How to design a pricing strategy that works for you
Pricing is one of the more effective levers companies can still use to grow revenue during economic slowdowns. It was often overlooked in headier times when customer acquisition was easier – for software companies in particular – and the emphasis was on revenue growth at any cost. But with investors placing more focus on the quality of that growth, it is worth revisiting compelling research from McKinsey which shows that changing your pricing strategy can generate margin improvements of up to 7% in as little as 3 months – improvements which were sustained into the long term. So how can businesses ensure they get their pricing refresh right?
One size does not fit all
There are various ways to package and price software products, with pros and cons to each. Subscription-based pricing, where customers are charged per user and have a monthly fixed bill, is a strategy that has dominated the software industry over the last two decades.
However, as many technology professionals have noticed that 53% of SaaS licences remain unused, subscription pricing has been increasingly deselected in favour of models that align costs to value more clearly. Usage-based pricing, for example, allows vendors to charge customers based on their consumption of a product. This can deliver usage transparency, curbing the risk of your offering being seen as ‘shelfware’.
Another approach gaining popularity is hybrid pricing, which combines elements of subscription and usage-based models. With hybrid, vendors sell a subscription with overlaid usage elements, such as allowances or usage-based add-ons. This is useful as it allows for lower friction expansion (heavier users automatically pay more), better margin control (because heavier users who generate incremental costs pay more), and better retention because lower entry prices reduce the risk of lighter users churning away.
Regardless of which pricing strategy you choose, a solid pricing operations capability is required to ensure it is implemented and iterated on successfully. This isn’t easy and many businesses don’t know where to start. In my experience, there are three key principles to keep in mind when designing your pricing to achieve results.
Four tips for success
1. No department left behind.
Pricing changes, particularly with significant shifts in strategy, aren’t just for billing teams. You’ll need the whole business on board when designing a new pricing strategy, as different stakeholders will have different opinions on what strategy will be most effective. Getting the whole team involved in the designing process will ensure that your strategy has a strong foundation and works for the whole team.
For example, sales teams will need to be re-trained to pitch and negotiate new pricing, especially if transitioning to a hybrid or usage model where narratives about value and price can become complex. In a usage-based approach, product teams will need to understand monetisation models of different product features in order to accurately capture and bill for the usage. If you leave these teams in the dark about the changes you’re implementing, you’re setting your strategy up to flounder before it has had a chance to fly.
2. Get data savvy.
The key to unlocking which pricing model is the right fit for your business lies in data. Pricing is unique to each organisation, so it is important to accurately assess all options before jumping into implementation.
You need accurate data on what your customers use, how much it costs you as a vendor to support that usage, and various other factors like how retention and expansion varies by segment.
Taking this first step will allow you to build a strong foundation that is essential to figuring out your customer needs and choosing the right pricing strategy.
3. Get customers on board
It might sound obvious, but the best pricing strategy is the one that works best for your customers. After all, pricing is about value exchange. Design your strategy with their input – if you don’t, you run the risk of seriously aggravating your customers, as Unity’s recent pricing debacle earlier this year illustrated. Combining usage data with feedback from your customers is a great way to design a pricing strategy that will serve them best.
In order to keep your customers on board – especially in cases of UBP and hybrid models – you will need to be able to anticipate your customers’ needs and expectations. Adoption-rates of usage-based approaches have almost doubled in the past five years because customers actually want to know how much they’re spending and how their usage drives that spend. So make sure you always have data backing up your pricing decisions readily available and up-to-date, enabling your customers to easily check their usage and spend at any time to avoid nasty surprises and help them forecast their next bill.
4. Regular iteration is essential
Whatever your pricing strategy, you will need to revisit it regularly. Once you have the previous three steps in place, build them into your regular workflows. There is a lot of scope for learning and growth through iteration, and so it should become a key part of your company priorities.
A “one and done” approach is a surefire way to leave money on the table, as customer needs and expectations are continually evolving. To stay on top of their developing needs, ensure there are effective flows of information between sales, finance, and customer success teams. Have tools to not only collect and analyse trends in customer usage, but to easily update bills and contracts. Engage in regular open dialogues with your customers to receive on-the-pulse insights into value they get from your product – which will also give you awareness of how else you can serve them.
Setting up for long term success
Businesses which review and update their pricing at least once every 6 months see nearly twice the average revenue per user gain of those who update it less often. Transforming your pricing design will offer new opportunities to think creatively about your product’s value as well as allow you to take proactive control of your growth, even in uncertain economic conditions.
Griffin and his co-founder John Griffin started m3ter after building and selling a backend-as-a-service company for video games to AWS. The experience brought the challenges and opportunities of usage-based pricing into sharp focus, inspiring them to found m3ter, an intelligent metering and pricing engine for SaaS businesses.
Earlier in his career, Griffin held senior digital strategy and transformation roles at Sky.