Previously we laid the groundwork for an effective pricing strategy, setting goals and gathering key inputs. Now it is time to take the final steps toward your ultimate pricing power.

Pricing affects external AND internal behaviors. Salespeople will quickly determine the best way to maximize their interests just like a customer or prospect will strive to minimize their cost. This has become particularly important with the drive to subscription revenue. Selling companies like the subscription pricing approach (whether or not they have a software as a service offering or leased physical product) because it creates a more predictable revenue stream. The issue becomes how your pricing model affects your sales team compensation plan. What term of subscription do you offer? What risk of renewal or inflation do you want to bear as a company? Additionally, how will you pay commissions — up front, as revenue is recognized or on what part of the subscription?

Buyers generally want to reduce inflationary risk by locking in long-term contracts with no cost of living / inflation adjustments. So as a provider you must determine the balance of risk you will bear to offset the benefit of predictable revenue streams. Let us explore all the internal and external forces that should shape your price.

Pricing Structure

What key factors will your team need to consider in the pricing decision that will impact the final calculated price? Remember, having to update your pricing strategy for current customers often results in churn. Avoid surprises and spend the time noting down all relevant impacts to your price. This might include:

1. Unit price
2. Embedded or associated partner products
3. Volume discounts and cutoffs
4. Time factors
5. Incentives
6. Geography
7. Bundles or packaging
8. Direct or resell (third-party)

Discounting Practices and Policies

Set the criteria for discounting, including discount levels, determining factors and who is allowed to authorize these decisions. Also consider how bundling and packaging can impact price discounts and adjustments. Lastly, include a plan for exception processes for things such as end-of-life of your product or any sort of market change (remember COVID?).

The Review Cycle and Roll-out

Next, build a formal foundation of your organization’s’ standard practice for a pricing review cycle. Common triggers of a pricing review cycle include:

1. Annual review or updates
2. Solution / product introduction
3. New packaging or bundle introduction
4. Product change
5. Product end-of-life

Additionally, formalize what needs accomplished, who owns the tasks, and what systems and assets need to be created or changed for a pricing rollout.

UNLOCK YOUR ULTIMATE PRICING POWER

A B2B Leader’s Guide to Pricing Strategy Workbook provides B2B leadership with the four key pricing principles and the six steps that will lead you to a successful pricing strategy and outcomes.

 

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I recently shared the key elements that make for an effective pricing strategy and who should be leading this. Yet actually taking the steps toward creating an effective pricing strategy can be daunting.

Emotions can rear their heads and lead decisions astray. Opinions can undermine what should be a calculated, informed decision. And, most importantly, your leadership team should be able to use this strategy to replicate the process for any product updates or new solutions into the future.

I am here to show you the approach that will lead you and your team to a pricing strategy that serves your buyers, reduces future churn and supports your revenue performance. Are you ready to set the groundwork?

THE 5 GOALS OF PRICING

In order to realize success in the end, your leadership team must first identify which goal your exercise will help fulfill. Five common pricing goals include:

1. Alignment with Financial Plans and Strategy: Defined in specific revenue targets, revenue mix, growth rates and margin targets over time.
2. Growth: Defined in terms of revenue, market share, market penetration, units sold, and customers retained or acquired.
3. Retention: Defined typically by revenue or customer numbers, but may also include rates by geography, industry or other market / product segment.
4. Pull-Through or Cross-sell / Up-sell: Defined by attachment rates and cross-sell or up-sell rates.
5. Product Selection: Targets associated with selecting one solution versus another (typically considered in replacement, end-of-life or transition strategy scenarios).

6 KEY PRICING INPUTS TO GATHER

Before any decisions start to form, your team needs the right input and data to inform them. These six pricing inputs all play a key role in the final pricing strategy. And when they are all considered and incorporated, your organization will ultimately reduce significant pricing churn into the future.

