This is a transcript of episode 284 of the Troubleshooting Agile podcast with Jeffrey Fredrick, Douglas Squirrel, and special guest Ulrik Lehrskov-Schmidt.
Commercial and technical debt are twins: when your product is mispriced, your engineering investment is out of whack too. Listen to this episode of Troubleshooting Agile to learn how you can build product plans that scale, with special guest Ulrik Lehrskov-Schmidt.
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Read the previous episode in this series here.
Introduction
Listen to this section at 00:11
Squirrel: Welcome back to Troubleshooting Agile. Hi there, Jeffrey.
Jeffrey: Hi, Squirrel. And we’re back with Ulrik again. Ulrik, thanks for joining us and coming back.
Ulrik: Of course, guys.
Jeffrey: Last time you talked about the importance of a “jobs to be done” framework, which is something I usually think of coming out of product management and design world, like UX, interaction design, that kind of thing. It’s surprising to have the same answer come up from the pricing side of things. I thought that was interesting. Then that’s happening again: you mentioned this idea of commercial debt. A lot of our listeners would have experienced technical debt, and having the analogy on the pricing and commercial side they’re probably less familiar with. I love that connection. If you get things wrong, you can end up with commercial debt. What do you mean by that term and what problems does it cause?
Ulrik: Let me give you an example. Two years ago I was working with a Scandinavian scale-up. They had maybe 600 enterprise customers on a software solution, and they spent the better part of a decade sort of building this business up and the product and so forth. I was in a management team meeting with these guys and we’d done some preliminary research, and everybody in the management team agreed that on average we could raise prices 85% on these 600 enterprise customers. But they didn’t. Instead they sold the company about a month later.
Jeffrey: Wow.
Ulrik: So then the question is like, why didn’t you just raise the prices 85%? Then presumably you could have gotten at least 85% more when you sold the business, right? And the reason is that the 600 enterprise customers were closed on 600 different contracts, usually written in word or PDF. Some of them signed, some of them not, some of them findable, some of them on local hard drives with salespeople, some of whom were not with the company anymore, and so forth. They were sold on different pricing models with different discounts, with different feature toggles. You know the sort of environment that this happens in; they just sold the heck out of it for a decade trying to gain traction, gain volume, gain customers, and just build revenue, not really looking at the scalability of things, which means that if they were to re-price all these customers essentially they would have to renegotiate with all these 600 customers and also re-spend all their sales costs over the last decade, and they just didn’t have that bandwidth. This is what I call commercial debt. So commercial debt is whenever you have to spend resources in sales or marketing to gain revenue you sort of already earned or already sold, to renegotiate, re-price and so forth, because you didn’t stay disciplined within the parameters of whatever pricing and product structure you already had agreed with yourself was the truth for you.
Clean Sales
Listen to this section at 03:38
Jeffrey: That’s such a great, perfect analogy. Maybe it resonates with me because I’ve experienced what you’re describing on the commercial side, where we’ve done exactly the kind of thing of trying to standardize our contracts and work through a years long backlog of different terms and extensions. And it is very much like what I’ve experienced on the technical side, in the software development side. The good habit that people describe is “working clean,” where you’re constantly refactoring your code, refactoring your build process. And the idea is to minimize the cost of change. So if we want to change the software, we can go and do that with the least overhead. What you’re describing is directly analogous. If we want to change our commercial terms, how can we do that with the least overhead? Is that right? You’re kind of describing what happens when you don’t work clean commercially?
