- Value-based pricing is vital for growing and monetizing subscription offerings
- Organizations often leave money on the table by failing to understand customer value drivers and how to differentiate customers according to their needs and the value they gain from the offering
- In a Summit EMEA 2020 session, Lisa Singer and Duncan Jones shared how product and marketing managers can align packaging and pricing with their value messages for customers
In a solar system, the circumstellar habitable zone (aka the Goldilocks zone) is the region around a star in which liquid water could be present on a planetary surface. Because liquid water is critical to Earth’s biosphere, the concept of the Goldilocks zone (not too hot and not too cold) may be fundamental in identifying planets on which life and intelligence similar to Earth’s can grow and survive. But over recent decades, a planet’s presence in the Goldilocks zone has been challenged as the primary requirement for life. Evidence has shown that habitable planets must have not only enough water, but also a breathable atmosphere, solar energy, and protection from radiation.
In B2B, organizations are striving to develop a value-based approach to pricing software-as-a-service (SaaS) and subscription offerings that is “just right” for customers and the organization, assuming all customers are looking for the same value because they share a requirement for the same type of offering. “But with pricing, it’s very difficult to make everyone happy,” said Lisa Singer today in her presentation with Duncan Jones at Forrester SiriusDecisions Summit EMEA.
Every customer can be a Goldilocks. For example, some customers believe they should pay less because they’re small. Others believe they should pay less because they’re big. We’re not just dealing with one Goldilocks here — there are multiple versions with different ideas of what price is “just right.” Organizations must understand different value drivers and segment customers on that basis to develop value-based pricing that works.
“With subscription and SaaS pricing and packaging, you need a number of qualities to come together,” said Duncan. “It must be simple, promote account growth, monetize value, and drive profitable growth.” In other words, it should be easy to understand for the buyer and seller; enable new-logo acquisition and existing-customer growth; monetize each customer’s volume, needs, and complexity; and allow for discretionary discounting.
To meet these requirements, the SiriusDecisions Pricing And Packaging Blueprint defines a process with four phases: measure value, build offering structure, define target price, and support price. Duncan and Lisa focused on the first two steps of each of the first two phases:
- Segmentation and buyer value. Identify customer value drivers through customer and internal interviews. For example, ask customers what business case they use to convince their organization to invest in your offering. Use this information to set and support your pricing and as part of your sales enablement effort. Ask sales reps which customers use your offering the most and which gain the most ROI from your offering.
- Packaging and metering. Consider which packaging approach is best for your offering to ensure its success. Is it one SKU with all features included (all in one)? Specific packages targeted at different functions or personas (functional)? Specific packages at different levels of complexity and price point (tiered)? Or a combination of products that work together (customized)?
When building the offering structure, organizations also must consider which price metrics to use. Subscription and SaaS companies often use several price metrics, and each one has several pros and cons. “Your Goldilocks point from a packaging perspective will depend on the type of customer you’re going after and how complex they are,” said Duncan.
“This is really an important message,” added Lisa. “Picking the right metrics can mean a strong business with buyers that are completely engaged with your offering, while picking the wrong ones can mean a business that stagnates because buyers and users are not as engaged.” Price metrics can be user based (e.g., price per user, price per active user), related to business scale (e.g., revenue, number of customers), usage based (e.g., transactional/outcome), or flat rate (e.g., one price, one feature set).
How do you assess the best price metric? Compile a list of potential metrics and answer several questions about each one. For example: Can buyers predict how much they will spend? Will buyers purchase additional units as they grow? Do customers gain value with each unit purchased? Is there a correlation between the metric and the offering’s variable costs?
Finally, support pricing with clear policies and negotiation tools. “Best-in-class pricing includes clear pricing and packaging as well as a policy that promotes sales confidence,” said Duncan. This includes a clear price list, appropriately sized bundles, a sales process containing an approach for estimating customers’ quantity requirements, price increases timed with launch of new capabilities and functionality, and a value-enabled sales team.
A planet in the Goldilocks zone may have plenty of liquid water, but countless other factors are involved in enabling it to sustain life. Likewise, buyers of subscription and SaaS offerings may be in the market for a similar product, but organizations need to know the intangible value their offering provides to each customer, like peace of mind or reduced risk.
“Ultimately, it all comes around to ensuring that sales understands the value each offering provides,” said Lisa, “so that reps can effectively support pricing.”