This is Part-Time Genius Blog on how to grow your business in a profitable and sustainable way.
WHAT – NEGLECTED PRODUCT PRICING STRATEGY
Why is pricing important?
Pricing has the highest impact on the growth and profitability of a company yet often very little is invested in planning it compared to the dedication businesses put to customer acquisition, customer retention, or defining product functionality.
According to a great read "The anatomy of SaaS pricing strategy" by Price Intelligently, the average SaaS company spends six hours on pricing over their whole lifecycle.
Come on - that's less than a working day!
How much does your company spend on understanding pricing?
Make no mistake - this is not a SaaS-only matter. Pricing is equally important to all businesses on any competed market. Just that in the SaaS business model, pricing has elevated importance as the company has to monthly (read continuously) earn the justice to bill the customer.
Without an emphasis on pricing, you underserve customers and leave revenue on the table.
SO WHAT - PRICING IS ABOUT KNOWING YOUR CUSTOMERS
Three dimensions of pricing strategy - positioning, packaging, and the price.
Let's start off with positioning.
In sound product planning, after defining a compelling product vision (something you dare to get a tattoo) which states the core business benefit and the target user, you should deep dive into user personas.
Who do you serve - what industries are they in, what is the customer company like, what is the role of the persona in that company?
Here clarity makes the difference. Think it as if you would see a group of people walking down the street and you can say without hesitation who belongs to what segment and why.
Come up with a handful of personas that are distinctive and relevant to your business. Here quality over quantity rules.
As I wrote in my earlier blog post "WHAT, WHY, TO WHOM AND HOW" these questions are dead simple, yet it can be grueling to find the right answers.
Likely that's the very reason why companies too often skip the act with predictable outcomes - producing mediocre products and services that are not solving anyone's problem.
Next, you want to know what are the high-value features for each of the user personas, and how much they are willing to pay (WTP) for those.
Why is it relevant to find the high-value features and WTP?
Let's invite in the two other dimensions of pricing.
Take your product feature list and ask your existing customers and prospects to sort them into two baskets - the most preferred/valuable ones and the least preferred/valuable ones.
As an outcome, you don't only see what features are valuable for your customers but you understand what features the different personas value.
You will see also what features you can well live without as they don't deliver value to your customers.
That's your product packaging.
Now it's getting even more interesting as you are about to learn what your customers are willing to pay for the high-value features. That's the essence in value-based pricing.
Based on the product positioning and packaging examples above, you should now have a pretty good understanding of the different product packages, how they differ from each other and who are their customer personas - right?
Next, you go and ask from the existing customers and prospects behind the personas what they would be willing to pay for the product "package" you just designed.
With four simple questions and numeric price point scale, you can build a surprisingly solid understanding of the price range for each product package.
Your questions are - at what price would you consider the product to be too expensive, at what price would you consider the product to be too cheap (relative to perceived quality), at what price would you have to think twice before buying, and at what price would you consider the product to be bang for the buck?
When you match the price range data with customer lifetime value (LTV) and customer acquisition cost (CAC) you can further define at what price point the LTV/CAC ratio is optimal.
Why's LTV/CAC ratio relevant - higher the ratio, greater the growth of your business.
See, for these questions, you just cannot shoot the answers from the hip but you need data. In practice, it means that you have to go out and interview your customers and prospects.
In case you don't know LTV and CAC for your product, go and find them - it will be an eye-opener.
NOW WHAT - MATCHING THE VALUE WITH WILLINGNESS TO PAY
Why should you be paranoid about the pricing of your products?
When your product pricing is clear, value-based, targeted to the right audience and is aligned with the buyer's willingness to pay, a big part of your marketing and sales effort has already been taken care of, not to forget that you'll growth faster with increased profitability.
In an evolving marketplace, pricing is a continuous optimization effort of your product value against the customers' willingness to pay. Pricing is a process.
By the way, pricing is the lever that has 1:1 impact on profitability - pretty cool.
What's your excuse for not investing in proper pricing?
Again, if you have good practises on the covered subject, let me know as I'm eager to learn from the best.
Pekka Usva is a seasoned business executive passionate about helping companies reinvent themselves, grow business profitably yet in a sustainable manner.