For our March Webinar, Mark Stiving, PhD, Chief Pricing Educator at Impact Pricing, explored how every B2B company can utilize segmentation, packaging, and pricing metrics to capitalize on their innovative offerings and improve profitability. After the session, he answered questions from the webinar audience. In this blog, we share part two of his live answers.
How do you interact with product management to decide on pricing metrics?
This is a really hard question. The first question is who decides what the pricing metric is going to be? Depending on the size of your company, it could be the product manager making that decision. In really large companies, you don’t have executives making decisions like that. Then again, some really large companies – for example, Oracle – require all of their pricing metrics to be the exact same.
So they just charge by the user because makes it easier for them to manage the way they do their business. I think that for product managers (in the way I’ve always thought of them), it’s crucial that they are heavily involved in the value of the product is, and what the pricing metric that they are going to be able to get away with and be able to use.
How do you coordinate price or APY impact on all factors? Is there some method linking to it company valuations?
This is actually a no-brainer decision. First, subscription companies tend to get 4x to 10x the valuation over revenue compared to non-subscription companies. So if you can build your company around a subscription, you are much better off. Second, companies who master pricing get much higher valuations. It isn’t because they can go in and say, “hey, we’ve mastered pricing.” It is because they end up with much more profit.
If you think about this for just a second and assume that you have a hardware product and you have a hard cost of $50, and you are selling it for a $100, so you get a 50% margin. What if you could improve your pricing by 10%? So instead of a $100, you are now getting $110 and that extra $10 is all profit. It didn’t change your costs at all. Mastering pricing helps you master profit way more than almost any other thing that you can do for your company.
For anybody who has subscribed or has adopted your product, there are switching costs to leave. Before they adopted your product, they used perceived value to say, “I think this is probably the best use of my resources.” But once they’ve adopted it, they now know whether your product adds a lot of value to them or not. Let’s assume you have done a really good job and you’ve added a lot of value – way more value than what they are actually paying for. Now you can raise their price, because when you raise their price, and they realize how much value that they are getting, they are willing to pay for it.
They are not happy – don’t get me wrong. But they realize the value is there and the switching costs are too high to go to someone else. This is like free money. For example, I use QuickBooks for my business and they raise my price every single year. It ticks me off and I keep paying it.
How important is communicating value/outcomes with users and buyers in QBRs / account reviews?
I’ve never heard that idea before, but I’m going to make a comment about it anyway and I think it’s awesome. Here’s why I think this: when we are trying to win a new customer, we are focused on perceived value and how well we sell that value. But after we have won them as a customer, do we actually go in and monitor how much value we are really delivering? Do we help that customer understand how much more value they are getting?
If we can walk into a QBR and say, “hey, we delivered you a million dollars [in value], but we only charge you $3000, then we are ripe for either selling more product or raising prices. There is such an advantage to that. By the way, if we’re not delivering the value we think we should be, that gives us an opportunity to get our customer success people involved and say, “how can we actually deliver more value?” I love the idea – I think it’s a great idea.