Pricing Transformations in 2020
Editor’s Note: This is a conversation between Kyle Poyar, VP of Market Strategy at OpenView and Steven Forth, Partner at Ibbaka.
Every year people publish predictions for the coming year. This year we thought we would do something a bit different and frame this as a conversation between two pricing leaders, Kyle Poyar, VP, Market Strategy here at OpenView, and Steven Forth, Partner at Ibbaka, a strategic capability development platform that enables sustainable growth.
They have identified the hot topics that you need to be factoring into your pricing plans for 2020.
Let’s start with the role of pricing in product led growth organizations
Kyle: We’re increasingly seeing end users going out and finding SaaS products that help them do their job. You can see that with user-focused products like Slack, Zoom, Atlassian, Calendly, Expensify, Pluralsight, Datadog and more. Oftentimes these products grow virally within an account whether through in-product collaboration, word of mouth or expansion of product usage. To adapt to this trend, it’s important to have a product that appeals to end users of the products and not just the executive buyer. Then you need to offer something of value for free or at a very affordable price, allowing end users to try before they buy. But here’s the challenge: the free product has to be good enough that people will get hooked on it, but there still needs to be a clear and compelling migration path that gets users to open up their wallets. Be wary of becoming the next Evernote! Getting pricing right means having a strong understanding of the job that your product does for these different profiles of users so that you can seamlessly land and expand within an account.
Steven: Pricing scalability across the customer lifecycle becomes critical. Customer experience designers have become accustomed to using customer journey maps to design for adoption and expansion. Layering value and price onto these maps helps you understand two critical things:
- How your solution delivers value over time and how this changes as you move from individuals to small teams to business units to the whole organization. The value proposition can change over the customer journey.
- The ways in which your pricing model needs to be flexible and scalable. Pricing needs to reflect changes in how you are delivering value and who is buying. It is critical to design this upfront.
We see too many promising companies trapped in the low (and unprofitable) part of a market because they did not design pricing to scale.
Product led growth depends on successful product adoption. This has led to companies differentiating based on the customer experience (CX). How does CX impact pricing?
Kyle: This is a tough question! Here’s how I think about it. In order for a product to deliver on its ROI potential, you have to get individuals to actually use it. This means setting up the product correctly, providing proactive coaching to change business processes, offering an intuitive user experience and being responsive when problems arise. If I were purchasing new software, this would be an absolute requirement and I would certainly pay more for a great CX. That said, how do you prove that you have a better CX before the prospect has made a purchase? Is it something that a customer has to experience to believe? Practically it’s challenging to command a premium price just on the back of CX.
Steven: I think we answered your question above. The free or low entry point aspects of your solution must deliver a compelling experience. It has to be easy to get started, to get initial value and then to scale. First impressions matter. The customer experience of your first users at any organization is as important, if not more important, than the experience at scale. Majid Iqbal, author of the excellent book, Thinking in Services, has an equation: Value = Outcomes – Price/Experience. If the experience is poor (less than one) the effective price is higher, for the customer that is. Superior customer experience acts like a discount for the customer, but you don’t need to give up revenue.
Customer success and customer experience are sometimes hard to quantify. In enterprise sales, one often ends up negotiating with procurement. How is procurement responding and negotiating on pricing?
Kyle: Procurement is certainly getting more sophisticated as they see enterprise SaaS spending steadily increase with each passing year. I’ve been hearing about procurement teams getting creative with ‘reverse auctions’ in certain highly competitive product categories. Essentially they will propose a price and see which vendors will agree to that price. If there are multiple vendors still in the running, they’ll try lowering the price. And so it goes until they get to such a low price that all vendors (or at least all preferred vendors) have dropped out of the process.
Steven: Procurement teams are well trained in negotiation and well armed with information. They often have more information than the vendor, as they get to see all of the different pitches and proposals. Most procurement teams have three goals: make sure there is a stable and reliable supply, make sure that an alternative is available and get the lowest price possible. This works well with undifferentiated or commodity type offers. It has an unfortunate result. It drives variation out of the system and can lead to commoditization of the buyer and not just the seller.
We have seen some procurement teams become more sophisticated. They are willing to partner with vendors that bring differentiated solutions, so long as the differentiation increases the value they can offer their own customers.
