Harnessing the Power of Usage-based Pricing with Adam Howatson, CEO of LogiSense

Episode Transcript
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Dan Balcauski (00:20):
Welcome to SaaS Scaling Secrets, the podcast
that brings you the insidestories from the leaders of the
best scale up.
B2B SaaS Companies.
I'm your host, Dan Balcauski,founder of Product Tranquility.
Today I'm excited to speak withAdam Howatson, CEO of LogiSense.
Adam's journey in softwarestarted early in life as he
founded and sold his firstsoftware company while still in
high school.
He spent nearly 20 years atOpenText Rising through
technical and product rules tobecome chief marketing Officer.

(00:40):
Now at LogiSense, he helps majorenterprises like Garmin and
Cisco tackle the complexchallenges of usage based
monetization at scale.
Let's dive in.
Welcome Adam to SaaS.
Scaling.
Secrets.

Adam Howatson (00:49):
Thanks, Dan.
Very excited to be here.

I am personally very excited and I say that in
front of every episode, but youknow, I think we're gonna have a
lot of fun in this conversation.
'cause there's sometimes in lifewhere you.
You beat those people and thetime flies by as you both geek
out on a mutual topic.
And you and I have that in ourshared love of the monetization
space.

(01:11):
So we're gonna, we may go alittle long, we may get a little
weird and geek out here, but I'mexcited for where the
conversation takes us.
Before we dive into that worldlook, you started your career
building and selling software inhigh school.
What sparked your interest inthe business side of technology
at such an early age?

Oh, geez.
Probably goes back to when I wasabout 15 years old.
In Canada here we have a highschool co-op program, sort of
like a little internship as highschool students where you have
the opportunity to go out andwork with an employer in the
local community, pick up a fewreal world skills and get a
little bit of exposure to what,uh, working at a company might
be like for you.
And I was fortunate enough toget a placement with a professor

(01:50):
at the University of Waterloohere in town, which is a
notoriously good engineering andcomputer science school.
There was a gentleman named PaulBeam and had the opportunity to
work with him.
At the time he was creating anonline technical writing course
with automated grading and endusers students could submit
their papers online.
It would check the tags andmarkup.

(02:10):
It would grade the structure oftheir markup language
automatically.
It was pretty revolutionary.
'cause keep in mind, this was.
Geez 25, 30 years ago.
So that was pretty extraordinaryand I had the chance to spend a
year with that organization.
It was called Wattage.
And learned a little bit abouthow software worked and what a
market for software might looklike, and how Paul was using

(02:32):
that technology.
To automate the human task ofgrading, structured markup
language so that a computercould do all of his grading
work, essentially automatically,and he could then take that
solution around to other schoolswho had that same sort of
program in place and offer thisautomated grading solution
around it.
So it gave me a little bit of ataste in my early teen years for

(02:54):
what technology and what atechnology business might look
like.
And I had a bit of a doublebenefit in that there was a
direct attachment to theUniversity of Waterloo.
So some of the people in Paul'scircle had a really advanced
knowledge of technology, whichwas just emerging at the time.
This was in the very nascentdays of the internet.
So I think that experience gaveme a little bit of a leg up and

(03:14):
gave me a little bit of exposureto technology and to the
academic system in and aroundkitchen or Waterloo, here in
Ontario, Canada, and that Iwould track back as the genesis
of peaking my interest intechnology.
And how it can be used toperform different tasks to
automate and how a businesscould be built around it.
So I was very fortunate.
Looking back now with 2020hindsight, I was very fortunate

(03:34):
to get that placement because itpeaked an interest in me that I
have enjoyed and pursued for therest of my life since then.

Wow, what a beautiful experience and
opportunity and Yeah, for nowwe're living in the world of
GPTs and it's very easy to say,oh, well, oh, what do you mean
that it can't just grade thepaper for you?
Let, that seems obvious.
Any basic model could do thattoday.
But you know how quickly weadjust, we're only about two

(04:01):
years into that regime.
But I can imagine, yeah, theUniversity of Waterloo what a
fantastic program.
And to be exposed to that at anearly age.
You go from, kind of the, thosehigh school years and, post
university year in you joinOpenText in set early on in
technical roles and product andeventually, leave as their chief
marketing officer.

(04:21):
I guess, how did that time Iguess it was nearly two decades,
if I'm not mistaken how did thatjourney shape your understanding
of the software industry and itsevolution over that time?

Yeah, it was 17 or 18 years at OpenText.
And again, just very fortunateto have had that opportunity and
that experience during my timethere.
When I started with theorganization, we were much
smaller than the organization istoday, or even six or seven
years ago when I left and hadthe opportunity to watch the
organization scale.
From a few hundred people to, Ithink at the time that I left,

(04:53):
it was 12 or 13,000 peopleworldwide and almost$4 billion
in revenue.
And during my tenure there, Ihad the chance to move around
from information technology,from IT help desk type work into
marketing and partner managementinto product management, where I
spent about 10 years of mycareer.
So I have a passion for productmanagement and how products are

(05:15):
designed, taken to market.
Now input is provided back toengineering teams to help build
the best customer fit that youpossibly can.
Ultimately, my career there ledme into marketing through
engineering.
I had the chance to run a verylarge engineering organization
while I was there overseeingenterprise content management,
digital asset management typesof products and then out of

(05:36):
engineering and product and intomarketing.
Which is not always a transitionthat people will make, but gimme
the benefit of understandingboth the technological needs of
the organization and howproducts are produced,
supported, maintained, and thenhow those products are taken to
market.
And those two worlds don'talways connect, but I found in
my marketing experience that itwas hugely beneficial to have

(05:58):
had the badge of having run aproduct and engineering
organization.
And an interesting affectationof that was to enter or meet up
with a customer and they say,oh, that's great.
Which executive are you sendingto meet us?
And they'd say, oh, what's thehead of marketing?
And you could almost see thecustomer deflate.
But then when you wouldintroduce yourself and say,
well, I, I come to marketinghaving run the product and
engineering organization formany years, and they would

(06:19):
brighten right back up and say,oh, great.
Well then I would like to sitdown and have a discussion with
you.
So it was very fortunatethroughout those two decades to
have had the opportunity toalmost do an MBA in practice and
experiencing a multitude ofdifferent organizations,
understanding that perspectiveof.
Customer support and serviceorganizations understanding how
product and engineering works,understanding how the program

(06:42):
office and the office of the CEOis run and managed.
Understanding how products aremarketed to how partnerships are
developed and maintained andbuilt.
And that breadth of experience,I think starts to give you the
well-roundedness necessary tostep into a CEO role.
Because you can commiserate withevery function within the
organization, and pro canprovide a perspective that will

(07:03):
hopefully help you to arrive atthe best outcomes for the
overall organization versus themandate of a discreet function.
So OpenText was an extraordinaryexperience, and having had 20
years and the opportunity towork within and lead a multitude
of different functions withinthe organization gave a very
general expertise and theability to see into how discreet

(07:23):
organizations are run and whattheir needs are and hopefully, I
hope make you an overall betterrounded leader at the end of
that.

Well, I, we are definitely simpatico'cause I
started my career on theengineering side as a developer
into product, and then now intopricing, which is, could be a
marketing function as well.
So, so definitely appreciate thelevel of empathy that you as a
chief marketing officer couldlend to the product and
engineering organizations andhow that made you a better
leader in that function.

(07:51):
I, so now you've been atLogiSense for a little bit,
what, give us a little 32ndoverview of what LogiSense is
and I guess what drew you to thespace that LogiSense is in.

LogiSense is a provider of usage and
outcome-based monetizationsolutions.
You can think of it as anenterprise billing platform, but
billing that is capable ofmonetizing discrete outcomes of
tracking, ingesting and ratingusage telemetry.
So in the market recently, we'veheard a lot of scuttlebutt about

(08:22):
things like usage based.
Pricing and outcome-basedpricing.
Salesforce just recentlyannounced that agent force is
going to charge$2 per resolveticket, where a generative AI
model can come in, answerquestions on behalf of a
customer, address a specificticket, and if it's capable of
resolving it without humanintervention, there's a charge

(08:42):
of$2 for the outcome of havingthat ticket resolved and a happy
customer.
In order to do that at scale,you need a pretty advanced
system because what is thedefinition of.
Success and a good outcome.
Is that just one API call?
Is it a particular flow of dataor a workflow that the customer
will engage with that willdetermine if it was a successful
outcome or an unsuccessful one?
Or even in more basic usagebased models?

