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

Dan Balcauski speaks with Adam Howatson, CEO of LogiSense. They discuss Adam's extensive journey in software, from founding his first company in high school to leading LogiSense. The conversation delves into the complexities of usage-based and outcome-based monetization, which LogiSense specializes in, and how it aids major enterprises. Adam shares practical examples, the advantages of transitioning to such models, and the necessary organizational changes. They also explore how Gen AI impacts monetization strategies and offer advice for CEOs considering a move to usage-based pricing. 

00:31 Adam Howatson's Early Journey in Software
07:51 LogiSense and Usage-Based Monetization
10:27 Challenges in Usage-Based Pricing
15:00 Complexities of Usage-Based Monetization
24:04 Infrastructure for Usage-Based Revenue
39:06 Navigating Customer and Auditor Expectations
39:51 Building vs. Buying Monetization Infrastructure
40:46 Understanding Outcome-Based Pricing
42:10 Real-World Examples of Outcome-Based Monetization
46:33 Forecasting in a Usage-Based Model
55:24 Organizational Changes for Usage-Based Monetization
01:02:50 Future of Monetization and AI Impact
01:11:58 Rapid Fire Questions and Closing Thoughts

Transcript

Dan Balcauski: 0:20

Welcome to SaaS Scaling Secrets, the podcast that brings you the inside stories 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 with Adam Howatson, CEO of LogiSense. Adam's journey in software started early in life as he founded and sold his first software company while still in high school. He spent nearly 20 years at OpenText Rising through technical and product rules to become chief marketing Officer. Now at LogiSense, he helps major enterprises like Garmin and Cisco tackle the complex challenges of usage based monetization at scale. Let's dive in. Welcome Adam to SaaS. Scaling. Secrets.

Adam Howatson: 0:49

Thanks, Dan. Very excited to be here.

Dan Balcauski: 0:51

I am personally very excited and I say that in front of every episode, but you know, I think we're gonna have a lot of fun in this conversation.'cause there's sometimes in life where you. You beat those people and the time flies by as you both geek out on a mutual topic. And you and I have that in our shared love of the monetization space. So we're gonna, we may go a little long, we may get a little weird and geek out here, but I'm excited for where the conversation takes us. Before we dive into that world look, you started your career building and selling software in high school. What sparked your interest in the business side of technology at such an early age?

Adam Howatson: 1:28

Oh, geez. Probably goes back to when I was about 15 years old. In Canada here we have a high school co-op program, sort of like a little internship as high school students where you have the opportunity to go out and work with an employer in the local community, pick up a few real 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 to get a placement with a professor at the University of Waterloo here in town, which is a notoriously good engineering and computer science school. There was a gentleman named Paul Beam and had the opportunity to work with him. At the time he was creating an online technical writing course with automated grading and end users students could submit their papers online. It would check the tags and markup. It would grade the structure of their markup language automatically. It was pretty revolutionary.'cause keep in mind, this was. Geez 25, 30 years ago. So that was pretty extraordinary and I had the chance to spend a year with that organization. It was called Wattage. And learned a little bit about how software worked and what a market for software might look like, and how Paul was using that technology. To automate the human task of grading, structured markup language so that a computer could do all of his grading work, essentially automatically, and he could then take that solution around to other schools who had that same sort of program in place and offer this automated grading solution around it. So it gave me a little bit of a taste in my early teen years for what technology and what a technology business might look like. And I had a bit of a double benefit in that there was a direct attachment to the University of Waterloo. So some of the people in Paul's circle had a really advanced knowledge of technology, which was just emerging at the time. This was in the very nascent days of the internet. So I think that experience gave me a little bit of a leg up and gave me a little bit of exposure to technology and to the academic system in and around kitchen or Waterloo, here in Ontario, Canada, and that I would track back as the genesis of peaking my interest in technology. And how it can be used to perform different tasks to automate and how a business could be built around it. So I was very fortunate. Looking back now with 2020 hindsight, I was very fortunate to get that placement because it peaked an interest in me that I have enjoyed and pursued for the rest of my life since then.

Dan Balcauski: 3:41

Wow, what a beautiful experience and opportunity and Yeah, for now we'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 the paper for you? Let, that seems obvious. Any basic model could do that today. But you know how quickly we adjust, we're only about two years into that regime. But I can imagine, yeah, the University of Waterloo what a fantastic program. And to be exposed to that at an early age. You go from, kind of the, those high school years and, post university year in you join OpenText in set early on in technical roles and product and eventually, leave as their chief marketing officer. I guess, how did that time I guess it was nearly two decades, if I'm not mistaken how did that journey shape your understanding of the software industry and its evolution over that time?

Adam Howatson: 4:32

Yeah, it was 17 or 18 years at OpenText. And again, just very fortunate to have had that opportunity and that experience during my time there. When I started with the organization, we were much smaller than the organization is today, or even six or seven years ago when I left and had the opportunity to watch the organization scale. From a few hundred people to, I think at the time that I left, it was 12 or 13,000 people worldwide and almost$4 billion in revenue. And during my tenure there, I had the chance to move around from information technology, from IT help desk type work into marketing and partner management into product management, where I spent about 10 years of my career. So I have a passion for product management and how products are designed, taken to market. Now input is provided back to engineering teams to help build the best customer fit that you possibly can. Ultimately, my career there led me into marketing through engineering. I had the chance to run a very large engineering organization while I was there overseeing enterprise content management, digital asset management types of products and then out of engineering and product and into marketing. Which is not always a transition that people will make, but gimme the benefit of understanding both the technological needs of the organization and how products are produced, supported, maintained, and then how those products are taken to market. And those two worlds don't always connect, but I found in my marketing experience that it was hugely beneficial to have had the badge of having run a product and engineering organization. And an interesting affectation of that was to enter or meet up with a customer and they say, oh, that's great. Which executive are you sending to meet us? And they'd say, oh, what's the head of marketing? And you could almost see the customer deflate. But then when you would introduce yourself and say, well, I, I come to marketing having run the product and engineering organization for many years, and they would brighten right back up and say, oh, great. Well then I would like to sit down and have a discussion with you. So it was very fortunate throughout those two decades to have had the opportunity to almost do an MBA in practice and experiencing a multitude of different organizations, understanding that perspective of. Customer support and service organizations understanding how product and engineering works, understanding how the program office and the office of the CEO is run and managed. Understanding how products are marketed to how partnerships are developed and maintained and built. And that breadth of experience, I think starts to give you the well-roundedness necessary to step into a CEO role. Because you can commiserate with every function within the organization, and pro can provide a perspective that will hopefully help you to arrive at the best outcomes for the overall organization versus the mandate of a discreet function. So OpenText was an extraordinary experience, and having had 20 years and the opportunity to work within and lead a multitude of different functions within the organization gave a very general expertise and the ability to see into how discreet organizations are run and what their needs are and hopefully, I hope make you an overall better rounded leader at the end of that.

Dan Balcauski: 7:29

Well, I, we are definitely simpatico'cause I started my career on the engineering side as a developer into product, and then now into pricing, which is, could be a marketing function as well. So, so definitely appreciate the level of empathy that you as a chief marketing officer could lend to the product and engineering organizations and how that made you a better leader in that function. I, so now you've been at LogiSense for a little bit, what, give us a little 32nd overview of what LogiSense is and I guess what drew you to the space that LogiSense is in.