1. Product Cost: For example fixed cost and variable cost, such as data storage, maintenance and access
2. Competitive Environment: Such as pricing level and pricing approach
3. Financial Strategy and Financial Plan: Like revenue mix by product segment / category (this impacts packaging and bundling considerations)
4. Differentiated Value Proposition: Such as assessed level of differentiation in the marketplace
5. Product Strategy and Defined Roadmap: For example growth dimension (what are the goals and tactics?) and identifying products that will pull this product into a sale or vice-a-versa
6. Market and Environment Trends: Like regulatory and compliance drivers, as well as overall economic market trends

UNLOCK YOUR ULTIMATE PRICING POWER

A B2B Leader’s Guide to Pricing Strategy Workbook provides B2B leadership with the comprehensive four key pricing principles and detailed six steps that will lead you to a successful pricing strategy and outcomes. Download the guide for the complete framework.

 

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Nextworld was going to market with a powerful no-code enterprise resource planning (ERP) platform. Rather than assign an ambiguous, arbitrary cost to their subscription services, they recognized that pricing was key for both their organization’s and their buyers’ long-term success.

“Pricing can be a highly debatable, emotional subject, both internally and externally,” Minda Marshall, VP of Business Development, said.

For organizations like Nextworld, a calculated pricing strategy can provide a substantive competitive advantage or it can be an albatross that impedes sustainable growth. Here, we share four key pricing principles that can help you achieve the latter.

4 KEY PRICING STRATEGY PRINCIPLES

There should be zero mystery, ambiguity and unpredictability in pricing. Selling organizations must stand on objective, solid, repeatable ground each time they set about pricing a new solution or bundle.

Our solution management experts at Mereo independently researched 20 B2B software companies, including application and platform providers. We supplemented our online research with 15 in-depth buyer and seller interviews focused on C-level executives that procure and sell software, as well as product management and sales executives of software providers — representing the spectrum from SMB to enterprise companies.

After digging into the biggest challenges, solutions and outcomes for our participants, we yielded four key pricing strategy principles every seller should consider when determining the right price for a solution:

1) Pricing Should Encourage Growth

As obvious as this seems, in the companies we were helping and that we researched, we found numerous examples of pricing models that in fact discouraged user growth and adoption.

In those cases, it was necessary to revamp pricing strategies to:

• Align the pricing to the value the solution delivers
• Simplify scaling as the business requires
• Package to encourage initial adoption as well as cross-sells and up-sells of new features and associated modules

2) Pricing Should Be Predictable and Understandable

Buyers want to predict how much a solution costs now and into the future. The sellers in Mereo’s research also did not want models that created buyer confusion and objections to closing a deal — in essence not adding friction to the buying journey.

As part of aligning to this principle, selling organizations need to think in terms of pricing structure versus the price itself. Keep the structure simple to understand for the buyer and seller, and consider how predictable it will be for you as a solution provider and them as a buyer. Can the buyer see how future costs would be impacted, for instance, by a merger, acquisition or other growth strategy?

3) Pricing Should Reduce Churn

Sellers must make it easy for buyers to remain a customer. Providing flexible models for consuming the software from both a technology and pricing approach (e.g. modules, users, transactions) is critical, but, as a provider, you will also want to think about what will make your solution “sticky” in the long-term. For example, a seller could provide built-in concierge service for specific tools to ensure they are rapidly deployed. The strategy varies between solution, market and customer, but is important to consider from the onset.

4) Pricing Should Recover Fixed and Variable Costs

Solution providers, especially those in rapid-growth mode, often talked about the “surprise” factors associated with using third-party hosting services (e.g. Microsoft or Amazon Web Services). These providers had not considered all the associated costs related to storage, transactions, integrations and more. As such, they often were put in a position of having to go back to customers upon renewal with significant cost changes.

No buyer wants to be surprised by data and storage charges, unexpected transaction fees or costs of integrations to other mission-critical systems (see Principle 2). Do your up-front research and do it well to make this part of pricing transparent to the buyer. Also, consider approaches that allow you to recoup these environment charges early to reduce cost absorption risk on your business.

