As a leader of a small- or medium-sized B2B company you have a lot of things pulling on your time. Arguably the most challenging, but critical, element of your business is pricing. Pricing drives adoption and your margins. However, most don’t know how to optimize or maintain a winning pricing strategy.
Set prices too high translates to low customer growth. Set them too low, and you miss out on valuable revenue. And the playing field changes continuously.
Thankfully, pricing doesn’t have to be a shot in the dark. There are dozens of pricing models and strategies to better understand how to set the right prices for your audience and revenue goals. But pricing is an art, so expect that you will need to make regular adjustments.
Implementing a discipline of regular check-ups will drive those adjustments as your market changes, your customers maneuver and external forces (think pandemic) take twists and turns. Pricing should be a part of life, part of your corporate DNA. The 8-point checklist below will help you to maintain a strong pricing strategy in almost any type of business.
1: Understand Your Customers and Your Market
Everything starts with the understanding of your value to your customers. Value-based pricing is the pinnacle of pricing. Know who is buying. Research your customers, get to know who they are, their core values, their financial condition and margins, and market challenges.
- Understand why your customers are buying. Understand why they want to buy from you and the importance of value. Understand their priorities.
- Understand your competition. Who are your direct and indirect competitors? How do they price, and how does your pricing differentiate you?
- Talk to your sales team. They will provide surprising insights on your customers willingness to pay. Set small group meetings, or drop in after prospect calls and ask them about feedback on your value proposition and pricing.
- Add social media platforms to your research. Do your customers have a culture of quality and loyalty?
- Get the big picture. What are the global and regional trends that have an impact on your customer in the short term?
It is important to identify what differentiates your product from the competition and factors that influence your price. No matter how you plan to price relative to your competitors it is important that your elevator pitch about your pricing strategy is crystal clear and easily explained to customers and internal stakeholders.
2: Uncover How They Want to Buy
A common barrier we find in our clients is that pricing is structured the way the company wants to price vs. how the customer wants to pay. Make sure you understand the common and logical structure of how customers perceive your product fitting into their world and cost structure. Speak their language and follow their desires vs. your wishes, and you will see a dramatic improvement in both sales cycles and conversion rates.
3: Choose Your Pricing Quarterback Wisely
All too often, companies don’t really assign pricing as a responsibility that is monitored and tracked like other company elements. Assign the task to a clear and logical quarterback who is responsible and accountable for your pricing strategy.
If you are small, it may be the CEO or CRO. In a medium-sized business it can be a VP-level Sales or Marketing leader. Always assign it to the highest level action taker in your organization that is analytical, creative, customer-oriented, a great communicator, a good listener, and has great clarity of thought.
The goal is a passionate leader that will integrate, communicate and imbed the pricing strategy into and throughout the company. A great pricing quarterback takes ownership with pride, closely monitors the performance, reacts quickly to warning signs of poor performance of the pricing strategy and provides strong leadership for quick and appropriate adjustment.
4: Understand Your Options for Pricing Strategies
There are countless possible pricing strategies your business can apply but which one will maximize growth and optimize your revenues? Some of the common pricing models are:
- Cost Plus Pricing
- Competition Based Pricing
- Value-based Pricing
- Usage-based Pricing
- Freemium Pricing
- Premium Pricing
- High-Low Pricing
- Skimming Pricing
- Hourly Pricing
- Dynamic Pricing
- Penetration Pricing
- Project Based Pricing
- Bundle Pricing
- Psychological Pricing
- Geographic Pricing
If you have a SaaS software business model there are a lot of exciting new ways to price. Those approaches are beyond this discussion but usage-based pricing has gained strong traction as a follow-on to freemium pricing. Selling premium usage-based pricing acts as value-based to the customer and consistently improves conversion over fixed fee and time.
Recently dynamic pricing using an AI-driven software engine has emerged with fanfare and claims of margin improvement of up to 3%. Case studies in the building/construction, eCommerce, and retail industries are on pricefx.com for more details about dynamic pricing optimization engines.
Your market, customers, and competitors will be the main drivers for deciding on which of the pricing methods you should use. You have an existing pricing strategy, so list the reasons you chose that approach. Are they still applicable? Value-based pricing is one of the best, but it is a challenge to execute. We also recommend consideration of a hybrid pricing model that takes the best of multiple pricing strategies.
Hybrid Pricing: A Case Study
I have implemented hybrid pricing models in hi-tech startups for years. Hybrid pricing models can be used creatively to either build a new market or to penetrate and disrupt an existing market. A hybrid pricing model combines the characteristics of different types of pricing strategies into a specially tailored pricing model that is fit to your situation. One client example, almost single-handedly propelled a start up with $5M revenue to an IPO and valuation of $2.2B in less than 3 years, using hybrid pricing.
