The Four-step Pricing Process for Fast-growing SaaS Companies
I have spent much of my career in product marketing roles at fast-growing companies. At Glassdoor and Lever, we doubled in size each year; and Reflektive—where I am now Head of Marketing—was recently recognized by Deloitte as the 13th fastest-growing technology company in North America. Over the last five years, I’ve had a lot of experience tackling pricing challenges at companies that were rapidly pole vaulting their way through growth stages.
It didn’t take me long to realize the critically important role pricing plays in a company’s success (or failure). At Glassdoor, where we went through several iterations on our pricing strategy, I had a front-row seat to witness how these changes directly influenced the way we went to market, our overall sales motion and the types of conversations we were having with prospects and customers in the marketplace.
Having gone through the pricing process multiple times, I have developed my own framework for assessing the situation and then developing pricing that is appropriate and effective. From helping me determine when it’s time to make a change to actually implementing that change, this process has been a valuable resource to me over many different pricing projects.
What to watch – pricing signals you need to know
When it comes to updating your pricing, you need to keep your ear to the ground for certain internal and external signals that indicate when it’s time to make your move. These signals come from a wide variety of sources, but together reveal a telling pattern.
Establishing a close and trusting relationship with your sales team is critical to your success as a product marketer. As the people on the frontlines, they are an invaluable source of first-hand data on what’s actually happening at the point of sale. The key to getting the real story is to be real with them. Make it your mission to understand what they are going through, both the good and the bad. Invite them to share details about where they are running into trouble, and then focus your energy on helping them win without caving in on discounts. Keep in mind that your goal is to develop a collaborative partnership. This means keeping the sales team in the loop on sales-enablement and other supportive marketing initiatives; and it means walking the floors and halls regularly so you can have ongoing, one-on-one, personal conversations.
Regular and consistent review of specific CRM data points can yield important insights and trends that will help you predict when you’ll need to consider a pricing shift. Things to keep an eye on include your average price by segment, how those average prices evolve over time, how they measure up against your list price, and how pricing affects your win rate, cycle time and time to close. The answers to these questions will give you an accurate picture of whether your pricing conversations with customers are as efficient and effective as you’d like.
We are committed to doing win-loss interviews at Reflektive because they are a great way to hear directly from buyers about what’s working and what’s not. Inviting buyers to share their uncensored experiences gives you the opportunity to really understand how buyers perceive the value of your product and how that compares to their perceptions of competitors’ products. Good stuff to know.
Competition and Market Behavior
Finally, there are a couple of external signals that are worth watching. One is what specific competitors are doing, and the other is trends in the overall market. You can find a wealth of information online about how different companies are packaging and pricing their products. Even the most cursory research will help you uncover problem areas, such as cases where you’re charging more than a close competitor. These are the day-to-day challenges your sales team faces, so it’s important to be aware of them.
Staying on top of these signals helps you identify when you’re reaching a point where a pricing and/or packaging change might be a smart move, but how do you know when you’ve reached the tipping point to make such a shift in executive-level priority? Pricing often falls into the important-but-not-urgent category, until it’s suddenly on fire and becomes everyone’s priority. You can avoid that kind of panic by realizing that there is a pretty common confluence of factors that—when they come into play—require you to take a really hard look at pricing.
One factor is when the competition is heating up because your conversion rates are down or there are new competitors entering the market. Another is when you’re about to release a bunch of new features or products, and you need to figure out how to effectively move people through the different models you’re trying to sell. And another is when you’re about to hire a ton of new reps in different locations, and you need those new people to be as productive as possible, as quickly as possible. To meet sales goals, you may need to adapt your pricing structure so it’s easier for the new team members to understand, allowing them to take it to market with confidence. Any of these scenarios should trigger a serious pricing conversation with leadership.
Three key considerations – underlying concepts of successful pricing
When you have decided that it is definitely time to make a pricing adjustment, there are three key considerations that help ensure your new pricing structure is successful.
1. Knowing how pricing impacts your market position
Pricing is inextricably tied to how you position and market your product. If you price high as a premium provider, you have to back that position up with a lot of tangible value. Not only that, but you also need to have the right resources and examples to prove that you are, in fact, delivering that real-world value to actual customers. On the other hand, if you choose to be a low-cost leader your strategy needs to focus on getting as many people through the door as quickly as possible. In either case—and any position between those two extremes—the way you use price to position your product in the market drives many downstream effects in your overall sales and marketing motions. So, it’s important to really think it through.
