Foundation: Pricing & PackagingPricing
Not all Product Marketers (or companies) agree on the ownership of Pricing & Packaging. It’s historically sat in either Product Management or Finance, or some combination of the two. This made sense because Product Management is intimately familiar with the costs of their products, and Finance focuses on margin/profitability. It’s not uncommon when asking companies how they obtained their current pricing model that they do so from a combination of Cost + Margin and what the Competitors Charge. There are a few things wrong with this mentality that we cover here:
- You’re assuming that your competition has done any type of pricing study themselves
- You should price based on your product, not your competitor’s; I’m guessing your products aren’t exactly the same
- Cost + Margin pricing puts your cost problems on to your customers. Just because it costs you X for the product, why should a customer pay Y? There’s very little logic in that
- Trying to defend your pricing model because it’s solely based off either cost+margin or competitive pricing is a difficult thing to do
- You’re going to see a lot of sales cycles eaten up with the customer demanding discounts as you struggle to defend your current model
This is not a golden ticket
I’d like to call out specifically that the need to conduct a pricing study should not born out of losing a single deal or customer. I hear too often sales complain that a deal was lost, or a competitor beat them, because the price was too high (or insert any other reason). You do not conduct pricing studies, or change your pricing, to appease that one large customer/deal. Your pricing work should be to accommodate the middle 90% of your target market. Your sales leadership will be able to handle the top 10%, regardless of how you price and package your solution.
As you read through this, if you’re familiar with a company called Price Intelligently, this is going to sound similar! I started my exploration of value-based pricing from their online resources, and fully believe in it.
Value Based Pricing Simplifies your Selling Motion
The best way to sell your solution, regardless of whether you are B2B/B2C/B2G, Enterprise orSMB Sales, SaaS or On-Premises, revolves around Value Based Pricing.
We define value based pricing as pricing & packaging based on the value your customer receives from your solution. This model is not cost+margin based, and while aware of competitive pricing it is not based on it.
The major components of value based pricing are:
- the value metric it is priced along
- the packaging of your solution
- the positioning of each package
The biggest recommendation I can provide anyone changing pricing & packaging is to:
- Keep it as straight forward as possible
- Not solve for every requirement in the market
- Collect enough data and then verify with your customers
The Right Value Metric Makes the Biggest Difference
The value metric is what your customers will purchase your solution along (per user, per endpoint, per MB, etc).
The right value metric will:
- align with the value your solution provides to your customers
- scale directly with the growth of your customer, as they grow they want to purchase more
- make it easy for your customer to predict how much they need
- allow your customers to control their costs
- align with the majority of your target market, while providing additional tiers or add-on pricing for outliers
- discourages your customer from gaming your pricing model because they will shortchange the value they receive
This is probably one of the hardest things to figure out, because it’s very easy for us to default to the standard models like “Per User” for SaaS based solutions.
Sidenote: “Per user” in many cases is a very poor value metric as it doesn’t encourage customers to expand and purchase more. Price Intelligently, and other pricing companies, echo this in their articles as well.
A really simple test I use is if a customer wants to expand the coverage of whatever they are buying, can they do that by spreading what they’ve purchased thinner and still get relatively the same amount of value out of it? If so, it’s probably a poor Value Metric. For example, let’s say you had a Software Quality Testing solution, and you decided your value metric was “Per Test”; meaning your customers would have to buy a bucket of tests every month. Let’s suppose they wanted to test one application every single day, thus purchasing 30 tests per month. Now your customer wants to expand coverage to a second application, what will they do? Buy another 30 tests? or run 15 tests on each application. Can they get away with getting twice as much value out of your product, for the exact same cost, by testing each application every 2 days? Yes… probably… and that makes it a potentially poor value metric.
I will be creating a more detailed “Template & Guide” article on pricing, with worksheets on arriving at a good value metric, and steps to get there. But to give you a bit of a preview into that process, let’s just say that your existing customers are going to play a really big role in that project.
Primary & Secondary Value Metrics
Sometimes you are going to come across situations where a single value metric does not make sense, and you will need to introduce a primary and secondary value metric. This works great where you have different audiences who care about different things, but you don’t want to come up with different pricing models. You still have a single pricing model, but with two value metrics that a prospect looks at and then realizes they can scope their needs along one, the other, or both. For example, let’s say you are selling an e-commerce software that is sold in tiers with up to X number of transactions and Y total dollar amount transacted every month. You might have some customers who have a high number of transactions but lower overall dollar amount, while others only do a few transactions a month but for very large amounts. You still have one pricing model (# of transactions and total $), but you can have two or more different tiers. And your customer knows which type of company they are, are they high dollar amount? high transaction volume? or both?
