Name Your Number: Four Keys to Pricing Success
Though you may have outstanding customer satisfaction ratings and a stellar reputation for quality, the battle for customer loyalty is often fought on price. Nearly two-thirds of buyers want to talk dollars and cents on the very first prospecting call.
Nonetheless, pricing strategies remain the ultimate cat-and-mouse game, with even small changes having a significant impact on the bottom line. A price cut of just 5 percent, according to a McKinsey study, would require sales of 19 percent more items to return to break-even.
So how can you win at the pricing game? Here are four critical steps to develop value-based pricing strategies for success:
1. Understand the customer
What is the essence of the customer’s business needs? Who makes the buying decisions? Understanding the answers to these questions is the essence of a good pricing strategy, but it’s important to dive deeper. How do unmet needs impact the customer’s financial health? If your offering provides value that meets these needs, you can better justify your price. For example, a client of mine leverages AI to identify improper insurance claims at a much larger scale than using traditional means. This approach enables payers to recover significantly more dollars, allowing my client to rationalize their pricing.
2. Select the right value metrics
The value metric is essentially what and how you charge. It must relate to the customer’s view of value, not an easy task. I once served as Chief Marketing Officer for a real estate capital planning SaaS provider. Our typical customer would have millions of square feet in their real estate portfolio, but only a handful of users. Pricing based on the common value metric related to the number of users did not capture the value we provided. Basing our price on the square footage, a measure used by the customers, helped foster their acceptance and led to increased revenues. One note about licensed products: several companies are shifting from on-premise perpetual licensing to SaaS. It is critical to ensure you don’t use the perpetual pricing assumptions in the SaaS model, or the transition will fail.
3. Set the right pricing tiers
A common approach is to price based on functionality, e.g., have Bronze, Silver, and Gold levels or a freemium model. Buyer personas, feature preferences, and willingness to pay can help define the features in these tiers, as can usage levels. However, they must be a manageable number and not confusing or overwhelming. As an FYI, there exists a whole category of pricing tools that will help you with your pricing strategies. PriceFx, PROS, and Vendavo are three with which I am familiar.
4. Manage discounts appropriately
Companies often discount far more than needed. When I was the CMO of a SaaS company, we used a structured discounting program and discounts based on volume purchases and up-front payments, all of which were useful. And while it can be helpful to pre-approve discounts, it’s okay to be discretionary and make exceptions to close deals.
Finally, you can ensure success by involving the salespeople early in the process and making sure they can communicate the value customers will get for their money. (For more on sales enablement, you can read my past blog here). Focus on what’s critical to the customers — product functionality, quality, and reliability as well as integration with other offerings, service delivery, onboarding, and support. Also, test pricing and periodically revisit your strategy. With a little forethought and planning, you can use pricing strategies like these to grow revenues readily.
Note: A version of this article was earlier published on Medium.
Ameeta Soni focuses on driving revenues and profits for technology and digital health companies as Chief Marketing Officer and consultant, often serving as an interim or fractional CMO. Her expertise includes strategy, new product development and launch, demand generation, thought leadership, and business development.