The key to B2B value creation is to look beyond your customer and make sure you are having a positive impact on your customer’s customers. When you can show this, procurement is much more likely to have a collaborative conversation around value.
There is a lot of talk about the need for speed in pricing and the need to tailor this to individual opportunities. Vendors are promoting dynamic pricing as the solution. Is this the direction things are headed?
Steven: Whenever someone tries to sell me a dynamic pricing system I ask if their system is priced dynamically. So far the answer has been no. I suspect that over the next decade the B2B market will bifurcate. Part of the market, the commoditized part, will be priced using dynamic pricing. But as Kyle pointed out above, buyers can turn the tables and use forms of dynamic buying, also known as auctions. Part of the B2B pricing market will end up as M2M (Machine to Machine) with pricing and buying interactions engaged in complex auctions.
The other direction will be performance-based, or outcome-based, pricing. Here the price will be based on some form of risk adjusted outcome. Causal modeling and prediction systems are improving rapidly, driven by machine learning and related technologies. This makes outcome-based pricing easier to design and adopt. The party that takes the most risk, and is best able to manage risk, will have a pricing advantage. I have written more about this in Dynamic Pricing is a Two Edged Sword.
Kyle: There’s already dynamic pricing in SaaS–it’s called a sales rep. In theory, a great rep should be able to understand the value a customer derives from the product, the budget they have available and the level of differentiation relative to other products on the market. It doesn’t always work out that way in practice. I actually think that the market is headed in the reverse direction. SaaS companies are-and should be-moving away from dynamic pricing and towards transparent pricing. This is already the norm for infrastructure software products and tools like Atlassian, GitHub, GitLab, AWS and so on. Buyers are doing more and more research online before talking to a sales rep (if they ever need to talk to a sales rep at all). They want a frictionless experience to evaluate products, try before they buy and then transact at a fair and predictable price.
One of the big memes right now is category creation as a strategy. Is pricing different under a category creation strategy?
Steven: This is an area we are actively engaged in, as a number of our clients have category creation as a strategy (they are using the book Play Bigger by Al Ramadan, Dave Peterson, Christopher Lochhead and Kevin Maney). Interviewing people who are successful in this strategy focus on defining the value of the category first. Category value trumps solution value and frames the pricing for any solution. When one does get to pricing, remember that value drives determine value metrics (the unit of consumption by which users get value) and that the best pricing metrics track value metrics. When pricing a solution in a new category find a way to tightly connect value metrics and pricing metrics.
Kyle: Pricing is certainly more important when creating a new category. You have much more flexibility in terms of the metric(s) that influence your pricing, how you package up different features and what price you set. One piece of advice I received early on is that pricing is a work of fiction-it’s something you get to make up. Prospects don’t naturally know how much they should pay for a new product or service. You get to decide what that should be; however, you also have to tell a compelling story about why the product is worth that price. This means you have to spend extra time quantifying the problem you’re solving and the value you provide to a customer. I would urge you to think about this as not a pricing problem, but rather important work to find your product-market-price fit.
Category creation often requires some level of virality to win big. How can pricing help you ‘go viral?’
Kyle: There are two key elements to going viral: having a product that users love (and therefore want to share) and making it easy for your champions to share the product with others. This often means making collaboration an important part of your product’s workflow, which almost any company can do even if you don’t have a ‘naturally’ viral product like Calendly or Zoom. For example, I’ve been a long time user of SurveyMonkey. Over the years they’ve added a number of collaboration features in the platform to encourage users to both get feedback on surveys before they go live and to share the results of surveys after data has been collected. It’s always free for the collaborative user and helps SurveyMonkey go viral inside of an organization. SurveyMonkey then monetizes when those users want to use more robust features or write their own survey.
Steven: As Kyle says, the best way to drive virality is to make sure that people get additional value from sharing. There are many ways to do this. Sharing can provide more data that improves the solution for all users. People may want to collaborate. The output of your solution may be a natural input into another solution, make it easy to do this. Make sure pricing does not get in the way. This gets to the Catch 22 of value-based pricing. You want to connect the value metric to the pricing metric but you don’t want to let the pricing discourage use. You especially don’t want the pricing to get in the way of viral adoption.
We look forward to more insights in 2020 and we will come back to these themes and see how they are playing out with real examples.