How to fix your broken pricing model?
Senior Director Market Strategy, Openview Venture Partners
About the speaker
Prior to joining OpenView, Kyle was a Director at Simon-Kucher and Partners, where he advised leading technology companies on their pricing and packaging. Simon-Kucher is known as the world’s leading pricing strategy consultancy with 1,000+ employees worldwide.
Conference: SaaStock 2018
Kyle in this session talks about how you can fix your broken pricing model.
How did you come up with your initial pricing?
The answer tends to be picking the price out of thin air a lot of the time. As companies are incredibly data-driven, people are extremely data-driven about their onboarding, about their SEO strategy and about so many parts of growing a business, but pricing is still a blind spot.
So, 94% generally have a broken pricing model in some way.
Where are you in your journey?
Regardless of where you are - You can't just set and forget pricing. Your pricing needs to evolve as your company evolves because if you don't evolve your pricing it can actually break your business.
First-round Capital put out their annual state of the startup report at the end of last year and had a ton of great insights in that report. They compared Founders who struggle to raise Capital versus those who find Raising Capital to be a piece of cake.
The common denominator really comes down to pricing and revenue model.
Kyle's company - Openview, really help SaaS companies fix their pricing. A few examples below on the far left is the state of Saas pricing. Over a thousand software companies were surveyed about where they are in their pricing maturity. On the far right is the e-book mastering SAS pricing how to price your product from seed through IPO.
Top 5 Pricing mistakes
1. Too Cheap
There are five mistakes that you're probably making when it comes to pricing and if you could correct these mistakes you would unlock a tremendous amount of value for your business.
It's easy to understand how this happens. So, you build a product. You don't want any barriers getting in the way of someone adopting that product, but the reality is that B2B buyers unlike consumers, not price sensitive. And in fact, having too low of a price can even keep you out of a deal because there are reputational risks for the buyer. There are company-wide risks of going with a cheaper product that doesn't actually do what it needs to do.
Companies that were asked if they changed their pricing in the last year and what have they done this last year - actually 70% of companies did change their pricing. In the vast majority of cases, it was a price increase. What impact did it have on the business and 2% did say that it hurt their ARR when they increase prices. But 98% said that it grew their ARR. And in fact two out of five said that the pricing change had a 25 percent or greater impact on the revenue growth.
So if you think about all of the growth initiatives that you have lined up not too many have a 98% chance of success including more than a 40% chance of growing your business by 25% or more.
So if you haven't prioritized pricing for 2019, it's time to start putting that in your strategic plan for next year.
How to raise prices without losing customers.
At the early stages, people think about rolling out price increases to just their new customers. But as you get to scale you need to think about raising prices for your existing customers as well. There's a lot of Revenue potential that you can unlock and there are ways that you can do it without losing customers.
2. Wrong Value Metric
We all instinctively know what a valuable metric is. It's the unit that defines how much a given customer pays or how much you charge a given customer and historically we've always had the seat base model. That came out of on-premise or desktop software where you would install the software in a particular device and the closest analog to that in the SaaS world was charging per user.
But research shows that seats are not the only game in town anymore. In fact, less than half of SaaS companies now charged based on seats. It is important to also consider what kind of software product you are. So, if you're a horizontal application like a Salesforce or a Slack, seats are still the most common approach, but if your vertical app like a Viva remind body or an infrastructure software like an AWS or a data dog usage-based pricing is now becoming the norm.
In fact, once developers realized that they could buy AWS based on exactly how much they use they didn't want to pay for anything else that way.
A recent example, within the open view portfolio, is a company called VTS. They had a per building price. So, it didn't matter if you were the Empire State Building if you were a multi-tenant office building or a single tenant building you paid the same price and this work pretty well early on. It drove a lot of sales velocity, was easy to explain to customers, but it left a lot of money on the table and one-size-fits-all actually works for nobody in the end.
Their answer was moving to a per square foot model. So this is where the price would scale as the building size was larger and when they adopted this new pricing model within just a matter of weeks, they were able to increase their average revenue per customer by 70%. Their winrate didn't change, their length of the deal cycle did not change because their pricing was actually aligned with customer value.
3. Hard to Buy
What separates the fastest growing companies from everyone else? The fastest Growers are extremely efficient at landing new customers. They have a CAC payback of just seven months and that's because they are easy to do business with and they sell to customers the way customers want to buy.
Consider this example. If you look at a pricing page - just like as a customer, do you understand what you're getting and how much you're paying for it?
Is this looking like a business you want to actually work with? This is in fact the simple version of the pricing page if you click to view offer details to know what you're actually getting, it's been even more complicated. The average SaaS company has nine competitors on average. So, if you were like this your customers would go somewhere else.
Lets look at another example and this company takes a different approach. They do a lot that's worth emulating. I'll highlight three things in particular. This is Slack. So first off Slack clearly states their value proposition. So even though this is their pricing page should never miss out on an opportunity to explain who you are what you do.
Second, when you look at the individual plan, so they're free. They're standard and plus slack is really clear about the benefits of the plan. Their pricing page is their best performing sales rep. So, like any other sales rep, they need to be able to put lingering fears to rest and answer any objections that the customer might have.
Here's another example. This is a company called logikcull and they've actually pivoted their business model to be more customer-friendly and it's had an incredible impact on the business.