This B2B tech company’s solution is both hardware and software. The primary market was large communications service providers who used the product to deliver ultra-high bandwidth to their end users.
The problem with their classic pricing model was the need for quick revenue traction, but we were competing with large expensive products in a market consisting of large billion dollar companies that were risk averse and extremely slow-moving. The close and time-to-revenue needed to be improved.
- Pursued other markets geographically – Here we researched new markets and adopted pricing purely based on that market, geography and culture. Call it geographical pricing.
- Expanded to smaller opportunities – These were the competitive communications providers who were smaller, hungry for customers, nimble and creative. They proved to be a better size and fit for our earlier stage client. For this, we used a combination of competition-based pricing and penetration pricing.
Customer feedback from our best sales person was very clear: downsize the product and price it in a way that fits their customer sales ramp and customer base.
We listened and acted immediately. The product was downsized. Then we built a pricing model that integrated freemium pricing for the software- and usage-based pricing and value pricing for both the hardware and software. This tied the incremental use of our multi-port system to their growth rates. We were able to get higher margins per user. Our creative hybrid pricing approach paid off as our customers supercharged their revenue velocity, and we saw exponential revenue growth and double digit margin increase.
Yes, that example may be a little more aggressive than you need and want, but you can see the power of hybrid pricing for generating explosive revenue growth and the impact on many parts of your business.
Regular offsite brainstorming sessions with your executive team and your pricing quarterback (I was the quarterback and CRO in the example above) can open up your thinking and develop a creative pricing approach. The pricing quarterback boils it down into a coherent integrated strategy across all parts of the business.
5: Use Online Pricing Analytic Tools
There are a number of online pricing analysis tools that are free and helpful to provide another perspective and confirmation of your pricing approach. A few of the CRM vendors like Hubspot and Salesforce provide online tools which are easy to use. Combining the use of those tools with an outside pricing expert is inexpensive and can open other options to consider.
Other software optimization tools can be purchased online at sites like zilliant.com, domo.com, wiser.com, competera.com, revionics.com and pricefx.com. Each one has its strengths and weaknesses of course and they are typically targeting pricing strategies for a specific market or two.
When choosing these tools, try using an independent third party consultant to get the tool that is the best fit for you.
6: Communicate Your Pricing Strategy Broadly to all Customer-Facing Organizations in Your Company
Ask your pricing quarterback to identify all customer facing parts of your organization. Most companies have a large percentage of employees who talk to customers every week and can, if empowered, help gather customer feedback regarding your company value to them.
Your sales team will obviously provide the largest number of touches but your marketing, customer service, and executive team can also gather valuable customer information. A formal survey process can also be implemented but there is nothing like person to person direct interaction to get the full feedback in my opinion.
These organizations should be trained on the pricing strategy, how it fits with the company’s core values, core focus, marketing plan and one year vision. They should also understand the pricing strategy relative to the customers and how to provide the “elevator pitch” of the advantages of the pricing strategy. Encourage direct feed back to the pricing quarterback after those discussions.
7: Track the Success of the Pricing Program and be Ready for Trial and Error Adjustments
Use a small number of metrics to measure the success of the pricing strategy. Revenue growth, profit margin, sales cycles, conversion ratios at a minimum. Start by tracking the metrics based on your original plan and assumptions for profit and revenue targets and compare to actuals at scheduled intervals.
The pricing quarterback will need to work with internal stakeholders in the finance organization to solicit their support of an aggressive low margin penetration pricing approach on a new product to help it gain market traction in the early launch stages.
Expect the pricing approach and pricing metrics for a product to evolve as the product matures. Be ready for some trial, error and volatility. There is no exact science to pricing a product, so there’s no guarantee you will nail it on the first try.
8. Use an Outside Resource to Support the Pricing Quarterback
Unbiased feedback and pricing evaluation from outside experts can help to keep the pricing strategy fresh and on target. Consider bringing in an outside expert on a regular basis to infuse a spark and energy into your pricing program. We have successfully teamed one of our partners with Sjöfors Partners to help our clients with their pricing needs.
Strengthening your pricing as a core element of your success (one of our 21 High-Performance Revenue elements) requires dedicated resources, discipline and checkups just like product, finance, staff, and other core business functions. Perhaps start by forwarding this article to your likely quarterback for their perspective. Not sure you know who to send it to? Start with a few likely candidates and ask.