2. Getting your packaging right
From the product marketing angle, packaging is a critical element of the pricing equation. The tricky thing in SaaS is that, with new feature releases and so forth, your product offerings can change pretty quickly. To help keep your pricing grounded, you need to figure out which are the primary features and values that you deliver. Once you’ve defined those, you can figure out how to slice and dice different feature sets into packages that really resonate with different types of buyers. You may, for instance, want to consider the specific needs of small businesses versus enterprise companies and develop packages that are tailored to those specific requirements. Look at your product’s pricing and packaging from the customer’s perspective to ensure you stay focused on what’s actually valuable to them.
This is also an area in which it pays to carefully monitor the competition. Your reps will be your best source of intelligence on this front. I was in a situation at one company where our reps kept telling me that our competitor was offering more for less. Based on the sales team raising this red flag, we did an assessment of the two portfolios and found that the competitor had, indeed, crammed more features into their starter package. Because of the friction, this was causing for our sales team, we moved a key feature from our middle-tier package to our starter package. Small change, big results.
3. Keeping things simple, transparent and fair
Finally, something that is particularly important to both sales reps and customers is that pricing is easy to understand, easy to justify and honest. The last thing you want is to make the pricing conversation more complicated than it has to be. Reps want to be able to look at the rate card and then jump into a prospect conversation with confidence. On the customer side, they want to be able to quickly grasp how much they’re paying and what they’re getting in return.
It’s challenging to master the art and science of achieving simplicity in your pricing, but it’s especially worth it in high-growth environments where you are talking to a lot of prospects over a short period of time. The key to the process is picking the right price metric, something both reps and customers can agree is a good proxy for value. This might be the number of employees or jobs or page views. Whatever it is, it needs to make sense to the customer, and—optimally—have as few moving parts as possible. The more variables and components you add into the equation, the more difficult the pricing conversation becomes. Facilitating a clear and effective pricing conversation will go a long way toward reducing friction in your sales process.
As an aside, a question that often comes up is whether packaging and pricing should be used as your primary competitive advantage. The answer is yes and no. It depends on the dynamics of your industry and your position in the market. In commoditized and highly competitive industries, being the low-cost provider has obvious appeal. On the other hand, if you’re operating in a new field and carving out a niche in a less competitive market, you may be in a strong position to create brand loyalty that will allow you to sustain both high retention and a premium pricing structure.
The Pricing Project Framework – four steps to get it right
You’ve monitored the critical signals and taken the time to work through the three key pricing considerations. Now it’s time to take action. While the process will vary depending on your specific situation, product type and available resources, there are several broad steps that every team should take when embarking on a packaging and pricing project.
Step 1: Analysis
Analysis falls into two main buckets: internal and external. Internal analysis is all about collecting input from your sales reps—via surveys and conversations—and looking at your CRM data to understand how internal players react to and work with your existing price structure. Are they happy with the feature sets and packages, or do they want more? Are you constantly having to pull à la carte items into lower-level packages? Where are your internal teams encountering pushback from prospects and customers? What hurdles do they have to clear to book a sale?
Externally, your goal is to understand how the market and competitive set are evolving, which requires conversations with customers and prospects. In addition to surveys, this research also includes getting on those 1:1 win-loss calls for direct feedback on not only why people bought (or didn’t buy), but also what the process was like overall and how your product measured up against the competition.
The goal of all this research and analysis is to get a clear picture of what’s working and what’s not. It’s also to gain a greater understanding of which features your customers value most—what are the table stakes, and what are the nice-to-have items for which they’re willing to pay extra?
Step 2: Straw Man
Armed with insights from your in-depth analysis, you will be prepared to engage your leadership team. This step needs to be taken fairly early on so that you can accurately scope what’s on the table, what’s off the table and what suggestions your leadership team might have to contribute.
Once you have all the data points in place, you can start developing a basic straw man or model for the overall pricing structure. There are many options and variables to consider including the different segments you’re selling to, what kinds of packages you could offer and also things like what types of scenarios might drive different types of discounts.