Adam Howatson: 8:01

LogiSense is a provider of usage and outcome-based monetization solutions. You can think of it as an enterprise billing platform, but billing that is capable of monetizing discrete outcomes of tracking, ingesting and rating usage telemetry. So in the market recently, we've heard a lot of scuttlebutt about things like usage based. Pricing and outcome-based pricing. Salesforce just recently announced that agent force is going to charge$2 per resolve ticket, where a generative AI model can come in, answer questions on behalf of a customer, address a specific ticket, and if it's capable of resolving it without human intervention, there's a charge of$2 for the outcome of having that ticket resolved and a happy customer. In order to do that at scale, you need a pretty advanced system because what is the definition of. Success and a good outcome. Is that just one API call? Is it a particular flow of data or a workflow that the customer will engage with that will determine if it was a successful outcome or an unsuccessful one? Or even in more basic usage based models? How many kilobytes have you sold? What is the entitlement of the customer? How many units are they entitled to? And a lot of us will be familiar with these types of plans just based on our mobile phones and cellular devices. The concept of prepaid buckets of monetizing discreet text messages, telephone calls, the data that travels over the wire. So LogiSense provides the system which is capable of ingesting all of that usage telemetry, API calls usage data records, assigning charges to them, and then billing the customer. And why ultimately that is important for companies around the world is that increasingly your commercial offer and the way that you monetize your product is a part of your product, and that stands out to consumers and businesses alike If you have a competitive commercial model. You have a leg up on the competition, and what LogiSense does is really helps organizations to implement the technology necessary and to consult strategically to help customers arrive at those highly differentiated monetization and pricing models.

Dan Balcauski: 10:05

So, and I know that you just got back from a user conference that LogiSense put on, and I think there was, you mentioned a couple of interesting examples going on in the industry in general around outcome-based pricing. I think you mentioned Salesforce as an example. So I'm sure you're Chockfull coming back from that experience of the opportunities as well as the challenges that companies are dealing with today. I guess when companies come knock on your door at LogiSense, what are the specific challenges that you see companies facing as they're trying to approach this area?

Adam Howatson: 10:39

Well, the challenges can be on a couple of different fronts. Sometimes companies are coming to us and if they're more established, they may not have ever previously implemented usage-based pricing or outcome-based monetization. So they have a lot of questions strategically around how do we model the business? How do we prepare our data architecture to be able to supply the information necessary to achieve a usage-based or outcome-based pricing model? And with this notion of usage or outcome-based pricing and go to market, you can monetize anything, even if it's an algorithm. If we think of our consumer lives, if I go to buy a car I'm, as a consumer, not particularly interested in the specific alloy of sheet metal used in that car, but I might be interested in something like miles per gallon that represents value to me as a customer. So it's important for organizations, whether you're selling a car, a piece of software, network access or bandwidth, whether you're selling a service or a connected digital device, to understand the constituent components of your product and what each of those costs you, but also to deeply understand what it, where it is and what it is that your customers see value in. And we call that the value metric. I know there are different names and different nomen nomenclature around that. But ultimately, what are you gonna charge your customers for? Is it the alloy of the sheet metal that you use because it is a superior alloy of sheet metal, or do no consumers in the automotive market, but for a very small percentage actually care about that and customers would rather know? Does it have airbags? Is it safe? How many miles per gallon does it get? Is it fast? Can it accelerate quickly if you are a spirited driver? So under zeroing in on what your consumers, whether they're B2B or B2C consumers, see value in is a critical part of that process. And it's something that, that, nuke back to your question, that organizations who are implementing this for the first time need to understand and they may not have that knowledge or expertise within their pricing offices today. I'll add to that a second component. That is the challenges that faces organizations is when going to do usage based monetization. Not all organizations actually understand their own enterprise architecture, meaning that they're not a hundred percent sure where the data in their organization resides, what the authoritative source of truth is. Or where the systems that are feeding that type of telemetry and data, which is invaluable for a number of other reasons beside pricing. And hopefully we'll get into those discussions today. But they may not have a clean architecture. They may not have an enterprise architect. They may not know where the data resides within their own IT environments. So that notion of being prepared to establish a pricing model that is competitive and tied directly to where customers see value, understanding where the data resides within your organization to be able to execute against that, and then having the financial savvy within the finance department to be able to model and forecast accurately against a usage or consumption based model are three of the principle challenges that we'll encounter when we're engaging with clients and something that we can help them resolve.

Dan Balcauski: 13:41

And you did an excellent job at the end there summarizing, but I'll just double click on all those points. So what I heard was really understanding what is the point parts of my offer that really drive value and tying that into pricing, understanding the technical infrastructure required to successfully turn the pricing model, the pricing plans into dollars and cents, then the organizational capabilities. To make sure that the stakeholders who have responsibilities, I've gotta make sure my revenue recognition is correct and all my forecasting is appropriate. I gotta make sure my salespeople are comped correctly on, on what they sold. Like all those things are different areas where companies struggle as they start to lay this out. I want to just really quickly get to ground truth on terms.'cause we've kind of go, gone out of the gate with this term usage-based pricing. One thing that frustrates me to no end is that even among pricing experts, we are very inconsistent across ourselves with terms. I try to at least be consistent in the terms that I use. What does usage-based pricing usage-based monetization, mean to you as you're sitting at in larger sense?

Adam Howatson: 15:07

Yeah, so usage based pricing can encompass a variety of different pricing models, and it's not an all or nothing proposition. There'll be a lot of vendors out there in the core. Quote to cash ecosystem and in and around billing and pricing in particular, who will think of usage-based pricing as X times Y equals Z and here is your price. And that's not even beginning to scratch the surface of what usage-based or outcome-based monetization really is. If we think back historically, when I started my career you would sell a piece of software once. Then you would provide a perpetual on-premises license to the person who bought it. And I don't know Dan, how old you are, but you may remember this too.

Dan Balcauski: 15:46

That's how I started.