PRICING PRINCIPLES IN PRACTICE

These four key pricing principles helped Nextworld enter the marketplace competitively and with little barriers to sales — setting Nextworld up for sustainable revenue performance from the start.

“Mereo came in as an objective expert,” Marshall said. “They didn’t just provide pricing input focused on the software aspect, they delivered a holistic view of pricing, packaging and everything that rolls into a complete ERP SaaS solution.”

Learn more about Nextworld’s successes here.

UNLOCK YOUR ULTIMATE PRICING POWER

A B2B Leader’s Guide to Pricing Strategy Workbook provides B2B leadership with the four key pricing principles AND six steps that will lead you to a successful pricing strategy and outcomes.

 

DOWNLOAD NOW

Pricing a B2B solution is complex. People are quick to debate pricing models and numbers. Sellers and buyers alike can fall prey to emotions over reason when considering dollar signs associated with a solution. And it is a challenging concept: What is the buyer willing to invest for the target outcome this solution delivers? What should the value this solution provides cost a buyer? What is it all worth?

The leading B2B organizations do not leave pricing up to chance. They treat pricing as an art and science.

In part one of this four-part series, let’s look at the leaders who should be driving pricing power forward in the organization and what key roles they play.

WHO IS IN CHARGE OF PRICING?

These key leaders within a B2B organization should play an active role in the information-gathering, discussions and roll-out of pricing and its policies. Importantly, for pricing to work well, these leaders must be working in unison with clear role expectations and regular communications.

FINANCE’S ROLE: Finance creates the internal strategic context for pricing models and decisions by setting financial milestones and direction to achieve the overall business plan. Recent movement towards subscription revenue models are an example of this context setting.

• Strategies
• Annual Plans
• Policy Compliance

PRODUCT MARKETING’S ROLE: Product Marketing interaction with external players (e.g. customers, analysts, competitive sensing) provides key insights into broad market and specific competitor trends. Alignment of the differentiated value proposition to the pricing approach is critical.

• Market Sensing
• Analyst Input
• Messaging and Differentiation

OPERATIONS AND SUPPORT’S ROLE: The Operations team provides key cost and risk information needed to model pricing impacts on margin and investment decisions. As an example, for software companies hosting solutions in a cloud environment, fully understanding cost drivers is critical to the pricing model.

• Cost Information
• Efficiency Plans
• Strategies
• Roadmaps

SALES’ ROLE: Sales complements Product Marketing’s input with more real-time competitive insight and feedback on pricing policy impact on sales performance.  Sales representatives’ reaction to pricing models, pricing complexity and approval processes and impact on compensation plans can be a key performance driver.

• Market Insights / Sensing
• Competitive Information
• Policy Compliance

PRODUCT MANAGEMENT’S ROLE: Product Management needs to consider pricing in the context of the Whole Product design, strategic plans and investment roadmap including one solution’s impact on the broader portfolio.

• Physical Product Design
• Future Direction
• Co-Dependency Relationships
• Strategy
• Roadmap
• Final Pricing Decision
• Roll-out

HOW IS PRICING FINALIZED AND APPROVED?

With so many leadership functions vital to uncovering the right pricing model and approach, it may seem daunting to land on an ultimate decision. Leading pricing committees benefit from developing a formalized process that reduces heated disputes and in-decision.

Key points in the process include:

• Formalization of the pricing process
• Agreement of roles and responsibilities (as outlined above)
• Regular pricing committee meetings (often monthly or quarterly)
• Standard approval process
• Instantiation of a feedback mechanism / loop so the committee can respond quickly to unexpected market or competitive changes

UNLOCK YOUR ULTIMATE PRICING POWER

Download A B2B Leader’s Guide to Pricing Strategy Workbook to discover the four key principles and six steps to a successful pricing strategy.