Our company is built on the premise that pricing is your single most powerful variable for driving growth, taking market share and maximizing value creation. Unfortunately, far too many companies don’t pay attention to the warning signs that their pricing strategy is failing.
Anyone telling you that pricing is 100 percent a science and claims to have it all figured out is delusional. Why? Because you’re selling to people. And even with our amazing technical advancements, we still can’t predict with certainty how the human brain will react to specific prices.
In setting prices, it helps to have an expert who can balance both art and science in your strategy. I sat down with Chris Mele, Managing Partner of Software Pricing Partners, to demystify some of those telltale signs of a failed pricing strategy.
Five (among many) key signs of a failed pricing strategy:
1. If you look back at your customer base and know instinctively that you’ve left money on the table
The feeling of leaving money on the table is typically a side effect of a failed home-grown pricing strategy. That strategy is often littered with bespoke deals, and no plan for properly scaling with the value delivered over the years. Eventually, you will have customers paying very little yet are extracting huge value.
Second, the feeling of leaving money on the table comes from instituting a price change, which often follows one of two likely scenarios: (1) You pushed the price change to customers and created stress, maybe even permanently damaged goodwill or (2) you grandfathered in your legacy customer base with the old prices.
When you change pricing, packaging, licensing or launch a new product, you have this wonderful chance to readdress all the people you’ve left money on the table with. And if you handle that right, you can lift the revenues of the legacy base over time. You might not get them to upgrade completely to today’s pricing but getting closer to today’s pricing is still better than ignoring the problem.
2. If you have unlimited, or all-you-can-eat options anywhere in your strategy
You are not selling a depreciating asset; software is not like a tangible item that loses value over time. With software, you are selling a product that is constantly getting better; there’s a product roadmap of daily, monthly and yearly improvements that increase the software’s value. However, if the customer has you locked into a sweetheart deal of unlimited usage at a set price, you’ll miss out on money from the software’s accruing value. The horrible version of all-you-can-eat says, ‘Here’s a flat fee of $10,000 for the year, or $100,000 for the year to use the software all you want.’
The trick to pricing and packaging is to make sure you can still get existing customers to pay for capabilities that come out in the future. Too many times the pricing strategy implemented ignores tomorrow’s value and acts instead as a mere line drawn in the sand, marking a period in time when you were a bit hungrier for new customer logos, rather than optimizing revenues.
3. When your prices don’t account for your customers’ varied budget cycle
Every customer just wants to pay for what they use, but nobody wants a variable bill. Nobody wants to see a bill at $10,000 for a few months, then have it jump to $30,000 or $60,000. You can’t budget for it and at the end of the day when the cost exceeds expectations or the investment amount exceeds the budgeted amount, people lose their jobs, pilot projects get canceled and software gets yanked out. Most software companies love this idea that the more the customer uses the more they’re going to get paid, but that’s not enough. You must get inside the buyer’s brain and know what issues they are facing.
If you’re selling to the federal government, you need to know that it’s a longer-term contract and they’re not going to want to see a lot of fluctuation that appears with typical consumption strategies. If you’re selling to a school, you need to know their budgeting cycle and the cadence of when those dollars are approved and for what time frame. So, you can’t hit them in month 18 with a cost overrun because there’s no budget. If you are selling to certain commercial customers, they might be a little more tenable to variations in pricing. You must know the industry and the dynamics at play.
4. If you did not model in detail the impacts of pricing changes for the entire legacy customer base, as well as the impacts on generating net new revenues
You’re essentially flying blind. Every change in price impacts new customer acquisitions and renewals. Everybody is staring at a different price change in the face. For some customers, the price is similar to what they paid before, for others it might be far less. If you put a price out there and it’s lower than your existing contracts, that will likely come back to bite you at renewal time. The customer won’t forget and will demand the lower price you now offer to new customers.
Then there will be customers who will be asked to pay significantly more. If you didn’t proactively communicate with them and they notice the new, higher prices online, they’re going to immediately start searching for alternatives. The worst part is you probably won’t even know that they’ve been shopping around for other options until it’s time for renewal; they probably won’t call you ahead of time to give a warning.
You should understand the impact of your pricing changes. Many pricing advisors avoid the tedious work of conducting a detailed impact analysis to look at all the net prices paid, and to compare them with the net prices of your new pricing strategy. It’s hard work, it takes expert pricing analytics and it means mucking around in the messy world that has to do with the cleanliness (or lack thereof) of your billing data. This isn’t a game of broad strokes, aggregate trends and some market research surveys. You have to simulate the price changes account by account by account. Pricing is about mitigating risk. Skipping out on impact analysis homework maximizes your risk of things going wrong.
5. When there is friction in the selling process because salespeople must explain things that should be intuitively obvious to prospects.
If you overcomplicate what you’re doing and try to get the pricing really super accurate, then the salesperson has to ask all of these questions of the customer and this creates friction. Salespeople have it hard enough as it is; overcomplicating pricing and packaging loses deals. Pricing is one of the most powerful levers you have in being perceived as being easy to do business with by customers. If you make it too accurate (complicated), buyers will choose a different vendor whose pricing is easier to understand and poses less financial risk—even if the solution is a less capable one.
You want your pricing strategy to be as elegant as your software. Pricing elegance comes from combining simplicity to the customer with the ability for you to be paid fairly for the value you deliver.
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