Flexibility is another important pricing element to think through. There is a balance to be struck between finance, sales ops and sales reps. You will definitely need to factor flexibility into your model—especially if you’re using an enterprise SaaS pricing model—because your sales reps will need some room to maneuver. Giving them the ability to negotiate prices and features will give your reps more confidence and empower them to create the right conversations and, ultimately, the right offers. Be cautious, however, about giving your newest reps too much leeway. You don’t want your sales team giving crazy discounts to the smallest tiers. That just doesn’t make good business sense. Reserve that for the larger deals where you need some bargaining chips to land the customer.
Step 3: Testing
Once you have your pricing structure defined, it’s time to start testing. Initially, it’s useful to do quick, ad hoc tests by talking with a rep who is working a deal, asking what price they are proposing and then seeing how that might factor into the proposed rate card. This will help you see if there’s alignment and get some insight into how the new rate card might affect an actual deal.
After a few of those inquiries, you can move ahead to piloting the new rate card with a select group of reps. Best approach for this is to pick a mix of individuals with different abilities who sell to different groups and segments from different locations. A diverse test group will help you get the best overall feedback on how different kinds of customers react to the new pricing. Avoid defaulting to engaging only your top reps in a pilot. That approach won’t reflect how the pricing will work for a less experienced or skilled rep.
This beta group of reps will become the champions of your new pricing structure. Their support will be critical as you expand the new pricing to the entire sales organization, so it’s important to give them a voice in shaping the final pricing product.
It’s also important to enable a close collaboration with this group because, in a high-growth company, you won’t have a lot of time to run a pilot and wait to get results. With sales cycles of 30 to 100+ days, you need to work on the fly to get a handle on qualitative and quantitative indicators from the field. On the quantitative side, look at how the new pricing is affecting things like average deal size, win rates, days to close and attach rates. And on the qualitative side, solicit anecdotal feedback from sales reps to hear first-hand accounts of how the conversation is developing around the new pricing.
Step 4: Iteration and Rollout
Once you’ve completed enough testing to have a solid sense of how things are going, you can iterate on the overall model and then do the full rollout to your entire organization. Ideally, some of your test reps will step in to champion the cause as you take your show on the road. The sales reps who have already been working with the new pricing will be able to back up the value of the new pricing with proof points derived not only from research and analysis, but also from frontline conversations with real customers.
Overall, this process can take six weeks or six months. It depends on where you’re starting from, how big a change you need to implement and how in-depth you want to go with each step in the process. Some pricing projects are much less complex than others. It will also depend on your specific company situation whether it’s best to handle everything internally or hire consultants. In most cases, I advise at least trying to do it on your own to start. Most companies can manage the investigation piece and get to a hypothesis about what’s working and what’s not. From there, you can size up how big an issue you’re dealing with, and determine whether you need to bring in outside help to sort everything out. Even if you’re planning to hire external resources from the start, it’s still important to do the internal investigation yourself so that you have the information you need to set the right scope for the consultation.
A few last words of big-picture advice
While there are no silver bullets or one-size-fits-all pricing solutions, these frameworks and processes will give any team a solid foundation on which to develop and refine their own approach to pricing and packaging. Just being aware of these core elements and considerations goes a long way toward ensuring that you are putting your best foot forward and not missing out on any opportunities.
Stepping back a bit, there are three big-picture pieces of advice that are especially important for SaaS founders:
Fight for the high ground
In the early days, you want to price high and then fight for that price. While no one wants to have to struggle through a pricing conversation, it’s only by standing your ground that you’ll be able to get the data points you need to understand your customer’s thresholds and priorities. If you price too low, those critical conversations won’t happen, and you won’t gain any insight into how your first buyers are truly assessing the perceived and actual value of your product.
Keep things simple
It’s so easy to fall into the trap of overly complicated pricing. This is usually the result of trying to please everyone and account for every possible sales scenario. Resist that urge. It’s much, much more valuable to have a pricing structure that both your reps and your customers can easily understand and discuss. That diminish friction, allow for greater transparency and build trust in the relationship.
Review your pricing annually
Finally, remember that pricing is never really done. Your product, audience, market and competition are always evolving. This is why, even when you think you’ve designed the perfect model, it’s important to take another look at least once a year. Listen for those signals. Pay attention to the data. And be prepared to dive back into a new pricing project when conditions warrant it.
We monitor these closely within our portfolio at OpenView.
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