This week on the Inbound Success podcast, I talk about pricing. From who should be involved in determining pricing, to what type of research you'll need to do, choosing a pricing survey methodology, and evaluating different pricing structures, I go into detail on how to conduct a pricing exercise and what you should expect once you nail down initial pricing.
There's plenty of actionable advice included in this episode, but if you want access to my full swipe file on pricing (including sample presentation decks for customer research calls), all you need to do is Tweet me or send a LinkedIn DM and I'll give you full access.
Check out the full episode to get the details. (Transcript has been edited for clarity.)
Kathleen (00:01): Welcome back to the Inbound Success podcast. I'm your host, Kathleen Booth. And this week, it's a little bit of a special episode because I don't have a guest. We are over 200 episodes into the podcast and I generally try to really shine the spotlight on other marketers who are doing outstanding marketing work and learn from them. I mean, I learned so much when I interview them and I figure if I'm learning, then so are you. Well, this week it occurred to me that there's something I've been working on that when I set out to do it I really didn't know anything about, and I didn't have any good resources that told me how to do it. And so I thought today I could be my own guest and share with you the experience I had specifically with pricing. So some of you may or may not have been responsible for pricing in your career.
Kathleen (01:08): It's one of those things as a marketer that, when you are given ownership of it, it can be very intimidating because pricing is something that goes out to the world. It has a direct and immediate impact on the attractiveness of the product, the likelihood of people to convert, how you're positioned competitively, as well as how much revenue you bring in. So knowing how to price is such a valuable tool to have in your marketing toolset. And yes, marketers are people who should have some responsibility for pricing. Very often though, I will start by saying that very often in companies pricing is a committee exercise. It's something that more than one person within the company does. And so I would suggest that, whether you're given ownership for pricing or your company's talking about pricing, step number one is to form a pricing committee, and who is on that will depend on how your company is structured.
Kathleen (02:07): But certainly if you have anyone that owns product marketing, they should definitely be involved, if not be in the lead position. But you would want to have somebody from product-slash-engineering, somebody from sales, certainly. And you can add other people to that committee as need be, perhaps customer success if you have people in those roles. But the whole idea is to get cross-functional people on the committee so that you get all of the different perspectives on how pricing could impact not only customer acquisition, but retention, and also the sales perspective as to how it affects your ability to position yourself competitively. So the first thing is to form a pricing committee. And once that committee is formed, really the next step in a pricing exercise is research. And that really starts with what I guess would call economic value analysis.
Kathleen (03:03): That's sort of a fancy term, but the bottom line is you want to study the economic impact that your product has on the customer. Are they saving money with it? Are they saving time? And does that translate into money? How does it affect their sales velocity, etc.? Now, some products won't have a direct financial impact, but the whole idea of this exercise — economic value analysis — is to begin to quantify whether there's any sort of an economic impact that the product has on the end customer. And there are a variety of ways to do that. You know, if you do … in my case, I was pricing out a SaaS product that actually did have a direct economic impact. So, it held the potential to save money by reducing the incidents of sales that were affected by discounts or promotions.
Kathleen (03:58): And so we had a variety of market research tools we used to figure out what percentage of sales would this affect, how large are those sales? If we're able to prevent promotions from being activated in this case at checkout, what size of promotion are we talking about? Is this a 5% off, a 10% off, etc. So these dynamics are going to be different for every company, but really understanding what that impact might be is crucial. And then looking at industry benchmarks for pricing. So in our, in my case, as I said, this was SaaS pricing. In some industries, it's easier to find competitor pricing than others. I used to own a marketing agency, and at that time, so many agencies were posting their pricing on their websites. So it was very easy to benchmark and to figure out what the market was willing to tolerate for SaaS.
Kathleen (04:56): So I turned to OpenView Partners and their Mastering SaaS Pricing research to understand industry benchmarks around average revenue per customer, by customer target segment. And that was really helpful for me, as I began to think about how I might segment our customers. And then I also looked at a competitive analysis. So what were other companies in our space charging? What – not just how much were they charging – but what was the structure of their actual pricing? So this is where you definitely need to, as a marketer, have already done your research. And usually – let's face it – usually with pricing, you're talking about a new product. So at this point, you have to have already done your research and really settled on who is the audience that we're targeting and what other, in this case, software products are they buying?
Kathleen (05:51): So whether you have a direct competitor or not, what are the other players in the space, and are they structuring their pricing? So that would be what I would call a peer cohort, right? You identify your peer cohort of SaaS solutions and then figure out what they're charging. So in my case, I looked at a number of different companies that sell products that affect checkout for e-commerce stores, because that was what we were really selling into, and looked at the structure of their pricing. So in some cases, these companies were charging a fixed monthly fee plus a variable fee. For example, it might be a percentage of the customer's revenue. So if you are selling something into checkout, presumably your product affects e-commerce revenue. So, a lot of these companies had a variable amount that would scale as customer revenue scaled.
