Price Setting

“We want our pricing to be competitive, but also profitable. How do we make sure they see our value?”

Winning business at a fair price requires an understanding of two things: (1) What value your offering provides to customers relative to other alternatives, and (2) How your customers perceive that value. More often than not, companies do not fully appreciate how their products and services help customers increase their sales, reduce expenses, or minimize risk. This gap in understand leaves growth opportunity both in the product innovation and development lifecycle and in the pricing of those offerings. Once product features, offering structure, and pricing is aligned, communicating that value credibly to customers so they see your value is what will drive price realization. Assessing how “fair” your prices are typically means prices can be adjusted in a positive direction, but this search for truth can also uncover areas where your offerings are out of alignment with market alternatives, and selected prices should be softened to be more competitive and provide a solution for price buyers to choose you.

“We only use cost+ pricing. Is that bad?” Everyone talks about value-based pricing, should we be using that?”

Your products and services provide financial value to your customers by increasing their revenue, reducing their costs, or helping them to mitigate risks. The best way to understand the value you provide to them is by going out and talking to your customers. Customers really appreciate sellers who take the time to understand their business, that ask interesting questions, and then sit back and really listen to what the customer has to say. Talk to your internal experts in sales, product management, marketing, or marketing research, to understand how your customers use your product today. Try to probe for the business benefit that your customers get from choosing and using your products. Start with your differentiators. Link your products and services to the business need they address. Next, try to understand how your customers can observe and measure your impact. Pick some accounts and begin with open-ended, high-level questions that try to detail the challenges and opportunities they’re facing. Try to validate your assumptions about how your products and services can address these needs. Then probe for financial benefits or business improvements that their customers will get. Most importantly, stay curious. After you’ve talked to a few customers, you’ll begin to see patterns. People will begin to repeat the same value use cases and the same benefits. Now it’s time to go back to the office and build a financial model: adding up all these value equations in a spreadsheet. Use this value model to build a range of options from high- to low- value and prices that capture a fair share of that value. These tools will enable your sellers to capture the prices you deserve. Your sellers can use this financial model to qualify a prospect to be sure your solution really fits their business. They can also be used to roughly calculate the financial value they should see from choosing your solution. Sellers can then use that same value understanding to take back control of negotiations.

“What should I look for as indicators that it’s time for a change?”

The three basic pricing strategies are skim, neutral, and penetration. Depending on where your product or service is in the product lifecycle, you will likely need to adapt your pricing strategy. In addition, in competitive markets, pricing strategy must also be measured against market dynamics and the capabilities of competitors. Here are a few key indicators to keep an eye on: slowing unit volume growth, ineffective discounting, new competitive offerings, low-cost competition.

“How do I upskill the pricing team to help improve KPIs?”

You can’t improve what you can’t measure. Are you measuring your pricing performance? Many B2B organizations have dedicated pricing teams that carefully think about price measurement, price realization, and how pricing should connect to their corporate strategy. But just as many companies don’t know where to start. What they don’t realize is that pricing performance and conducting the root cause analysis of why pricing performance might be lagging, does not require extensive market research or high-powered analytics. Focusing on basic revenue and price data, by customer, is enough to identify pricing KPIs and create action plans to improve those KPIs. Action plans may include price adjustments or price models to drive consistency, but they also include tactical items like deal term or rebate audits or improving sales team communication of key value drivers during their customer conversations.

“We only use cost+ pricing. Is that bad?” Everyone talks about value-based pricing, should we be using that?”

Price increases are a great opportunity to increase communication with your customers and reinforce the value you deliver with your products and services. The best way to prepare the sales team is to develop clear and concise messaging that outlines the need for the price increase and reiterates the value of your product or service from the customers perspective.

“Price too low, and we will need to increase prices later. Too high, and we will lose the audience. Where do we start?”

The best approach is to pursue a skimming strategy. In general, skim pricing hinges on your ability to demonstrate that your offering provides significantly greater financial benefits than the competition. This occurs in the introductory phase of the product life cycle with early adopters who are generally price insensitive because they see the potential benefits of being the first to deploy a new technology. Since products move through life cycles, the only sustainable basis for skim pricing then is the level of differentiation or added value created by the offering. If the level of differentiation declines as more competitors enter the market and match your offering, skim pricing is no longer appropriate since it will price you too high for comparable offerings in the market. Low introductory pricing does more harm than good. First, it results in a lot of money left on the table. Low prices also compound customer perceptions of risk. Under these conditions, customers may reasonably conclude that the low prices factor in some undetected risks, limitations, or seller’s desperation. Such a strategy has significant benefits. A high initial price sets the reference for future generations of customers and revisions of the product. Also, a skimming strategy at introduction can actually improve adoption, as early customers will use price as a proxy for value.

“How do we get to the root of the issue?”

The best pricing strategy with fail unless salespeople and managers have the confidence and ability to defend it. Confidence in negotiation requires confidence in pricing. Confidence in pricing comes from knowing the value of your products or services and most importantly, from knowing your customer.

“Everybody seems to be increasing their prices these days.”

Inflation and price adjustments have become an expectation, not an exception. Based on our research with B2B organizations across the US, customers expect that supply chain constraints and inflation will lead to continued inflationary pressures over the next 12 months. For example, the 60% increase in Diesel prices since 2021 will impact customer freight charges and reduce the number of suppliers offering free shipping. For example, in industries that have traditional cost-plus pricing methodologies, systems are typically already in place to respond to supplier price increases and protect margins. Alternatively, software and SaaS organizations must continually assess their end-market and competitor pricing to understand how customers value their solution, otherwise labor rate and hosting cost increases can erode margins over time. Where and how to pass along costs, and to what degree, will typically vary by the market dynamics, product types, and customer segments involved. Therefore, price adjustments are best implemented with a targeted approach vs. blanket increases for all customers. Getting this right can accomplished via market research to understand customer expectations and competitive pressure more carefully, but there are also opportunities to pilot adjustments with new customers or a sample or existing customers to test acceptance.

““We can’t seem to find the root issue.”

In SaaS solutions, identifying areas of high customer churn often align with products that are delivering less incremental value to customers. This concept is similar to creating “fair prices” for an offering [link to that answer]. To identify the root cause of churn problems, it’s critical to assess customer behavior by segment before recommended adjustments. For example, if a SaaS organization with user-based pricing structure has a churn problem in a low-usage segment, it suggests a hypothesis that considering usage-based pricing metric could better maintain pricing alignment. Alternatively, it may be that table stakes functionality is allocated to higher-tier product versions, preventing customers from experiencing value with an introductory product. Finally, the price itself may be disconnected from “do nothing”, in-house, or competitive solutions and must be adjusted.

“We only use cost+ pricing. Is that bad?” Everyone talks about value-based pricing, should we be using that?”

Innovation-driven companies respond to the increasingly sophisticated needs of their early customers with complementary product and service offerings. They evolve their offerings to meet the differing needs of both high- and low-value segments. You need to be the first to break for the bottom by lowering prices with a stripped-down offering the flank the highest value offering. As an innovation becomes accepted, dropping prices will help accelerate the growth of the market by providing a low-cost means for customers to try it. Also, it provides a low-risk way for more conservative customers to adopt your innovation. These low-risk, low-price customers then serve as a ready pool of candidates to up-sell additional products and services. Finally, the break for the bottom enables early market leaders to preempt competition that will come from the low-priced competitors that enter as the market grows. Increasing volumes may drive down costs, thus increasing the ability to control how profitable low-price entrants can become.