimension and the channel dimension, right? And let's just take them one at a time and I'll come back where this they all displayed together. So let's start with user Basically two very easy things like your value proposition should be higher than the competitor value proposition and Or your pricing should be better than competitor pricing, right? So together kind of the combined difference It's called kind of called whatever customer surplus should be better than the competition Otherwise, why would somebody use your product, right? If you're not creating more value than competition, nobody will use your product They will use a competitive product. So that's the first part But also the important to beat and actually what I want to talk more about is switching cost So it's not enough to create more value than the competition Because they there's also a switching cost and switching cost can be a habit like the like people build up a habit It's it can be lack of confidence like they don't know that you create that value you need to educate them and so on and And it's all it's almost always exists and almost always Underestimated right so people rarely thinks in terms, okay Like they often think in terms how am I better than competition? But they don't think okay. It's not enough to be better than the competition I also need to overcome a switching cost, right? And very often the people tend in terms of activities like activation on boarding and so on but they don't think Abstractly about okay. This is why I'm doing all those things is because there's a switching cost to move from Competitor product to my product or even by the way from nothing to my product, right? So you there's rarely nothing There's always some competition like you know, even be like even if you don't think about it as competition there's something that people do somehow how they achieve their goals right now and this is your competition and The good news in the consumer world in price consumer world not alternatively monetized consumer world you can very often solve this through activation incentives through trials through on boardings kind of through education and It's actually why almost every you know, whatever service you use will have some free delivery So a free food and the important bit to understand there that also that it's not Like switching cost is not a one-time thing, right? It's not enough to get the user registered. It's not enough to get them to do a first transaction You they need to build a habit they need to basically or they need to be bought into your value proposition or something So you need to be sure okay? You basically bring them to the same level of other users of your platform, right? And this this this you have to somehow sponsor this is a separate part Like I just call it overcoming switching cost and and it consists of many different activities, right? And in B2B it's like it's it's it's very often negotiation getting buying within the organization doing pilots You know doing contract clever contracting do giving stuff for free like basically, but but it's all again the same It's always overcoming switching cost and it's really really important to to keep that in mind. So this is the user part It's actually relatively easy business part is a bit trickier so So few concepts here, right? So this is basically it's just like if you look at the at you at the unit economics And this is what is going to be there's going to be costs, right? there's going to be profit and And I just separate profit into two parts I separate profit into the minimal profit So the minimum amount you can charge and then the mode premium and and of course price in the end will equal that right? It's just logical that the price is your basically your revenue and the revenue one way or the others will separate it to costs and profits And like I think for the longest time the theory was that a good tech company Like and doesn't really doesn't really have to worry about that that like you get your Revenues on one side you get your costs on the other and if they connect that's great But like who cares right and you know and this Google and Facebook like Google specifically you know the search engine which is the primary product is on one side, which is the cost driver and advertisement which is on the Revenue drivers kind on the other side and they very loosely connected actually right so the cost and the revenues kind of like They could scale the revenue 20 times and probably the cost could stay the same if they wanted to because there's no like there's no strong kind of connection that every That every next like search query has some kind of like cost structure there, right? But we're but this only happens when this mode premium dominates and I'm gonna talk about mode premium quite a bit So we'll get to that but today more and more businesses again a normal businesses which compete Which are in tight competition which don't have those strong modes? So let's let's take now this this equation kind of one beat at a time, right? So the first one is I start with maybe minimal profit. What do I mean by minimal profit? It's very much defined so and it's quite interesting actually minimal profit is defined by the Willingness of investors to invest with money in your company for them to put money in your company They need to get a return at a minimal expectation of return in a private equity company Like when I invest into equity like Amazon investor is at least 15 percent. That's that's still quite low But that's like the minimum, right? So this kind of directly defines your product your profit from the point that if you Raise a million dollar with that million you can create three millions worth of business then the minimum The minimum viable kind of profit margin on that business is 5% if it's anything less than that then you already kind of You're not competitive on the investment market. So this is the minimum, right? It's not it's not suggested It's just the minimums where you start from There are the thing that I think is the important component is costs and I think what I think what is not getting enough attention from entrepreneurs is Understanding your return of investment model So surprisingly few can tell me like there's a lot of activity on kind of the micro level Which is okay. What is our user acquisition cost? What is our user lifetime? What is his left and value but less understanding on the macro level? Okay? I if I invest a million dollars, how much business can we get right and? And I would say that this understanding your return and also understanding When understanding your return a very important part is understand what is your return? Very often I see projections over revenue But the problem is that revenue is not a stable metric revenue in one company is not the same as revenue another company, right? And so it's hard to understand like it's even for entrepreneurs themselves hard to understand what is like kind of a good metric And then what I found is a good metric Good kind of divisor is a long-term projected net profit is long term You believe that you're gonna get like 40% profit then this is what you should use as okay This is our return if it costs you me now I don't know $10 to acquire $5 in long-term projected profit then this is like a 50% return This is a pretty decent one right and and it kind of helps you all align with Whether you like and again it comes back to pricing because understanding you cause projecting costs and so on helps you set pricing as well Anyway, and yeah, and then like just again being mindful of your fixed costs being mindful of your error because this is all very basic I guess microeconomics 101, but again like I see I Think we've created this biosentry industry that people are over focused on the kind of product side and vision and everything And this is all great But then also I see a lot of businesses which kind of compete very actively on the market And and they don't pay enough