Setting the right price for your product or service sits at an intersection of important and uncomfortable. It’s important because your company’s revenue and growth depend upon it. It’s uncomfortable because it’s natural to fear that something could go wrong and customers could hate you. Fear often means it’s easier to do nothing. But inaction on pricing is risky.
The most important step in pricing is change, and making this change regularly, according to pricing expert Patrick Campbell, the founder and CEO of ProfitWell, who spoke with the founders recently at Surge.
Campbell says, “Your pricing model should change, at least once a year, ideally four times a year, and there are many strategies one can use.”
It is important to ensure your revenue per customer constantly rises, and you can achieve this by raising the price, adjusting your value metric, using add-ons, going up-market, or using feature differentiation.
But change isn’t just about raising the price. Changing your pricing is about how you move ahead with your monetisation strategy. For example, in one quarter you may introduce a few add-ons, in the next quarter adopt a discount strategy, and so on. ProfitWell’s data shows that frequent price changes generate higher revenue per customer.
Campbell suggests that founders approach pricing in the two phases, each with clear steps, to help progress their business to the next level of growth.
Phase 1: “Get your stuff together”
Define Your Value Metric
Price isn’t just a number. It’s the exchange rate on the value you’re creating in the world. Campbell believes getting your value metric right is most important. “If you get everything else wrong, but your value metric is right, you’ll be okay.”
Your value metric is ‘how’ you charge. It can be a charge per user or per number of products or based on an outcome. For example, the business message software company, Intercom, charges based on the number of people coming through on a live chat, but their competitor, Drift, charges based on the number of people using the product at a company. The value metric that each of them chooses depends on the customer they are chasing. Intercom targets customers including, operations, product, sales, marketing, etc. and therefore need a more general value metric. Drift primarily targets sales professionals, for whom price per user is more common.
A value metric provides infinite price points, allowing you to charge different prices based on your clients’ usage or consumption. This allows your customers to upgrade or downgrade and mitigates churn ‒ one of the highest-impact things you can do for growth.
In setting your value metric, first, consider the perfect manifestation of your product’s value. It could be time savings, access to new customers, or simply the joy of using a product. If customers are willing to pay for this, you have the perfect value metric. However, most of us won’t have a perfect value metric.
The perfect value metric for the marketing platform Hubspot is the amount of money you can make using their product. However, if a blog you write generates $100k worth of new leads, how much is attributed to Hubspot and how much to you?
So, the next step is to identify, via customer research, the more tangible value points that your potential customers are willing to pay for. For Hubspot, these proxy value metrics could be the number of contacts, users, or page views.
Determine your market
A sales pipeline is about driving a human to the point of conversion. “If you don’t know your buyers, it is near impossible for you to have an optimised pricing strategy, let alone an optimised funnel to create an efficient and effective business,” says Campbell.
Creating buyer personas – data-driven customer profiles – is a valuable step for startups for a lot of reasons, including setting your pricing. To build these personas, survey your customers and prospects to test your assumptions on factors like customer acquisition cost. Online surveys or qualitative interviews will help you focus on who you are selling to and their value. Companies that undertake research at least once a quarter grow twice as fast compared to those which are infrequent with customer research ‒ some compelling maths, here!
Phase 2: “Let’s grow up”
People have a different willingness to pay for products based on their living standards and density of the product in the market, so localising your price makes sense. In Southeast Asia, willingness to pay is on average 40 per cent less than in the US. A localised pricing strategy also makes future price hikes easier.
Campbell recommends up to five categories when localising pricing:
- No localisation
- Cosmetic localisation – once you have 15-20% of your market from another region
- 2 Region localisation
- 3 Region localisation
- 4+ Region localisation
Establish a pricing committee & proper discipline
Campbell admits this may seem irrelevant for small, early startups, but it’s so important.
Even when, as a founder, you’re wearing multiple hats in your business, you need processes, deadlines and decision-makers. Failure to act or to not make a decision on changing the pricing can be risky. The earlier you have a process in place, the better it is for when you’re ready to scale.
Ideally, your pricing committee will include individuals from the domains of product, marketing, sales, and finance. Product or marketing should lead the group, rather than sales and finance. Campbell recognizes not all start-ups will have a team this extensive, but developing a similar mindset early on can help maintain focus.
When it’s time to raise, raise it right
Price rises are inevitable, so avoid keeping customers on legacy pricing, says Campbell. But knowing how to raise prices matters.
Doing some market and competitor research will help you determine the ceiling before you change your price. Consider current customers, prospects, and targets who have never heard of you when collecting data. If the data tells you that you’re already at the ceiling, it’s time to work on your product. If your product isn’t competitive, is your idea big enough?
If you’re raising your price by over 50 per cent, especially for early-stage startups, call your customers. Personalised messaging is key to a comfortable conversation. Most companies make the message about them – ‘Our costs have gone up, so we have to pass it on’. It’s easier and more effective if you remind your customers how much value you’ve delivered. Tell them what you’re going to do, and soften the blow.
Campbell has a template: “For us to continue to invest in making us better for you and the company, we need to increase prices. But you’ve been incredibly loyal – so as of today, we’re raising prices for new customers, but we’ll extend your pricing for another six months and then increase. If this materially impacts your business, let me know, and we’ll work something out.”
This is called ‘legacy discount’, and it’s a valuable lever to protect customer retention and revenue.
Five tips to raise your price right
- Don’t keep customers on legacy pricing
- Raise prices once a year or twice if you’re flying
- People with +50% or more get a phone call or personalised message
- Focus on them, not on you
- Legacy discount
Having a framework to approach your pricing strategy is a solid start, particularly for early start-ups. Building the confidence to make regular changes will come. As Campbell suggests, perhaps the most critical step is: starting now.