Ulrik: Yeah, exactly. Having a really good commercial model, constituting solid packaging where you know where all the features go, and you also know where all the future features go because you have a conceptual solid ground in each of the modules or tiers or add ons or packages that you sell. You also have a very clear pricing structure and a very clear contract framework. So those are the components. But I think also interesting is that technical debt fuels commercial debt and vice versa. So they’re sort of tied up in a vicious loop. If you have technical debt, from a product side or a development side you might think “We know best, we know how the customer should use this solution, and if only they were to use it how we envisioned it, they would be better off.” So if you have this sort of high and mighty feeling within the product department and then hand this product to a sales rep, this sales rep has to go out and sell it to a customer. Usually what will happen is that then the sales rep will go to a customer and say, “Look at the solution that I have,” and then the customer will say, “Well, that’s all great, but I only need half the features. So how about I pay half the price?” You can go into a SaaS business and look at what kind of discounts they’re giving, and if they’re giving a lot of discount, sometimes the problem is upstream in product, right? That product is misconstruing what customers want, and that is creating this commercial debt. All the discounts and the patchwork solution that sales has to make. Now, if sales then does this with customers and say, “Okay, so I know you don’t want to buy the monolith, but what do you want to buy?” And the customer says, “Well, I do want to buy this, but you know, maybe I also want this feature or maybe we can like just give me access to half of the solution.” Then the sales rep sells an enterprise client, like big whale, and then goes back to developer and says, “Well, I just sold this contract. It’s going to be amazing. We’re going to hit the quarterly target,” or whatever it is. “But, we need to build these two features, right?”
Squirrel: And they might say, “Hey, look, you don’t have to do some of these things.” Like you said last week, about taking the roof off. But something goes wrong with that.
Ulrik: “Oh, by the way, we also invented a new pricing model because the the customer wants this.” One of the dirty secrets I often see in SaaS companies is that the billing system itself is an internal product where sales and product are the customers and finance and development are the vendors. And everybody hates each other. So new technical debt accrues which spurs new commercial debt and on it goes. This often is what happened when companies grow from zero to €10 million in annual revenue and then stop. The reason they stop is that the product is really hard to keep innovating on, it’s really hard to reprice customers, and it’s really hard to be agile—if I’m using your words correctly—both on the technical and commercial side, which means that growth slows and this can sometimes be lethal for these businesses.
Squirrel: Absolutely. Ulrik, I have an approach for this, which Jeffrey, you and I talked about a couple of weeks ago. I think we’re talking about the same thing, but I want to check. When I coach my clients, I notice people on the technical side often feel disempowered, they’re trapped in that vendor relationship. They’re not talking to the customer usually, in the model you described. So they don’t have the chance to come back and say, “Yeah, actually it’s hard to take the roof off, but how about no wheels?” They don’t get a chance to bring in the technical view that would actually help the customer more and be more feasible and more resellable. I say what you need is to go talk to your sales people about unselling. “Yeah, you went and signed that wonderful agreement. You got that commercial end product debt, you incurred it for us. Thanks for doing that. It’s actually a good thing because it means we have a client inside the tent. Now what we need to do is do some customer management. We need to do some unselling, we need to change those contracts, change those discounts, change what’s happening, to the benefit of the customer. Can you work with us on the tech side to work out what changes make the customer win and get a better product that works better for them, so our investment actually matches up?” Now, is that the sort of thing that you’re helping folks to do as well on the sales side, or is it something else?
Build Your Boat
Listen to this section at 09:21
Ulrik: I’ll tell you how I do it. We will do a design process where we design new packaging, pricing model, whatever it takes. The entire commercial offering will align, sales with product, and then we’ll go validate with customers in a sales test. This is really where the rubber hits the road, where we then take the new offering and sell it to new customers. You do that for a sales cycle, maybe two. At that point, usually the organization as a whole, product, sales, management, whoever is involved, we’ll see this new offering that we have, we’re able to sell it. We’re able to sell it better than before, maybe at higher prices, shorter cycles, sales cycles, whatever it is, because we actually got to a better concept. Also, we’re smarter than we were since we designed the first thing. So we now have confidence that this is working, and we then take and roll it back to all the legacy customers that aren’t on this new packaging and pricing. So that’s sort of usually the sort of the project flow that I run through is new design, sell it to new customers. Once they validate it in the market, then we roll it back to old customers with the argument that, “Hey, all your competitors just bought this on commercial terms for the past six months, so we know it’s fair. This will update your plan and pricing Jan 1st,” or whenever it is.