Kathleen (06:46): In other cases, there was a fixed fee plus a fee that had to do with the number of orders processed. So there's a lot of different ways to do it. Some companies only charged a fixed fee, some only charged a variable fee, but the more I dug into it, the more you started to get a sense for the actual pricing structures that these companies were using, how they were developing different customer segments, how that pricing scaled, whether it was annual or monthly, etc. So there's a lot in there that's really important to understand so that you can figure out, first of all, why is pricing structured that way? Is it because that's what the customer set is used to seeing? Is that what they're comfortable buying? Because if that's the case, then having a pricing structure that's dramatically different than what they're comfortable with is going to introduce friction in the process, which is not to say that you can't do it, but it's something that you need to factor in when you're thinking about your pricing structure.
Kathleen (07:45): The other thing you have to look at once you've done that competitive analysis is really, how do we want to structure our pricing? And so there are a variety of common pricing structures, there's usage-based pricing, which aligns really closely to the value that a customer receives from the product and enables you to fully monetize customers who use the product more. So there are plenty of examples out there on usage-based pricing. Everything from, I do rent the runway and the more I do a monthly subscription and the more items I want to include in my monthly shipments, the more I'm going to pay, right? That's an example of something that — I guess you could call it SaaS, but it's really sort of more of a subscription model. Volume pricing is a little different. That gives one defined price for all items purchased with the price per item, determined by the total quantity purchased, meaning put simply quantity discounts, volume discounts.
Kathleen (08:52): So the more you're getting, the less you're paying. Very common when you're buying hard goods, especially if you're buying them wholesale. for example. You see that in a lot of different industries. Then there's tiered pricing, which allows companies to offer multiple packages with different combinations of features offered at different price points. That's really common in SaaS. We see that all the time. There's your silver, your gold, or your platinum package, or it used to be a HubSpot partner and they had basic professional and enterprise, and the feature sets differed pretty dramatically based on what was included. And then there is value-based pricing, which uses the perceived value of the product as a benchmark for price setting. And based on the rule of thumb that I saw generally, you want the value that the product provides to be at least 10x the price.
Kathleen (09:52): So, I mentioned, I had a marketing agency earlier. That's an industry where I think you do sometimes find value-based pricing. For example, when you hire agencies to do rebrands or big strategy projects those are not often time and materials contracts. There's a perceived value for brand work for strategy work that is very high compared to more commodity-type services. For example, “Hey, we'll write your blog for you.” There's usually a fixed price for that. And it is somewhat commoditized, and therefore you can charge as high of a margin. So, usage-based pricing, volume pricing, tiered pricing, and value-based pricing: You really need to start to narrow down from your research [by] what pricing structure you want to go with before you can get to the next stage in the pricing process. So everything I've described so far, just to recap, it's all background research, it's all information that's publicly available, whether that's what competitors are charging based on information from their websites, or whether that is research into what buyers can tolerate as far as pricing, or whether that is economic value analysis and what you think you'll be able to state as claims to your customer that the product will have as an impact on their life.
Kathleen (11:18): All of this research goes into then helping you narrow down, what do I think my price structure should be? And what incentives or disincentives will that provide the customer once you get there, once you are at the point where [you’re deciding] what you think you want that structure to be. In my case, it was a fixed monthly fee plus a variable fee that was based on the number of orders the customer processed every month because we were present at checkout. And so we felt that would enable our pricing to scale with the customer. Larger customers that processed a high volume of orders could pay more than customers who processed a lower volume of orders, but it would also allow us to peg that fee in a way that, as the pricing scaled, it would keep a degree of consistency in terms of how it affected their revenue and their margins.
Kathleen (12:14): So they could budget really easily for it. So that's what we settled on in my case. Once you think you have your pricing structure and your pricing committee is all in agreement about this, because let's be honest, if you have a committee, that's really what it's about at this stage is consensus building. Then you want to enter into the next phase of market research, which is actually speaking to potential customers. And in our case, we decided to onboard free beta customers before we did our pricing research so that we would have at least 10 to 15 users who were experiencing our product and could speak to the value it was delivering. And so we did our customer research with our beta users. I got an — they weren't paying anything prior to this and these customer research interviews, they take 30 minutes or less.