Adam Howatson: 15:47

there you go. So we're of a similar vintage and that's how you sold software. And attached to that, you would've a 20 or 22% maintenance annuity that you would attach to that one time license sale. That would keep the customer in current versions of the software, it would allow them to phone your business for support if they required it. And it would pay for the ongoing care feeding and support of the solution to ensure that the vendor was there for you if you had any challenges with it. For the vendor though, it meant that they really could never, just in terms of market dynamics, could never really take an ongoing revenue stream past that 20%. And they had sold the full entitlement to their software, to that customer in perpetuity. We evolved from that into the notion of basic subscriptions, and I would say 10 or 15 years ago was the big push to recurring revenue. And I was, mid-career when we all did the big push to recurring revenue and all of the top tier one organizations started to make that shift. And I remember determining what the inflection and break even points were if you started to do an annual monetization versus a big one time upfront license sale. How do you get to your three to four year payback? How do you ensure to get the customer to renew? And then subscriptions started to run rampant. They were a good model. People liked them. They liked the recurring revenue, they liked the predictability, they liked the opacity 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 you use, no matter whether you're using it or not, pay that amount every year and we'll be very happy the subscription. Economy is now table stakes. And to differentiate because everybody's got subscriptions again I'll come back to a very colloquial example in our consumer lives cable television. I cut the cord on cable television 15 years ago, and I think the world achieved peak cable in 2010 or 2011, and it's a multi-billion dollar a year industry that has been on a straight decline since then. Why is that? Because people don't see value in paying three or$4,000 a year for 800 channels that they don't care for and two that they want to watch. It's a ripoff, right? So I think that would be the reaction by a lot of consumers. In order to cut through that, we started to see streaming services emerge and eat the multi-billion dollar market share of those cable companies who are offering a locked in opaque flat subscription to a service 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 of those services and content houses are based on a flat, opaque sub subscription fee as well. It's less than a cable, but I'll give you access to my catalog whether you watch it or not, for x dollars a month, and I will increase that almost bi-annually. It seems into perpetuity and over the last few years we've been seeing those subscription rates come up and come up from streaming providers. So beating the locked in basic opaque subscription of the cable companies came a more translucent version of a subscription from the streaming houses that was a fraction of the cost per month. They drove huge market share adoption via that, and now we're sort of reaching market saturation. We saw, I believe, earlier this year that Netflix started to lose subscribers for the first time ever because they've reached a saturation of the market where almost every household has got a Netflix subscription. So now they have to look for alternative methods through which to generate revenue, which seems to me anyways to be an constant increasing of that opaque regular subscription fee challenges now that I believe I'd seen a report earlier in the year that most American houses now have nine or more of these flat subscriptions. Well, holy smokes, we've come full circle and it's now more expensive than cable television again, and we're entering into the usage economy where differentiation, much like the streaming providers were able to eat, the cable providers, I would contend that the first streaming service who says, I'll just let you put a hundred or$200 on account and I will deduct from that bucket. Prepaid as you actually consume content. And if you're tired of my catalog because you've watched everything, that's okay. Don't terminate your relationship with me. Don't cancel your payment details. Don't delete your subscription account. Just stay with me because you've prepaid it and I'll deduct it as you use it, consume it, and really get value from it. The first streaming provider who does that has gotten my business because I'll move over there and I can put money on account and I can come back to it and I can consume as I see value in it. Oh, the new season of the television show I like to watch is out. I'll come back to that provider. I'll start to consume data. It's a big commercial differentiator because I don't want to carry nine subscriptions. And in fact, what a lot of consumers will do is go and watch the catalog of the provider that they like for two months. Watch the new version, the new season of the show that they like. Cancel that subscription, go to the next content house and subscribe for three months. Watch their catalog. Cancel the subscription, go to the third one for the third quarter of the year, sign up for three months, cancel the subscription. There's a cost to those companies every time a client disengages with them commercially, there's a cost when the client has to re onboard. And if the trend is pervasive where I go and I watch a few months of content and I cancel and I'll come back to you in a year when you have some new content that's worth my coming back to watch, there's an expense to it. A usage-based plan I would contend would allow one of these streaming media houses to hugely differentiate against their competition. So that's my colloquial example of how usage-based monetization can deliver true value to customers. How it can help to differentiate in the same way that we saw basic subscriptions for services that provided discrete value to you, differentiate from the large locked in multi-year cable television plans. So too, I would posit will we see the first usage based monetization of a media clearinghouse differentiate, differentiate them from the rest of the competition and help them to retain customers, help them not to have to spend money to terminate commercial agreements, to manage PCI data to sign customers back up and reactivate them to process credit cards a second time and pay the transaction fee for it. It will help them to retain the number of active subs they have as well. So those, that's just a basic example, but one that's near and dear to my heart and I think to most, because we all sign up to these sorts of streaming services that demonstrates the shift from the one one-time sale, the multi-year lock-in the cable package to the subscription economy, which is now 10 or 15 years old. And we're all getting to a state of subscription fatigue in our day-to-Day lives. And it's the same in business. You want me to pay$20 a month and I haven't viewed your service in four months, I'm just gonna cancel. I'll come back when you have some new content. To the next evolution, which will be usage or outcome-based monetization. I'll retain a commercial relationship with you dear vendor, but you charge me when I get value from your service and I'll stay with you forever. And I think that's a, a good example in our day-to-Day lives of how this style of monetization is going to help organizations to differentiate both in B2C and in B2B.

Dan Balcauski: 22:55

Well, it's not just a good example. I'll quote. Tony the tiger. That was great. Example there and I think it was it Jim Barksdale who said, there's only two ways to make money in business, bundling and unbundling. And so we went from the one giant cable subscription to a 20 paying for 20 streaming subscriptions independently. And I don't, I'll leave it as an exercise to the reader to decide if you're better off today than you were now. But I could see the appeal of the I will pay as I get value versus this opaque fee. that was excellent overview of kind of this transition from kinda the perpetual world of subscription into this world of usage base As we think about. I hear these terms thrown around in the industry and I'm a interested observer, but by no means an expert of what people might label as rev ops or monetization infrastructure. And there seems like there's any number of components, but you know, if you're just kind of casually looking, maybe everything gets lumped under, oh, these are billing platforms, but they do a whole lot more than billing. And it's like, okay, like I understand that, customers have to get sent a bill, right? Or maybe we have to do some metering. I guess, can you break down what's actually involved from an infrastructure perspective when you think about turning usage into revenue? Like what are all of those components in the landscape that companies need to be thinking about?

Adam Howatson: 24:18

Yeah, absolutely. So you're going to have very likely you're going to have a quote to cash infrastructure in place today, and that will include things like your customer relationship management, your configure price quote, your enterprise resource planning system, and you may have some form of billing system in there today. Doing things like generating charges and doing invoice presentment so that your customers. Get a bill and they know what to pay. And that can take many forms. When we think about usage-based monetization, there's a couple of extra components that have a high degree of technical depth in them that are necessary to be able to do it at scale. So at LogiSense we always say it's all about the data and it's all about the usage data and some of the components that help to distinguish a platform that is a traditional quote to cash cycle onetime transactions, onetime sales, flat transactions to usage based monetization is the capacity of that platform to do what is known as mediation or data transformation when we're monetizing or rating information, it could be data coming from a network switch within your infrastructure. It could be if you're a SaaS vendor, it could be your own APIs. Call the billing engine, call the monetization engine and say, Dan has consumed two units at this time of day in this location. Please rate it and add it to his bill. It could be to aggregate data because your core systems generate all of the usage data, but send volumes of data so large they're prohibitively expensive to ingest and deal with all of it. So being able to aggregate data to what's relevant to conduct the usage based monetization in real time is very important because if you want to conduct a calculation on a hundred billion events a month, that's a lot of data. That's a lot of compute capacity. That's a lot of storage if you can. Disregard what is not necessary. If you can transform the data into what is necessary in the right format, and you can ingest data from multiple sources, you'll have a much more efficient and effective method of usage-based monetization within your organization. So part of the platform that differentiates a real usage based biller or mon or monetizer from a standard one time sale or flat subscription type of biller is this capacity to conduct data transformation or mediation at scale. The second one is aggregation which I had mentioned, and the third one I'm gonna call monetization flexibility usage-based monetization is not an X times Y equals Z exercise. When you start to think about the layers of complexity, and in particular in B2B use cases where I. A company may commit to onboard or 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 that amount that they had contracted to when they signed up? Can those terms be applied automatically? If you are a B2B company and sales goes out and makes a deal every time you do a deal, and this probably happens at every company, not just the large ones, but sales will get very creative sometimes, and sometimes they'll sell things that don't exist.