attention to the other side of this which is like normal normal boring gold business stuff, right? So it's be I think it is becoming more important with time All right, but let's talk about more premium because I think that is the most important part of pricing and And mode premium is is basically what allows you to get Disproportional returns to investors right mode premiums is why investors are excited to invest in to tech companies because and it's And notice is anything that is an unfair advantage due to scale, right? So this is one thing that people forget. It's not an advantage when you're small It's basically what is what will become your advantage once you get big, right? And it essentially captures the part of your business that scales non-linearly with size or rather scales like So so the most classical example economy of scale, right? So like when I'm when I'm a billion company, I spend 100 million on R&D That's like 10% of my whatever Revenue and then if I'm a 10 billion company now I spend 200 million in a Resurgent development, then it's not only 2% of my of my business, right? So now I have an 8% margin which I can basically for example decrease my pricing by 8% and become like very hard to compete with because now Everybody else has to somehow match those 8% right and this is literally what I mean under mode This is actually how modes realize themselves and pricing is that you can either under either Have these proportional profits and invest them and then you have a choice take out of this proportional profits invest them into bettering your software so that you'd be sorry Bettering your business so you would be hard to compete with creating more value for the customer or invest them into Creating better pricing for the customer But either either way you got you kind of much harder to compete with because you have that capacity And there are different types of modes, of course, right? So and and I think one of the most important thing a business has to do Is to understand what are the non-linearities in the business models? What are the things that change as you grow right and of course? There's like I mentioned economies of scale, but actually we more and more today understand that there are these economies of scale So there's also like the companies become less and less efficient as they grow bigger Classical modes is network effects, right? So the in social networks every user you add adds value to every other user, right? And replicating a network is become prohibitively expensive because it's so such a Exponential like right the non-linearity there is exponential. So replicating is quite hard Marketplace critical mass is a classical one So if you if you know booking.com, you know, they basically have every hotel in the world And now for me to for me to build a competitive service And now somehow have to go and sign up every hotel in the world But I can't get any demand I can get those hotels without if I don't have the demand Right if I don't have the bookings and I can't get the bookings without the hotel So getting that critical mass marketplaces require critical mass to operate under which it's really really hard to operate Right and getting to that critical mass is the non-linearity that is in marketplaces user data You know the reason why nobody can compete with Google is purely because it's very they capture so much of the traffic That their models are so much better than everybody else's that basically nobody can kind of undercut them on that And so it's become so a classical a classical example mode is this chicken and egg right if only I would have x I could do why but I can't get I can't get x without the y right and this is like classical modes Negotiation leverage very hot in US to compete with Amazon Unless you're ready super big on newcomers because they will have the best pricing out of everybody because they can buy things at such volumes that they can Negotiate amazing like pricing right and then they basically can return that To you and of course vendor lock-in and so on so there's a there's a interesting book about that Which is called the seven powers. I don't think it's the best it can be but it's quite good And like I kind of read it also when when preparing for this talk And like but generally I do think that understanding the non-linearities in your business is one of the most important thing to do because this is Like if you can understand it if you can capture it if you can show it to investors I think the many investment thesis become like much easier, right? So like what is like and and and this is probably the most interesting prior part of this kind of pricing Okay, and so a final piece of pricing is the channel, right? So now you have a great user proposition. You have decent business You're confident of your mode you confident how much kind of you confident both that you can offer a good value to the Competition and you also confident that your business can be protected, right? That your business is a solid and then you look should look at the channel And I think the most important bit to think about the channel is that you should look at it last What I have done historically and what I think is also a mistake from others is that people very often start from the channel They're like, okay, I can only do that with sales So if I can only do it with sales then I have to price my product to be like at this level because otherwise It won't pay for sales right because basically kind of your cost of customer acquisition Since since every acquired customer has to create a good return then your cost of customer acquisition Defines your pricing or is defined by pricing, right? So they're really connected and I think it's super important to first understand the fundamentals of your market your users and your business and Then figure out the channel and not start like okay I'm gonna build a self-service and then you know and then start from that assumption and then build and then kind of build everything else and Yeah, that's actually like kind of the mistake. I made historical where in my company We had the really nice self-service organic kind of business and we introduced sales that sales eventually drove the pricing up And I think it moved us like kind of it kind of nerfed our value proposition And now you need economics to a point and moved us to a segment Which was like completely like I would say different that with which we didn't have that much experience And in the end it was like probably not it not the smartest move even though it wasn't you know I didn't understand that at the time. I understood it much later So coming back Just a summary of what we talked about be careful with subscriptions, right? It's just a lot. I think there's still overused and overhyped There are places where they work really well, but they're a tool, you know, they're there hammer There needs to be nails when there's nails that work really well when they're screws then, you know, not so well And when there's light bulbs then not well at all And and then think about the user think about the value proposition you create think about the switching cost Understand your unit economics try to understand the non-linearities in your business So you can adequately understand what is what can you protect long-term, right? And because this informs kind of the minimal pricing you can offer because if you can offer like twice better pricing than Competition and you confident this is the best business model and this is what you can protect long-term And you think that like anyway that like basically that the market will anyway move there So it's just a matter of time then it's always smart to go there faster Because you so much increasing the value proposition to user right and then finally once you understand those try to figure out your channel So that you're not overspending on the channel and driving your pricing That is it. Thank you very much. Enjoy the rest of the conference