Kathleen (13:10): They're really pretty quick. And I had — I got some great feedback from other SaaS marketing leaders I know who shared with me really fantastic examples of presentation decks to use for these calls. And if you're somebody out there who's going to be charged with doing pricing, and you want an example of a deck like this, Tweet me @workmommywork, and I can DM you and get you a link to a template for this. It saved me a ton of time. And let me just tell you, it worked incredibly well. But the basic structure that we used for these 30-minute customer conversations was the following: So I would let them know in advance that I was going to be asking them questions about the product and about pricing. And I made sure I had the right people on the phone, so people involved in making decisions about purchasing the product and about using the product.
Kathleen (14:03): And then I had my deck ready. And I started out with just a quick overview of the rules of the conversation. So like, “I really want your feedback. I need you to be honest. There are no wrong answers, etc.” It's really important to do that table setting so that people aren't trying to be polite. If they have negative feedback, you need to really encourage them to be completely candid. Then I would go into a recap of what the product did. And I'm sorry, before that, then I would actually ask everybody on the phone, what their role was with the product. So, “are you involved in making purchasing decisions? Are you involved in using it? Who else that's not on this call is involved or would need to be consulted?” Just so that I could get a sense of who the players were on their side and what that customer journey might be like leading to a purchase.
Kathleen (14:53): Then I went into background description on the product, even though they're already using it, [because] everybody uses it differently within a company. And so I wanted to level set and go in with a shared definition of what the product was, just in terms of functionality. Then I made a list of — from all of the conversations I had prior to this and all of my research, as well as all of my assumptions, I made a list of what I thought the pain points were that the customer might be experiencing, that our product could address. And in my case, I kind of was able to sum those up into six distinct pain points. And I framed those as first-person statements. So an example would be “I feel like I can't trust my attribution reporting for my affiliate marketing program.” And I put those in quotes.
Kathleen (15:47): So it's like a statement coming out of a customer's mouth. I had six of them, each of those six hit on very different pain points. And then with the group on the phone, I had those pain points listed out in a table on a slide. So I had a slide deck that I took everybody through. And the first slide I showed them on the pain points had the list of the pain points. And then it had a second column. And I asked everybody on the phone to force rank the pain points, one through five, one being the most painful, five being the least, and just put them in order. And they all had to agree. So they went through a conversation, they agreed, [and] I made notes on the screen so they could see it as they were talking. And we came up with a rank choice, a list of pain points.
Kathleen (16:35): And in order from worst to least, at least effecting. OK, then this is where it got really interesting. That tells you in what order do they prioritize the pain points, but it doesn't tell you how much more painful is one of those things than the next. So the next slide was the exact same list of pain points. But this time, instead of saying “rank them one through five,” I said, “OK, I'm going to give you a hundred dollars to spend to solve the pain. And I want you to tell me, based on how painful each of these five things is, how would you allocate that $100 across these five pain points in order to solve them.” And what was fascinating about that is. in many cases, the pain point that they had previously ranked number one, they would say, “you know, we want to put $95 on that.”
Kathleen (17:31): And then $1 on each of the other ones, like that's how much more painful it is. That's so, so, so telling in terms of giving you the information you'll need later to hit on in your marketing, but also to understanding that, when you do your pricing, your pricing needs to speak to how the price correlates with the value the product will deliver and solving that pain that they're saying they really want to get rid of. And so, in my case, what I learned when I summed up all of these kinds of dollar-based questions, like the more qualitative questions around pain, I learned that there were two themes that really emerged that our customers felt very keenly. The first is the need to take back control over something that they weren't able to control previously. And the second was to increase their profit margins.
Kathleen (18:28): And so immediately we knew those were the two themes we had to hit on in our pricing and in our marketing messaging then. So still on the same call, we did the exact same exercise, but we did it for product benefits. So it's kind of the other side of the same coin. I listed out the pain points, and then on the other, this new slide, I listed out, “here are the benefits that I think our product will deliver.” So examples of those were to retain more revenue from your sales, in other words, increase your profit margins. Now one was, get better insights into how customers are using your coupon codes. Another one was to improve the accuracy of your attribution reporting. So there were five or six different benefits that we listed out. And I went through the same exercise. So the first slide where I asked them to force rank one through five, the benefits, one being the one that was most important to them, five being the least, and then the same exercise where I asked them to put the dollars behind getting those benefits, and the same thing, funny enough happened again. There was one benefit that leaped out far and away above the others, and it had to do with revenue retention or incremental gains in profit margins.