(09:05):
How many kilobytes have yousold?
What is the entitlement of thecustomer?
How many units are they entitledto?
And a lot of us will be familiarwith these types of plans just
based on our mobile phones andcellular devices.
The concept of prepaid bucketsof monetizing discreet text
messages, telephone calls, thedata that travels over the wire.
So LogiSense provides the systemwhich is capable of ingesting

(09:28):
all of that usage telemetry, APIcalls usage data records,
assigning charges to them, andthen billing the customer.
And why ultimately that isimportant for companies around
the world is that increasinglyyour commercial offer and the
way that you monetize yourproduct is a part of your
product, and that stands out toconsumers and businesses alike

(09:48):
If you have a competitivecommercial model.
You have a leg up on thecompetition, and what LogiSense
does is really helpsorganizations to implement the
technology necessary and toconsult strategically to help
customers arrive at those highlydifferentiated monetization and
pricing models.

So, and I know that you just got back from a
user conference that LogiSenseput on, and I think there was,
you mentioned a couple ofinteresting examples going on in
the industry in general aroundoutcome-based pricing.
I think you mentioned Salesforceas an example.
So I'm sure you're Chockfullcoming back from that experience
of the opportunities as well asthe challenges that companies

(10:26):
are dealing with today.
I guess when companies comeknock on your door at LogiSense,
what are the specific challengesthat you see companies facing as
they're trying to approach thisarea?

Well, the challenges can be on a couple of
different fronts.
Sometimes companies are comingto us and if they're more
established, they may not haveever previously implemented
usage-based pricing oroutcome-based monetization.
So they have a lot of questionsstrategically around how do we
model the business?
How do we prepare our dataarchitecture to be able to
supply the information necessaryto achieve a usage-based or

(11:02):
outcome-based pricing model?
And with this notion of usage oroutcome-based pricing and go to
market, you can monetizeanything, even if it's an
algorithm.
If we think of our consumerlives, if I go to buy a car I'm,
as a consumer, not particularlyinterested in the specific alloy
of sheet metal used in that car,but I might be interested in

(11:23):
something like miles per gallonthat represents value to me as a
customer.
So it's important fororganizations, whether you're
selling a car, a piece ofsoftware, network access or
bandwidth, whether you'reselling a service or a connected
digital device, to understandthe constituent components of
your product and what each ofthose costs you, but also to

(11:43):
deeply understand what it, whereit is and what it is that your
customers see value in.
And we call that the valuemetric.
I know there are different namesand different nomen nomenclature
around that.
But ultimately, what are yougonna charge your customers for?
Is it the alloy of the sheetmetal that you use because it is
a superior alloy of sheet metal,or do no consumers in the
automotive market, but for avery small percentage actually

(12:06):
care about that and customerswould rather know?
Does it have airbags?
Is it safe?
How many miles per gallon doesit get?
Is it fast?
Can it accelerate quickly if youare a spirited driver?
So under zeroing in on what yourconsumers, whether they're B2B
or B2C consumers, see value inis a critical part of that
process.
And it's something that, that,nuke back to your question, that

(12:29):
organizations who areimplementing this for the first
time need to understand and theymay not have that knowledge or
expertise within their pricingoffices today.
I'll add to that a secondcomponent.
That is the challenges thatfaces organizations is when
going to do usage basedmonetization.
Not all organizations actuallyunderstand their own enterprise
architecture, meaning thatthey're not a hundred percent

(12:51):
sure where the data in theirorganization resides, what the
authoritative source of truthis.
Or where the systems that arefeeding that type of telemetry
and data, which is invaluablefor a number of other reasons
beside pricing.
And hopefully we'll get intothose discussions today.
But they may not have a cleanarchitecture.
They may not have an enterprisearchitect.
They may not know where the dataresides within their own IT

(13:12):
environments.
So that notion of being preparedto establish a pricing model
that is competitive and tieddirectly to where customers see
value, understanding where thedata resides within your
organization to be able toexecute against that, and then
having the financial savvywithin the finance department to
be able to model and forecastaccurately against a usage or

(13:33):
consumption based model arethree of the principle
challenges that we'll encounterwhen we're engaging with clients
and something that we can helpthem resolve.

And you did an excellent job at the end there
summarizing, but I'll justdouble click on all those
points.
So what I heard was reallyunderstanding what is the point
parts of my offer that reallydrive value and tying that into
pricing, understanding thetechnical infrastructure
required to successfully turnthe pricing model, the pricing

(14:07):
plans into dollars and cents,then the organizational
capabilities.
To make sure that thestakeholders who have
responsibilities, I've gottamake sure my revenue recognition
is correct and all myforecasting is appropriate.
I gotta make sure my salespeopleare comped correctly on, on what

(14:29):
they sold.
Like all those things aredifferent areas where companies
struggle as they start to laythis out.
I want to just really quicklyget to ground truth on terms.
'cause we've kind of go, goneout of the gate with this term
usage-based pricing.
One thing that frustrates me tono end is that even among

(14:51):
pricing experts, we are veryinconsistent across ourselves
with terms.
I try to at least be consistentin the terms that I use.
What does usage-based pricingusage-based monetization, mean
to you as you're sitting at inlarger sense?

Yeah, so usage based pricing can encompass a
variety of different pricingmodels, and it's not an all or
nothing proposition.
There'll be a lot of vendors outthere in the core.
Quote to cash ecosystem and inand around billing and pricing
in particular, who will think ofusage-based pricing as X times Y
equals Z and here is your price.
And that's not even beginning toscratch the surface of what

(15:30):
usage-based or outcome-basedmonetization really is.
If we think back historically,when I started my career you
would sell a piece of softwareonce.
Then you would provide aperpetual on-premises license to
the person who bought it.
And I don't know Dan, how oldyou are, but you may remember
this too.

That's how I started.

there you go.
So we're of a similar vintageand that's how you sold
software.
And attached to that, youwould've a 20 or 22% maintenance
annuity that you would attach tothat one time license sale.
That would keep the customer incurrent versions of the
software, it would allow them tophone your business for support
if they required it.
And it would pay for the ongoingcare feeding and support of the
solution to ensure that thevendor was there for you if you

(16:10):
had any challenges with it.
For the vendor though, it meantthat they really could never,
just in terms of marketdynamics, could never really
take an ongoing revenue streampast that 20%.
And they had sold the fullentitlement to their software,
to that customer in perpetuity.
We evolved from that into thenotion of basic subscriptions,
and I would say 10 or 15 yearsago was the big push to

(16:31):
recurring revenue.
And I was, mid-career when weall did the big push to
recurring revenue and all of thetop tier one organizations
started to make that shift.
And I remember determining whatthe inflection and break even
points were if you started to doan annual monetization versus a
big one time upfront licensesale.
How do you get to your three tofour year payback?
How do you ensure to get thecustomer to renew?

(16:53):
And then subscriptions startedto run rampant.
They were a good model.
People liked them.
They liked the recurringrevenue, they liked the
predictability, they liked theopacity of it.
In some cases, for some vendors,I can just charge you an amount
and don't worry what's in that.
Just pay that amount.
Well, no matter how much youuse, no matter whether you're
using it or not, pay that amountevery year and we'll be very

(17:13):
happy the subscription.
Economy is now table stakes.
And to differentiate becauseeverybody's got subscriptions
again I'll come back to a verycolloquial example in our
consumer lives cable television.
I cut the cord on cabletelevision 15 years ago, and I
think the world achieved peakcable in 2010 or 2011, and it's

(17:35):
a multi-billion dollar a yearindustry that has been on a
straight decline since then.
Why is that?
Because people don't see valuein paying three or$4,000 a year
for 800 channels that they don'tcare for and two that they want
to watch.
It's a ripoff, right?
So I think that would be thereaction by a lot of consumers.
In order to cut through that, westarted to see streaming

(17:58):
services emerge and eat themulti-billion dollar market
share of those cable companieswho are offering a locked in
opaque flat subscription to aservice that you may or may not
be getting value from.
Enter Netflix, enter Prime,enter Disney, enter Apple tv.
The challenge is now that all ofthose services and content
houses are based on a flat,opaque sub subscription fee as

(18:20):
well.
It's less than a cable, but I'llgive you access to my catalog
whether you watch it or not, forx dollars a month, and I will
increase that almostbi-annually.
It seems into perpetuity andover the last few years we've
been seeing those subscriptionrates come up and come up from
streaming providers.
So beating the locked in basicopaque subscription of the cable

(18:42):
companies came a moretranslucent version of a
subscription from the streaminghouses that was a fraction of
the cost per month.
They drove huge market shareadoption via that, and now we're
sort of reaching marketsaturation.
We saw, I believe, earlier thisyear that Netflix started to
lose subscribers for the firsttime ever because they've
reached a saturation of themarket where almost every

(19:03):
household has got a Netflixsubscription.
So now they have to look foralternative methods through
which to generate revenue, whichseems to me anyways to be an
constant increasing of thatopaque regular subscription fee
challenges now that I believeI'd seen a report earlier in the
year that most American housesnow have nine or more of these

(19:23):
flat subscriptions.
Well, holy smokes, we've comefull circle and it's now more
expensive than cable televisionagain, and we're entering into
the usage economy wheredifferentiation, much like the
streaming providers were able toeat, the cable providers, I
would contend that the firststreaming service who says, I'll
just let you put a hundred or$200 on account and I will

(19:46):
deduct from that bucket.
Prepaid as you actually consumecontent.
And if you're tired of mycatalog because you've watched
everything, that's okay.
Don't terminate yourrelationship with me.
Don't cancel your paymentdetails.
Don't delete your subscriptionaccount.
Just stay with me because you'veprepaid it and I'll deduct it as

(20:06):
you use it, consume it, andreally get value from it.
The first streaming provider whodoes that has gotten my business
because I'll move over there andI can put money on account and I
can come back to it and I canconsume as I see value in it.
Oh, the new season of thetelevision show I like to watch
is out.
I'll come back to that provider.
I'll start to consume data.
It's a big commercialdifferentiator because I don't
want to carry ninesubscriptions.

