Pricing. It’s the most effective driver of revenue and profitability for a company at any stage—and the thing every product marketer is terrified to touch. Yes, pricing is intimidating, but the cost of not giving it the constant attention it deserves is crippling. Neglecting pricing can undermine the success of your product portfolio and, at an extreme, drive your company out of business.
Product marketing is a mix of art, heart and science, while pricing is more science than art. But not many product marketers buy into this belief: 52% base pricing on the competition, 24% use cost-plus pricing, 21% ask customers what pricing should be, and 18% guess, according to Price Intelligently.
The reality is that pricing can be set more accurately by using a scientific process. And you, as a product marketer, need to own it.
The Importance of Pricing
Pricing affects revenue and profitability more than anyone realizes. Regardless of stage, but especially for companies in expansion and growth stages, pricing is the best lever to pull to make more money. Too often, companies that want to increase revenue reach for the “sell more,” “reduce costs” or “invest in new products” levers.
While each of these could theoretically increase revenue, they’re not the most effective. Just a 1% movement in top-line pricing can equate to a 12.7% increase to the bottom line. The same improvement 1% improvement yields far less when applied to revenue, cost of goods sold, research and development, and selling, and general and administrative expenses. A 1% improvement in pricing is twice as efficient as the same improvement to retention and is four times as efficient as the same improvement to acquisition.
But simply increasing prices isn’t the only way to improve pricing. Packaging redesign also can drive significant improvements to revenue and profitability. By recalibrating which products, features and services are in each of your packaged offerings (based on usage and market demand) and adding or removing packages, it’s easy to net additional revenue while making your product portfolio more market driven.
Despite all this upside, most companies neglect pricing. While it’s common to see dedicated pricing roles (or even entire pricing teams) in late-stage corporate machines, this is atypical in smaller companies. In a recent OpenView Venture Partners study, 55% of expansion- and growth-stage companies reported that no one has pricing in their job description. For the remaining 45%, pricing tends to be a small piece of someone’s responsibilities rather than an area of focus. But companies without someone thinking about pricing and product packaging are literally losing money because of it.
Pricing should be a living, breathing organism in every company. Early-stage companies should review pricing quarterly and make changes every six months. Later-stage companies should review pricing quarterly but only make changes once or twice a year.
Changing pricing is scary but offers rich benefits. Ongoing improvements to your pricing model let you monetize customers more effectively by charging for the value you’re constantly adding to your products and services. It also clears the lead funnel by forcing out customers who aren’t willing to pay and are, therefore, truly unqualified. Pricing changes can also spur annual contracts from prospects and current customers who are up for renewal and want to lock in existing, lower prices. Put simply, pricing paves a faster path to revenue and profit.
A Pricing Case Study
One of the most effective behaviors a product marketer can employ is playing the empathetic challenger. There was no better time for me to play that role than when I learned that it had been three years since my company last evaluated its pricing. We also were one of the 18% who set it by simply guessing.
A lot had happened in those three years. First, our product looked significantly different. New capabilities and value had been added to our core product—and these were being given away for free instead of being monetized. New ancillary product lines and services had emerged, which were simply added to the existing pricing model as line items with, you guessed it, arbitrarily set prices.
Sales reps were having trouble articulating platform value to customers, navigating our price book and generating proposals for prospects. There was no clear upsell or cross-sell path. This resulted in confusion and inconsistency that bordered on anarchy. We were constantly changing our pricing on a deal-by-deal basis, discounting was through the roof and prospects were just as confused as the salespeople.
But, perhaps most shockingly, existing customers were telling us that we were “cheap,” and they were willing to pay more. While a great problem to have, it’s a bad sign that we were long overdue for a price overhaul. While it would be a slog to get back on course, the upside for the company was huge—if everyone was willing to get on board.
Your New Mantra
Before touching anything related to pricing, it’s imperative that you accept that “pricing is a process” and evangelize that mentality across your organization. This must be embraced before you start, retained during the journey and held close after the first wave of changes is implemented.
Making any degree of change to optimize pricing is an emotional process. Pricing affects every department, from finance and its revenue projections to marketing and its budgets to sales and its quotas. As such, just about everyone will have an opinion on what pricing should be. Evangelizing that pricing is a process sets you up for success and helps manage expectations. It establishes that changes will be approached scientifically, as a team decision and, therefore, as close to perfectly as possible. It also sets the expectation that new pricing isn’t final and will continue to be iterated, preemptively allaying fears from stakeholders and preventing stalled decision making.
To approach pricing changes as a process, you must:
- Conduct a study to analyze internal and external data and arrive at a new pricing hypothesis
- Pilot the new hypothesis with a small group of salespeople and prospects
- Fully roll out pricing changes to new and existing customers
This sounds simple and fast. And it will be, the more often you go through the cycle. But your first time through will be the longest and hardest—especially if your company hasn’t touched its pricing in years. Fear not. If you follow the process, you’ll arrive at the right answers.
