There are basically two times to make pricing changes. One is when a force that is external to the pricing committee demands a thoughtful pricing response which is either going to be market-driven or product-driven. The other is when the pricing committee as an internal force identifies a problem or opportunity that it is going to address. The second group is easier to handle because you can prioritize them where you see fit versus an external force that usually dictates a short timeline for your team to formulate a response.
Market-driven
When encountering a market-driven reason to potentially change pricing. It is the result of competition either adding features or changing price.
Competitors who have better products and worse one both can release new features, and in a predominantly software-as-a-service industry (SaaS) this will definitely be the case. However, better products were already better than yours and feature upgrades for these superior products will frequently come with price increases if the pricing manager within your competitor’s company is rational. CEOs and CFOs want to see a return on their R&D investment in said feature. The real trouble comes from competitors with inferior products. They are typically startups or in rarer cases, a company like Microsoft who has decided they want to gobble up your space in the tech sphere. This startup is trying to disrupt your space and take your customers and may not raise the price to compensate for this new feature set. If this happens, as it often does, it will reduce the value surplus that you had over your inferior, startup competitor. You’ll need to respond by either releasing new features from the product roadmap, over which you have very limited control. Or you have to effectively reduce price. This can take the form of reducing your price, which I would advise against, if you can avoid it. And instead look for products that are sold separately as value-add extras and change your packaging to include them in your bundle. That way you can battle your least favorite startup on price without reducing revenue.
The other external market force comes from competitors reducing price, which is most common and problematic when it is done by your competitor with a superior product. This is bad. Your competitor with a superior product who is also typically better-resourced is aggressively courting your customers by offering a better product at a more similar price (than before). What do you do? Well, by reducing their price, they’ve cut down on your price advantage, so you could lower your price to maintain that advantage. But now you’ve responded to their price reduction by starting a price war, and the better resourced company with a better product is likely to win that price war. So that doesn’t work does it? You have two other options. One is to pull the same trick we did in the last example of taking previously standalone add-on products and bundling them into your core product offering. The other option is niche down, which is a way to adjust your competitive strategy and remove the focus from being directly on price. If you’ve made it this far in my pricing guide and are wondering why I’m veering off from price at this point, stay with me. The strategy of niching down is based on the insight that your competitive space should be as broad as one that you can win. What is winning? Winning is acquiring and retaining profitable customers. If you can’t continue to do that against your larger competitor that is trying to squeeze you out, you should shrink your field of customers that you compete to win so that the deck is re-stacked in your favor. For instance, let’s say that you are Vimeo several years ago and are competing against Youtube. If you are the head of pricing at Vimeo, you can feel the tide turning against you because Youtube is building huge audience of consumers for the videos that its creators are posting and the product is free. That’s bad. So what do they do? Narrow the focus to video pros and commercial customers. If you can’t win in your current space because a giant competitor is coming after your market, then it’s time to identify who your best customers are who love your product the most, find out why, and go get more of them at your current price.
Product-driven
The product management team should always be delivering new functionality and it generally comes in two forms: new features and new standalone products, and the pricing process for each is very different.
New feature
When a new feature is being released, that’s opportunity for some of us in the pricing biz like to call feature teeth. It’s a ridiculous-sounding term, but it’s also incredibly helpful. If your product has pricing tiers, roughly: good, better, best, then you have an opportunity to leverage this new feature to convince customers to upgrade. And upgrades = incremental revenue. This incremental revenue drives lifetime value (LTV) up through pricing growth, which if you remember is incredibly important for your company’s long-term profitability and its valuation. This incremental revenue is the return on investment (ROI) for the R&D investment your company made in developing the feature. For users already in that tier, this additional feature should improve churn rate since the value proposition of the product is suddenly improved at no cost to them and delivers on the inherent promise of buying SaaS products – ongoing improvements without switching or upgrade costs which isn’t true of on-premise or physical products. Be careful when placing a feature within one of your packaging tiers. Your bias should be to include it in the highest package first, because you can always bring it downmarket, but once it is included in lower-end packaging, it cannot be taken back without a lot of painful change management and lost customers.
New product
Pricing new products is a bit of a crapshoot. For that reason, you need to de-risk the decision as much as possible. Benchmarks are helpful. Are there products in this market already for sale whose price points you can use as starting points? Are there indirect substitutes? If no direct comparisons exist, an indirect substitute could be the manual labor required if a company doesn’t use your shiny new automation tool. Keep in mind though that you cannot price your product for the equivalent of the cost of that labor that will be saved. Think about it from the prospect’s point of view. Acquiring and implementing your product will take some commitment of time and resources and what they’re doing now already works, so there needs to be surplus value in making the switch. It varies, but a good rule of thumb is you can likely price your product at roughly 1/3 of the value of that indirect substitute, which is manual labor in this case.
The timing balance
When planning potential pricing changes, keep in mind the very important balance of the projected net benefits of the change and the cost of complexity and implementation. Obviously the juice needs to be worth the squeeze generally. But as it pertains to timing, there are key periods in which the cost of introducing your change will be more costly from an operating expense, opportunity cost, or political cost. Take note of when your key stakeholders are busiest. For accounting and finance, that may be when they are closing the quarter or annual financial statements. For Sales, it might be a period when they typically sell the most product, have the best access to their customers and prospects, or when they are implementing other changes that tax the team’s non-selling time. It’s important to take your stakeholders’ own timing considerations into account when planning heavy work by your pricing committee members or rollouts that will heavily impact stakeholders outside the core team. Adjusting for their needs will lead to smoother delivery, fewer political favors being needed, and co-workers who feel a lot better about working with you in the future.