(20:28):
And in fact, what a lot ofconsumers will do is go and
watch the catalog of theprovider that they like for two
months.
Watch the new version, the newseason of the show that they
like.
Cancel that subscription, go tothe next content house and
subscribe for three months.
Watch their catalog.
Cancel the subscription, go tothe third one for the third
quarter of the year, sign up forthree months, cancel the
subscription.

(20:48):
There's a cost to thosecompanies every time a client
disengages with themcommercially, there's a cost
when the client has to reonboard.
And if the trend is pervasivewhere I go and I watch a few
months of content and I canceland I'll come back to you in a
year when you have some newcontent that's worth my coming
back to watch, there's anexpense to it.
A usage-based plan I wouldcontend would allow one of these

(21:11):
streaming media houses to hugelydifferentiate against their
competition.
So that's my colloquial exampleof how usage-based monetization
can deliver true value tocustomers.
How it can help to differentiatein the same way that we saw
basic subscriptions for servicesthat provided discrete value to
you, differentiate from thelarge locked in multi-year cable

(21:33):
television plans.
So too, I would posit will wesee the first usage based
monetization of a mediaclearinghouse differentiate,
differentiate them from the restof the competition and help them
to retain customers, help themnot to have to spend money to
terminate commercial agreements,to manage PCI data to sign
customers back up and reactivatethem to process credit cards a

(21:55):
second time and pay thetransaction fee for it.
It will help them to retain thenumber of active subs they have
as well.
So those, that's just a basicexample, but one that's near and
dear to my heart and I think tomost, because we all sign up to
these sorts of streamingservices that demonstrates the
shift from the one one-timesale, the multi-year lock-in the
cable package to thesubscription economy, which is

(22:16):
now 10 or 15 years old.
And we're all getting to a stateof subscription fatigue in our
day-to-Day lives.
And it's the same in business.
You want me to pay$20 a monthand I haven't viewed your
service in four months, I'm justgonna cancel.
I'll come back when you havesome new content.
To the next evolution, whichwill be usage or outcome-based
monetization.
I'll retain a commercialrelationship with you dear

(22:38):
vendor, but you charge me when Iget value from your service and
I'll stay with you forever.
And I think that's a, a goodexample in our day-to-Day lives
of how this style ofmonetization is going to help
organizations to differentiateboth in B2C and in B2B.

Well, it's not just a good example.
I'll quote.
Tony the tiger.
That was great.
Example there and I think it wasit Jim Barksdale who said,
there's only two ways to makemoney in business, bundling and
unbundling.
And so we went from the onegiant cable subscription to a 20
paying for 20 streamingsubscriptions independently.
And I don't, I'll leave it as anexercise to the reader to decide

(23:17):
if you're better off today thanyou were now.
But I could see the appeal ofthe I will pay as I get value
versus this opaque fee.
that was excellent overview ofkind of this transition from
kinda the perpetual world ofsubscription into this world of
usage base As we think about.
I hear these terms thrown aroundin the industry and I'm a

(23:38):
interested observer, but by nomeans an expert of what people
might label as rev ops ormonetization infrastructure.
And there seems like there's anynumber of components, but you
know, if you're just kind ofcasually looking, maybe
everything gets lumped under,oh, these are billing platforms,
but they do a whole lot morethan billing.

(23:58):
And it's like, okay, like Iunderstand that, customers have
to get sent a bill, right?
Or maybe we have to do somemetering.
I guess, can you break downwhat's actually involved from an
infrastructure perspective whenyou think about turning usage
into revenue?
Like what are all of thosecomponents in the landscape that
companies need to be thinkingabout?

Yeah, absolutely.
So you're going to have verylikely you're going to have a
quote to cash infrastructure inplace today, and that will
include things like yourcustomer relationship
management, your configure pricequote, your enterprise resource
planning system, and you mayhave some form of billing system
in there today.
Doing things like generatingcharges and doing invoice

(24:40):
presentment so that yourcustomers.
Get a bill and they know what topay.
And that can take many forms.
When we think about usage-basedmonetization, there's a couple
of extra components that have ahigh degree of technical depth
in them that are necessary to beable to do it at scale.
So at LogiSense we always sayit's all about the data and it's
all about the usage data andsome of the components that help

(25:02):
to distinguish a platform thatis a traditional quote to cash
cycle onetime transactions,onetime sales, flat transactions
to usage based monetization isthe capacity of that platform to
do what is known as mediation ordata transformation when we're
monetizing or ratinginformation, it could be data

(25:23):
coming from a network switchwithin your infrastructure.
It could be if you're a SaaSvendor, it could be your own
APIs.
Call the billing engine, callthe monetization engine and say,
Dan has consumed two units atthis time of day in this
location.
Please rate it and add it to hisbill.
It could be to aggregate databecause your core systems
generate all of the usage data,but send volumes of data so

(25:45):
large they're prohibitivelyexpensive to ingest and deal
with all of it.
So being able to aggregate datato what's relevant to conduct
the usage based monetization inreal time is very important
because if you want to conduct acalculation on a hundred billion
events a month, that's a lot ofdata.
That's a lot of computecapacity.
That's a lot of storage if youcan.

(26:08):
Disregard what is not necessary.
If you can transform the datainto what is necessary in the
right format, and you can ingestdata from multiple sources,
you'll have a much moreefficient and effective method
of usage-based monetizationwithin your organization.
So part of the platform thatdifferentiates a real usage
based biller or mon or monetizerfrom a standard one time sale or

(26:32):
flat subscription type of billeris this capacity to conduct data
transformation or mediation atscale.
The second one is aggregationwhich I had mentioned, and the
third one I'm gonna callmonetization flexibility
usage-based monetization is notan X times Y equals Z exercise.
When you start to think aboutthe layers of complexity, and in

(26:55):
particular in B2B use caseswhere I.
A company may commit to onboardor activate a certain number of
devices by a certain time.
Is there a penalty?
If they're under their amount,is there a break or a benefit or
a discount if they're over thatamount that they had contracted
to when they signed up?
Can those terms be appliedautomatically?

(27:16):
If you are a B2B company andsales goes out and makes a deal
every time you do a deal, andthis probably happens at every
company, not just the largeones, but sales will get very
creative sometimes, andsometimes they'll sell things
that don't exist.

No, no,

it never happens.
Part of a usage basedmonetization system is in its
capacity to provide a price bookcapability to provide a
monetization capability whendesigning products or
customizing contracts.
To support any wild commitmentthat sales may make, whether
that's termination fees, ramp upincentives or penalties, volume

(27:52):
or step discounting.
The capacity to do prepaid drawdown consumption buckets and to
allow a customer to deplete thatbucket across your entire suite
of are all various componentsthat help to differentiate a
usage based monetization systemor billing engine from a
traditional one time or flatsubscription system.

(28:16):
And some of these elements hereI'm describing, I'm it would be
an hour long discussion just onits own, but you can imagine the
amount of complexity when youstart to layer a prepaid bucket.
70,000 SKUs in a catalog thatcan all deplete from that
bucket.
Discounting based on the rateand volume at which you deplete
those credits, penalties orincentives depending on how

(28:37):
quickly or slowly you go.
And the capacity to allowcustomers to change their
entitlements to top up a bucket,to consume additional services
to span billing periods in theirconsumption of services becomes
really a mathematically complexprocess.
So a usage based monetizationsystem is gonna contain those

(28:57):
elements around mediation, datatransformation, aggregation.
Rating in a very sophisticatedprice book with a lot of
monetization flexibility.
And it will also probably be avery API forward modern platform
with a queuing architecture tohelp you accommodate massive
volumes of telemetry that'scoming into the system.

