Estd 4.22.2023
.png)
It’s important to recognize that pricing isn’t just about placing a price point on a product. It’s a strategic exercise that touches every part of your business. We’ve designed this 5-step framework that when sequentially applied across these steps will help take you through the process of a pricing strategy exercise. (Note that diagnosing a pricing issue, is then conversely looking at all these steps from the bottom-up.)
The first step in any pricing transformation is to clarify your goals and identify your customer segments. Without a clear understanding of what your company aims to achieve—whether it’s boosting margins, capturing market share, or reducing costs—your pricing efforts may fall short. Additionally, there needs to be complete clarity of “who” your customers are, i.e. what segments are you selling into and what are their Ideal Customer Profiles (ICP).
In many cases, pricing problems stem from a lack of alignment within the executive team. Different leaders may be advocating for different pricing strategies, each with their own assumptive goal and understanding of customers segments.
This happens because there’s often no clear consensus on the company’s go-to-market strategy or an updated ICP. Misalignment at this stage can lead to significant downstream issues, where there is often a lot of confusion, arguing and friction. All the while packaging and pricing that is created as a result of misalignment will likely not resonate with your target customers. There are many epic cases of failure with this being the root cause. In fact, most pricing problems are truly problems of misalignment at this stage.
Here’s the bottom line: alignment is key. When everyone is on the same page about your strategy and segments, everything else flows more smoothly.
In fact, later in the book we dedicate a small chapter to a case study on organizational alignment at Citrix and usage of the ADKAR model by Prosci for change management.
With your goals and segments clear, the next step is to focus on packaging (and the corresponding positioning). Packaging isn’t just about bundling features; it’s about creating offers that make sense for your specific customer segments.
For example, it’s common to see companies start by creating a “good-better-best” pricing structure and slotting features into three plans. But when done without a deep understanding of what each segment truly values, this approach can backfire.
Imagine throwing all your enterprise features into a high-end package without really understanding what your enterprise customers need. You might end up with customers choosing a package that doesn’t fit them or, worse, discounting heavily just to make a sale. This can lead to what’s known as “shelfware,” where customers pay for features they don’t use, which ultimately harms your long-term financial results.
Or when your packaging is too granular it slows down sales cycles and can actually work well for bespoke enterprise type deals, but this will completely not work for a mid-market customer segment as these move quickly and the adage of “time kills all deals" applies.
The next decision around pricing metric selection is to be made independent of package design. It is most often a step considered after package design.
The price metric is how you capture value from your customers. This is where you decide whether to charge based on usage, subscription, or another model. The right price metric aligns with your customer’s perception of value and your business’s revenue model.
For instance, in the early stages of a company, a usage-based pricing model might be appropriate as it encourages adoption by reducing upfront costs. But as this company grows, it may seek more predictable revenue, and might shift to a user-based pricing metric.
Or consider a case of launching a new AI-based SaaS product, you may encounter many considerations around pricing this product. The existing product category may still be entrenched with a user-based pricing model, however your product will drastically reduce user count as it automates a lot of work humans were doing. Additionally, with an AI-based product the ongoing cost implications are non-trivial, which increases the need to select a usage-based pricing metric. Even here the specific metric within the realm of usage-based pricing (execution, resolution, by unit tokens, or by output tokens, etc.) needs to be a carefully considered decision that helps both you and your customers win.
The point needs to be made here that many companies will combine Step 2 & 3 and introduce pricing metric as the primary way by which packages are differentiated – this is not a smart decision because you signal to your customers that the quantity of the product is how you will tier the offers and not by differing customers needs. We recommend treating it as a separate decision where packaging is first about the capabilities offered in the product and not the quantity of usage.
Once the two most important decisions/levers have been made around Packaging and Pricing Metric, it’s now finally time to focus on rate-setting—choosing the actual price points. This is where the rubber meets the road in terms of pricing.
Rate-setting should reflect your overall strategy, market conditions, and the Customers’ willingness to pay . It’s a complex step that involves understanding pricing psychology, market competition, and customer expectations. For example, while a conjoint analysis might suggest a specific price point, you’ll need to consider how this aligns with your customer’s perceived value and your competitive landscape.
Also, as much as qualitative and quantitative research may provide detailed answers, it is always important to test them before launching broadly as the main offering or line-up.
The final step is about the structure that helps your pricing strategy actually succeed on a day-to-day basis.
Operationalizing pricing is crucial to ensuring that a company’s pricing strategy is effectively implemented and drives the desired business outcomes. This phase involves integrating the new pricing model into every aspect of the business, requiring the alignment of systems, processes, and teams to ensure smooth adoption.
Essential tasks include instrumenting the pricing metric, implementing either a basic calculator or CPQ system and integrating with an ERP and/or Billing system. Depending on complexity these implementations can take months or even years and can make or break the pricing strategy.
Additionally, it requires effective sales enablement, deal management (Deal Desk), discounting policy setup and enforcement.
Join companies like Zoom, DocuSign, and Twilio using our systematic pricing approach to increase revenue by 12-40% year-over-year.