Pricing is the foundation of any company’s revenue model. It also has deep links into everything from product strategy to sales enablement and customer segmentation.
Because it’s a complicated topic, companies frequently ask Onsite how they should tackle pricing. Our answer depends on what growth stage a company is currently in. Smaller companies have a massive opportunity to use good pricing structure to accelerate growth, while larger companies have a greater need for bundling and sophistication, along with the ability to execute multiple pricing strategies.
In this blog, we’ve outlined the top three success factors for each stage of growth.
Early Stage (~$3-15M ARR) – Set the Foundation
As a company emerges from seed stage to early stage, it typically has product-market fit, and is evolving from experimentation mode and a grow-at-all-costs mentality. Pricing has been one-size-fits-all. The next step is to build a pricing strategy and scalable go-to-market motion.
1) Define and test your value equation – By this point there is a loyal base of customers that love your product. You need to understand why they love it. Set up interviews with customers to ask what drives value for them and where they get their return-on-investment. These interviews often uncover benefits you never knew your product offered!
Use this information to feed into your marketing and sales messaging, align features with packages according to the use cases they support, and test the limits of your customers’ willingness to pay. If a customer is reporting a 20 times ROI on your product, it’s an opportunity to push price higher for future customers with that same use case.
2) Set the right pricing metric – A pricing metric is the primary unit of value by which you charge customers. In the B2B software world, this is typically a per-user price (our research suggests that 51% of Insight’s software portfolio price this way). To ensure that your pricing metric sets you up for the next phase of growth – test out alternatives early. It is a lot easier to change your pricing metric and migrate customers with a smaller customer base.
In addition to choosing a metric that reflects the value that customers receive, choose a metric that can be accurately tracked, and one that sales and customers are able to predict at time of purchase. If your customers don’t see a logic for the way they are charged, they are less likely to accept paying by it. In Onsite’s experience, no metric perfectly ticks every box. We recommend weighing your available metrics and choosing the best metric available to you.
3) Don’t limit upside – A common challenge for ScaleUp companies is “unlimited” deals. Often, a young company will sell early customers an ‘unlimited’ deal. As the product features expand, it can be painful to watch that deal stay at the same price while new equivalents sell for a much higher ARR.
Take a firm look at your product packaging and contract limits to ensure that in every deal there is a way to upsell the customer later as your product becomes more valuable.
Later Stage Growth (~$20-50M ARR) – Perfect the Model
At this point, your fundamental pricing model should be driving growth and be well matched by a growing go-to-market machine. The next pricing strategy is to ensure you can develop a repeatable model for capturing future value.
1) Invest in pricing data – Informed pricing decisions rely heavily on using all possible data about your customers and your product. Your data analysis should focus on what is happening in your orders (who bought what, at what price, versus what they should have paid) and your usage (of the features and metric levels they bought in their contract, what is a customer actually using?).
This data is used to ensure that your price levels and price model are optimized for selling, and your features and packaging are optimized for continued customer usage and growth. Building a base of good clean data requires time, thought, and investment in systems to capture information. However, the earlier you can make this investment, the better your pricing decisions will be as you scale.
2) Include pricing and packaging in product decision making – Price and customer purchase behavior need to be factored into product development. Think about your offering as a portfolio of features. Understand how customers think about using your products and individual features together, and maximize their willingness-to-pay by bundling features into integrated packaged solutions. This is the first step in pricing differentially (e.g., by feature, use case, and customer type). If bundled correctly, customers will get more value from what they buy and end up buying more.
In addition, as you begin to develop a second product, incorporate a view of willingness-to-pay early in your development cycle. Don’t get to general launch, or even beta, without a good idea of how much customers are likely to pay if you add the product to the portfolio.
3) Upsell, upsell, upsell - Your pricing model, packaging and product development should be designed to propel most customers into upsell conversations. Many SaaS companies operate on some form of a land and expand model. With a carefully thought out price metric and packaging structure, a large proportion of customers (at least 30%) should be coming back to ask for more of the products they buy currently, or to buy additional products.
For customers who are satisfied with their current products, we recommend a minimum 5% annual price increase. To do this effectively you need to target price increases based on analysis of each customer segment’s willingness to pay, and selecting a pilot group for any larger increases. To aid in execution, specifically incentivize your renewals team to ensure that price increases and upsells are executed.
At-scale growth (~$50+M ARR) – Optimize and refine
If all has gone well in the previous phases, you now you have a scalable revenue model that is consistently able to capture value, with pricing that can stand up to scrutiny. The next step is to professionalize your pricing processes and sales enablement to adapt to your (probably now quite large) go-to-market organization.
1) Invest in pricing operations, and a dedicated pricing owner– By this point in your company’s growth, monitoring and maintaining the data, keeping pricing updated and working with the myriad of sales, product, customer success and financial stakeholders is a significant task. As you scale further, you will need an owner for each of the activities below, and ideally a dedicated pricing resource to help tie everything together.
- Measure and monitor key data and KPIs on packaging (cross-sell, upsell, product usage) and pricing (discount %, ASP, gross retention, metric usage, conversion and win/loss)
- Work with product owners to perform willingness-to-pay analysis and voice-of-customer research to identify and validate pricing and packaging opportunities
- Monitor competitive price levels and value
- Develop and maintain price lists, metric definitions and packaging rule books
- Develop sales and channel partner enablement for pricing topics
- Run order management / deal desk to ensure enforcement of pricing principles
- Manage discount approval and exception processes, and provide in depth support to sales on strategic deals
- Maintain, update and optimize CPQ
2) Push toward price maximization – Many earlier stage companies price their products at lower than their true market value, by design, because logo growth is key. As your company, product offering, and sales motion becomes more mature, it’s time to further capture the true customer value you are delivering. Use the data you’ve collected, along with customer research, to track opportunities to make sensible price adjustments by segment.
It’s particularly important to track the before and after effects of a price increase. If it hasn’t significantly impacted your conversion rates (i.e., your product is price inelastic), then you know you can push a little bit higher to maximize revenue.
3) Improve sales enablement around discounting – Once you have a sizeable sales organization, the potential for lost revenue through discretionary discounting is high. Discounts are not a bad thing; they allow for differentiation that cannot be covered through list price alone. However, without the right guidance and controls, sales will leave more money on the table than necessary.
The ideal state for discounting is one where discounts are tied to specific customer traits, or drive customer behaviors. For instance, you may have a specific discount for mid-market customers due to an aggressive competitive environment, a discount tied to certain strategic accounts, or a discount allowance for customers who agree to provide a reference. Once you determine the ideal discount levels, you can design approval processes and incentives to ensure the desired behavior within your sales team. With the correct structure in place, you will maintain (or regain) control over your discounting process and reduce the amount of revenue lost.
Along with product satisfaction, pricing is the next most important lever to accelerate growth. Pricing to value, collecting data and bundling for different segments is fundamental to land and expand customer accounts. These activities require focus and an internal owner. Onsite is here to guide you via our experience and pattern recognition. We can be reached at email@example.com.