Dan Balcauski: 27:28

No, no,

Adam Howatson: 27:29

it never happens. Part of a usage based monetization system is in its capacity to provide a price book capability to provide a monetization capability when designing products or customizing contracts. To support any wild commitment that sales may make, whether that's termination fees, ramp up incentives or penalties, volume or step discounting. The capacity to do prepaid draw down consumption buckets and to allow a customer to deplete that bucket across your entire suite of are all various components that help to differentiate a usage based monetization system or billing engine from a traditional one time or flat subscription system. And some of these elements here I'm describing, I'm it would be an hour long discussion just on its own, but you can imagine the amount of complexity when you start to layer a prepaid bucket. 70,000 SKUs in a catalog that can all deplete from that bucket. Discounting based on the rate and volume at which you deplete those credits, penalties or incentives depending on how quickly or slowly you go. And the capacity to allow customers to change their entitlements to top up a bucket, to consume additional services to span billing periods in their consumption of services becomes really a mathematically complex process. So a usage based monetization system is gonna contain those elements around mediation, data transformation, aggregation. Rating in a very sophisticated price book with a lot of monetization flexibility. And it will also probably be a very API forward modern platform with a queuing architecture to help you accommodate massive volumes of telemetry that's coming into the system. You could imagine a company with a hundred thousand or 200,000 customers would create terabytes or petabytes of usage telemetry that all have to be processed, aggregated, de-duplicated rated, assigned to a customer, and built into a bill with all of the discounting and terms applied to them.

Dan Balcauski: 29:36

Mm.

Adam Howatson: 29:37

I could go on, as I say, for, ad nauseum about this topic, but there's a few technologically sophisticated elements that really do differentiate a usage based monetization platform from a standard billing platform.

Dan Balcauski: 29:48

So that was a really excellent overview. Adam and I just want to hit on a couple of points. So, there's the kind of front end of the sale. So you mentioned things like C-R-M-C-P-Q, quote to cash. I think you use the debt general umbrella term there. We have to. Present a bill, we have to generate a bill and be able to present that to the user. There's this whole idea of what you term mediation, data transformation, being able to find a usage event. How much should that be charged? And I think one interesting among many interesting things you said, there is a complication that when you're first. Looking at this, you described it I think very well, where it's not just an X times Y'cause I think a lot of people get into that. It's like, yes, that's the, that's a base case. And maybe if you're, first approaching this, you're thinking like, oh, well we just have to do that. That doesn't seem so hard. But then you meet the reality of, oh, we want to have contractual commits and we want to have on demand, if they go over their contractual commit, or, all of these different use cases and corner cases that may come up that you don't necessarily think of when you're sort of first approaching this whole area. I imagine, you at the beginning we were talking about the challenges that people are dealing with when they, they come to LogiSense. And I imagine that, there you kinda said, well, people are thinking about moving into usage base, but I imagine some people have long before they come knocking on your door, have said, Hey, we're trying to do usage base. And maybe they've tried to. Build their own systems to handle this and then realize like, oh, this is actually way more complicated than we thought. Or we wanted to add this thing and we realized that breaks everything and so we can't retrofit it. Or, maybe the systems are old or inflexible or they cobbled it together. Maybe all those engineers have left for greeter pastures and it's not, I've talked to a lot of these engineers. It's not their most fun job. If they're excited to work on new product capabilities where they get put on the monetization infrastructure. So you gotta make sure that they stay happy. So I imagine you see a lot of companies that, especially those are trying to do it at scale and have maybe tried to do this themselves or with other systems. I guess from an infrastructure perspective, where do you see companies really sort of run into challenges when they're coming to LogiSense?

Adam Howatson: 32:03

It is as they want to, as they start to uncover the various complexities around usage-based monetization, and around the levels of abstraction that exist within that computational flow. We're gonna ingest all of these events. Some of the events may need to be mediated to form one event for billing and rating from seven different usage records, as an example. And when you start to overlay the discounting price book and go to market, literal pricing, contract terms and contract enforcement to it, it is a very as I'd mentioned, a very technically complex thing to be able to manage. So as companies build this out and they start with their X times Y approach. Looks great. As they start to want to price around outcomes, as they start to want to offer discounts, as they start to want to manipulate that pricing, it becomes clear that this will become an extraordinarily expensive, long-term endeavor to build your own. I would liken it to a company starting off and going, well, this is easy. I can just count the receipts at the end of the day, and all know how much revenue the company has made. Why don't we just build our own ERP system? Well, probably a year or two into that journey as your company begins to scale, as you get more customers, as you serve more geographies. That's going to, you'll be disabused of that notion. And very few companies create and manage their own ERP system. And I would liken it to that in a degree that there's a huge amount of complexity and being able to deal with the scale in particular, LogiSense itself primarily serves the upper end of the mid-market and enterprise customers. And just focusing on the hyperscale required to ingest the volume of events that some of the world's larger organizations generate is in itself its own technical expertise, its own technical specialty. So I think as soon as you start to get out of the, it seemed like a good idea on the first day and in the first month, as sales has weighed in, as finance has weighed in, as the product teams have weighed in, as the market has weighed in, we're now starting to realize that building and maintaining the system is going to cost us more than we're making off the product. So I think it's an area like ERP, like CRM, like CPQ, we're at a certain size of scale and sophistication. It's way better to have an expert vendor come in and do it. With an economy of scale, that will make it much simpler for your business in the long run.

Dan Balcauski: 34:09

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 gets really complicated really quickly, but I'm in a position where, you know, the. Maybe the executive team doesn't quite understand that yet, and they're just like, oh, how hard could it be? Like, we're gonna, we're gonna do this, usage monitoring like what are the questions I can sort of put in front of everyone to help them come to this, realization that this is this is gonna be a long road because I imagine it, I've been on these discussions as a product leader before where, you start getting pulled down a path whether it's, hey, can you build this dashboard for the support organization so they can have this sort of view into what's going on in the product usage data? So when a customer calls, they could see it, right? And you're like, okay, I could, or we could have a BI tool that is supposed, is purpose built for that. And we have the data intelligence team sort of build those dashboards versus having product engineers, do this right. So maybe there, there are. They're used to sort of handling that, but when it comes to billing monetization just maybe they're, maybe they get swept up and they, they don't know how to sort of make this case effectively. Are there ways you could help them, like sort of, be advocates in the organization for, Hey guys, this gets more complicated than we, we may think as we want to start adding in these commercial use cases that everyone's not thinking about right now, but we'll be mandatory that we add in in 12 months.

Adam Howatson: 35:33

Absolutely. As you begin down this journey, it's not creating an algorithm that is X times Y and then we'll pipe that into the ERP system. You're gonna have to start to think about billing itself, invoice presentment, invoice templates, customization, multi currencies, internationalization. Taxing requirements, revenue recognition requirements, having the hooks within your system to identify the key points in time and key events around which your rev rec is structured absolutely vital, and the billing system must contain that. You must have the concept of a mediation or data transformation engine that can operate at. Billions, tens of billions, a hundred billion events or more in terms of scale and capacity. You must have automation around enforcing every one of the contracts that are in your system. And in a B2B scenario, as we say, is sales does, let's make a deal on every deal that's over a million dollars in a RR. The customer gets some purchasing power in that and they get to select some terms. Are you also going to build an automated contract enforcement system? Are you going to build your own taxation engines? Are you going to build your own customer experience portal? Are you going to build your own payments integration? Are you going to build your.dot? And I can go through the entire stack and what might start out as a, well, this is really simple. It's just X times y and we'll send that over to the ERP and we'll issue a bill. There are eight or nine different modules. Everything from ingesting and managing the usage events to billing, rating, mediation, aggregation, invoice presentment, customer self-service portal, taxation, payments, processing. And you'll see that it starts to grow into a very, very large project, which can't be a recreational hobby of somebody on the IT or IS team because it's a FinTech solution and you can't get it wrong. So you're gonna have to invest in a quality of quality quantity and quality of. Engineering quality assurance and product management that will make this a, an endeavor that will be an expensive one for the organization. And as you say, if you lose a little bit of expertise on that team, if you never had the expertise to start, you could end up down the garden trail, millions of dollars spent and still not have a serviceable solution. So it starts to become complex enough with enough modules to really make it work right, to be taxed, to be compliant, to be accurate, that it will far outweigh the benefit that you would get by just going to a vendor who does this full time for a multitude of different clients.

