Here’s Why it Should Be Your Top Priority (Deep Dive)

Transcript from Episode 19 of Good Revenue

Welcome back to Good Revenue.

Today, we are going to talk about what you need to know if you're just getting into pricing and packaging, and why it should be the top thing on your list this year.

Pricing isn't just about price points.

It's not about matching the competition.

It's about validating what customers need, value, and are willing to pay for.

The last couple of years have been pretty rough for many companies in all types of industries.

Budgets have been cut, fundraising is down, valuations are down, contracts are shorter, renewals aren't assumed anymore, the buyer journey is self-serve, and there's high turnover in almost every organization, which is extending sales cycles and generally introducing more complexity into deal making.

I fundamentally believe that pricing research is one of the most efficient ways to solve for a myriad of challenges that many of us are facing all at once.

Here's my top 10 list of the benefits that you can get from doing pricing work.

First, you identify your key segments.

This gives you an actionable segmentation.

Second, you build better packages and bundles for your target segments.

Third, you avoid deal killers and the kind of fluff that is actually preventing segments from buying from you.

This one shocks CEOs and people who think that more bells and whistles necessarily means a higher price tag.

It doesn't.

Fourth, pricing lets you evaluate different business models that fit each of your segments, which helps you maximize value.

Fifth, you can differentiate yourself from the competition without spending time or money building something new just by changing the business model or changing your pricing strategy.

Sixth, you can validate your positioning.

This is a crucial benefit that helps you validate who you're selling to right now instead of just guessing or going with recency bias, which I see a lot.

Seventh, it will help you communicate more effectively with customers because you're validating key messages when you do pricing research, which makes it easier to sell value instead of just selling anticipated benefits.

Eighth, it reduces concessions and end of quarter trickery, which is sometimes tied to bad planning.

Nine, it validates your product roadmap, which is one of my favorite benefits of pricing, which is sometimes a surprise as well.

This also shocks teams who tend to measure value by the amount of time and effort it took to build something because the customer just doesn't look at any sort of product or service in that way.

And 10th, pricing aligns your go-to-market teams to the customer instead of team objectives or anything else that might be a distraction.

And so I see this as a core input for a good revenue strategy for high-performance companies.

So what's behind this top 10 list?

Let's talk about how pricing really works.

The core insight is this, customers define value, not us.

Features are what we build.

These are attributes or capabilities.

Benefits, this is what the features or capabilities enable.

This is about anticipated utility.

Value, on the other hand, is the importance, worth or usefulness of something.

That's why willingness to pay is such a strong proxy for value.

It's also helpful to keep in mind that value maps to customer goals.

These are often things like cost reduction, time savings, trust building, credibility with colleagues, risk management.

Saving time and saving money tend to be the big two.

But the thing is, you have to know if and how much those benefits actually matter to your customer, because it might be a little or it might be a lot.

It really matters if you're the third priority or the 300th priority for your customer.

Once you know and have validated value, you can do two really important things in the world of pricing.

The first is understand your value metric.

That's how you charge for something.

The second is your pricing metric.

That's what you charge.

I find that a lot of companies tend to focus more on the pricing metric or the price point, and they may not be thinking creatively enough or really thinking at all about what the value metric is, but aligning the value metric with what customers care about in your specific segments is a huge unlock for your business because you're actually giving the customer more of what they want and letting them pay for it in a way that aligns with their goals.

Companies tend to confuse benefits with value.

So independent market and customer research takes the bias and the opinion wars out of the mix because you're talking to your customer and they're validating what they actually care about.

Value changes over time, value changes as markets and customer expectations evolve, and crucially, value changes by segment.

This concept of segments and segmentation is important enough that I want to just take a quick moment to talk through three things.

I hear a lot about personas and ICP as substitutes for segments, but they aren't.

And here's the difference.

A persona is a generalized profile of a fictional individual or individuals.

They range from qualitative synthesis at best, which is helpful, to stereotypes at worst.

This is where you're effectively using someone's job title or demographics to make generalizations about how they might behave.

The ideal customer profile, or ICP on the other hand, this is generally derived from statistical data from your CRM or your analytics tools.

It's typically categorized by industry, firmographics, and it might include things like revenue and close rates, also often by industry.

This information is helpful, but it is just not the same thing as having a real segmentation, and here's why.

Segments are shared characteristics of real firms or people, and they particularly focus on important things like needs, attitudes, and my favorite, willingness to pay.