(29:20):
You could imagine a company witha hundred thousand or 200,000
customers would create terabytesor petabytes of usage telemetry
that all have to be processed,aggregated, de-duplicated rated,
assigned to a customer, andbuilt into a bill with all of
the discounting and termsapplied to them.

Mm.

I could go on, as I say, for, ad nauseum about
this topic, but there's a fewtechnologically sophisticated
elements that really dodifferentiate a usage based
monetization platform from astandard billing platform.

So that was a really excellent overview.
Adam and I just want to hit on acouple of points.
So, there's the kind of frontend of the sale.
So you mentioned things likeC-R-M-C-P-Q, quote to cash.
I think you use the debt generalumbrella term there.
We have to.
Present a bill, we have togenerate a bill and be able to
present that to the user.
There's this whole idea of whatyou term mediation, data

(30:12):
transformation, being able tofind a usage event.
How much should that be charged?
And I think one interestingamong many interesting things
you said, there is acomplication that when you're
first.
Looking at this, you describedit I think very well, where it's
not just an X times Y'cause Ithink a lot of people get into
that.
It's like, yes, that's the,that's a base case.

(30:33):
And maybe if you're, firstapproaching this, you're
thinking like, oh, well we justhave to do that.
That doesn't seem so hard.
But then you meet the realityof, oh, we want to have
contractual commits and we wantto have on demand, if they go
over their contractual commit,or, all of these different use
cases and corner cases that maycome up that you don't

(30:55):
necessarily think of when you'resort of first approaching this
whole area.
I imagine, you at the beginningwe were talking about the
challenges that people aredealing with when they, they
come to LogiSense.
And I imagine that, there youkinda said, well, people are
thinking about moving into usagebase, but I imagine some people
have long before they comeknocking on your door, have

(31:17):
said, Hey, we're trying to dousage base.
And maybe they've tried to.
Build their own systems tohandle this and then realize
like, oh, this is actually waymore complicated than we
thought.
Or we wanted to add this thingand we realized that breaks
everything and so we can'tretrofit it.
Or, maybe the systems are old orinflexible or they cobbled it
together.
Maybe all those engineers haveleft for greeter pastures and
it's not, I've talked to a lotof these engineers.

(31:38):
It's not their most fun job.
If they're excited to work onnew product capabilities where
they get put on the monetizationinfrastructure.
So you gotta make sure that theystay happy.
So I imagine you see a lot ofcompanies that, especially those
are trying to do it at scale andhave maybe tried to do this
themselves or with othersystems.
I guess from an infrastructureperspective, where do you see
companies really sort of runinto challenges when they're

(32:01):
coming to LogiSense?

It is as they want to, as they start to
uncover the various complexitiesaround usage-based monetization,
and around the levels ofabstraction that exist within
that computational flow.
We're gonna ingest all of theseevents.
Some of the events may need tobe mediated to form one event
for billing and rating fromseven different usage records,
as an example.
And when you start to overlaythe discounting price book and

(32:25):
go to market, literal pricing,contract terms and contract
enforcement to it, it is a veryas I'd mentioned, a very
technically complex thing to beable to manage.
So as companies build this outand they start with their X
times Y approach.
Looks great.
As they start to want to pricearound outcomes, as they start
to want to offer discounts, asthey start to want to manipulate
that pricing, it becomes clearthat this will become an

(32:46):
extraordinarily expensive,long-term endeavor to build your
own.
I would liken it to a companystarting off and going, well,
this is easy.
I can just count the receipts atthe end of the day, and all know
how much revenue the company hasmade.
Why don't we just build our ownERP system?
Well, probably a year or twointo that journey as your
company begins to scale, as youget more customers, as you serve

(33:07):
more geographies.
That's going to, you'll bedisabused of that notion.
And very few companies createand manage their own ERP system.
And I would liken it to that ina degree that there's a huge
amount of complexity and beingable to deal with the scale in
particular, LogiSense itselfprimarily serves the upper end
of the mid-market and enterprisecustomers.
And just focusing on thehyperscale required to ingest

(33:29):
the volume of events that someof the world's larger
organizations generate is initself its own technical
expertise, its own technicalspecialty.
So I think as soon as you startto get out of the, it seemed
like a good idea on the firstday and in the first month, as
sales has weighed in, as financehas weighed in, as the product
teams have weighed in, as themarket has weighed in, we're now

(33:50):
starting to realize thatbuilding and maintaining the
system is going to cost us morethan we're making off the
product.
So I think it's an area likeERP, like CRM, like CPQ, we're
at a certain size of scale andsophistication.
It's way better to have anexpert vendor come in and do it.
With an economy of scale, thatwill make it much simpler for
your business in the long run.

Well, let's put ourself in the shoes of a
listener right now who said you,Adam, you're making a really
compelling case that this getsreally complicated really
quickly, but I'm in a positionwhere, you know, the.
Maybe the executive team doesn'tquite understand that yet, and
they're just like, oh, how hardcould it be?
Like, we're gonna, we're gonnado this, usage monitoring like

(34:29):
what are the questions I cansort of put in front of everyone
to help them come to this,realization that this is this is
gonna be a long road because Iimagine it, I've been on these
discussions as a product leaderbefore where, you start getting
pulled down a path whether it's,hey, can you build this
dashboard for the supportorganization so they can have

(34:51):
this sort of view into what'sgoing on in the product usage
data?
So when a customer calls, theycould see it, right?
And you're like, okay, I could,or we could have a BI tool that
is supposed, is purpose builtfor that.
And we have the dataintelligence team sort of build
those dashboards versus havingproduct engineers, do this
right.
So maybe there, there are.
They're used to sort of handlingthat, but when it comes to
billing monetization just maybethey're, maybe they get swept up

(35:15):
and they, they don't know how tosort of make this case
effectively.
Are there ways you could helpthem, like sort of, be advocates
in the organization for, Heyguys, this gets more complicated
than we, we may think as we wantto start adding in these
commercial use cases thateveryone's not thinking about
right now, but we'll bemandatory that we add in in 12
months.

Absolutely.
As you begin down this journey,it's not creating an algorithm
that is X times Y and then we'llpipe that into the ERP system.
You're gonna have to start tothink about billing itself,
invoice presentment, invoicetemplates, customization, multi
currencies,internationalization.
Taxing requirements, revenuerecognition requirements, having

(35:53):
the hooks within your system toidentify the key points in time
and key events around which yourrev rec is structured absolutely
vital, and the billing systemmust contain that.
You must have the concept of amediation or data transformation
engine that can operate at.
Billions, tens of billions, ahundred billion events or more
in terms of scale and capacity.

(36:14):
You must have automation aroundenforcing every one of the
contracts that are in yoursystem.
And in a B2B scenario, as wesay, is sales does, let's make a
deal on every deal that's over amillion dollars in a RR.
The customer gets somepurchasing power in that and
they get to select some terms.
Are you also going to build anautomated contract enforcement
system?
Are you going to build your owntaxation engines?

(36:35):
Are you going to build your owncustomer experience portal?
Are you going to build your ownpayments integration?
Are you going to build your.dot?
And I can go through the entirestack and what might start out
as a, well, this is reallysimple.
It's just X times y and we'llsend that over to the ERP and
we'll issue a bill.
There are eight or ninedifferent modules.
Everything from ingesting andmanaging the usage events to

(36:55):
billing, rating, mediation,aggregation, invoice
presentment, customerself-service portal, taxation,
payments, processing.
And you'll see that it starts togrow into a very, very large
project, which can't be arecreational hobby of somebody
on the IT or IS team becauseit's a FinTech solution and you

(37:16):
can't get it wrong.
So you're gonna have to investin a quality of quality quantity
and quality of.
Engineering quality assuranceand product management that will
make this a, an endeavor thatwill be an expensive one for the
organization.
And as you say, if you lose alittle bit of expertise on that
team, if you never had theexpertise to start, you could

(37:36):
end up down the garden trail,millions of dollars spent and
still not have a serviceablesolution.
So it starts to become complexenough with enough modules to
really make it work right, to betaxed, to be compliant, to be
accurate, that it will faroutweigh the benefit that you
would get by just going to avendor who does this full time
for a multitude of differentclients.