Dan Balcauski: 37:56

Well it, this reminds me so much.'cause, so as an engineer or even as a product leader, you so rarely have to interact with your finance and accounting teams. Unless something's gone terribly, terribly wrong. That's usually not a primary stakeholder, but it is here. And it reminds me of a discussion that's been going on for years in the BI space, which is every, like, it's the Monday exec report meeting, and everyone 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 to finance and auditing books, you can't all have different answers. Where in product sometimes it's like, ah, did we get 10 new users or do we get a, 11, we can hand wave it, it's close enough for the decisions we have to make. And the finance people are like, no, no, no. I cannot go in front of our auditors and say we might've had 10 customers or 11 customers. I have to know which one of those it was and be able to point to exactly that. And you could see how that problem with all the other contexts you've very well elaborated. It gets, much more beyond even the number of customers is like, okay, how many billable events? When did those events occur? What was contractually? What were they obligated to? Can we prove that all the way down the line so when the auditors show up, we can point to, no, this is the revenue we actually had and this is why we're justified. Right. And also to the customer, because I think that's where a lot of folks maybe get into problems they didn't expect was like, Hey, customer gets a surprise bill and they want, your. They're, you might think the auditors are friendly to deal with, that the customer is gonna bill, they don't expect, The, you might rather be

Adam Howatson: 39:31

we, we, Half jokingly, w we half jokingly say that and I think you've hit the nail right on the head here. You can send a client a thousand bills and they'll pay them dutifully, and you'll never hear from them and you'll never get permission to speak to them. But if you get the bill wrong once and have a negative commercial interaction, you'll hear from that customer the next day. And there's a lot of truth in that. So is it something that you want to trust to the experts who, who test rigorously, who do this for a number of clients? Is it something you want to build yourself and maybe you get all of the bills wrong once or twice? That's something that, that people certainly have to think about when they're choosing buy versus build decision in this space.

Dan Balcauski: 40:08

Well, I really appreciate your elaboration of all the technical component that are required to, to build a proper monetization infrastructure. And, one thing I might ask you, Adam, is, much like I said, my I try to help my pricing peers give more consistent with their terminology. I hope that you could go back into your world of monetization infrastructure with your peers and make everyone more consistent because, I'm a very interested observer and I get super confused. Go website to website because it's very difficult to wrap your head around it. So hopefully our listeners got a little bit better sense from this part of the conversation and. What are all the components that are involved and no, it's not just billing and it's not just payment processing. There, there's so much more to this beyond the technical challenges we discussed, what are the, in your mind the strategic decisions companies need to make or maybe you're seeing it the worst case aren't making when they think about, going to usage based pricing.

Adam Howatson: 41:01

I think the biggest decisions are around product market fit, and I think that's my top advice to anybody who's contemplating their commercial strategy, and particularly as we're starting to emerge into this world of outcome-based monetization, you have to have this right and you really have to understand where your customers see value. With systems like ours, you can price around any outcome that you like. It can even be an algorithmic outcome. And we're seeing a lot more of this and a lot more of this notion of outcome-based monetization hit the market, which is a subcategory of

Dan Balcauski: 41:34

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

Adam Howatson: 41:47

Yeah I would coin outcome-based pricing as a subcategory of usage-based monetization, typically where you're gonna have an abstracted concept, which is, rather than me just selling you a kilobyte of data, which can be clearly measured, is empirical. And we all know what a kilobyte of data is. It may be an outcome that is somewhat abstracted and may require some algorithmic attention to derive that outcome and price the solution for the client. So let me give a few examples that are quickly emerging as popular and are the topic of discussion in the industry. Open ai. Pretty familiar to everybody, consumes tokens based on the size of the context set and some other math that not everybody is aware of outside of open ai. But everybody is familiar with the fact that you will go consume tokens to use generative AI models, whether that's for text or images or otherwise, and that's an abstraction, that's an outcome-based monetization, Salesforce with agents force has done this pretty clearly where a resolved ticket is$2, and if the AI bot is able to answer a customer support question and resolve it successfully for you, that outcome costs$2. Sword Healthcare, AI based healthcare outcomes where organizations who have better wellness plans and drive better employee health get better rates and better outcomes around their healthcare plans. Hitachi Rail is another great example. I believe this is in the uk. Hitachi isn't selling the train to the municipality or to the regional government who's using them. They're selling. The outcome of the train trips, did it arrive on time? Was the rolling stock available? What was the temperature of the cabin for the trip? Did it go well? Did, was there any issues? Was there any maintenance required? If not, you're gonna get a full charge for the successful rail trip. Why is that important? Because Hitachi is then, as the vendor required to deliver a quality of service to the client and only gets paid when they do. And for the client, though, they may 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 upfront capital expenditure. I'm sure there are conditions around the contract there. But what it really means is that they're going to consume that rolling stock and use those services, and the vendor is paid as those services are delivered on time to the constituency. So I'm not doing a massive capital expenditure upfront. I'm paying for an outcome-based price, where my citizens get trained, trips on time in a comfortable car. Other examples, 11 x actually, LogiSense uses the services. For AI based a DR meeting bookings. And if the AI account development representative can go out and secure a meeting with an interested party or a prospect, the vendor gets a small payment for having booked that meeting with their AI tool. Probably the most popular examples of the style of monetization, our Amazon web services, and that's, very a basic type of usage-based monetization. You make a commitment upfront, you can deplete that commitment across their entire portfolio of SKUs and their marketplace and partner applications. Or in the case of Amazon's mechanical Turk, I don't know if you're familiar with that, but mechanical Turk is human workforce automat automation with monetization in the same style of marketplace. Call fast with appointment booking, phone screen AI with phone screenings, riskified with fraud free transactions. All of these are examples of outcome-based monetizations, which are quickly emerging, but require that deep understanding of product market fit. To tie it back to the original question, and what would I really call out, is that as we strive for and arrive at this market that is emerging with these outcome-based monetization models methods, deeply understanding whether your customers see value in the trains running on time, the appointment getting booked, the phone screening being completed, the transaction being fraud free, whatever the outcome is that's most important to your customer base, understanding that deeply before you embark down the change in the commercial model, I would say is probably number one that that organizations should be considering as they get into this journey.

Dan Balcauski: 45:44

So many good examples of different outcome models that you just listed. Obviously that you live and breathe this every day you did not come unprepared with specifics. Well, as kind of commercial leaders, right? Maybe the CEO, maybe it's someone else, on the team who's kind of thinking about this transition from maybe what you termed before. Is this more opaque sort of all you can eat subscription pricing to a usage or outcome based model. A lot of these folks, they have concerns that, if we make this transition I had this nice. Predictability with my revenue previously. And now you're telling me that I only get paid as my customers actually use the product or get, some successful outcome outta the product. How the heck am I supposed to forecast that? Are there ways that you think that companies can kinda wrap their head around this concern? Are there, different options or approaches that could be considered? Is this, I mean, what, I mean it is a legitimate concern, but like, I mean like how do you think about addressing that?