Segments can be situational and they can evolve over time.

And in my experience, the most powerful segments tend to be things like behavioral or psychographic measures, not just firmographics, demographics, or geographical attributes.

The thing about segments is that if you start thinking like this, you'll see that segments let you treat your best customers differently.

Maximizing value for segments that care the most about your strengths is the way to win, because it prevents you from diluting your efforts across a pool of buyers who just don't care enough.

So again, if you're focused just on understanding price points, what you're missing is that across your customer base, there are very likely multiple different segments.

Some segments are going to be more important than others, and therefore, you'll be able to charge those customers more because you are delivering more value to them.

There's a real difference, even though it is nuanced, between that mindset and a mindset that says, my customers are there for me to extract value from them.

I really don't love that language because I think it puts you in an oppositional frame vis-a-vis your customer.

Instead of thinking, how am I actually delivering the most value to these customers that are super excited about it, and therefore, we have an aligned, shared interest in success.

And I think if you make that mindset shift, you'll find that you'll deliver more value to customers, and those customers will be more willing to actually pay you whatever your product or service is really worth.

Next, let's talk about the top five things you should keep in mind if you're getting into pricing and packaging.

First, some customer segments are worth more than others.

It's absolutely better for your business to focus on high ROI segments instead of trying to serve absolutely everyone.

You just can't do that if you're working with only personas or an ICP.

And this is because value varies by segment.

One of the things you want to do when you get into this is look for the value differentials between your segments, which you will see in the data.

Second, your monetization strategy and your positioning are both going to change as you scale or as your business or the market grows.

That means that you have to find product-market pricing fit all over again at every stage of growth.

Even if you're a public company, even if you don't have investors, neither your customers nor your competitors or even the competitive alternatives are going to be standing still.

So you should approach pricing and monetization as a journey, not a destination.

Another way to frame this is that as you're growing, your goals might change from gaining market share to improving margins or improving retention.

And again, your monetization strategy and the positioning will likely change to accommodate those objectives.

Third, at the same time that that strategy is going to evolve over time, you have to deliver more value to your existing customers to retain them over time.

You can't assume that just because you acquired a customer, you're done.

And I think a lot of companies have discovered the perils of this as budgets have been caught in the past few years and as things have just tightened up.

If customers are cutting back on your product or your services, you're not delivering enough value to them.

It's that simple.

Fourth, you should kick the tires on a wide range of business models.

Even if you ultimately really want a subscription model, because obviously that can help your valuation again, whether you're a private company or a public one.

But don't assume that usage-based or flat subscriptions or anything else that you want to use is right for everyone.

It probably isn't.

If you've got multiple target segments, or if you have an established customer base and you're looking to grow, therefore you're seeking new segments, you really want to do some serious thinking and look at this pricing research so that you can figure out which segments are appropriate for which business models.

Subscriptions in particular are about delivering more value to customers over time.

That's lifetime value.

And if you don't do this, your customers are going to churn, you won't be able to recoup the investment or the acquisition costs of acquiring that customer.

And so therefore, again, how you charge the value metric is more important than what you charge, the pricing metric.

You've got to align that value metric with whatever customers in each segment care the most about.

One example I really like is Slack.

They charge for a number of users, they don't charge for the number of messages sent, which would be counterproductive because clearly their customers are more likely to use Slack if lots of people in an organization are on it.

So if they were charging by volume of messages sent or some other metric, they would disincentivize people from actually using their technology, which would be counterproductive.

Fifth and last, don't assume that your customers have done this work.

You can use pricing to differentiate yourself if you figure out what your best customers value.

That's true if you're the market leader and it's also true in crowded markets.

So you want to keep your strategic goals in mind, but just matching prices because someone else made a move is a miss.

The opportunity is taking that inflection point and thinking hard about what you can do to differentiate yourself, to better offer value to your best customers, and that's how you're going to win.

Shifting gears, let's talk a little bit about how to achieve all of these great benefits that we've just talked through.

I fundamentally believe that external validation, aka talking to customers, cuts through the noise and it takes bias and opinions out of the mix.

So I think you should start pricing research and start this kind of thinking as soon as you possibly can.

It's pretty common for companies to start by looking at contracts and kind of checking out the competition, but I think you're missing out if that is all that you do.

Here's my thinking.

Your contracts are an important input into your forward-looking strategy.

That is where we would start to.

