Estd 4.22.2023
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Jan Pasternak is a recognized leader in the sphere of Software Pricing & Packaging, and has driven pricing for companies such as Microsoft, LinkedIn, Citrix and Coupang.
From growing revenue through optimizing product line-up to managing sales policies, Jan’s ideas tap into a deep understanding of the subject.
I interviewed Jan on his approach to software pricing, where he shared his general approach to the topic, as well as some lessons learnt while he was leading pricing at Citrix.
When Jan joined Citrix around 2014, the focus was initially on how to approach the portfolio across the existing product range. While the key product at the time was GoToMeeting, there were a variety of other communication products like GoToWebinar and GoToTraining, besides other security and remote access products also on SaaS. Jan’s job was to redo the pricing for all of them, embarking on a successful journey to grow revenue through optimizing product line-up and managing sales policies.
The following are some key perspectives in his own words:
In the beginning, the sales of all our products at Citrix combined both offline (in-person) and online. The challenge was different for each, but some themes in SaaS products were common.
Usually, for established/mature products, core functionality tends to get commoditized. Larger players like Microsoft, Amazon, and Google, started providing a product for free, like video-conferencing with Google, or a single sign-on with Microsoft Office 365 that is either free or heavily discounted.
Such pieces of functionality were initially offered by independent companies like Okta, GoToMeeting or GoToMyPC, and then, they became part of a commoditized body of product.
The company has to understand how to adjust the line-up as it could become too expensive, but it also has to stay competitive and provide core functionality at either a premium or very low cost.
In this case, the key is to focus on the premium elements and figure out how to make money on them. A company specializes in a certain feature, whether video-conferencing, password management or single sign-on. They probably have much more advanced premium features that they can offer, which Google, Microsoft, the Ankle Biters or the competition are not offering.
The goal or challenge for products that are already established and being commoditized is to stretch the line-up to accommodate the masses, who are just interested in basic functionality. But, at the same time, you also have to push some portion (whether five or seven per cent) into premium offerings, which is what the company specializes in.
To talk about a differentiated feature based on which one could create a premium tier, let’s take the example of GoToMeeting. Here, the differentiated feature was whiteboard functionality. We considered introducing some GoToWebinar functionality into it. So, from your GoToMeeting, you could run large, all-hands-on meetings, or incorporate it into other communication, including email, chat and messaging systems.
This means you’re not just selling the fact that one can talk over video, like Zoom, but the premium of making scheduling easier. For instance, adding the scheduling functionality of everybody marking an available time, and the most suitable time for all to meet is automatically chosen.
When it comes to general pricing methodology, I have observed that there are three stages that work best.
You must first start with a hypothesis around key value drivers, customer preferences and product packages.
The round of testing usually leads you to polish the new offering. You validate the key value drivers you selected in the beginning, but now you understand better what the tiers should be. There could be two or maybe four, and you can also determine the cut-off points between the tiers in order to maximize revenue.
In testing, data simplicity matters. If you propose four tiers of a product, even if that means each prospect finds a solution better suited to their needs and consumption, the tiers can get confusing as they require analysis to choose. If you offer fewer tiers, even if they don’t fit the customer needs as well, you see a higher conversion rate. This is a bit counter-intuitive initially.
It is important to not test only on the customers who are already visiting your website. A common mistake is putting something on a website without a broader demand generation campaign, especially when it comes to discounts. If you’re only talking to pre-existing customers, and offer them the product they visited the website for, but cheaper? Of course they will buy it!
But one cannot quite measure if you will be able to attract new customers who are not even considering the products. It could lead to false negatives and misplaced comfort.
It must be added that driving agreement across departments is necessary. If you are introducing discounts, finance will be terrified; sales will have mixed feelings, because on the one hand, they can sell something more easily, but on the other, they cannot meet quotas if the discount is too deep. The product team will probably be excited to connect to more users. Driving the agreement on what the success metric is, and ensuring that everybody is comfortable with that, is more difficult than doing the data work.
Multiple conversations with customers face an issue will not amount to much, due to difficulties in quantifying such results. How do you design the right survey, then? Factors to consider include designing the right survey with the right financial model, being data-driven by capturing differences in perception or performance of different tiers.
The challenge in coming up with a new tier and running a survey is that it requires the customer to have knowledge of your offering and your value propositions. You may need to provide considerable context before running through the simulation, and give out information about what the customers are selecting in a survey. This is why it’s potentially difficult to get people to complete a survey, and you often have to incentivize them to get to the end.
When you have a new product, you can test more ideas as you don’t have a well-established customer base to be careful about. For us, most of the products under consideration still had a large body of subscribers, who should not be rushed too much.
How you change the line-up but not cannibalize revenue from the existing customer base, is a whole different chapter. You could increase the attractiveness of a product and boost new sales, but risk losing some existing customers, from ongoing or recurring subscriptions. The key here is to be proactive about change, let it happen on your terms, rather than having a displeased customer contact you.
Balance this with segmenting the existing customer base and offering slightly varying things to different cohorts. Some use the product very often; some got a deep discount when they signed up, as they negotiated well. Some bought 100 seats, and are using 7; others are using 70.
Considering all the variables, one needs to segment the customer base and vary the approach. Proactively and creatively offer alternatives. Stay upfront on prices going down and offer either a better option for the same money, like an upgrade, or a discount (with some strings, not unilateral concessions), like committing to more time or getting an add-on.
It also helps to create a new line-up and modify it to be quite different from the old one. Taking the same tiers and discounting them makes the comparison too easy for the customer. Even purely from a marketing perspective, packages should be called something different, like changing ‘Pro’ and ‘Elite’ plans to ‘Premium’ and ‘Advanced’, with variances in the feature set.
Two important elements to consider before addressing the difficulty in selecting an actual pricing model (like charging by number of seats, per interaction, data-volume driven, etc.) are:
Pricing is not necessarily always about what objectively generates the highest revenue.
Think American Express, they don’t own terminals, but just the standard, and make huge amounts of money for something like payment rails. But because they collect the money, when the customer makes money, there is no pushback and their fees are paid, because there is no risk.
On the other hand, look at inexpensive Office solutions, for $9.99 or $19 a month. People question whether they will make enough interaction in that value, to justify the commitment of purchasing for a year.
That becomes a big conversation on how the customer wants to be charged. The more flexible, the better. The company, whichever round of financing it is in, should demonstrate to shareholders or investors that it has a stable source of revenue. Illustrating this is easier if you can demonstrate subscriptions and committed customers.