This is Part-Time Genius Blog on how to grow your business in a profitable and sustainable way.
WHAT – PRICE AND VALUE DISCONNECTION
The other week I had an inspiring lunch discussion on pricing with my friend Peter Maahn Sterkenburg who's leading the Customer Success at LeadFeeder, an extremely cool Finnish SaaS startup.
This company helps businesses increase revenues by providing them with information on potential customer companies visiting their websites, what the visitors were interested in about and how they found the company in the first place.
They provide high-quality leads to their customers and charge for unique leads on a volume basis.
Customers end up on a price plan depending on how many leads the company can identify in their Google Analytics data. This depends on how good customers are at inbound marketing and driving traffic to their sites.
In a nutshell, it is a nice, linear, volume-based model that is easy to understand and budget by the customer.
But what if customers perceive the value of a lead differently?
For sure they do.
SO WHAT: WITH THE RIGHT VALUE METRIC YOU GROW WHEN THE CUSTOMER GROWS
Let's take an example. The customer company A is selling productivity software for businesses and customer company B is in the maritime industry selling off-shore equipment.
In our example, the value of an individual deal for customer A would be, say 80EUR whereas it would be 80KEUR for customer B - a bit extreme just to make the point clear.
For customer B due to the dynamics of the business, they have a fairly limited amount of potential customers and their site traffic is relatively low. They would end up in the lowest volume plan and pay 50EUR for 100 leads.
Marketing troops at customer A have been able to drive high traffic on their website and the customer would subscribe for a high-volume plan with 3000 leads for 350EUR. There's a clear logic between the site traffic and the number of unique leads they pay for - the value grows as the traffic grows.
What about customer B?
Practically they would get high-quality, unique leads each potentially worth 80KEUR for free. This doesn't sound fair and the customer knows that. There is a price-value disconnection.
"At what price would you consider the service to be too cheap to provide the quality you were looking for?" That's the question customer B would be thinking of.
I bet they would be willing to pay for 5KEUR per each lead that brings the deal in but there's no incentive or such a plan for him to subscribe for - the traffic on their site is low and will stay low no matter what.
As an outcome, the product value is not monetized to its full potential and this has an impact to LTV - there's money left on the table and likely churn increases due to value-price mismatch.
Bottom line - even though the volume-based value metric sounds obvious and right in the beginning, it does not follow the logic of the title - you grow when the customer grows.
NOW WHAT: FINDING THE CORRECT VALUE METRIC
In our example case, leads were considered to be the correct value metric but we found it problematic at least with the high deal-value case.
What's a good value metric then?
The customer can understand the value metric in a few seconds when skimming through your pricing page, the value metric reflects the customer needs and it has a path to scale.
Good value metric grows when the customer grows and scales down if the business of a customer is in a decrease.
Value metric is really about two questions - what you charge for and how much.
Start by specifying on a high level what you are offering to customers. Next, break that down into detailed value attributes to make it specific for your company - show how you differentiate.
Once done, you bravely test that with your customers as explained in my previous post "PRICING - THE MOST IMPORTANT PRODUCT DECISION".
This is not rocket science yet it takes a conscious effort to get it properly done - not once but as a process optimizing unit economics of your business, LTV, and CAC.
In case you feel this is something you should pay attention to, give me a call or send an email and let's talk more about it.
As always, if you feel your company is just phenomenal in this, please let me know as I want to learn from you.
BR Pekka, part-time-genius.com
Check out the great read on SaaS pricing by Price Intelligently.
Pekka Usva is a seasoned business executive passionate about helping companies reinvent themselves, grow business profitably yet in a sustainable manner.