It absolutely makes a lot of sense, and it's a point of insight.

However, the numbers that are reflected in past deals are also reflective of where your business, your product, and the market existed at a moment in time, and that time is in the past.

The numbers in your sales contracts also very likely reflect discounts that were authorized at the time, maybe other choices that you made at end of year or to meet some other goal in the business.

And therefore, unless you have a really large sample set, I think there are a lot of limitations in just looking at contracts.

And even if you have millions of customers and millions of contracts to look at, you're still looking at historical data.

So yes, you could project off of them, but what you're missing are all the rich customer insights that you would get if you look at this through the lens of pricing strategy and pricing research.

The other thing to think about too, is that when it comes to competitors, as we discussed just a minute ago, I would bet a lot of money that they haven't done the work that I'm recommending.

So why would you seed a potential advantage in the market just by going along with the prevailing business model or price point?

Or worse, if you are doing well, you might end up in a price war that you didn't subscribe to, and you're basically falling into a trap that your competitor has set for you.

So just focusing on contracts and competitors and short-term fixes misses the broader opportunity that can help you transform your business.

Instead, here's the overall framework that I use when we're doing this work.

I think you do start with internal analysis and insights.

So you should look at available information.

You should also have clarity on your business strategy.

Next, you want to talk to key players, whether it's in marketing or finance, the sales team, product teams, customer success.

All of these teams are going to likely have helpful inputs to keep in mind and to help you build a hypothesis.

Next, you want to move into a qualitative phase where you're talking directly to customers and you're trying to tease out answers to a series of business questions, which we'll get to in just a minute.

And then fourth, you want to validate what the customers are telling you at scale through quantitative market research.

Now, shifting into what these business questions are, the most important thing is to start with an understanding of who cares a lot and is willing to pay for the value that you provide.

This is about the need, the value, and the willingness to pay of segments.

And I do assume that most companies have at least a few of these.

So there's typically a high-value, high-ROI customer segment, and there may be some other segments where customers have a niche interest in something you're providing, or maybe they're infrequent customers or infrequent users of your product.

So they might have slightly different needs, their value may be different, and likely they're willing to pay less than someone who's using your product or service all the time.

Next, you want to understand the reference price that these customers have in mind.

What do customers judge your value against?

Third, business models.

There are lots of options for business models.

You want to align the business model as closely as possible with the value of the segment.

So if you have multiple segments, you very well may have multiple business models.

Here's a quick list of a few ideas.

Subscription model, a usage-based model, seat-based, transactional, an annual plan, an annual plan monthly, a monthly plan, pay-as-you-go, a toll booth, freemium, or a day pass.

So there are 11 ideas right there.

Give it a whirl.

See if one of those is a better fit than just what the competition chose to do.

Overall, you're trying to tease out which models align to your overall hypothesis of value, which you will validate in the quantitative stage.

Fourth, packages.

Which features create more value when they're bundled together?

And this is also something that you can start to get a sense of this in the qualitative rounds, and you will validate this in quantitative.

But some features or services have more power when they're bundled together.

Conversely, the fifth thing on this list is deal killers.

There are also very likely some features that prevent customers from buying from you because they don't get enough value out of them, or maybe they get no value.

And I've seen this a number of times, particularly if you have a feature-rich product or you offer a ton of different services, it is unlikely that all of your customers are going to want all of those services.

I would hazard a guess that that never happens.

Instead, your best fit segment might love all of those features, but maybe all the other segments don't.

Or, it could be that your high-value segment really still just cares about three or four things.

And so therefore, you'd actually be better off doubling down on a cleaner, simpler package, because that's actually going to help people buy from you.

Instead of people feeling like your product has a hundred things, I only use seven of them.

Therefore, I'm overpaying when you sell me something with a hundred features.

I'd also like to spend a couple minutes talking about some of the business questions you should think about if you are looking at multiple product offerings or multiple brands.

This is commonly found post M&A, post acquisition, and from a lot of the analysts that I read, it looks like they are predicting more M&A in 2024.

So this might be relevant to you.

These questions are a little bit different and they're broader, because what you're trying to figure out in this situation, particularly if you've acquired someone and they have products and services with similar or overlapping customers, or even if they have totally adjacent products, I think it's still helpful to think about this.

You wanna know at the end of the day, how are customers making trade-offs?

Because whoever you're selling to has budgets, priorities, bosses, investors, just like you do.