Well it, this reminds me so much.
'cause, so as an engineer oreven as a product leader, you so
rarely have to interact withyour finance and accounting
teams.
Unless something's goneterribly, terribly wrong.
That's usually not a primarystakeholder, but it is here.
And it reminds me of adiscussion that's been going on
for years in the BI space, whichis every, like, it's the Monday

(38:20):
exec report meeting, andeveryone comes with how many new
customers did we get last week?
And marketing says one number.
Sales says another number.
Finance says another number.
Engineering says another number.
And you can't, when it comes tofinance and auditing books, you
can't all have differentanswers.
Where in product sometimes it'slike, ah, did we get 10 new
users or do we get a, 11, we canhand wave it, it's close enough

(38:44):
for the decisions we have tomake.
And the finance people are like,no, no, no.
I cannot go in front of ourauditors and say we might've had
10 customers or 11 customers.
I have to know which one ofthose it was and be able to
point to exactly that.
And you could see how thatproblem with all the other
contexts you've very wellelaborated.
It gets, much more beyond eventhe number of customers is like,
okay, how many billable events?

(39:04):
When did those events occur?
What was contractually?
What were they obligated to?
Can we prove that all the waydown the line so when the
auditors show up, we can pointto, no, this is the revenue we
actually had and this is whywe're justified.
Right.
And also to the customer,because I think that's where a
lot of folks maybe get intoproblems they didn't expect was
like, Hey, customer gets asurprise bill and they want,
your.

(39:24):
They're, you might think theauditors are friendly to deal
with, that the customer is gonnabill, they don't expect, The,
you might rather be

we, we, Half jokingly, w we half jokingly say
that and I think you've hit thenail right on the head here.
You can send a client a thousandbills and they'll pay them
dutifully, and you'll never hearfrom them and you'll never get
permission to speak to them.
But if you get the bill wrongonce and have a negative
commercial interaction, you'llhear from that customer the next
day.
And there's a lot of truth inthat.

(39:51):
So is it something that you wantto trust to the experts who, who
test rigorously, who do this fora number of clients?
Is it something you want tobuild yourself and maybe you get
all of the bills wrong once ortwice?
That's something that, thatpeople certainly have to think
about when they're choosing buyversus build decision in this
space.

Well, I really appreciate your elaboration of
all the technical component thatare required to, to build a
proper monetizationinfrastructure.
And, one thing I might ask you,Adam, is, much like I said, my I
try to help my pricing peersgive more consistent with their
terminology.
I hope that you could go backinto your world of monetization
infrastructure with your peersand make everyone more

(40:28):
consistent because, I'm a veryinterested observer and I get
super confused.
Go website to website becauseit's very difficult to wrap your
head around it.
So hopefully our listeners got alittle bit better sense from
this part of the conversationand.
What are all the components thatare involved and no, it's not
just billing and it's not justpayment processing.
There, there's so much more tothis beyond the technical

(40:49):
challenges we discussed, whatare the, in your mind the
strategic decisions companiesneed to make or maybe you're
seeing it the worst case aren'tmaking when they think about,
going to usage based pricing.

I think the biggest decisions are around
product market fit, and I thinkthat's my top advice to anybody
who's contemplating theircommercial strategy, and
particularly as we're startingto emerge into this world of
outcome-based monetization, youhave to have this right and you
really have to understand whereyour customers see value.
With systems like ours, you canprice around any outcome that

(41:24):
you like.
It can even be an algorithmicoutcome.
And we're seeing a lot more ofthis and a lot more of this
notion of outcome-basedmonetization hit the market,
which is a subcategory of

you just, just, before, before you dive into
this,'cause, so because thisoutcome pricing, people might be
hearing that and say, okay, whatis, how does that differ from
the conversation we've just beenhaving about usage pricing?
Are those the same thing?
How are you using that term?

Yeah I would coin outcome-based pricing as a
subcategory of usage-basedmonetization, typically where
you're gonna have an abstractedconcept, which is, rather than
me just selling you a kilobyteof data, which can be clearly
measured, is empirical.
And we all know what a kilobyteof data is.
It may be an outcome that issomewhat abstracted and may
require some algorithmicattention to derive that outcome

(42:08):
and price the solution for theclient.
So let me give a few examplesthat are quickly emerging as
popular and are the topic ofdiscussion in the industry.
Open ai.
Pretty familiar to everybody,consumes tokens based on the
size of the context set and someother math that not everybody is
aware of outside of open ai.
But everybody is familiar withthe fact that you will go

(42:29):
consume tokens to use generativeAI models, whether that's for
text or images or otherwise, andthat's an abstraction, that's an
outcome-based monetization,Salesforce with agents force has
done this pretty clearly where aresolved ticket is$2, and if the
AI bot is able to answer acustomer support question and
resolve it successfully for you,that outcome costs$2.

(42:50):
Sword Healthcare, AI basedhealthcare outcomes where
organizations who have betterwellness plans and drive better
employee health get better ratesand better outcomes around their
healthcare plans.
Hitachi Rail is another greatexample.
I believe this is in the uk.
Hitachi isn't selling the trainto the municipality or to the
regional government who's usingthem.

(43:12):
They're selling.
The outcome of the train trips,did it arrive on time?
Was the rolling stock available?
What was the temperature of thecabin for the trip?
Did it go well?
Did, was there any issues?
Was there any maintenancerequired?
If not, you're gonna get a fullcharge for the successful rail
trip.
Why is that important?
Because Hitachi is then, as thevendor required to deliver a

(43:33):
quality of service to the clientand only gets paid when they do.
And for the client, though, theymay pay a little bit more over
time.
They're not required to make a,in the case of a rail project, a
multi-billion dollar upfrontcapital expenditure.
I'm sure there are conditionsaround the contract there.
But what it really means is thatthey're going to consume that
rolling stock and use thoseservices, and the vendor is paid
as those services are deliveredon time to the constituency.

(43:56):
So I'm not doing a massivecapital expenditure upfront.
I'm paying for an outcome-basedprice, where my citizens get
trained, trips on time in acomfortable car.
Other examples, 11 x actually,LogiSense uses the services.
For AI based a DR meetingbookings.
And if the AI accountdevelopment representative can

(44:16):
go out and secure a meeting withan interested party or a
prospect, the vendor gets asmall payment for having booked
that meeting with their AI tool.
Probably the most popularexamples of the style of
monetization, our Amazon webservices, and that's, very a
basic type of usage-basedmonetization.
You make a commitment upfront,you can deplete that commitment
across their entire portfolio ofSKUs and their marketplace and

(44:37):
partner applications.
Or in the case of Amazon'smechanical Turk, I don't know if
you're familiar with that, butmechanical Turk is human
workforce automat automationwith monetization in the same
style of marketplace.
Call fast with appointmentbooking, phone screen AI with
phone screenings, riskified withfraud free transactions.
All of these are examples ofoutcome-based monetizations,

(45:00):
which are quickly emerging, butrequire that deep understanding
of product market fit.
To tie it back to the originalquestion, and what would I
really call out, is that as westrive for and arrive at this
market that is emerging withthese outcome-based monetization
models methods, deeplyunderstanding whether your

(45:21):
customers see value in thetrains running on time, the
appointment getting booked, thephone screening being completed,
the transaction being fraudfree, whatever the outcome is
that's most important to yourcustomer base, understanding
that deeply before you embarkdown the change in the
commercial model, I would say isprobably number one that that
organizations should beconsidering as they get into

(45:43):
this journey.

So many good examples of different outcome
models that you just listed.
Obviously that you live andbreathe this every day you did
not come unprepared withspecifics.
Well, as kind of commercialleaders, right?
Maybe the CEO, maybe it'ssomeone else, on the team who's
kind of thinking about thistransition from maybe what you

(46:04):
termed before.
Is this more opaque sort of allyou can eat subscription pricing
to a usage or outcome basedmodel.
A lot of these folks, they haveconcerns that, if we make this
transition I had this nice.
Predictability with my revenuepreviously.
And now you're telling me that Ionly get paid as my customers

(46:29):
actually use the product or get,some successful outcome outta
the product.
How the heck am I supposed toforecast that?
Are there ways that you thinkthat companies can kinda wrap
their head around this concern?
Are there, different options orapproaches that could be
considered?
Is this, I mean, what, I mean itis a legitimate concern, but

(46:50):
like, I mean like how do youthink about addressing that?

It is absolutely a legitimate concern, but I
think it's ba it's a concernthat's based on a bit of a
misunderstanding aroundusage-based monetization, and
again, it's that inclination toimmediately go to the oh x times
Y equals Z, and I'm never gonnaget paid if I don't.
Push a bunch of services andthey, if people aren't actually
using my product, it's anotherdiscussion.
If you're concerned that youwon't make any money unless

(47:13):
people are using your product,but we could leave that for
another session.
So it's not an all or nothingproposition.
And there are several differentarchetype of usage based
monetization that can beimplemented and must be
considered depending on whatindustry you're in, the type of
product that you sell and whoyour customer base is.
You've got the one timeperpetual sale, a perpetual
license.
I sell you a pencil one time youown the pencil.

