Pricing tends to be the window dressing of a GTM strategy.Window dressing? When people remodel or build a house, there are so many decisions that need to happen. Exhaustive thought has gone into the architecture planning. Countless hours imagining a room size, flow, usefulness and how/where furniture fits. Hundreds of paint swatches, flooring samples, hardware choices, etc. Then the project is near completion, the budget exhausted and all of sudden; “…what are we going to do about the window dressings?”
So, process fatigue, lack of budget, and inexperience causes them to make a decision that is nowhere near as thought-out as the rest of the project. So the hasty decision becomes: “This will do for now,” and “for now” lasts for a very long time.
For companies, so much work goes into your GTM strategy. Marketing and sales take the product offering and develop an ideal customer profile and a plan to attack it. Marketing develops its strategy to provide air cover and assistance to sales and branding. Sales exhaustively looks at the resources and process needed to effectively execute on the plan.
And unfortunately, all too often, a hasty “window dressing” approach drives pricing. Our most successful engagements and examples all prioritized a rigor and priority to pricing.
I have spent a lot of time consulting with seed to B round venture-backed companies, mainly with founders, CEOs, CROs, and boards. Most have a wide aperture of sales strategies they deploy. They all grapple with how to develop what they think will be an effective pricing strategy. When I ask how they developed their pricing “strategy,” I get a varied and inconsistent set of theories on how they got there. I’ve seen many common missteps on their approach, and very few are in support and aligned with the sales strategy.
To outline some of these common mistakes, I reached out to Per Sjöfors from Sjöfors and Partners. A friend and partner to Altus and author of “The Price Whisperer”,he pointed me to his firm’s compilation of the three most common pricing mistakes. I found myself agreeing and reflecting on seeing all of them in the field.
Price to Competition
While we all need to price competitively, our pricing should be based on the value we bring to a client, not as a counter balance to our competitors. That makes your value prop about price. If it’s a you vs. them battle on price, then your customer is ignoring your value. The downstream effects on retention and stickiness become severe. You can just as easily be replaced by a lower cost option. Your sales strategy is based on maximizing the message around what your value brings. So develop your pricing strategy based on that.
As Per will tell you,
“Companies switching from competition-based pricing to pegging their price to their customers’ willingness to pay will see higher sales volumes or higher profits. Sometimes both. And who would not want that!”
Using Cost to Price
Man, this one always makes me giggle! Your customer doesn’t care what your costs are. Your customer cares that they are paying what they feel is fair value for what they get in return from you.
So many things go into maximizing the value they get from you, and it’s your job to ensure the entire organization is bringing that value to justify your price. It’s not about your cost. So, does the logic then go, if your cost goes down, your price goes down? That makes zero sense. Do you raise rates only when your cost goes up? No! You raise rates when your value dictates your worth more.
Per has really detailed this beyond this brief article, but I think this statement sums it up for all industries, products and markets everywhere:
“Since the cost of a product or service is uncorrelated to their customers’ willingness to pay, it is unlikely that a cost-based pricing strategy yields the “right” price — which is the price that matches customers’ value perceptions and willingness to pay.”
That seems pretty simple to me!
Guesswork and Gut Feel
When I asked questions to clients of “How did you develop pricing?”, I found “I know what customers will pay!” to be the most common response. There are lots of ways to define what guesswork means.
Per believes people practicing a guesswork model have an informed intuitive sense of why they feel they know what the price should be. And again, Per goes into much greater detail and research on why this is.
From my experience, I often hear founders of young companies say “I know what customers will pay for this!” Inevitably 12-18 mos after being in the market and sales problems arise (and they will), I then hear the board directors asking, “Are we priced correctly?” If the original pricing development was based on “I know what they will pay!” that is a tough thing to defend when revenues aren’t where they need to be.
I have given some good insight on the Don’ts, let me give some advice on the Dos. The following is grounded in countless hours of me working with clients, actually getting it right and more often that I’d like, getting it wrong. Countless hours working with clients who have done it right and have done it wrong.
Just as Per’s three mistakes seem like common sense when you read them, my advice below will seem like the same. Common sense. Too often, we get into the weeds and details. Hopefully this will act as a reminder around some of the core fundamentals of effective pricing.
K.I.S.S (Keep It Simple Stupid)
Find the two or three simple aspects of your pricing strategy that incentivize your client to buy but align with your revenue and retention goals. Don’t get too complex. Don’t get too creative. Be simple. It’s got to make sense.
There is a reason a lot of SaaS companies price on two components: contract term and volume. Locking in a longer term contract and/or locking in a higher commitment of usage creates strong retention and enterprise value for the company. At the client level, commitments for a longer term and higher volume equals lower price. Easy, clean, and simple!
Make it a Win/Win
As I mentioned above your pricing needs to be aligned with your strategy. That’s how you win. At the same time it needs to also be a win for your customer. It needs to make sense to them.
Let’s take my firm’s, Altus Alliance, pricing model. We are a professional services firm. We price on a simple (see K.I.S.S above) “three-legged stool” model. We have a retainer fee, a success variable fee, and an equity component. Easy for a client to understand. The retainer locks in our time. The success variable incents us to perform quickly. The equity component ensures our work is forward-thinking enough to provide long-term value. Altus wins because we have short-term and long-term gains. Our client gets the same, short term and long term value. Again: easy, clean and simple!
Keep Price Out of Center Stage
Good pricing strategy is like a good sports referee. When you watch any sports game with a referee. Soccer, basketball, baseball, etc. If the ref calls a great game, they are invisible. You never knew they were there, all made sense and you enjoyed the game. However, if they make a controversial call that has you lobbing obscenities at theTV, you are now acutely aware of the ref. The attention is on them, not the game.
Same with pricing. Make your customer focus on the “game,” not on your pricing. Acceptance of your pricing should be like a good close to a sale. A logical conclusion to the process. It should not be the center of attention.
The key point I am trying to make is to keep pricing high priority on strategy and your complete offering and value proposition. Follow these basic principles and ideally dive deeper into the topic with research specific to your category.
If customer acquisition and retention are core to your plan, getting pricing right should either be compelling or a non-issue. Whenever I see a consistent theme of deep price justification in a sales process, I know it’s time to begin these conversations.