And you wanna get into their mindset, which you can do through pricing research, and understand what they care the most about.

You need to know what those customers care about in terms of need, value, and willingness to pay for the target segments across all of your offerings.

You also need to know, how can you best prioritize and package offerings across the suite?

Looking across geographies, across budget cycles, decision makers, and frontline priorities, where are you most likely to win?

Fifth, how can you best sequence offerings to maximize share of wallet?

For example, you might have offering A in some segments, offering B and C in others, and the third segment might be a combination of all three things.

So there may be unique opportunities to package, as well as things like cross-selling and upselling offers.

But even in the packaging and the pricing itself, I think there is more that a lot of companies could do.

And they would see those opportunities if they use pricing research.

Finally, and this is another really important and really large business question, how can you best align pricing, messaging, and your sales and marketing strategy to meet that need, value, and willingness to pay of the target segments?

You can, believe it or not, get the answers to all of this through pricing research.

Now your reasonable next question might be, okay, this sounds great, how?

So let's just talk a little bit about some of the methodologies that are helpful if you're thinking about pricing research for the first time.

At a high level, there are two things you need to dig into.

The first is around understanding customer behavior.

This is around product awareness.

It might be usage or utilization, satisfaction levels.

This is like baseline insights work.

Second, concept testing can be really helpful.

This is where you're trying to understand the likes, dislikes and the receptivity of offerings.

This might be something where you are showing bundles to a customer.

It might even be a new product that you're showing.

This is also used in product development research quite often.

But your goal is that you're trying to analyze each of these concepts independently without comparing them to others.

So that might sound a little bit confusing because I'm also going to talk more about trade-offs, but you need to get an understanding of both of these things.

Both because you want to understand the utility of just a single offering, a feature, a product, and you're also trying to understand how your customers make trade-offs.

As you start to understand trade-offs, here are a few methodologies that can be helpful.

One of them is called Van Westendorp.

This is about understanding pricing sensitivity, price thresholds.

I think this is really helpful, and I like this methodology a lot because it allows you to ask open-ended questions of customers.

Another popular methodology is called Gabor Granger.

This attempts to define elasticity of demand because it's giving your customers or the respondents specific price points at which they are likely to buy a product.

Third, MaxDiff.

This is a technique that helps you understand needs hierarchy, gaps, perception of offerings, the competition, new concepts if you're trying to introduce those.

And fourth, Conjoint, which is a really powerful, very popular tool that I think can be super helpful.

It helps you assess how customers make trade-offs across offerings, across features, products, price.

There are other ways you can use Conjoint too, but I think in this context, it's a really powerful and helpful tool that is definitely worth considering.

Now, as you look at your research process, I think with customer research, you should really get external help.

Because the thing is that you are trying to get as core to where the customer is as possible.

And it can be hard to do if you're the one asking questions.

Sometimes customers don't want to disappoint you or there is a brand association that might be distorting the results.

I worked for a company that had really strong customer feedback, a really high NPS score.

And I was working on a business that was new to the overall construct of this company.

And it was very clear when we did customer insights work that the brand halo of the parent company did not actually transfer to this new offering.

Because what we were doing was different enough that we really had to start from scratch and earn the customer's trust and build a brand for what we were trying to offer.

So all of this to be said, it's hard to get that kind of level of insight if they know that you're asking from the parent company.

You want to use a combination of techniques, whatever you choose to do.

And even if you choose to do all of this work yourself, just one of these is unlikely to be sufficient.

Once you have a couple of these methodologies and you've gone through these key business questions as well as other questions that are specific to your company, you'll have a lot of insights.

And then I think you're in a really good place to weigh the data and to try to prioritize which options and opportunities are likely to be the best for your business and the market.

At this point, you're also going to be able to be more successful in modeling your best options tied to the segments that you've just discovered in the research.

And then once you've done that, I would recommend that you test into restructuring your business model.

You should also be using those segments across go-to-market.

So from product to marketing to sales to customer success, every team should be making changes to bring this insights work in.

Let's say that you have three options for pricing strategy and you don't pick the most bold choice.

Let's say you pick the middle option.

That's fine.

It's still better than staying static in a world that is always changing around you.

Even if you choose to be less adventurous in following the data and you take a middle road, I think it's still worth doing.

And you should still make sure that you're doing really basic things too, like updating sales contracts and quotas and making sure all of the teams are using this research.

