Pricing Transformations In 2021
Editor’s Note: This is a conversation between Kyle Poyar, VP of Market Strategy at OpenView, and Steven Forth, Partner at Ibbaka.
Back in another lifetime—exactly one year ago—Kyle and I offered up our pricing transformations for 2020.
A lot has happened since then, and not all of it was because of the COVID-19 pandemic. As we enter the post-pandemic economy and get used to the “new normal,” we’d like to look back on our 2020 predictions and share our thoughts on what’s in store for 2021.
How did our 2020 predictions hold up?
In short, the themes we addressed in 2020 held up quite well. We stand by these trends (and we believe they’ll accelerate this year):
- The role of product led growth and the centrality of pricing to a product led growth strategy
- Pricing as a part of the customer experience (CX)
- The need to track and quantify value being delivered across the customer success process
- The need for speed in both adjusting pricing and in getting quotes out
- Category creation as a growth strategy and the role of pricing is communicating value
- Pricing for value adoption
What we did not predict was the COVID-19 pandemic and what it would mean. We must carry forward these three lessons from COVID-19:
- Pricing needs to be flexible so that it can adapt rapidly to new scenarios
- The subscription model is robust and held up well under the stress of the pandemic
- Put the customer first when pricing in response to a crisis
There are good resources on the OpenView and Ibbaka websites that remain relevant as we plan our pricing for 2021:
- Now Is the Time to Revisit Your Pricing by Kyle Poyar
- The Ultimate SaaS Pricing Resource Guide by Kyle Poyar
- It’s Time to Resegment Your Market (and Revise Your Pricing) by Steven Forth
- How to Plan Your 2021 Pricing Strategy by Steven Forth
So how will these trends play out in 2021, and what work should we be doing now to put us in a better position tomorrow?
The continued adoption of product led growth (PLG) best practices, by Kyle Poyar
2020 was a banner year for PLG companies such as Zoom, Shopify, and Datadog. In fact, in Q4 the public companies in OpenView’s PLG Index were trading for a 19x revenue multiple, or a 45% premium compared to the broader SaaS index.
Despite the numerous benefits of a PLG approach for both SaaS vendors and customers, we found that most companies are only dipping their toe into PLG. Four-in-five SaaS companies said they’ve adopted at least one PLG tactic (for example, a freemium product or a free trial), but only 27% said that PLG was fundamental to their business.
We expect more companies will lean into PLG as a way to differentiate themselves from their competitors, attract more new customers, and make 2021 an accelerated growth year.
Some of our favorite PLG pricing stories to follow include:
- RingCentral (launched a freemium video meetings product and saw their stock price jump 4.7%)
- HubSpot (slashed the price of its Starter Growth Suite by >50% and saw a major increase in new customers not only signing up, but also upgrading)
- Atlassian (went free for teams of up to 10 users)
- GitHub (launched a free edition with unlimited repositories and unlimited collaborators)
Pricing models must be adaptable, by Steven Forth
One thing we learned from 2020 is that pricing models need to be adaptable. HubSpot provided a great example of this last year when they gave their users a variety of price-based accommodations at the beginning of the pandemic (see Early Survey Results Show the Most Common Pricing Responses to COVID-19).
If your pricing model is locked into a financial or subscription management system that makes it difficult to modify, or if your internal process for modifying your pricing is burdensome, then you are at a significant disadvantage.
The post-pandemic economy is likely to be fluid. Many companies are shifting from resilience to adaptation, which means that business models will be changing. When your customer’s business models change, you often need to resegment your market and adjust your pricing model.
This means that your pricing model needs to be scalable and extensible. People with software development backgrounds will recognize these ideas.
A scalable model is one that works as your business grows (or in some of your segments contracts). Test your pricing model at vastly different scales and see what happens as you scale up and down. An extensible model is one that can be modified easily, with new factors added.
As Kyle discusses below, usage-based pricing is going to become a part of many people’s pricing models. How easy will it be for you to add this to your current pricing model? It’s better to start planning for this now.