Squirrel: Ah, I get it.
Jeffrey: You know what I really liked about that is you said in there “We’re smarter than we were before.” I think it’s giving our listeners more of a 360-degree view of things they would have heard about before but maybe hadn’t experienced from the commercial angle. In this case, the ability to have something that you test and learn from in the market. You’re describing that the whole goal is to learn from your experience, and part of the thing about learning I would say is the detection and correction of error. You found mistakes that you made before, you want to go fix them. That includes creating something new, but also removing things that are old, which is where the unselling comes in. The process you’re describing is, I think, a natural extension of what people would talk about agile approaches. However, there’s often a disconnect between the commercial side, which haven’t typically heard this kind of language around “testing” and “trial” and “learning” and “refactoring,” and the product side, which have heard it but haven’t had that connection to as you put it, “where the rubber meets the road,” the commercial reality. I feel like we have a mirror image here in what you’re describing for some of our our listeners. I hope they recognize now some of the behaviors and mistakes that they’ve seen in their own environments, as you’re describing the kind of things that they might have been advocating for from an Agile side. But now they can put it in terms on the commercial side that they might not have been familiar with.
Ulrik: Yeah, when you’re saying that actually sort of occurs to me that I think product tests a lot, but actually I think sales tests a lot too, and so does marketing and so forth. Part of the missing link is that they haven’t agreed on what to test together as a unit. So they’re just running off and testing different things and then they’re arguing to each other, “My test is better than your test.” That’s lessening the opportunity that you have. I hope that’s an extension of what you’re saying because I’m definitely agreeing with you, I think.
Jeffrey: Yeah, absolutely. They’re also missing conversations, when this happens.
Squirrel: Absolutely. There’s a wonderful thing that commercial folks like Ulrik know how to do, and it looks like absolute magic to those of us in the technology side because we’re not used to talking to customers in this way, it feels weird to us. I impress upon my clients that people like Ulrik and your sales people and your account managers in your organization, listeners, they have a special pocket watch they can wave back and forth in front of the customer, and they can say, “Customer, you want this feature, you don’t want this feature, you don’t want the one you bought, you want this one instead.” And the customer, hypnotized, nods and says, “Yes, that’s what I want. Absolutely. That will be great.” You just have to view it as this kind of magic ability. We now have a bit more understanding from Ulrik of how that magic works, which I think is really valuable and I hope it gives our listeners the excitement, willingness, and courage to go to their commercial folks, to the people agreeing and putting in place this commercial debt, which is leading to the technical debt, and suggest they pull out their their pocket watch to help us get out of that situation. That’s fantastic.
Ulrik: Yeah. Actually once I’ve worked with a client, it’s often product that leads the pricing redesigns on my client side. Usually you can see a very talented CPO, or product marketing guys leading a pricing project, you can see that sometimes they get it and then they just start working on this path and keep working on it for years and years in the organization, which really helps everyone. That’s really where the magic happens, to me, where you start to consider this integrative process that has to continue over time, right? The true marker of my success is when I can see people carrying the torch on their own.
Squirrel: Fantastic. Well, Ulrik, there’s lots of ways for people to engage with you and get some of this good magic going for themselves, including reading your book. I also realized in these two episodes we haven’t managed to pronounce your surname, so I hope you might be able to do that for us because I’m not sure Jeffrey and I can. Would you mind just telling us where people can get in touch with you, where they can read your book?
Ulrik: Sure. So my surname is Lehrskov-Schmidt. My website name is willingnesstopay.com, so that should be relatively straightforward. The name of my book is The Pricing Roadmap. You can find that on your local Amazon. If you go to YouTube and just search SaaS pricing, then I have a lot of content there as well.
Squirrel: Thanks, Jeffrey and Ulrik.
Jeffrey: Thanks, Squirrel.
Ulrik: Thanks, guys.