The first ironclad law of pricing is that pricing is never done. Why? Because pricing should be tethered to a customer’s willingness to pay (WTP), but this metric is constantly in flux. It responds to trends in the marketplace, competitors’ pricing, and your products’ increasing sophistication. Since WTP is a moving target, your pricing strategy needs regular revision too. An iterative mindset—similar to the mindset needed for product development—is the best way to capture more value from your customers.
Many companies treat pricing as a point-in-time exercise, then leave it to languish. But this is a mistake. You need maintenance to continually refine pricing, ensure new features are incorporated correctly, and respond to competitors’ moves. All of those tasks require more and more information and typically at least a dedicated individual to help manage (e.g. a Director of Pricing Strategy).
In this article, we’ll share the signs your pricing is due for a revamp, give you the tools you need to have biannual pricing check-ins, and share how one multibillion-dollar tech company revamped its pricing to better monetize its ongoing innovation.
How to incorporate regular pricing checkups into your DNA
At early-stage startups, pricing tends to feel like throwing spaghetti at the wall and seeing what sticks. But as your company gains more sophistication, you’ll hit an inflection point where you’ve gathered enough information to create a more data-driven pricing strategy.
You know it’s time to refine your pricing process when:
- You hear chatter about lots of hypotheses about how pricing can be refined amongst your team.
- There are too many cooks in the pricing kitchen and no clearly defined strategy for how pricing fits into broader corporate strategy.
- Your packaging is either too fragmented (with dozens of SKUs) or too monolithic (an all-you-can-eat pricing model with no room for upsell).
If you’re nodding your head at any of these, it’s time to create an optimization check-in every two quarters. You’ll want to look back at all the new opportunities created and evaluate two things: the discount rate and the win rate.
Try to identify areas in which the win rates were too low or the discount rates were too high and troubleshoot ways to improve. Be sure to couple the numbers with a qualitative insight from your sales team. In addition, you’ll want to create certain structures and processes.
11 steps to set your organization up for ongoing price optimization:
- Appoint a dedicated pricing point person to consistently monitor it.
- Appoint a pricing council to make major pricing decisions and respond to major competitive changes.
- Systematically capture price realization metrics and detailed customer characteristics.
- Track competitive trends and changes.
- Monitor your discounting data on an ongoing basis.
- Enlist the customer success and product teams to encourage greater usage.
- Create an escalation process to avoid ad hoc sales discounting—and capture data around trends in discounting.
- Consider instituting a price increase program (e.g. a year-end uplift).
- Regularly monitor pricing KPIs through a shared dashboard.
- Systematically record customer information, as well as satisfaction and feedback.
- Secure cross-functional executive buy-in and support for pricing projects.
Don’t overlook the importance of discounting strategically
In the absence of a proper pricing function, anecdotal sales suggestions can often fill the vacuum. This results in an ad hoc, overly complex, and suboptimal discounting model. But when executed well, a discounting strategy can be a strategic tool rather than a reactive approach. By creating this discipline and moving away from salespeople pricing deals based on their own intuition or their own limited insight, you reduce the discounting spread.
Here are a few tips to create consistent and strategic discounting practices:
- Create an internal Configure Price Quote (CPQ) tool. This will allow salespeople to quickly quote a price while still on a call. Speed is key to driving internal adoption.
- Be strategic about when you show a discount to a customer. Train the sales organization to anchor the value at the original price point, then discount reluctantly. Where necessary, use spiffs to encourage low discounting.
- Get a sense of how specific feature packages drive value for which personas. Then determine which matchups should be discounted and which should not. There will inevitably be situations where you should almost never discount (e.g. if the customer is confused and comparing your product to an incomparable product, or if your customer is dependent on your platform because of deep integrations).There will be other situations where discounting will be a no-brainer (e.g. if they’re an ABM target account or a household name logo that’ll make it easier to sell to others).
Case study: How a multibillion-dollar tech company learned to monetize ongoing innovation
Company D is a multibillion-dollar public SaaS company that sells real-time operations and incident response tools. They relied on a “Good-Better-Best” pricing model, which served them well in the early years, but over time as they kept rolling out ever newer and more exciting features, executives were asking themselves: “How can we monetize this innovation?”
There was a pervasive feeling that the company was evolving from a single product to a more robust platform offering, but the building blocks were not in place from a pricing standpoint. Their core product was relatively difficult to feature-gate, and their tiered pricing model meant new features were not monetized.
On top of the current pricing challenges, two years prior, the company had already rolled out a pricing change that had meaningfully increased the price across all tiers, driving some customers to either churn or downgrade. The team knew they had to tread carefully to avoid losing more valued customers.
After hiring third-party consultants at Simon-Kucher & Partners, they landed on a hybrid pricing model that combined a “Good-Better-Best” model with add-on features for an additional cost. It isn’t disruptive for existing customers, but it captures more value by allowing some extra customization options for those who need it. This allowed them to see a meaningful spike in their net retention, generating more revenue for each incremental feature built.
Lessons Company D learned from the revamp
1. A pricing overhaul takes a massive amount of work.
Here are some of the most labor-intensive parts so you can budget your time and resources accordingly:
- Finding and organizing data from distinct silos and information systems (e.g. the finance team’s ERP, and the sales/marketing’s CRM).
- Unearthing context around historical trends in the data— having an internal resource who has been with the company for a long time is invaluable for providing backstories.
- Rolling our pricing changes—for company D it took a full year to execute. (Although the average for companies tends to be 3-6 months.)
- Feature-gating takes significant work for the product and engineering teams.
- Overhauling entitlement management, provisioning, and billing systems.
2. Pricing has to be fairly fluid, especially in competitive markets.
It is important to keep revising your approach. Competition changes and the environment around you changes, so you need to monitor all of these signals. (Just be sure to give customers lots of advance notice and make your announcement clearly and explicitly to avoid upsetting customers with changes.)
3. An agile foundation sets you up for speed and success.
If you can set up your product and your finance functions, and your billing and IT infrastructure in an agile way to quickly implement changes, you can more quickly accommodate pricing changes. For example, if your software is modular and you use lots of microservices, it may allow you to be more agile later on pricing. If you’re able to collect data on a regularl basis, it’ll be less of a heavy lift when it’s time for a pricing check-in.
4. A dedicated pricing point person is critical.
Hire a dedicated pricing person to operationalize pricing analysis coupled with a Pricing Executive Committee to review and approve changes.
Optimizing pricing is your largest untapped growth opportunity
Price and price realization (that is, how well you’re able to sell at list price) are a great bellwether for how well you’re able to monetize. If you’re discounting a lot, there’s something wrong. If you’re able to sell consistently at list price, there’s opportunity to capture more value. Pricing remains one of the last levers even successful operators think to optimize, but this is a grave mistake. It remains one of the most effective ways to drive more revenue efficiently. But much like product iteration, the only way to achieve excellence is to try, fail, experiment some more, and eventually, through much hard work and persistence, iterate into brilliance.
Ready to get smarter about pricing?
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