Dive a lot deeper
As I mentioned, in a future article I’m going to have some templates and guides to help you walk through this work yourself, however, in the meantime if you really want to dive deep on the world of value based pricing, I can’t recommend enough the resources over at Price Intelligently. You can start with this blog from there, which talks about some of what I’ve mentioned here. They dive into the world of MaxDiff surveys and Van Westendorp graphs, and for me it’s like being a kid in a candy store. I love analyzing data, and pricing is probably one of my favorite parts of the work I do as a PMM.
Sidenote: I’m not affiliated at all with Price Intelligently, I just actually really like the content they put out on value based pricing. I recommend starting with them, but do a lot of research on all of the different models out there based on what your needs are.
The next steps after discovering your value metric, rest in how you’re going to package the solution (which features should go into each tiers) and then how you will position each tier/package (do you have a SMB package vs a MidMarket package? etc).
When Value Based Pricing Reduces your Profitability
An outcome of your value based pricing exercise may be that you’re overpricing your solution per unit. Once you go through the exercises of finding how you should be pricing, you have to work with your Product Management team and Finance to understand what the costs of goods for each of these new value metric units you want to sell and what the margin looks like. If the margins are not sustainable at that rate, then you can’t swap to the new model at that price. The next step would be then to work with that team to understand how we can either:
- Bring down the cost associated with every sale
- Deliver more value into the product so customers will pay more
We all wish it was this “simple”
You find your value metric, package the product based on the needs of your customers, and position it effectively for the correct market. You put way more work into this than any other pricing exercise, and now you have value based pricing. Now everything is perfect and and customers will start rolling in the door, right?
… Well… maybe
When it comes to the world of pricing and packaging two competing ideas are at odds:
- Doing what is right
- Doing what is easy
I’m going to share some of my lessons learned along the way. While, I would like to believe that this primarily applies to enterprise/mid-market sales, these could apply to all market sizes and types.
Aligning to your existing Portfolio
When dealing with a portfolio of products changing your pricing & packaging can be a difficult task. It would be near impossible to try and do it all at once, and if you try to do it one product at a time, it will not align to the rest of the portfolio. Having your portfolio align is important to a consistent and smooth sales cycle, the more variables you introduce the harder closing the deal becomes. However, having your product on the right pricing model is crucial for the long term success of the business.
You can tackle this in one of three ways:
- Introduce this new pricing model alongside your old one. Have a few of your sales reps start to leverage it. This is my least preferred option, adding multiple pricing models leads to confusion among buyers
- Combine old & new value metrics into primary and secondary ones. This means each unit that a customer purchases, will have two limits on it. (e.g. up to X users and Y MBs). One is your old metric that aligns to the rest of your portfolio, and the second allows savvy customers & sales reps to purchase the product using the 2nd metric. This is one of your better options for transitioning.
- Rip & Replace: This is an option and some companies can afford to do this. Here you may allow companies to renew on the old model, but all expansions and new sales, are on the new pricing model.
You have to know when to stop analyzing
In a previous article, I said that one of the most important things for a PMM to do is deliver value to the business. You can dive into so an endless amount of data and analysis when it comes to pricing, that you never actually put anything out there. Do the work, get the data, analyze it until you can draw a few conclusions, and then verify those conclusions internally and with your customers. You may be wrong when you go to production, just be ready to pivot quickly and have some backup scenarios ready to go.
DO NOT DESTROY YOUR CURRENT REVENUE!!
I can’t emphasize this one enough. When you come up with a pricing and packaging model, do some calculations and find out what would happen if you applied this new pricing model to all of your customers today. What would be the outcome? Would you have gained money? Would you lose a ton of money? You have to assume the WORST case scenario when switching to a new pricing model, which is everyone switches over to the model on Day 1. If that were to happen, what would happen to your revenue. If you were pricing in a way before that didn’t quite scale with the value your customers were getting, and maybe overpricing in some cases, switching customers to this new model may be detrimental to your business. It doesn’t mean that the model is completely incorrect, or that you shouldn’t do it at all. Instead, it means that you have a segmentation in your customer base that you didn’t realize, and that your pricing model should tier/package itself to accommodate for that.
It’s Fun until it’s Not
Again, I love doing pricing work. For me, it’s like this gigantic puzzle that has a correct answer and I have to go figure out what that is. It takes every skill set as a PMM, from deeply understanding your target market, buyers, how they purchase, what they care about, and how your product works. But if it’s not done right, it can lead to a long road of frustration and problems. Pricing work leads to some of the biggest impacts you have on your business, and it does have its risks!