Because if you've done all of this, the marketing team and the sales teams should be using those validated key messages.

The campaigns should change.

Hopefully you are also working with your finance team on a better annual plan so that your marketing and sales teams could work together on revenue and retention and not on lead gen.

Your product team has hopefully a much clearer understanding of what on the roadmap is actually worth the most to customers.

This can sometimes give product teams some heartburn because as I mentioned earlier, I think that sometimes we conflate the amount of effort and time we put into something with the value that the customer or the user derives.

And so pricing research is really helpful because it provides immediate clarity around whether that point of view is fair or not.

And sometimes I think that product teams or even myself, I've been disappointed because something that I really valued and loved just wasn't worth that much to the customer.

And it might be a hard reality, but I would rather know that than continue to build things that the customer just doesn't care about and isn't willing to pay for, because it's obviously not going to be sustainable for our business over time.

Speaking of time, I don't think that pricing research needs to take a year.

It really doesn't.

I think you can get a ton of insights, everything I'm discussing here in as little as three months, if you're efficient.

And I think the payoffs would be immediate for your business.

I also think, and this might be controversial to some, that this work shouldn't sit in the finance department.

And I know that there are a lot of CFOs out there that probably would disagree with me, but here's my thinking.

The crux of an effective pricing strategy is understanding customer value.

So I think that marketing or product should own and drive a pricing strategy.

Of course, you do want the participation of finance, of sales, customer success.

Really, this is a company-wide initiative.

But at the end of the day, you're trying to understand value.

You need to communicate it effectively to customers, even in the research.

And then after you've done the research and you have all these insights and you've done your modeling, you need to be able to implement it.

And I therefore think that marketing is where I would deploy this.

If the product team is really more of a business-oriented team in your company, then it might be the product team.

But it's a really good opportunity for very close collaboration across teams.

And what I don't think you should do is just come back to the price point, because if you do that, I guarantee you, you're leaving value for your company on the table.

I also think if you do a good job with pricing research, the CFO at the end of the day is going to be happier, because she is going to have more confidence in the choices that product is making and in other go-to-market investments.

Another fun benefit for the CFO is that pricing research helps you reduce discounting.

So you don't need as many of those ad hoc, hail Mary, we just have to get this deal done conversations.

You can have an honest assessment of what customers care about and what is in fact a fair price.

That's also why I don't think that the pricing department should run this program if you have a pricing department.

I know in some organizations that function has been pulled out of marketing, but I still think that this is a very intersectional and interdisciplinary initiative.

And to get the broadest yield from the work, I think you want it to reside in a function that is more broad based, because I think they're going to see the implications and the potential of what is possible.

One other note too is that I think that some companies, if they have a pricing department, this is something that they might assign to pricing.

And I still think that I would hesitate to do that.

I think that this is more intersectional than that.

And I know in some companies, they have pulled pricing out of marketing and it's its own department, or it sits within the finance department, because they perceive it as a way to reduce risk.

And again, I think this is a mindset question.

Instead of seeing this as risk reduction, I see this as the investment opportunity for your company.

And the best CFOs are also there to help you, the CEO or you, the board, really think about the investments that are going to make your company successful.

So that's where I come down on this.

Thanks for joining us here.

I just want to wrap up by saying that I hope you can tell how much I love this topic.

I think it is so exciting.

And if you take any of these insights and bring them in to your business and you have success, I would love to hear about it.

I think that it is very rewarding to see the output of this research.

Because at the end of the day, pricing and packaging is all about value discovery.

Our customers don't all have the same interests.

They don't have the same purchasing power, and they certainly don't have the same needs.

And I think once you understand your segmentation in a very actionable way, you're going to be better able to prioritize your limited resources.

You're going to build better services and products.

And I think you'll communicate more clearly to your customers.

Insights work is powerful because it helps us better understand our customers.

We are doing this work because we want new information.

We want new insights that help us better serve the people that we are trying to help.

If you don't talk to customers, then you miss out on all of that opportunity.

So, I do recommend that you test and tune pricing as you go.

Make sure that you're collaborating closely, but don't just start with optimization.

Start bigger.

It's a real moment in time where you can do so much for your business.

If you take a little bit more risk and a minimal amount of investment, I think that you will come back with a segmentation, with positioning, key messages, pricing discipline for both sales and accountability for financial planning.

And my personal favorite, you're gonna have a better, stronger product roadmap.

You just can't get that from aligning on a price point.