The BLUF (Bottom Line Up Front)

• Clay pulled their data and AI costs out of their price and billed them separately to their customers. Should you do that too?

• There are 3 good reasons to pass your costs on to your customers. We talk through a few case studies of when this has been successful.

Full Disclosure: We are tiny angel investors in Clay and we have helped them with pricing in the past. We did not work with them on this latest pricing change.

Clay and their pricing - part 2

Last week we covered the first main change that Clay made to their pricing, following their big pricing announcement: introducing a 2nd price metric.

Today we’re covering the 2nd major change they made.

As part of their new pricing, Clay has loudly stated that their new data prices are the same cost you could get from buying that data directly from a provider. In effect, they have dropped their markup to $0.

Why is this an interesting strategy? First, we almost never recommend showing your costs to your customer, although in this case, it might be the right decision. Second, passing costs on to your customer can give your company tremendous market power, but only if you’re willing to deal with the risks.

Let’s dive in.

When should you pass your costs on to your customers?

It’s a question we get often. Actually, it’s a question we get too often because as we’ve covered before, your costs don’t matter as much as you think when setting prices. The “standard” recommendation is that you should set your prices based on willingness-to-pay while managing (read: eating) the costs separately. Allowing price and cost to float independently enables the price setter to capture more or less value by product or segment, for example, by introducing a “loss leader” product. And in the case where willingness-to-pay greatly exceeds the costs, allowing the two to float lets the company capture much more value.

So why would you ever forego these benefits?

1) Passing costs on to customers shifts your value perception

When a company declares that they are not marking up their direct costs, they are implicitly stating that they (the company) provide zero marginal value on top of those costs. If I sell lemonade at or below cost but charge for my witty repartee¹ , I am saying to the customer the the value is not in the lemonade but in my fantastic company.

It sounds like a ridiculous example, but it happens all the time in many industries. Have you ever been treated to a glass of bubbly wine at a fancy store? What about in professional services? Many lawyers will offer standard document creation (e.g. a will) at cost while charging a hefty markup on more advanced services. We see this in technology too. Any time you see “unlimited users” or “message and data rates may apply”, the company is saying “Hey! the value isn’t over there dummy!”.

Case Study: Dropbox in 2014

2014 was a brutal time to be in the cloud storage industry. Storing your files online in “the cloud” was a novel idea in 2008, but 6 years later the competition was fierce. Dropbox and Box were both going head to head with Google Drive, iCloud, OneDrive (née SkyDrive⁸ ), and a bazillion startups. Every single blog on the internet was writing about which provider gave you the best “bang for your buck”, i.e. the most gigabytes per dollar.

In 2014, Dropbox did something crazy. They offered unlimited storage. Ok technically they offered a terabyte, but 1) that was more storage than any reasonable person⁹ actually needed and 2) it meant they dropped their price 100x! Even if it wasn’t “technically” unlimited, it was still 100x cheaper.

Why in the world would they do this? Dropbox argued that the value of Dropbox came from their features, not from the amount of storage you were allocated. They shifted the dialogue away from a rapidly commoditizing part of their product toward one where they had competitive advantage.

Clay’s new value proposition

Shifting the value proposition in Clay from an “AI data provider” to a “GTM workflow tool” is exactly this play. First, data itself is being commoditized, much like gigabytes were in 2014. Second, Clay’s competitive advantage comes not from getting data but from the things you can do with the data - workflows, integrations, etc. By not marking up the data credits and placing the weight of the price on actions, they are shifting the value toward where they have competitive advantage.

2) Passing costs on to customers can put pressure on your suppliers

One of the most frustrating things about going out to dinner in San Francisco is the bill. Yes it’s expensive - we all expect that. The problem with restaurants in SF is that they have all of these extra fees at the bottom of the bill which can add up to as much as 30%!

This isn’t confined to restaurants - Ubers² now have a “CA Driver Benefits Fee” appended to every ride. I’m going out on a limb here to say that everyone hates these extra fees, so much so that there is legislation³ in the works to band them.