Step 1: Analyze Data and Create Your New Hypothesis
If you’ve ever been in a bank during an audit, you’ll notice two things: the auditors always wear blue suits and they scare the heck out of bank tellers and managers. Approach your pricing audit with the same thoroughness and bias toward data—but preferably without the fear. Or the blue suits.
It’s important to analyze a lot of data from various sources, both internal and external, before changing pricing. Internal data sources should include stakeholder interviews with all department heads and members of field teams, bookings and sales mix data, discounting levels, win/loss reports, financial projections, product feature usage and various anonymous surveys. External sources should include voice of customer (VOC) interviews, competitive benchmarking around offerings and pricing, and market panel interviews and surveys.
Because pricing touches every part of the business, it’s important to examine each part to get the whole picture. Grab every piece of data you can get your hands on. You may find that much of this data has never been pulled. Think ahead and partner with your administrators and stakeholders to build reporting frameworks that will make sourcing this data easier in the future. That way, you’ll have the data you need, when you need it, without the heavy manual lift you experience the first time. Regardless of how accessible quantitative data is, it’s often easier to start with qualitative analysis. Get some NIHITO visits and customer calls scheduled to get the ball rolling.
The goal in analyzing this data is to spot trends, outliers, deficiencies and opportunities. Things I spotted included:
- Discount rates significantly higher for one customer segment over others
- The sales mix skewing heavily toward one package and almost zero sales on another
- Price never being mentioned on win/loss reports
- Thematic frustrations from salespeople
When I interviewed customers and prospects, they echoed that our pricing was far too low for the value we were providing. More importantly, these interviews gave me insights into which parts of our product they valued the most.
You’ll begin assembling your new pricing hypothesis based on the insights you gather. Your insights could involve changes to the price points of products and services, edits to package content, and/or the birth or sunset of offerings. To get quantitative data around price points and package contents, I used two helpful tactics.
Tactic 1: Peter van Westendorp’s Price Sensitivity Model
I asked prospects and customers a series of questions regarding price and value. Based on price, they believed our product was one of three things: a bargain, so cheap that its quality came into question, or too expensive. I was able to triangulate optimum and indifference price points to determine the market’s willingness to pay. This informed the pricing of individual products, services and packages.
Tactic 2: Leveraging Product Usage Data
For package contents, I analyzed product usage data and conducted maxdiff (an analytic approach used to gauge survey respondents’ preference score for different items) and conjoint feature analyses. I asked customers to make tradeoffs to identify which product features were most valuable. Once I talked with enough customers, I could confidently rearrange product, feature and services offerings within each package so they mirrored market demand and propensity to pay.
Once you arrive at your hypothesis, it’s time to shop it around internally. Brace for strong personalities and passionate conversations. Present it to stakeholders, show the data, explain your reasoning and get their feedback. Keep discussions rooted in data as much as possible. Remember: Opinions, while interesting, are irrelevant. Aim to build momentum and move toward testing rather than trying to achieve consensus and perfection. Remind everyone that pricing is a process, much risk has already been eliminated by being scientific and more risk will be eliminated in the pilot.
Step 2: Pilot—Don’t Launch—Your Hypothesis
After several meetings spent fine-tuning our hypothesis and putting fears to rest, my team arrived at the new pricing and packaging we would pilot in the market. Our new pricing moved us from individual line items to packages, which made it easier for salespeople and prospects to understand. Each package also had a clear value proposition and was tailored for specific personas, their needs and propensity to pay. We retained some offerings that were valuable but didn’t fit into a package as add-ons. This gave our customers flexibility and, for us, offered a clear upsell path and improved monetization.
Once you have your new pricing hypothesis, don’t just say a little prayer and kick it into the market. Pilot it. Pricing is a (risk-reduction) process. Piloting your new pricing with a subset of your best salespeople and prospects is the best way to further eliminate risk. This validates that you’ve arrived at a price that the market can bear, and your salespeople can justify.
Effective pilots are time-bound, meticulously organized and closed-looped. To truly test your new pricing, it needs to make it through at least one sales cycle. At my company, that was about six months. My stakeholders were less than enthusiastic about this timeframe—until I painted a picture of us getting the price wrong. If initial responses were favorable, we compromised that we would expand the pilot to more prospects, customers and salespeople.
Choose your cohorts of salespeople, prospects and customers wisely. Use seasoned salespeople who are great at value selling, open to you riding along on calls and who are more objective than subjective. If you serve many audience segments, select prospects from each segment or industry to ensure you’ve tested evenly across audiences and offerings. While prospects who’ve never seen your pricing are the easiest to test with, remember that you’ll want to “true up” your existing customers to the new pricing at renewal. Choose some of your friendlier customers—perhaps the ones on your advisory board—and present and socialize your new pricing. To get unbiased feedback, consider offering to grandfather those existing customers.
Earlier, I mentioned pricing changes are emotional. Great product marketers infuse emotion into their marketing, not their decision making. Those strong personalities and opinions will continue to surface throughout your pilot. This subjectivity—whether it’s in the form of opinions, emotions, confirmation bias or forgetfulness—is especially dangerous as you work to fine-tune the pricing model that you ultimately will take to the broader market.