Adam Howatson: 46:53

It is absolutely a legitimate concern, but I think it's ba it's a concern that's based on a bit of a misunderstanding around usage-based monetization, and again, it's that inclination to immediately go to the oh x times Y equals Z, and I'm never gonna get paid if I don't. Push a bunch of services and they, if people aren't actually using my product, it's another discussion. If you're concerned that you won't make any money unless people are using your product, but we could leave that for another session. So it's not an all or nothing proposition. And there are several different archetype of usage based monetization that can be implemented and must be considered depending on what industry you're in, the type of product that you sell and who your customer base is. You've got the one time perpetual sale, a perpetual license. I sell you a pencil one time you own the pencil. Our business is done. A fixed fee type of subscription, the opaque flat subscription of 10 or 15 years ago, as all software companies were pivoting into the recurring revenue model, which has now become commoditized and is no longer a differentiator to implementing. Monetization elements like stepped or dynamic discounting based on the volume consumed to offer prepaid options of consumption or usage based drawdown, which means that you actually take the money upfront as the vendor, so it becomes a lot easier to recognize and to model what the customer will spend'cause it's already spent with you before they even start drawing down, has implications on revenue recognition, but you've got the cash in hand on day one into structures which are very popular, like the concept of a minimum commitment plus usage model. Allowing the customer to make a little bit of a bet on how much they're gonna consume for a better discount on the overage and consumption units on top of that base entitlement. And that allows you to have a little bit of stability with a minimum commitment and allows the customer to make a bet on how many of their services they're gonna consume. To get that greater discount if they feel that they're gonna get there all the way through to a full usage base or outcome-based pricing model, which is 100% dynamic. And I think that's the one that most people think, if I'm gonna do usage, my only option is to go from a binary one-time transaction. I sell you the pencil, you own it to a fully usage based outcome where I only get money if you're literally writing with the pencil at that moment in time. And that binary point of view, I think causes a lot of the heartburn. And if I switch to one of these models, I won't ever be able to forecast again. It's simply not true. And the vast majority of organizations who implement. A usage-based model will gravitate towards something like a minimum commitment plus usage model, or they'll gravitate towards an outcome-based model. And so predicting and forecasting in a usage-based world isn't this scary, void of knowledge that I think most people assume it is. And we're gonna have wildly different outcomes next year as a result. But it does require the product teams and finance teams to sit down, which pre usage based age, perhaps they didn't sit down often enough, and talk through what the revenue model is today, what the tolerance is for variability in favor of growth, and to decide on whether we need to stay as a fixed fee type of model. Whether we can introduce flat subscriptions, whether we want to move towards outcome or algorithmic pricing, whether we want to introduce dynamic pricing, whether we want a minimum commitment plus usage so we can have a hybrid and best of both worlds, or perhaps we want to fully commit. To an absolute pay as you go usage model. So the guidance I would give there is don't be afraid, but get educated because it's not an all or nothing proposition. And LogiSense itself we drink our own champagne and our customers are on usage based plans, which is a minimum commitment plus usage. We will typically forecast a year in advance and we'll end within 1% of our forecasted number each year. So it's absolutely possible, and for those who are interested, may wanna meet with my head of finance or there could be a good podcast in that as well. But it's absolutely possible to forecast accurately based on consumption trends. The key to doing that is to establish the right type of model with the right elements of usage that is right for your business and for your product.

Dan Balcauski: 50:52

So I love how there's a spectrum of options from sort of your traditional subscription on one end, the fully pay as you go usage or outcome based on the other end. And then there's a range of intermediate steps that you can take from, things that look like, subscription plus pay as you go hybrid to pay as you go with contractual minimum commitments et cetera. I guess staying on the extreme end of that I, it is interesting'cause actually, I don't think I've asked this question of anyone who's actually running a billing infrastructure company. Like I, I assume you do have customers that are on that extreme end of pure sort of pay as you go usage. Is, I guess, do they just find ways to just better forecast? Like, is there, even in that model does the reality meet the expectation of just, well, it's just gonna be totally throw our hands in the air. We have no idea because we don't have the subscription model. Like, I imagine you've had conversations with some of these customers who are in that space. What is the reality of that?

Adam Howatson: 51:50

It won't shock you to know that there's not a lot of businesses in the world that will do a throw our hands in the air and whatever happens, happens sort of move. So it is usually a little bit better contemplated than that. But those organizations will sit down typically over historical telemetry, consumption, seasonality, time of year, location, and other external factors. And we'll typically have multiple years of that data. If you just started the company last month and you're gonna do a, we'll throw our hands in the air and we'll see. That's fine. You weren't forecasting to start. If you're a larger business who requires predictability or a public business who requires predictability, it's a good exercise to go through and look at the consumptions of your product if you have that data available, or to implement a system that is capable of monitoring that telemetry for a period of time before you make the switch. And if I can go back and analyze two or three years seasonality, I sell consumer electronics and connected devices. I know that between November and December I do 70% of my sales for the year. I know that typically, that consumption happens at this rate, at this time of year, I can make a more salient prediction as to what my revenue will look like under a purely consumption based model in the coming year. So it requires a little bit of modeling. If you're making a switch from one time sales all the way over to the extreme end of the spectrum, 100% usage based monetization. Have some historical data to review and ensure that you can model accurately and again, that you're selecting the value metric, the price point, the discounting plans that will get you closer to and remove some of that variability, if that's a sense, if that's something, a point of sensitivity for your business so that you can model accurately and you can implement a usage-based monetization plan in increments as well. In fact, it gives you something to go back to market and talk about with some frequency. If you implement a variant of it and come back in a couple of quarters, refine it, maybe go a little bit heavier on the usage side, something to go back and talk to your customers about. We now have a new plan. More in your favor. Sign up for additional services today. So, I will

Dan Balcauski: 53:48

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

Adam Howatson: 53:52

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

Dan Balcauski: 54:08

A bunch of really important points there. So one is if you, in your finance group if you don't have a statistician you probably don't even know full blown data scientist but at least a statistician on your team.'cause you could start doing some pretty nifty modeling there. Assuming your usage data is correct. That also is a mandate that before you do this switch, you should probably be collecting, monitoring and making sure your usage data is clean. Because I've seen plenty of situations where we start looking at the usage data and then mapping it to what we think it means and realize that's not the case and that have engineers have to go and clean that up. So, the more you could do that ahead of time of collecting the data and having that monitored, but then also getting it modeled. And then, I was obviously joking there because it's a friction that I run into constantly in my world where, people get so nervous about pricing and packaging 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 stuck with it for the rest of eternity. And when there's nothing else like that. in business, but for some reason when it comes to pricing and packaging, people, are, get really concerned about it. So, you do have the ability to learn and iterate over time. So really love that advice as well. We talked a couple of times about, perhaps in the old days, the the engineers the product people should be sitting more in the room with the finance people. I guess as you think about kind of the broader organizational changes that need to happen as people embark on these usage-based monetization or outcome-based monetization world, like what organizational changes do companies need to make to successfully, implement these.

