How to Capture the Right Value Metrics to Accurately Price Your Product
Your data model is the net that you use to catch information. So what kind of information do you want to catch?
Advanced pricing strategies are all based on good information, information that increasingly is gathered by the system itself. So the design of your data model, instrumentation of your system and the design of your pricing model all go hand in hand.
The best pricing metrics track how you provide value. The more value you provide, the higher the price should be. So as you instrument your system and build your data model make sure you are capturing data about the value you provide.
How to do this? It starts with a deep understanding of your customer and your customer’s business model. If you don’t understand this, your pricing is just a shot in the dark.
One way to get started is to build an ROI (return on investment) calculator and put it up on your website. Here is a nice clean example from TSO Logic, a company that helps manage server farms, increase energy efficiency and reduce unnecessary redundancy.
TSO Logic has done a good job of building metrics deep into its system. It even has a dashboard that shows customers how much money they have saved and could save by reconfiguring their servers.
Here is a simple way to build your value-based data model.
- Build ROI calculators (you will probably need to build one for each market segment, at least you will if you have done a good job segmenting your market)
- Look at the variables in the calculator, divide them into the following categories
- Those that your system can collect
- Those that you can get from external data feeds
- Those that you can get from integrations with other systems at your customer
- Those that you have to estimate
- Build a. (those your system can collect) and b. (external data feeds) into your platform.
- See if you can design in a reason to integrate with the other internal systems that provide the data to drive your value calculator. Of course you have to have a good reason (from the customer’s point of view) to do this, one that provides additional value itself!
- Make estimates where you need to, but let the customer change these estimates (and then record the changes the customer makes).
Use this data (and the ROI model) to calculate the ROI for the customer. Show this as part of one of your product dashboards. Make it easy for the customer to understand value.
Then take this data and build it into your own pricing models. Evolve them so that your price is tracking the value you provide to your customer.
ROI is a crude way to do this. To go the next step you need to move to Economic Value Estimation or EVE® (trademarked by Monitor Deloitte). This approach was pioneered by pricing guru Tom Nagle and is described in detail in his book The Strategy and Tactics of Pricing. Here the focus is on what differentiates your offer from the alternatives. It is not easy to build EVE’s into software as you have to understand three systems, your customer, your competitor and your own, but the work done to build EVEs will lead to much more accurate and compelling ROI calculators.
In designing your data model think about three different types of data and how they will interact.
Start with your engagement model. This is fundamental to how people use your software and should be unique. If it is not unique then you have probably designed an ‘also ran’ application.
Some years ago, when I was raising money for LeveragePoint, a VC at Charles River Ventures said that “the best leading indicator of success for a B2B SaaS company is user engagement, and not any of the financial metrics.” Optimizing user engagement is a critical early priority for B2B SaaS companies, and one that many companies struggle with.
You want to get people engaged in the routines that create value for them and the company they work for. ‘Engaged in routines,’ that is important. The way to do this is to map out your cue-routine-reward-investment model and make sure you are capturing data on each part of the cycle.
Nir Eyal has written about this in his book Hooked an on the Nir and Far blog. Study this closely, and make sure you have not only built habit-forming software but instrumented it to understand how people are using the software and how this creates value.
I will be going deeper into these ideas in Toronto on February 25. If you are in the area, please join us and Future-Proof Your Business Model at the Pricing Innovation & Monetization Summit.