(47:34):
Our business is done.
A fixed fee type ofsubscription, the opaque flat
subscription of 10 or 15 yearsago, as all software companies
were pivoting into the recurringrevenue model, which has now
become commoditized and is nolonger a differentiator to
implementing.
Monetization elements likestepped or dynamic discounting
based on the volume consumed tooffer prepaid options of

(47:56):
consumption or usage baseddrawdown, which means that you
actually take the money upfrontas the vendor, so it becomes a
lot easier to recognize and tomodel what the customer will
spend'cause it's already spentwith you before they even start
drawing down, has implicationson revenue recognition, but
you've got the cash in hand onday one into structures which
are very popular, like theconcept of a minimum commitment

(48:18):
plus usage model.
Allowing the customer to make alittle bit of a bet on how much
they're gonna consume for abetter discount on the overage
and consumption units on top ofthat base entitlement.
And that allows you to have alittle bit of stability with a
minimum commitment and allowsthe customer to make a bet on
how many of their servicesthey're gonna consume.
To get that greater discount ifthey feel that they're gonna get

(48:40):
there all the way through to afull usage base or outcome-based
pricing model, which is 100%dynamic.
And I think that's the one thatmost people think, if I'm gonna
do usage, my only option is togo from a binary one-time
transaction.
I sell you the pencil, you ownit to a fully usage based
outcome where I only get moneyif you're literally writing with

(49:00):
the pencil at that moment intime.
And that binary point of view, Ithink causes a lot of the
heartburn.
And if I switch to one of thesemodels, I won't ever be able to
forecast again.
It's simply not true.
And the vast majority oforganizations who implement.
A usage-based model willgravitate towards something like
a minimum commitment plus usagemodel, or they'll gravitate

(49:22):
towards an outcome-based model.
And so predicting andforecasting in a usage-based
world isn't this scary, void ofknowledge that I think most
people assume it is.
And we're gonna have wildlydifferent outcomes next year as
a result.
But it does require the productteams and finance teams to sit
down, which pre usage based age,perhaps they didn't sit down

(49:43):
often enough, and talk throughwhat the revenue model is today,
what the tolerance is forvariability in favor of growth,
and to decide on whether we needto stay as a fixed fee type of
model.
Whether we can introduce flatsubscriptions, whether we want
to move towards outcome oralgorithmic pricing, whether we
want to introduce dynamicpricing, whether we want a

(50:04):
minimum commitment plus usage sowe can have a hybrid and best of
both worlds, or perhaps we wantto fully commit.
To an absolute pay as you gousage model.
So the guidance I would givethere is don't be afraid, but
get educated because it's not anall or nothing proposition.
And LogiSense itself we drinkour own champagne and our
customers are on usage basedplans, which is a minimum

(50:26):
commitment plus usage.
We will typically forecast ayear in advance and we'll end
within 1% of our forecastednumber each year.
So it's absolutely possible, andfor those who are interested,
may wanna meet with my head offinance or there could be a good
podcast in that as well.
But it's absolutely possible toforecast accurately based on
consumption trends.
The key to doing that is toestablish the right type of

(50:47):
model with the right elements ofusage that is right for your
business and for your product.

So I love how there's a spectrum of options
from sort of your traditionalsubscription on one end, the
fully pay as you go usage oroutcome based on the other end.
And then there's a range ofintermediate steps that you can
take from, things that looklike, subscription plus pay as
you go hybrid to pay as you gowith contractual minimum

(51:15):
commitments et cetera.
I guess staying on the extremeend of that I, it is interesting
'cause actually, I don't thinkI've asked this question of
anyone who's actually running abilling infrastructure company.
Like I, I assume you do havecustomers that are on that
extreme end of pure sort of payas you go usage.
Is, I guess, do they just findways to just better forecast?

(51:36):
Like, is there, even in thatmodel does the reality meet the
expectation of just, well, it'sjust gonna be totally throw our
hands in the air.
We have no idea because we don'thave the subscription model.
Like, I imagine you've hadconversations with some of these
customers who are in that space.
What is the reality of that?

It won't shock you to know that there's not a
lot of businesses in the worldthat will do a throw our hands
in the air and whatever happens,happens sort of move.
So it is usually a little bitbetter contemplated than that.
But those organizations will sitdown typically over historical
telemetry, consumption,seasonality, time of year,
location, and other externalfactors.
And we'll typically havemultiple years of that data.

(52:11):
If you just started the companylast month and you're gonna do
a, we'll throw our hands in theair and we'll see.
That's fine.
You weren't forecasting tostart.
If you're a larger business whorequires predictability or a
public business who requirespredictability, it's a good
exercise to go through and lookat the consumptions of your
product if you have that dataavailable, or to implement a
system that is capable ofmonitoring that telemetry for a

(52:32):
period of time before you makethe switch.
And if I can go back and analyzetwo or three years seasonality,
I sell consumer electronics andconnected devices.
I know that between November andDecember I do 70% of my sales
for the year.
I know that typically, thatconsumption happens at this
rate, at this time of year, Ican make a more salient
prediction as to what my revenuewill look like under a purely

(52:54):
consumption based model in thecoming year.
So it requires a little bit ofmodeling.
If you're making a switch fromone time sales all the way over
to the extreme end of thespectrum, 100% usage based
monetization.
Have some historical data toreview and ensure that you can
model accurately and again, thatyou're selecting the value
metric, the price point, thediscounting plans that will get

(53:17):
you closer to and remove some ofthat variability, if that's a
sense, if that's something, apoint of sensitivity for your
business so that you can modelaccurately and you can implement
a usage-based monetization planin increments as well.
In fact, it gives you somethingto go back to market and talk
about with some frequency.
If you implement a variant of itand come back in a couple of
quarters, refine it, maybe go alittle bit heavier on the usage

(53:40):
side, something to go back andtalk to your customers about.
We now have a new plan.
More in your favor.
Sign up for additional servicestoday.
So, I will

Oh, you mean we can't just do this once and then
set in stone for the rest of thecompany's

right.
You got it.
You can change it day by day ifyou want to.
But for those who are, who arevery nervous about this, for
those who are very nervous aboutthis, I think that largely that
reaction is predicated on thenotion that it is a move to an
all or nothing proposition, andthat just simply is not the
case.

A bunch of really important points there.
So one is if you, in yourfinance group if you don't have
a statistician you probablydon't even know full blown data
scientist but at least astatistician on your team.
'cause you could start doingsome pretty nifty modeling
there.
Assuming your usage data iscorrect.
That also is a mandate thatbefore you do this switch, you
should probably be collecting,monitoring and making sure your

(54:30):
usage data is clean.
Because I've seen plenty ofsituations where we start
looking at the usage data andthen mapping it to what we think
it means and realize that's notthe case and that have engineers
have to go and clean that up.
So, the more you could do thatahead of time of collecting the
data and having that monitored,but then also getting it
modeled.
And then, I was obviously jokingthere because it's a friction
that I run into constantly in myworld where, people get so

(54:54):
nervous about pricing andpackaging changes because it's
like, oh, this is the one thing,the one time we can ever modify
this.
And if it's wrong we are stuckwith it for the rest of
eternity.
And when there's nothing elselike that.
in business, but for some reasonwhen it comes to pricing and
packaging, people, are, getreally concerned about it.
So, you do have the ability tolearn and iterate over time.
So really love that advice aswell.

(55:16):
We talked a couple of timesabout, perhaps in the old days,
the the engineers the productpeople should be sitting more in
the room with the financepeople.
I guess as you think about kindof the broader organizational
changes that need to happen aspeople embark on these
usage-based monetization oroutcome-based monetization
world, like what organizationalchanges do companies need to

(55:39):
make to successfully, implementthese.

Oh, where to begin?
I think we could do a wholesession on this one, Dan.
I'll call a few highlights out.
Your sales organization is gonnabe affected by this.
How do you compensatedifferently?
Moving from a, I have sold youan opaque four year structured
contract.
You can't deviate a dollar.
Then I'll give you a percentagecommission on that.
That's today's world.

(56:03):
That's easy.
If I sell you a usageentitlement and your revenue is
going to depend on yourconsumption of the services, the
sales compensation ought tochange, right?
To realize that so that thebusiness isn't paying out a huge
sum early on a customer, whichmay or may not stay with the
business and may not, may or maynot be a prolific consumer of
those services.