Adam Howatson: 55:42

Oh, where to begin? I think we could do a whole session on this one, Dan. I'll call a few highlights out. Your sales organization is gonna be affected by this. How do you compensate differently? Moving from a, I have sold you an opaque four year structured contract. You can't deviate a dollar. Then I'll give you a percentage commission on that. That's today's world. That's easy. If I sell you a usage entitlement and your revenue is going to depend on your consumption of the services, the sales compensation ought to change, right? To realize that so that the business isn't paying out a huge sum early on a customer, which may or may not stay with the business and may not, may or may not be a prolific consumer of those services. So you'll have to think about sales comp compensation usage-based monetization does make the sales cycle shorter in that you can start to deliver value to customers and get them access to the product without them having to make a multi-year large upfront capital investment. Why don't you just try out my product? Let me show you how you can get value out of it. In fact, it's usage based. I'll tell you what, I'm gonna give you, Dan, 50 free credits today to go achieve 50 outcomes with the product and then come back to me and we can talk about whether or not we want to do a deal. And it almost hint at a product led growth and being able to get the product to the customer earlier in the sales cycle and have them delivering value right away. It changes the structure of the sales discussion, shortens the sales cycle. It affects sales compensation, it makes the customer success side of the business. If you think about the sales funnel as an hourglass and at the thinnest point of the hourglass, the waste of the hourglass, you make a deal with the customer. and they've committed to use your product. The bottom part of the hourglass where you now onboard and enable that customer and want to see the customer getting value out of your product, want to see them using your product, want to see them consuming your product so that you can continue to grow within that account. Well, that becomes much more important to ensure that your customers are getting value to ensure that they're onboarded properly, to ensure that they know how the pro platform works to ensure that they're getting value, because that's your chance to start growing the account. You've shortened the sales cycle. You've made it easier for sales, you've given value to the customer earlier in the process. You've asked for a smaller commitment upfront. You're leading with your product, you're leading with access, you're leading with value. But now, once the customer is on board and using the product, maybe in some small capacity during the sales cycle, having those training and enablement teams, customer success teams piling on to ensure that your, the use of your product proliferates within that account. It becomes more important than in the fire and forget one time sales cycle. So that coupled with the sophistication that your pricing product and finance teams will grow through together as they start to speak each other's language, which I think is a vital exercise. Whether you're selling in a usage based model or a one time fire and forget model, the usage model perhaps just creates a little more urgency around ensuring that the functions of your business are speaking with each other and there's gonna be other benefits that you get outta that. Besides pricing, by the way it becomes much more relevant. So sales and sales compensation are things you'll need to consider. How you approach customer success is something you'll have to think about how you market the product when you can provide access to a prospect for pennies or dollars and actually get them onto the product. Get them to receive value from your product before you negotiate the deal. Change is your dynamic as an organization when you're selling. You have more pricing power when a customer is getting value from your product than you have when a salesperson is telling them how much value they're gonna get from your product. Those are two fundamentally different points to negotiate from. So, as I say, I could go on for ages and ages, but. It'll reduce your sales cycle, change your sales comp, it'll give you different access to pricing power at the time of the commitment or the deal. It will shift the risk a little bit from the customer to the vendor to shorten that sales cycle, to get them on board, to get them receiving value. It will simplify your procurement process on the customer side. If you're using something like a prepaid consumption drawdown bucket again, this could be a much longer conversation. But Dan, if we just have an account together and your purchase order, your contract is for a prepaid bucket of services, you could top that up with a purchase order. You don't have to recontract with me to buy an additional product because your bucket entitles you to use any skew that my company sells. So I no longer have to fight with procurement to get you to top up or to enter into your next agreement with us.'cause it's just another. PO on the same MSA as an example, You're gonna reduce your DSOs, particularly with prepaid buckets'cause you're getting cash upfront. And it's important for companies to know that it's not an all or nothing proposition. But in terms of the immediate impact and most impacted organizations, sales, customer support, pricing, finance, and product are gonna be the five main organizations sitting around the table.

Dan Balcauski: 1:00:38

Yeah. And I think there's a so much good things that you mentioned there and when I think there's a probably a slew of companies that maybe were out of the kind of pure software world that are going into sub, into subscription and maybe they're jumping completely skipping subscription into just usage based pricing directly. And, we had to learn a lot of hard lessons in the software 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 at the time, but we all went from product companies to services companies. This is why you see the rise of functions like customer success. You see the rise of rev ops and DevOps and product ops. All these functions that have to stitch what were traditionally organizationally siloed teams that just had to do their job and get the product out the door and now needed to stitch together for the whole workflow.'cause you're delivering a service. That's producing an outcome. And so you're as you build that responsibility, you have to make sure the cohesive whole is all geared towards that and works together. And then, the other thing you mentioned I love about the sales and customer success there, we used to have an old joke in the perpetual license world. You ask a sales guy who's your favorite customer, they say the next one. Because the LTV they got on that sale was 90% of that whatever that customer was gonna buy from them. 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 move on to the next. And that doesn't exist in the subscription world. It definitely doesn't exist in the outcome world. So that handoff of making sure that the incentives are aligned for sales so that they care and are engaged in making sure that customer's successful long term, make sure the handoff into onboarding, training support and success is an ongoing thing.'cause, I was going to comment earlier when you were talking about those break even models as we transition from perpetual subscription, I apologize, I didn't give a trigger warning for anyone who had to go through that period. But it, it brought up back in the, those models, it, they inherently required that the customer sticks around for. Three, four years and is successful over that time so that they renew on their annual basis right. And that's even more extreme in a usage based world. So, a lot of great points that you brought up there. As we near the end of our conversation, I wanna kind of pivot towards like, how do you see this evolving and the monetization over the next few years? I know we've talked about things like ai things like you're coming back from your user conference and a lot of interesting stories of and examples that you've brought to this conversation of folks that are really kind of testing the bounds of what's possible with usage based, outcome based pricing. How do you see this world of monetization and usage based pricing evolving over the next several years?

Adam Howatson: 1:03:12

I think it's going to become far more pervasive and we're starting to see a lot of top players in the industry moving to this style of monetization. It's relevant in our consumer lives, right? You I'm upset spending$4,000 a year for cable television that I don't watch, and I would be upset in business too if I was paying a fortune for something that my company doesn't use or doesn't need. And the concept of this opaque lock'em in and take every last dollar you can and. Forget about'em, right? I don't like you said, oh, I sold'em the software. I don't care if they use it or not. That's a notion that might have been successful 20 years ago, but it's not anymore. And just philosophically, certain industries and certain players within industries are starting to reach the saturation point, the maximum market potential based on the number of human beings in the universe. That's a profound statement. We have large organizations who are getting to that scale of operation where there aren't additional humans for them to sell to in the market. So they must start to differentiate through retention, through upselling, through their commercial models. And gone, I think, are the days, and particularly after the economic, monetary and fiscal pressure of the last five years. Again, both in our consumer lives, we've all seen the inflation running rampant. We've all seen the interest rates go up and in our business lives where it's not acceptable to go to a CEO or a CFO and say, I'm spending a hundred thousand dollars 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're getting value out of it, we're not renewing that. So being a vendor, it's gonna become more and more important to have a commercial model that not only differentiates you against the competition, but also demonstrates that you are the sort of vendor who cares whether or not your customers get value out of the product and cares enough that you'll charge them based on the value that they're getting out of the product. Because I think we're getting to the end of the tolerance, at least in business budgets in 2024 to pay for expensive products. 50 a hundred K, 500 KA year a SP that renews every year. That team, are you getting value out of it? Well, we don't know. Those are gonna be the first items that come off the budget list, so don't be caught being one of the vendors who can't articulate their value to your customer.