At a deeper level, the key to successful pricing is being able to connect value metrics (the unit of consumption by which your customer gets value) with pricing metrics (the unit of consumption for which you charge). Usage-based pricing should align with the value metric.
Again, as your customer’s business models change, your value metric (and hence your pricing metric) can change. If this requires major surgery, you may find yourself struggling in a dynamic year like 2021.
Adapting a pricing model requires data—to the extent possible that data should come from your own system. So as you look at usage-based pricing (below), ask what measures of use drive value.
Usage-based pricing gets normalized, by Kyle Poyar
Snowflake, which IPO-ed in 2020, said loud and clear that “we are not a SaaS model.” 93% of their revenue is consumption-based—and they even allow customers to roll over some unused capacity into future contracts.
You might expect Wall Street to panic about the lack of predictability or customer lock-in. It did the opposite. Snowflake is now worth $80B+ on annualized revenue of $638M (based on their Q3 earnings). Investors like that Snowflake’s model allows them to rapidly expand customers—net retention is 158%—and it shows that customers are in fact getting value out of Snowflake. Otherwise they wouldn’t be using it.
Usage-based revenue models allow the customer to start at a low cost, minimizing friction in the buying process. It directly links the price a customer pays with the value that they receive. It also allows more users to access the product within an account, which makes the software more ubiquitous and seeds new use cases.
Furthermore, today’s software megatrends like automation, AI, and APIs mandate charging based on usage and not users. The value of automation, AI, and API products doesn’t scale with the number of human users; in fact, the opposite is true if a product is fully automating a manual process.
When moving toward a usage-based pricing model, you’ll want to be mindful of these common stumbling blocks:
- Pick the right usage-based value metric for your pricing. It should be success-based where usage aligns with your customers’ business outcomes, feasible for you to administer, scalable within an account over time, and at least somewhat predictable.
- Offer pricing structures that give enterprises peace of mind. Usage-based pricing doesn’t inherently mean pay-as-you-go or fully consumption based. Many companies offer discounts for committed usage and have come up with creative overage policies and flexible contract structures to navigate procurement teams who might be more comfortable with traditional ways of buying.
- Design a customer journey that enables land-and-expand. You want to lean into the benefits of a usage model and make it extremely easy for customers to try the product before they buy. Sales should come in later to sell an initial committed usage subscription without over-selling the customer ahead of their usage. Then CS and Account Management play a significant role in driving adoption of key features that create stickiness and lead to more usage in the future.
Pricing for social change, by Steven Forth
One theme that has begun to bubble up in pricing circles is the role that pricing could or should play in moving the economy and society in a better direction.
The obvious example here is carbon pricing (and carbon taxes). There is no consensus on this. Some people are strongly opposed to companies using pricing for anything other than business purposes (remember the Chicago school of economics?), and other companies understand that they have important social impacts that go beyond business and are looking at pricing with this lens. They’re asking, “What behaviors does pricing encourage and what are the social implications of these behaviors?” We all need to ask, “If we do not consider this, will customers or regulators impose this on us?”
What we’ve seen over the past year is more companies considering what we call community value drivers when building market segmentations. Market segmentation is the foundation of any pricing work (see Why Good Pricing Strategy Starts with Market Segmentation). In certain sectors, community value drivers are proving to be very useful in understanding market dynamics.
Healthcare, broadly defined, is one area we’re seeing this. One example is with SaaS platforms for emergency management. The same is true of platforms connected to the gig economy.
You may not need to go here in 2021. But you should ask the questions—and you should be prepared for what your customers, your regulators (there is going to be more and more regulation of SaaS companies, like it or not), and the community you operate in are going to be asking you.
Here are some ways to explore this in the context of pricing:
- As use of your service goes up, are there positive externalities (benefits to a larger community than just your paying customers)?
- The same question for negative externalities (costs to a larger community who are not your customers)
- Does your current pricing model reward negative or positive externalities, and how?
- Is there a way to make more money by capturing some of the positive externalities?
More 2021 predictions from the experts
But don’t let that keep you from making incremental changes that set you up to scale to $100+ million ARR in the long run.