(56:23):
So you'll have to think aboutsales comp compensation
usage-based monetization doesmake the sales cycle shorter in
that you can start to delivervalue to customers and get them
access to the product withoutthem having to make a multi-year
large upfront capitalinvestment.
Why don't you just try out myproduct?
Let me show you how you can getvalue out of it.

(56:43):
In fact, it's usage based.
I'll tell you what, I'm gonnagive you, Dan, 50 free credits
today to go achieve 50 outcomeswith the product and then come
back to me and we can talk aboutwhether or not we want to do a
deal.
And it almost hint at a productled growth and being able to get
the product to the customerearlier in the sales cycle and
have them delivering value rightaway.

(57:04):
It changes the structure of thesales discussion, shortens the
sales cycle.
It affects sales compensation,it makes the customer success
side of the business.
If you think about the salesfunnel as an hourglass and at
the thinnest point of thehourglass, the waste of the
hourglass, you make a deal withthe customer.
and they've committed to useyour product.

(57:25):
The bottom part of the hourglasswhere you now onboard and enable
that customer and want to seethe customer getting value out
of your product, want to seethem using your product, want to
see them consuming your productso that you can continue to grow
within that account.
Well, that becomes much moreimportant to ensure that your
customers are getting value toensure that they're onboarded
properly, to ensure that theyknow how the pro platform works

(57:48):
to ensure that they're gettingvalue, because that's your
chance to start growing theaccount.
You've shortened the salescycle.
You've made it easier for sales,you've given value to the
customer earlier in the process.
You've asked for a smallercommitment upfront.
You're leading with yourproduct, you're leading with
access, you're leading withvalue.
But now, once the customer is onboard and using the product,
maybe in some small capacityduring the sales cycle, having

(58:11):
those training and enablementteams, customer success teams
piling on to ensure that your,the use of your product
proliferates within thataccount.
It becomes more important thanin the fire and forget one time
sales cycle.
So that coupled with thesophistication that your pricing
product and finance teams willgrow through together as they

(58:32):
start to speak each other'slanguage, which I think is a
vital exercise.
Whether you're selling in ausage based model or a one time
fire and forget model, the usagemodel perhaps just creates a
little more urgency aroundensuring that the functions of
your business are speaking witheach other and there's gonna be
other benefits that you getoutta that.
Besides pricing, by the way itbecomes much more relevant.
So sales and sales compensationare things you'll need to

(58:54):
consider.
How you approach customersuccess is something you'll have
to think about how you marketthe product when you can provide
access to a prospect for penniesor dollars and actually get them
onto the product.
Get them to receive value fromyour product before you
negotiate the deal.
Change is your dynamic as anorganization when you're
selling.
You have more pricing power whena customer is getting value from

(59:18):
your product than you have whena salesperson is telling them
how much value they're gonna getfrom your product.
Those are two fundamentallydifferent points to negotiate
from.
So, as I say, I could go on forages and ages, but.
It'll reduce your sales cycle,change your sales comp, it'll
give you different access topricing power at the time of the
commitment or the deal.
It will shift the risk a littlebit from the customer to the

(59:41):
vendor to shorten that salescycle, to get them on board, to
get them receiving value.
It will simplify yourprocurement process on the
customer side.
If you're using something like aprepaid consumption drawdown
bucket again, this could be amuch longer conversation.
But Dan, if we just have anaccount together and your
purchase order, your contract isfor a prepaid bucket of
services, you could top that upwith a purchase order.

(01:00:02):
You don't have to recontractwith me to buy an additional
product because your bucketentitles you to use any skew
that my company sells.
So I no longer have to fightwith procurement to get you to
top up or to enter into yournext agreement with us.
'cause it's just another.
PO on the same MSA as anexample, You're gonna reduce
your DSOs, particularly withprepaid buckets'cause you're
getting cash upfront.

(01:00:23):
And it's important for companiesto know that it's not an all or
nothing proposition.
But in terms of the immediateimpact and most impacted
organizations, sales, customersupport, pricing, finance, and
product are gonna be the fivemain organizations sitting
around the table.

Dan Balcauski (01:00:38):
Yeah.
And I think there's a so muchgood things that you mentioned
there and when I think there's aprobably a slew of companies
that maybe were out of the kindof pure software world that are
going into sub, intosubscription and maybe they're
jumping completely skippingsubscription into just usage
based pricing directly.
And, we had to learn a lot ofhard lessons in the software

(01:01:01):
world when we made subscription,but that are carrying over into
this usage based world.
Things like, we all went.
I don't think we realized it atthe time, but we all went from
product companies to servicescompanies.
This is why you see the rise offunctions like customer success.
You see the rise of rev ops andDevOps and product ops.
All these functions that have tostitch what were traditionally

(01:01:22):
organizationally siloed teamsthat just had to do their job
and get the product out the doorand now needed to stitch
together for the whole workflow.
'cause you're delivering aservice.
That's producing an outcome.
And so you're as you build thatresponsibility, you have to make
sure the cohesive whole is allgeared towards that and works
together.
And then, the other thing youmentioned I love about the sales
and customer success there, weused to have an old joke in the

(01:01:44):
perpetual license world.
You ask a sales guy who's yourfavorite customer, they say the
next one.
Because the LTV they got on thatsale was 90% of that whatever
that customer was gonna buy fromthem.
And so it's just onto the next,I don't care if they ever
install or set up the software.
Like, I got the po, let's moveon to the next.
And that doesn't exist in thesubscription world.
It definitely doesn't exist inthe outcome world.
So that handoff of making surethat the incentives are aligned

(01:02:05):
for sales so that they care andare engaged in making sure that
customer's successful long term,make sure the handoff into
onboarding, training support andsuccess is an ongoing thing.
'cause, I was going to commentearlier when you were talking
about those break even models aswe transition from perpetual
subscription, I apologize, Ididn't give a trigger warning
for anyone who had to go throughthat period.

(01:02:26):
But it, it brought up back inthe, those models, it, they
inherently required that thecustomer sticks around for.
Three, four years and issuccessful over that time so
that they renew on their annualbasis right.
And that's even more extreme ina usage based world.
So, a lot of great points thatyou brought up there.
As we near the end of ourconversation, I wanna kind of
pivot towards like, how do yousee this evolving and the

(01:02:47):
monetization over the next fewyears?
I know we've talked about thingslike ai things like you're
coming back from your userconference and a lot of
interesting stories of andexamples that you've brought to
this conversation of folks thatare really kind of testing the
bounds of what's possible withusage based, outcome based
pricing.
How do you see this world ofmonetization and usage based

(01:03:09):
pricing evolving over the nextseveral years?

Adam Howatson (01:03:12):
I think it's going to become far more
pervasive and we're starting tosee a lot of top players in the
industry moving to this style ofmonetization.
It's relevant in our consumerlives, right?
You I'm upset spending$4,000 ayear for cable television that I
don't watch, and I would beupset in business too if I was
paying a fortune for somethingthat my company doesn't use or
doesn't need.
And the concept of this opaquelock'em in and take every last

(01:03:32):
dollar you can and.
Forget about'em, right?
I don't like you said, oh, Isold'em the software.
I don't care if they use it ornot.
That's a notion that might havebeen successful 20 years ago,
but it's not anymore.
And just philosophically,certain industries and certain
players within industries arestarting to reach the saturation
point, the maximum marketpotential based on the number of
human beings in the universe.

(01:03:55):
That's a profound statement.
We have large organizations whoare getting to that scale of
operation where there aren'tadditional humans for them to
sell to in the market.
So they must start todifferentiate through retention,
through upselling, through theircommercial models.
And gone, I think, are the days,and particularly after the
economic, monetary and fiscalpressure of the last five years.

(01:04:15):
Again, both in our consumerlives, we've all seen the
inflation running rampant.
We've all seen the interestrates go up and in our business
lives where it's not acceptableto go to a CEO or a CFO and say,
I'm spending a hundred thousanddollars a year on a
subscription.
Do you get value out of it?
I don't know.
Well, it's gone.
It's cut.
If you don't know that you'regetting value out of it, we're
not renewing that.

(01:04:35):
So being a vendor, it's gonnabecome more and more important
to have a commercial model thatnot only differentiates you
against the competition, butalso demonstrates that you are
the sort of vendor who careswhether or not your customers
get value out of the product andcares enough that you'll charge
them based on the value thatthey're getting out of the
product.
Because I think we're getting tothe end of the tolerance, at

(01:04:56):
least in business budgets in2024 to pay for expensive
products.
50 a hundred K, 500 KA year a SPthat renews every year.
That team, are you getting valueout of it?
Well, we don't know.
Those are gonna be the firstitems that come off the budget
list, so don't be caught beingone of the vendors who can't
articulate their value to yourcustomer.