Dan Balcauski: 1:05:16

So yes, having to continually push the boundaries of the commercial model. And what that means is you, I mean, imagine especially in the the consumer space, you do have some of those companies that are, yeah. There's no more people left to sell to we fully penetrated. How does, in your mind, if at all, how does the world of gen AI impact the, this path forward and in our conversation?

Adam Howatson: 1:05:38

Oh, this type of pricing is gonna be pivotable pivotal to Gen ai, both in terms of the baseline offerings in the large language models themselves. And these models are very expensive to train at scale and to get access to that training content. So I would posit that in terms of large, generalized generative AI models, there's gonna be very few players and we, we know who those are today. You've got llama out there, you've got chat GPT. You've got a variety of different alternatives, but most software vendors are going to take those general models and use them to add supplemental AI services to their products, right? Meaning that I'm not the one who develops the generative AI model, but I'm going to incorporate it into the solution that I provide. I may. Augment it, train it, or tune it with some additional data that is proprietary to me, but it's going to appear as a ticket resolving agent. It's going to appear as an automated account development representative. It's going to appear as a product or service from another vendor That's not just a a naked generative AI model. What that means is that you're using effectively the same raw materials as every other software company on the planet in those core four or five publicly available, publicly trained, large generative AI models. You're a value added reseller to those who create the large AI generative models. So how you price what it is that you've done to that model to make it different and specific to your application or customer set. Let's say I introduce. A generative AI model that can answer questions about billing, can resolve questions that your customers may have by interacting through a customer service portal. Why? Why was my usage up 10% this month? Well, you consumed 20 gigabytes while you were traveling two weeks ago, and that's what that extra charge is. How you monetize that can't just be a pass through of the tokens that is being consumed by open ai as an example. You'll have to come up with a discreet pricing solution that demonstrates values in what you are adding to those raw resource four or five large generative AI models. So distinguishing yourself in the AI race that is going on right now, and there'll be hundreds of billions invested in this over the next couple of years, is to distinguish a, what the value is that you're adding to that basic model. And two, being able to charge in a commensurate way with a direct relationship to that value. Otherwise, you're just one of a million vendors who's taking. A large common resource, and you're just trying to pass through and sell what somebody else has created. You're trying to add value to it. So being able to discreetly price the outcome of what you have added to that commodity model is gonna be imperative for companies who are incorporating AI into their solutions today. Otherwise what truly differentiates you from any of the other competition?

Dan Balcauski: 1:08:27

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

Adam Howatson: 1:08:47

I think I, I think good examples are things like the outcome-based model for AI agents and being able to resolve tickets, support technical or otherwise. It's a very clear demonstration of value. As a business leader, I can know that it costs me$7 per ticket to do that today on made up numbers. It costs$2 to pay agent force to do it. There's a gain of$5 per ticket there. I can make a pretty a pretty good calculation and I can make a business decision based on that. What I would caution businesses about entering into this AI race and the monetization around it is to think of an example like BMW with the heated seats, usage based payment, which they have retracted. It's possible to get this wrong and in examples where customers have bought an asset which they fully own and then have to pay an extra charge to activate something that is already materially or physically in their possession, generally is a turnoff for customers and they don't see value in that. I already own the equipment and you're charging me more to be able to use it. Well, I've already paid up the capital for the raw resources for the mechanical system, and now you want me to pay to activate it. Also, that can turn customers off, so understanding. Where the value is that you're delivering and ensuring that you're not trying to assign a charge to something that a customer perceives that they already are entitled to or have access to is an important thing to watch for in this race, and make sure that you don't get it wrong and alienate your customers.

Dan Balcauski: 1:10:10

Yeah, I love that. And I heard in both the positive and the mistakes category, so, and which has been reflected throughout our conversation. Making sure you really understand what customers value in, in tying your metrics that you're pricing on in a way that you know, makes sense to that customer. And I think you said it very well, where as a business leader, say, in a leading a customer support organization, I am well aware of my cost per ticket. And so, the outcome based pricing on, an automated AI agent. Closing tickets at a certain rate. That makes it very easy for me as a leader to do that comparison and make that purchase versus saying, oh, we're gonna charge you X number of tokens you use, and I somehow, as the buyer, have to do that translation in my head. And then likewise, I heard in your second example around the BMW indicated seats where this concept of fairness and making sure that customers feel that. The value they're getting is fair. And we can have a three hour conversation around what's fairness in pricing. But this is where no matter what the spreadsheet tells you, no matter what your usage data tells you, this is where it always helps to, before you roll out changes talk to your customers about, the different things you're trying to do. And they will immediately have no problem telling you whether they perceive that as, unfair. Because where I seek companies go off the go off the deep end is, either they don't do that those conversations upfront or they hear it and they. They think they know better. And then that's where they end up on the front page of the New York Times for a bad rollout where they just get roasted at the, BMW is just one of them. And there's many others. We could, we will not shame here right at this moment. Adam, I could talk to you all day. But we've gone on long enough and I wanna be respectful of our audience and your time. I wanna close it out with a couple of rapid fire questions. You ready?

Adam Howatson: 1:12:03

I am ready.

Dan Balcauski: 1:12:04

Alright. Well look, when you think about all the spectacular people you've had a chance to work with, is there anyone that just pops mind's had a disproportionate effect on the way that you think about building companies now?

Adam Howatson: 1:12:14

I think a number of mentors over the years I'd be remiss to mention only one, but certainly had a lot of a lot of opportunity to work with some very well-informed, well-trained, insightful people through my career certainly at ot, and also joining at LogiSense. So I think I, it would be a collective shout out to some of the managers and mentors I've had over the years but certainly have taken that opportunity to listen to them, to extract that knowledge and glean what I can.

Dan Balcauski: 1:12:38

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

Adam Howatson: 1:12:49

Yeah, I think key is not to get too caught up in any one particular moment in time. Typically bringing in additional heads, ensuring that you're working with a group of smart people As a CEO you don't do the work yourself. You're a general manager of a baseball team and you've gotta field the best team you can make sure that you got the right players in the right position and then rely on them to go play the game. And I think that you can have a tendency when you get to the CEO position to want to get your fingers into everything and that you know best. But it, the reality is that you're relying on a team of very smart brains to ensure that your company is successful and you're the arbiter or aware of those varied opinions trying to find the one that is the right middle ground to accommodate all of the 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 general manager. You're not necessarily on the field with the team, but you're gonna build the best team to go take the field.

Dan Balcauski: 1:13:43

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

Adam Howatson: 1:13:55

Understand where your customers see value number one.

Dan Balcauski: 1:14:00

Beautiful. Love it. Succinct, and it hits to the point you've reinforced throughout this entire conversation. Adam I've absolutely loved talking with you. If listeners want to connect with you or learn more about LogiSense, how can they do that?

Adam Howatson: 1:14:12

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

Dan Balcauski: 1:14:23

Awesome. Well, everyone I will put those links in the show notes for listeners that wraps up this episode of sas Scaling Secrets. Thank you to Adam for sharing his journey, insights, and valuable tips for our listeners. If you found this conversation as enlightening as I did, remember, subscribe so you don't miss out on future episodes.