"Companies spend more time thinking about buying cleaning products than they do about their pricing."
Pricing: please don’t set it and forget it, with Lilly Bacher, Head of Pricing, ProfitWell
For forward-thinking recurring revenue businesses who value growth, ProfitWell (formerly Price Intelligently) provides industry standard BI solutions that improve retention and monetisation automatically through unmatched subscription intelligence. ProfitWell serves over five thousand subscription companies, including B2B companies Autodesk, Atlassian, and Zuora, and B2C darlings Meetup, Blue Bottle Coffee, and Lyft.
Lilly Bacher is Global Head of Pricing at ProfitWell and works with tech founders and product teams around the world to conceptualise, effectuate, and realise pricing strategies with new products, legacy products, perpetual to SaaS, and so on. This article is based on a recent podcast interview with Lilly which you can listen to in full here.
Companies spend more time thinking about buying cleaning products than they do about their pricing.
A company exists explicitly to provide value, and pricing is how we monetise. People ultimately go into business because they want to make a profit, and they know they can do what they do better than anyone else, or they discover a need they can uniquely serve. What pricing does is accurately capture that value. Companies that do it well can scale and succeed, while companies that don’t, ultimately fail.
When we look at the lifetime of a tech company, the amount of time they spend working on pricing is often less than the amount of time they spend purchasing cleaning products, a potentially ridiculous (yet accurate) statement.
A lot of times people focus on what they can save on costs or how they can sell more as opposed to figuring out what the most effective value proposition might be from a pricing perspective.
Please, talk to your customers.
There is a strange unwillingness for company leaders to speak to their customers about pricing, even simple questions such as “What do you value?” and “What are you willing to pay?”
When you think about the initial kernel of starting a business, people often overlook the value, yet people’s willingness to pay is the most important validation of that value.
Fisker Karma car company is a great example. This is a now defunct electric supercar company, of cars that were incredible yet notably expensive. Now we might think some Tesla models are pricey, but they do have a market to serve and are significantly less pricey than Fisker Karma vehicles were.
The challenge is to understand and position pricing before you go to market. In the Fisker Karma example, this is a niche, so before you go to market you need to establish at least a reasonable assessment of the size of that market, then plan an appropriate level of customer discovery that explores pricing in the context of the problem. If your target market is 50 companies, talking to ten is a good number, but if your market is in the thousands,ten is woefully inadequate. You need to engage prospective customers at a scale that is commensurate with your market, to understand their perception of the problem you intend to solve and their willingness to pay.
Sometimes people don’t want to ask about willingness to pay, but they need to get over that — and there are ways it can be done. For example, in a brand agnostic manner. But even if you don’t go down that anonymous route, you can trust the lessons you will learn from engaging prospective customers in this way will far exceed any negative impact on your brand.
Guessing is something we highly discourage. People get in their own way by guessing what customers are willing to pay.
How do companies create repeatable and scalable pricing models?
The ideal way to position a model is based on outcome-based pricing, mutually beneficial for you and your customer — so that as a customer uses your product and receives more impact and value, you are, in turn, monetising more.
Again, as you are going through the process of establishing a repeatable pricing model with scalable pricing levers, signals become clearer, and you can again talk to your customers about what makes sense for willingness to pay and which lever to use. Often, we see companies that find a pricing lever and then leave it at that. Sometimes we see tech companies who use two or three levers. And others that have totally complex matrices of rate cards and need to simplify, because pricing is getting in the way.
A lot depends on how you want to position, as well as on your target market. If serving a larger, mostly self-service market, customers must be able to rapidly interpret pricing, understand where they fit, and understand how pricing will change as they use the product. When serving enterprise, your pricing may, by necessity, be more complex and require a sales person to help the customer navigate. In either situation, pricing can have a massive impact on the speed of adoption.
How do you make it easy for people to buy, and what is the impact on speed?
Having a low touch sales model enables faster conversion. Any additional complexity will slow things down. A way to address this is through live chat bots and automated processes for a calendar hold on both sides. The other thing that impacts speed is average contract value. Someone who has done well in this area is Slack. They have done a great job in pricing that allows you to get on the product fast and make it a no brainer to adopt on a per user basis. But they have a second value metric based on historical data usage. So, the initial sell makes sense – it’s low touch, per user – but the upsell makes sense too.
The challenge is to price in a way that is easy and quick to adopt, but that delivers more value to the supplier as the customer extracts more value.
We try and encourage simplicity, regardless of stage, rendering it as seamless as possible to adopt.
Who is doing a good job of more sophisticated pricing?
Complexity does arrive at scale, with international markets, a portfolio of products, and a series of different market segments. Companies like Hubspot, Atlassian, Slack, and Pandadoc are all good at this. As you start to scale up, and especially as you sell into enterprise, there does need to be customer interaction, for example when serving a different market segment, you do need the consultative element to your strategy. If there are two or three different product lines with different value levers, they scale differently.
Say you are selling a platform for real estate brokers and you are serving brokers in residential and commercial real estate, you need to have a deep understanding of the needs differentiating those segments. Within each of those segments there may be different customer groups, serving multiple sub sectors. So the sophistication of your thinking needs to increase, to allow you to create pricing models relevant to your different audiences.
It all comes back to understanding your customers, but in a more granular way, in different segments: what their needs are, what problems they are looking to solve, what outcomes are important to them, what their value drivers are, what their willingness to pay is. Then you can create structures that make sense to you and them, without creating undue complexity.
What should founders obsess about when it comes to pricing?
Talk to current, targeted, and ideal customers. People too often under value the importance of this: why your best customers are your best and why your worst customers are that way. There is no stage in your journey when this will not deliver value.
Even if you are scaling and growing fast, don’t overlook pricing. Don’t fall into the trap of thinking firstly that the price seems to work or that “if we can sell to this many customers at this price we will reach break-even”. Do the pricing exercise to understand the value your customers are receiving. Often our customers are so nervous about talking to their customers because they think that they will be told to put the price down, but that is not the case. If customers are receiving value, they will be willing to spend more.
Your market is constantly changing and there may be a new solution your customer is considering. Pricing can create the single biggest impact on your monetisation, more than increasing efficiency and saving money, and better often than just selling to more customers. Stay rigorous and attentive.