How to Implement a High-Growth Pricing Strategy
How do the fastest growing companies identify high-growth pricing? Pricing that minimizes objections, maximizes margin, and allows for faster scale?
This is the question go-to-market expert Brendan Dell answered during a live CFO Connect workshop. He shared actionable tips on how to reverse-engineer your pricing, how to align pricing to your customer vs. competition, and ways to implement an iterative pricing strategy.
About our speaker
Brendan Dell is an author, advisor and go-to-market expert. He’s worked with more than 100 early stage and enterprise brands to help them hone go-to-market strategies, sales programs, and marketing strategies to accelerate growth. Clients include Expedia, Cvent, HP, Accrue, Zeconomy and 100+ more.
You'll find a recap of the key takeaways from Brendan's presentation below, and can watch a replay of the live webinar here.
Pricing is not an event, it’s a process
Did you know that most companies spend an average of six hours on their pricing strategy? That’s six hours total. When you think about it, that's crazy. Pricing is literally the way that you communicate value to the market right, but it's something companies spend almost no time on.
Without a doubt, the most meaningful thing that your business can do is figure out the most effective way to monetize your products. And finance leaders have an important role to play in bringing rigor to pricing, as an ongoing function. Companies should continually look at pricing as a process; something that needs to be constantly attended to and optimized.
Let’s look at some hallmarks of pricing strategy at successful companies…
The right (and wrong) way to price products
High-growth pricing” means starting with your customer's willingness to pay, and working backwards to innovation, packaging, and product.
Most companies, when they go to market, they start with innovation. They start with a cool new widget, or a suite of features. And then they look at how much competitors charge for things like this, and consequently, what they charge that’s a little bit higher or a little bit lower than the competition.
Author, advisor and go-to-market expert
The highest growth companies do not start with the competition. They start with the customer and they package and deliver value based on that. And this comes to how you do marketing, how you develop products and so forth.
Price based on value vs. competition
Competitor-based pricing is looking at what people are charging for things that you deem similar to yours. And then you try to go a little higher or lower, depending on how you’re trying to position yourself in the market.
Value-based pricing is aligning what you charge to what your customers value.
To make sure you’re creating value-based pricing, there are two main factors to evaluate & optimize for on an ongoing basis: segmentation and value metric.
This is basically breaking up your end-user customer base into different groups, aligning how those individual groups find value, and charging appropriately. There's an 80/20 relationship between segments and the value to your business.
As an example, there are some companies that insist on maintaining a presence in the SMB market, even though a huge percentage of their revenue is derived from enterprise clients. And it takes a massive team to keep SMB going. Even though it's adding almost no value to the company. They're saying ‘we want to be everywhere’ instead of saying, ‘where is the customer getting value?’
A customer-centered mindset looks at value for a given segment, and then prices and delivers that value uniquely or — chooses not to deliver to that segment at all. You have to focus on trade-offs.
The most effective way to get your segmentation is quantified buying personas. This is the foundation of your entire pricing strategy and what I've observed again, and again, is that high-growth companies do this properly.
But personas are generally done wrong. They deal in vague generalities, about what people in a given role or given demographic like, and try to put a face to a name. But when we're crafting pricing, this is not effective.
Personas need to be specific, actionable & based on research. In the end, you’ll have personas that look more like: Administrator Alan highly values Salesforce integrations, Chrome extensions, et cetera.
We have lofty aspirational goals in terms of the value our software delivers. But what it often comes down to for the customer is time savings, efficiencies and so forth. So we need to understand the true value people are getting from our product, and price, package, and position it based on the actual value versus our perceived value.
High growth companies are going to focus and double down on their big opportunities and they're going to be willing to let the lesser opportunities go.
Value Metric: the thing you charge for
The second important pricing factor to optimize is the value metric. In SaaS, the value metric is the thing that you charge for.
One of the most common value metrics that SaaS and technology companies use is user seats - charging based on the number of people using the product.
And in many cases, this is not the most effective way to do it. Just having more people on the platform does not necessarily mean you're getting more value for it.
If we look at HubSpot, a marketing automation tool, they align their pricing to contacts. As a marketer, the more people you're communicating with, if you're doing things right, the more value should be able to derive from their platform. Which means that as their usage grows, your value grows and you are aligned.
How to create a high-growth pricing process
Is it possible to raise prices and increase revenue? Yes. But you can’t rely on flawed statistical analysis or assumptions. You’ll want to implement a culture of real-time testing.
Author, advisor and go-to-market expert
Surveys tell you what people say they will do. They do not show you what people will actually do. If you ask people if they want to buy something they'll say yes, but when you ask them to give their credit card out, it's different.
So running real-time experiments is how you start to get a sense of whether you need to tweak your pricing.
There's something called market replication models which actually makes people choose in real time, as a simulation. You can do this in transactional models where people buy online, and you can do this in rep-driven models. You can do this with cars, you can do this with anything.
As you’re thinking about real-time testing, here are some elements of pricing to test & iterate on:
Packaging and bundling
Set up fees
Pricing should be done iteratively on an ongoing basis, not once a year or once every three years when you have a big, new product release.
Start with price, then product. Focus on value to the customer, do proper segmentation, and test your value metrics. And finally, implement a culture of iterative and real-time testing so you can figure out how you actually deliver value, how customers realize value and how to get the highest possible price for what you do.
You can learn more about Brendan's work on pricing & go-to-market strategy on his website.