I used one centralized document to set strategy and run and close the pilot. It quickly ballooned to close to 100 pages, but I did—and continue to—swear by it. Whether it’s a Google doc, Word document or Smartsheet, one source of truth for coordination, collaboration and collecting feedback is critical for success. My document:
- Summarized the “why” behind the pricing pilot and new model
- Identified the internal and external audiences authorized for testing
- Outlined protocols and timelines
- Outlined decision-making authority with a RACI chart
- Recorded feedback from everyone involved in deals
- Logged changes
- Presented the final pricing model
The pilot of 20 prospects and customers was invaluable. We fine-tuned everything, from price points and package contents to sales narratives justifying the new prices. By the end of the pilot, we were confident that we had arrived at the correct answer, could articulate the value behind our prices and could roll out the new pricing with conviction.
Step 3: Rollout
If you’ve done everything correctly to this point, rolling out your new pricing is the easiest step. You’ve eliminated most of the risk associated with a pricing change. You’ve market-tested your new pricing and it holds. A subset of your strongest salespeople have become experts in selling with the new pricing and they can train and mentor the rest of sales. Marketing collateral is updated, and new SKUs are loaded into your price book and CPQ tool.
Now it’s time to invest heavily in training and certification around new pricing—and don’t limit this to field teams. Create materials like quick reference guides, scripts justifying new pricing, FAQ documents, escalation trees and discount matrices. Role-play customer calls until your salespeople are blue in the face. Try to exhaust and master responses to every foreseeable objective they’ll receive. Talk with your sales and finance leadership about implementing safeguards (e.g., clawbacks) so that it’s a hard switchover to new pricing and no one can revert.
Get everyone—again, not just field teams—excited about new pricing. Pricing is a key driver of company health, and everyone should know about the monumental effort you completed and celebrate the company making changes to improve its financial performance. All-hands or department meetings are great venues to champion new pricing and answer any final questions before rollout.
Have confidence at launch, but also know and accept that you likely will not retain every customer. New prospects are none the wiser when it comes to pricing changes, and most reasonable customers will accept price increases—if they’re not outrageous or there are mechanisms in place to make the adjustment less painful and abrupt.
For existing customers encountering small price increases, explain the changes in markets, the value you’ve added to your product and why they should come along. Clearly outline dates and price-change amounts. For customers facing larger increases, approach renewals like a new sale: outline a strong justification for the new pricing, dedicate a team to work accounts, and employ tactics like grandfathering, “meet in the middle” discounts or clockwork price increases.
When you’re ready to go live with new pricing, remember that pricing is a process. When you go to market with your new pricing, learning won’t end. I started another document similar to my pilot document when we went live. This way, I already had a head start on my next audit when it came time to re-evaluate pricing six months later.
The End Result
The two metrics I cared most about upon launch were average sale price (ASP) and regrettable churn. We blew ASP out of the water. Our average for new sales doubled immediately and increased by one-third for renewing customers just six months after launch. As for regrettable churn, it was zero for the same renewal cohort.
The entire process offered so many learnings, but four in particular stand out. First, lack of humility will sabotage your pricing and your business. Perhaps the most underrated interpersonal skill in business, product marketers are the best champions of humility because we trust customers’ opinions more than our own. It’s critical that you beat the drum of “we are not our customers” and get everyone to leave their egos at the door. Validated learnings and insights gained from an outside-in approach go into your pricing models. Remember that you won’t have all the answers you need, so get out of the office or pick up the phone to get them.
Second, project managing a pricing overhaul is, arguably, a larger undertaking than the overhaul itself. Because pricing affects every part of the business, you’ll work with a lot of stakeholders, salespeople, prospects and customers. While product marketers are no strangers to having multiple bosses and fielding everyone’s wants and needs, pricing changes take this to a new level. Solidify and get signoff on your approach, plan, meeting cadence and attendees—and a decision on RACI—early on. This will make the cats more herdable, decisions unblockable and your blood pressure lower. Having one central document and change logs that track each decision or modification let you battle “I thought” statements with “You said, and we agreed.”
When you believe you’ve over-communicated, communicate more. Undoubtedly, you accidentally missed someone who needed to hear or know something. Throughout the process, stakeholders will be out of the office, concentrating on projects or not reading their inbox. The more you can document, communicate, follow up and remind everyone of status and progress, the better. This holds true for stakeholders, field teams and everyone else up, down and across the company. Remind everyone that pricing is a never-ending process.
Have patience, confidence and conviction. Pricing done right takes time. Pricing done wrong is expensive. The opportunity cost of deviating from the process, rushing decisions and not taking actions to eliminate as much risk as possible is high. The moment you make a mistake, you’re eating into your profits. If you follow the right process, you will arrive at the right answer—and you’ll be able to launch with confidence and have the conviction to say, “We may not keep every customer, but this new pricing is right and fair for us, fair for the market, and balanced with the value we provide.”
You’ll know you’re priced correctly when customers complain, but buy anyway. Follow the process and you’ll cash in. But don’t delay. Time is money.
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