Your Pricing Strategy is Failing – Three Signals That Tell You Why
Do you have a pricing strategy? If not, you’re already in trouble. Many companies struggle to say what their pricing strategy is, how it helps create and communicate value for its users and how it’s tested over time.
You can’t ignore pricing. At the end of the day you and your customer will agree on a price. If you can’t agree on a price you won’t have a sale.
If you don’t have a pricing strategy you will drift, whipsawed between customer pressure, the need to close deals (sometimes at any price) and investor expectations. It’s not pretty, but it happens all the time.
A solid pricing strategy:
- Frames and communicates your value
- Positions you in the market (defines the alternatives)
- Reinforces your revenue strategy (by supporting your customer’s buying process)
- Captures enough of the value that you create for you to invest in continuing innovation (that is the baseline)
So, what signals point to a failing strategy? Let’s explore.
Signal 1: What people do on your pricing page
The first signals come early on. What happens when people get to your pricing page? Have you designed your pricing page to capture data about how people are responding to your pricing? If not, get to work and put in the right tracking. And make sure you A/B test not your prices but your pricing page to make sure it is positioning you where you want to be and communicating value.
Sometimes the best way to get to good is to look at bad. Patrick Campbell helps us here in his post The Saddest SaaS Pricing Pages of the Year.
Signal 2: Your prospects don’t know what the alternative is
You can’t price effectively if you don’t know what your customers see as the alternative to using your product and service. Can your customers answer the question “What is my next best competitive alternative to your solution?” Is their answer the one you expect them to have?
You need to test this regularly to see what people actually think. You may think the alternative is another software package, one you compare yourself to, but potential buyers may think the real alternative is consulting. And that could even help you if you understand it. Consulting is generally much more expensive than software. So if your potential customers think the alternative is consulting you probably have an opportunity to increase prices, but only if you can show them how they will get the same or greater value.
On the other hand, you often find that prospective customers believe their current ERP vendor provides all the functionality they need. That vendor spends a lot of time and money making sure they believe this. You can’t defeat this strategy with lower prices. You can only win customers over by showing you provide value in ways the incumbent cannot.
Signal 3: Your conversion metrics are not supporting your business model
Most companies have a three-tier pricing architecture with each tier playing a specific role. See The Art and Science of Tiered Pricing. When you design your pricing architecture you should spell out:
- How many customers you expect to enter at each tier
- How many customers you expect to upsell over what period of time
- How much churn you expect at each level
What combination of these factors will optimize growth and can you deliver the numbers? You will likely get this wrong at first. But by having a model and tracking against reality you will be able to make corrections.
What kind of corrections? In most cases it is just as important to redesign the fences that guide people into one category over the other, as it is to change actual prices. Look at your fences first, and once you are happy with them you can see if you still need to change pricing.
Fences are all those limitations you apply to each pricing category. Generally they are limits to transactions, number of users or specific function points that are closely correlated to value. Most fences are alternative pricing metrics. For example, a lead generation application company I have coached currently charges by number of users. They are planning to change this to sales qualified leads (SQL), but they will limit the number of users at each tier. They hope this will drive larger companies, with more complex sales processes, to move up to higher tiers faster than they would with just the SQL metric.
And for bonus points … manage your discounting
The other place to look for pricing problems is with discounting. Most B2B SaaS companies discount, especially with larger customers that will provide a reference.
There is nothing wrong with discounting, as long as it is disciplined. There are two reasons to discount.
- When for whatever reason, the customer, through no fault of its own, is not going to be able to get the value you promise.
- When you are making an investment in a customer or a segment.
Salespeople will frequently make the investment argument when arguing for a discount. Customers will do the same.
“Invest in this account and it will pay off over the years.”
OK, but just how will it pay off? Are there volume guarantees? Is the customer going to actively introduce you to new customers? Will the customer provide you with data you need to improve your offer or better understand your value proposition? All of these are possible, and are valuable, but they are often empty promises.
When someone asks you to give a discount because it is an ‘investment’ make sure you have calculated the ROI on that investment and done everything you can to ensure that promises are documented.
Most discounts are just discounts, money you are giving away with no expectation of a return. Even worse, discounts have a way of permeating a market and dragging your prices down.
Undisciplined discounting is one of the most common pricing problems. Best to stamp it out of your culture as soon as it shows up.
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