So why do businesses call them out separately? Because drawing attention to extra fees reduces willingness-to-pay for those fees. One benefit of this so called “drip pricing” is that customers do not reduce their willingness-to-pay for the core product, but still get angry at the extra fees⁴ . This ultimately puts pressure on legislators to reduce extra fees while not fundamentally hurting the business. Including the fees would raise the perceived price, lower conversion rates, and keep customers quiet (which is not what we as a business would want).

So… calling out fees / costs separately puts pressure on those imposing those fees, aka your suppliers. In Clay’s case, they can show how much a piece of data costs when it is sourced by Data Source A vs. Data Source B.

Clay’s buyer advantage

As a large aggregator of demand for both data and AI tokens, Clay can now throw its market power around a bit to pressure their suppliers to give better rates, better perks, or better terms in the same way that Walmart is able to negotiate heavily with its own suppliers.

Does this apply to you? It depends. If you source anything from a single supplier, this does not help you. For example, imagine I white label a website creation tool for my customers. If I only use Squrespace, there is little I can do to convince Squarespace to lower their price. However, if I give my customers the choice between Squarespace, Wordpress, and Wix (and show the costs of each), I can now pressure each supplier into offering me more favorable terms, since I control the demand.

3) Passing costs on to customers can create channel power

First up, what do I mean by channel power. Imagine my customers have a choice: they can buy my product directly from me or they can buy it from my partner. My partner might have better reach or a quicker product, but they charge me for that privilege. Let’s paint a totally hypothetical situation…

I sell a subscription app. It’s an app that lets you listen to my musings on pricing on demand and costs $10 a month. You can buy it from me ORRRRRR you can buy it from the “Banana Store”, a very popular App Store online.

Here’s the catch. The Banana Store charges me 30% every time you download Ian’s Pricing App. If I become famous enough⁵ , I might wonder if I even need the Banana Store. I might think to myself, “if I email these people with 10% off, I could get them to buy directly from me, rather than pay the Banana Store 30%”.

Obviously this is not a hypothetical. Large app companies have been using this tactic to get around their channel partners’ fees ever since Epic Games and Spotify won a lawsuit against Apple⁶ .

Is Clay pressuring their own channels?

Probably not, or at least they haven’t said that they are. But, we know of some other companies that are using this exact same playbook in the AI space. “Buy from us directly, rather than paying a tax for your tokens”.

When should you call out your channel partner’s costs? It’s a little tricky, but the theory would say that you should do so when you have evidence that the willingness-to-pay for the channel is dropping below the cost they are charging you. You can measure that in surveys or simply interview customers to determine whether the channel is providing significant marginal value.

Remember that this is constantly changing. For a long time, the willingness-to-pay and value created by online travel agents (OTAs - think Expedia) was exploding. Expedia’s and Booking Group’s stock increased by at least 10x from ~2005 to ~2015. But by 2015, many hotels, airlines, and free services (e.g. Google) began to eat into their value. Between 2014 and 2024, OTA stocks were largely flat. Only in the last few years have these groups been able to recapture margin.

Should you pass on your costs?

Like any good consultant, I’m going to tell you it depends. Talk to your pricing doctor (and follow this checklist) to see if passing on your costs is right for you.

1. Are you trying to shift the value of your product away from something that is commoditizing? You might want to consider passing those costs on to customers. That could mean selling your complement at cost OR jumping ahead and giving it away.⁷

2. Are you reselling from multiple providers? By calling our their costs, you might be able to get them to lower their rates as they compete for your customers.

3. Is your channel not providing value? Calling out the cost of your channel partner and offering customers a discount when they buy direct can help you reclaim margin that they are unfairly capturing.

For Clay itself, we know they did #1, we think they are doing #2, and they might leave the door open for #3 later.

Get in touch

Crescendo works with medium-sized software companies to improve their pricing, packaging, and promotion strategies. If you’d like to book a quick consult, reach out at info@crescendo.partners or schedule time via the button below.