So, when Logikcull started out, they sold only annual subscriptions, and this worked pretty well initially. They were able to sign up large Enterprise logos, like Salesforce, the city of Boston, the city of Chicago, but they kept hearing the same feedback from prospects. Prospects said, you know, we don't know how to predict how much we're going to need to use so we don't want to lock in an annual subscription up front when we don't know that. Or we want to use your software for one particular case or one client and I don't want to have to convince all the other partners at my Law Firm to bring you in just to use it for this one specific case. Logikculls answer was to introduce a pay-as-you-go option where there were no commitment people could import their data and take it out, totally at their will. Within just a few weeks of rolling out pay-as-you-go, Logikcull signed up more customers than they had over the previous four years combined. These aren't just vanity metrics on the back of pay-as-you-go. They're actually able to raise a 25 million-dollar Series B this year from Nea and it closed in just 17 days and this hockey stick growth continues to take off just because they just haven't embraced a sort of that old SaaS annual contract model, but they're selling to customers the way their customer wants to buy.
4. Upsell Path is broken
Again, when we look at what separates the fastest growing software companies from everyone else. The fastest Growers have slightly higher customer retention logo retention, but they are really good at when it comes to net dollar retention. They see net negative churn in their cohorts. And this is something that is key to a long-term viability. A lot goes into this - having a great product experience, customer success, the packaging, and pricing plays a major role as well.
On the feature packaging side - There are five main ways that Saas companies approach packaging and you could think about it based on going from simple to more complex.
On the total simple side is the Bloomberg terminal -they have one offer with everything included. It's quite expensive, but you have a One-Stop shop. On the more complex side is the Twilio models. This is so super modular, customized, build your own, developers can buy exactly what they need. I tend to recommend for most software companies being somewhere in the middle and 70% of Sass companies adopt a 'Good-Better-Best' approach. There's a reason it's so popular - this is where you have packages that have increasing amounts of features, services, and functionality as you go from good to better to best this provides a great upsell path for your customers as they get more mature with your products. It also provides an easy way to monetize the new features that you're developing for. Typically, your highest value of most sophisticated users.
The other route is usage-based pricing and an example thats still relevant is from HubSpot. When they started out, they just had fixed packages. It's like a good better best model and there were some upgrades, but their revenue retention was worse than Best in Class.
We should have best-in-class was a hundred nine percent. They were at 75% and so they decided to introduce a usage-based element to their pricing and this is based on contacts. So as their customers got more marketing context, they would pay HubSpot more money. And this was a controversial decision within HubSpot and it's a little counterintuitive. But by introducing contacts into their pricing they were able to increase their revenue retention to a hundred percent. So, you know, really dramatic growth and that positioned them for a successful IPO.
Having a usage base element to your pricing is a really great way of aligning your incentives with your customers' incentives. So in a company like HubSpot, everyone wants to build products or provide services for their customers. It's going to get them more success with their marketing get more contacts of a naturally HubSpot makes more money as a result.
5. Static Pricing
Think about where you are in your company's journey. If you're in the seed stage - you have a simple product, probably simple pricing. Then you are expanding features. You may be introducing new product lines expanding your Tam, moving International. Your pricing needs to evolve as your company evolves.
This quote from Monica Saha, a long-time executive at Zuora. She was actually the architect behind their pricing.
Steve Ballmer long-time CEO of Microsoft actually says - He looks at winners and losers the winners are deep in thinking about the revenue price in the business model.
So, it's really important to be paying attention to pricing. Having people dedicated to pricing. Most people don't take pricing seriously.
When you do research and testing around pricing -you get nuggets of insight that can change the course of your business.
There are a number of different ways to ask about pricing. So, a lot of pushbacks usually is 'I don't want to just ask my customers how much they'll pay for my product.' Well, there's methods that you can use that are either direct methods that are asking more specific pricing questions, but in a standardized way, what you'll get real insights and there are also indirect methods and this is where you ask other questions that can actually help you get insights about pricing indirectly, but you're not specifically asking about pricing.
So an example of a direct method is the Van westendorp method. This is where you know, it's especially great for new products. You ask people what price they consider would be a bargain for your product. What price would it be getting expensive at what price it would be so expensive that they wouldn't even consider buying your product anymore? That allows you to see into your customers' mental models for how they're going to budget and pay for your software. You can also find clear budget thresholds or psychological thresholds in the minds of your customers that you don't want to be going past when it comes to pricing.
On the indirect side, one easy one is just asking about the reaction to product loss. So, what would the customer do if they no longer had access to your product or how would they feel and that's a good way of getting insight into how sticky is your product within the organization? What value does it drive and how does it compare to the Alternatives in your customers' mind and that can help you understand what is the premium that you can charge over competitive solutions that exist.
It's less important who owns pricing that just that someone owns it and is responsible and accountable for doing the work of pricing. It's also something that's going to be cross-functional in nature. So you have someone that owns the pricing responsibilities, but there's still a cross-functional group that weighs in provides feedback and signs off on any pricing decisions and that's going to really be really important to any successful implementation of a pricing initiative. If you don't have anyone who owns pricing today, it should be a CEO priority for the next quarter to make sure that it gets off the ground.
So, recapping - looking at ways pricing is broken.