So yes, having to continually push the boundaries
of the commercial model.
And what that means is you, Imean, imagine especially in the
the consumer space, you do havesome of those companies that
are, yeah.
There's no more people left tosell to we fully penetrated.
How does, in your mind, if atall, how does the world of gen
AI impact the, this path forwardand in our conversation?

Oh, this type of pricing is gonna be pivotable
pivotal to Gen ai, both in termsof the baseline offerings in the
large language modelsthemselves.
And these models are veryexpensive to train at scale and
to get access to that trainingcontent.
So I would posit that in termsof large, generalized generative
AI models, there's gonna be veryfew players and we, we know who
those are today.
You've got llama out there,you've got chat GPT.

(01:06:01):
You've got a variety ofdifferent alternatives, but most
software vendors are going totake those general models and
use them to add supplemental AIservices to their products,
right?
Meaning that I'm not the one whodevelops the generative AI
model, but I'm going toincorporate it into the solution
that I provide.
I may.
Augment it, train it, or tune itwith some additional data that

(01:06:22):
is proprietary to me, but it'sgoing to appear as a ticket
resolving agent.
It's going to appear as anautomated account development
representative.
It's going to appear as aproduct or service from another
vendor That's not just a a nakedgenerative AI model.
What that means is that you'reusing effectively the same raw
materials as every othersoftware company on the planet

(01:06:45):
in those core four or fivepublicly available, publicly
trained, large generative AImodels.
You're a value added reseller tothose who create the large AI
generative models.
So how you price what it is thatyou've done to that model to
make it different and specificto your application or customer
set.
Let's say I introduce.

(01:07:06):
A generative AI model that cananswer questions about billing,
can resolve questions that yourcustomers may have by
interacting through a customerservice portal.
Why?
Why was my usage up 10% thismonth?
Well, you consumed 20 gigabyteswhile you were traveling two
weeks ago, and that's what thatextra charge is.
How you monetize that can't justbe a pass through of the tokens

(01:07:26):
that is being consumed by openai as an example.
You'll have to come up with adiscreet pricing solution that
demonstrates values in what youare adding to those raw resource
four or five large generative AImodels.
So distinguishing yourself inthe AI race that is going on
right now, and there'll behundreds of billions invested in

(01:07:47):
this over the next couple ofyears, is to distinguish a, what
the value is that you're addingto that basic model.
And two, being able to charge ina commensurate way with a direct
relationship to that value.
Otherwise, you're just one of amillion vendors who's taking.
A large common resource, andyou're just trying to pass

(01:08:07):
through and sell what somebodyelse has created.
You're trying to add value toit.
So being able to discreetlyprice the outcome of what you
have added to that commoditymodel is gonna be imperative for
companies who are incorporatingAI into their solutions today.
Otherwise what trulydifferentiates you from any of
the other competition?

I totally agree with everything you just said.
Are you seeing any I guess, wecan take this, either positive
or negative.
Are there any kind of mistakesthat you're seeing as folks
bring and try to price gen AIcapabilities in the market
today?
Either, either mistakes or Iguess, folks who you think are
really doing well, I guess wecould learn from either.

I think I, I think good examples are things
like the outcome-based model forAI agents and being able to
resolve tickets, supporttechnical or otherwise.
It's a very clear demonstrationof value.
As a business leader, I can knowthat it costs me$7 per ticket to
do that today on made upnumbers.
It costs$2 to pay agent force todo it.
There's a gain of$5 per ticketthere.
I can make a pretty a prettygood calculation and I can make

(01:09:10):
a business decision based onthat.
What I would caution businessesabout entering into this AI race
and the monetization around itis to think of an example like
BMW with the heated seats, usagebased payment, which they have
retracted.
It's possible to get this wrongand in examples where customers
have bought an asset which theyfully own and then have to pay

(01:09:32):
an extra charge to activatesomething that is already
materially or physically intheir possession, generally is a
turnoff for customers and theydon't see value in that.
I already own the equipment andyou're charging me more to be
able to use it.
Well, I've already paid up thecapital for the raw resources
for the mechanical system, andnow you want me to pay to
activate it.
Also, that can turn customersoff, so understanding.

(01:09:55):
Where the value is that you'redelivering and ensuring that
you're not trying to assign acharge to something that a
customer perceives that theyalready are entitled to or have
access to is an important thingto watch for in this race, and
make sure that you don't get itwrong and alienate your
customers.

Yeah, I love that.
And I heard in both the positiveand the mistakes category, so,
and which has been reflectedthroughout our conversation.
Making sure you reallyunderstand what customers value
in, in tying your metrics thatyou're pricing on in a way that
you know, makes sense to thatcustomer.

(01:10:31):
And I think you said it verywell, where as a business
leader, say, in a leading acustomer support organization, I
am well aware of my cost perticket.
And so, the outcome basedpricing on, an automated AI
agent.
Closing tickets at a certainrate.
That makes it very easy for meas a leader to do that
comparison and make thatpurchase versus saying, oh,

(01:10:53):
we're gonna charge you X numberof tokens you use, and I
somehow, as the buyer, have todo that translation in my head.
And then likewise, I heard inyour second example around the
BMW indicated seats where thisconcept of fairness and making
sure that customers feel that.
The value they're getting isfair.
And we can have a three hourconversation around what's

(01:11:14):
fairness in pricing.
But this is where no matter whatthe spreadsheet tells you, no
matter what your usage datatells you, this is where it
always helps to, before you rollout changes talk to your
customers about, the differentthings you're trying to do.
And they will immediately haveno problem telling you whether
they perceive that as, unfair.
Because where I seek companiesgo off the go off the deep end

(01:11:35):
is, either they don't do thatthose conversations upfront or
they hear it and they.
They think they know better.
And then that's where they endup on the front page of the New
York Times for a bad rolloutwhere they just get roasted at
the, BMW is just one of them.
And there's many others.
We could, we will not shame hereright at this moment.
Adam, I could talk to you allday.
But we've gone on long enoughand I wanna be respectful of our

(01:11:57):
audience and your time.
I wanna close it out with acouple of rapid fire questions.
You ready?

I am ready.

Alright.
Well look, when you think aboutall the spectacular people
you've had a chance to workwith, is there anyone that just
pops mind's had adisproportionate effect on the
way that you think aboutbuilding companies now?

I think a number of mentors over the years I'd be
remiss to mention only one, butcertainly had a lot of a lot of
opportunity to work with somevery well-informed,
well-trained, insightful peoplethrough my career certainly at
ot, and also joining atLogiSense.
So I think I, it would be acollective shout out to some of
the managers and mentors I'vehad over the years but certainly
have taken that opportunity tolisten to them, to extract that

(01:12:36):
knowledge and glean what I can.

Look, being A-A-C-E-O can be taxing
spiritually mentally,physically.
Are there any habits that you'vecultivated that help keep you on
the top of your game?

Yeah, I think key is not to get too caught up in
any one particular moment intime.
Typically bringing in additionalheads, ensuring that you're
working with a group of smartpeople As a CEO you don't do the
work yourself.
You're a general manager of abaseball team and you've gotta
field the best team you can makesure that you got the right
players in the right positionand then rely on them to go play

(01:13:10):
the game.
And I think that you can have atendency when you get to the CEO
position to want to get yourfingers into everything and that
you know best.
But it, the reality is thatyou're relying on a team of very
smart brains to ensure that yourcompany is successful and you're
the arbiter or aware of thosevaried opinions trying to find
the one that is the right middleground to accommodate all of the

(01:13:30):
functions of the organization.
So.
I would say if you're the CEO,don't see yourself as the star
pitcher.
See yourself as the generalmanager.
You're not necessarily on thefield with the team, but you're
gonna build the best team to gotake the field.

I love that.
Look if I gave you a billboardand you could put any other,
anything on there, advice youwould give for other CEOs
considering moving to,usage-based pricing
outcome-based pricing, whatwould it say on that billboard?

Understand where your customers see value number
one.

Beautiful.
Love it.
Succinct, and it hits to thepoint you've reinforced
throughout this entireconversation.
Adam I've absolutely lovedtalking with you.
If listeners want to connectwith you or learn more about
LogiSense, how can they do that?

can reach out to me on LinkedIn, Adam Howson, and
we'd certainly love to have youstop by logisense.com.
Check out our blogs, articles,and other content about
usage-based monetization, andwe'd love to hear from you.

Awesome.
Well, everyone I will put thoselinks in the show notes for
listeners that wraps up thisepisode of sas Scaling Secrets.
Thank you to Adam for sharinghis journey, insights, and
valuable tips for our listeners.
If you found this conversationas enlightening as I did,
remember, subscribe so you don'tmiss out on future episodes.

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