Kathleen (19:39): So that was really interesting. And it was a really fun exercise to go through. What I would say is that, after that, then in that conversation, in those customer interviews, I went into, “this is going to be a bunch of big words, a simulated Van Westendorp price sensitivity analysis. So I'm going to pause here and explain what I mean by that.” There are a lot of — not a lot — there are a few various, very common well-known methodologies, very scientific methodologies that you can use to conduct a pricing survey. And at some point, if you're doing pricing, particularly if it's SaaS pricing, you're probably going to need to do a survey. And I knew that we were going to eventually get there. We happened to wind up using Qualtrics for this because they were able to supply us with a really good audience.
Kathleen (20:34): And after all the research I did, I settled on this methodology called Van Westendorp. And I liked this methodology because it's really simple and straightforward and quick in the sense that it gives you a very clear picture of exactly what your price should be. So the reason for that, and the way Van Westendorp works is this: It is really just four questions. The first question is: at what price would you consider the product or service to be priced so low that you feel that the quality can't be very good? That's the question. No. 1, and effectively that sets the absolute rock bottom floor for pricing. Question No. 2 is “at what price would you consider the product or service to be a bargain, a great buy for the money? So still kind of honing in on the lower end of the pricing scale, but in a way where it becomes very attractive and would incentivize someone to buy it because they're thinking “I'm getting a deal” question.
Kathleen (21:36): No. 3 is “at what price would you say this product or service is starting to get expensive?” It's not out of the question, but you'd have to give some thought to buying it. So this starts to get into the upper end of the pricing band, where if you do price something at this level, it would begin to introduce some friction. People might question whether something was worth it. Question number four, the last question is “at what price would you consider the product or service to be so expensive that you would not consider buying it?” So questions one and four are the absolute lowest and the absolute highest you could possibly ever charge questions. Two and three are the ones that are meant to really hone in on that middle area, which, put simply, is your pricing sweet spot. So I knew I was going to do this survey through Qualtrics.
Kathleen (22:29): But I decided to verbally ask these questions in my customer research interviews. And the reason is that when you do an actual survey, you need to have a sense for what scale are you giving, letting people answer on your ... it's not an infinite scale. You're not saying “on a scale of zero to 3 trillion,” right? You need to know we're talking about between a hundred and a thousand dollars a month, or $5,000 and $20,000 a month, whatever's appropriate for you, but you need to know where to set the floor and the ceiling. And that's where I think questions number one and four can really help. If you ask them verbally in customer interviews, they will help you understand where to set that scale so that when you develop your survey, whether you're using Qualtrics or some other product like Survey Monkey, you'll have a good starting point for that.
Kathleen (23:20): So I did ask those questions, [and] got some really great answers. And I was able to put that together into an analysis in order to come up with like, “Hey, we need to be within this range. We know that based on these conversations.” And the other great thing about the customer interviews is you can ask why. So I had some people say a certain upper limit for pricing. And then they explained, “Hey, the reason I said this upper limit is that that's similar to what we pay for this other tool. And every single person in our company uses this other tool, but with your tool, we think only one department would use it.” And so paying more for a tool that only one department would use would be much harder in comparison. So that was just fascinating.
Kathleen (24:05): It was really interesting to understand the why behind some of the answers. And so if you do these customer research interviews and you get some of these pricing answers, I encourage you to dig in and ask why that's where the gold is. So then lastly, I also, in these interviews showed customers a loose product roadmap. I shared with them over the next nine months. “These are 10 to 12 features that we're thinking of introducing to the product. If you could choose only three of them as being most important to you, which three would you choose?” And that was also a really interesting exercise. It helped me understand, what really do customers want out of this product? Where do they want to see it go? And then even more importantly, I asked, “What's not on here?” That should be so interesting.
Kathleen (24:54): You know, not on here in terms of product features, product roadmap items. It was so interesting because almost everybody answered the same thing. We had missed a thing that in hindsight seems so glaringly obvious, but we never would have caught it were it not for that question. And so that was incredibly valuable, even just on top of the pricing insight we got. So that really kind of sums up the pricing interviews with customers. I think the last thing you do in those meetings is you give them an open forum. “Hey, any other feedback you have for me? Any questions you have, anything you think I should know?” It's just a wonderful opportunity for some back and forth for you to understand what's happening with your customers, how they're experiencing your product, what their pain points are, what they love, what they hate, etc.
Kathleen (25:41): I did I think it was between five and 10 of those 30-minute interviews. And that gave me a really nice small data set, but a consistent data set. The feedback I got was consistent, which was really helpful going into structuring the actual van Westendorp survey. So in this case we settled on what was called a three-part tariff, which is like a combination of a fixed fee plus a variable fee every month. But it also included a base amount of let's call it usage in the fixed fee. So if they exceeded that there might be an overage charge and there are a variety of reasons for that. Partly we felt that the fixed fee component should be value-based because we wanted it to convey the premium nature of our product. We wanted the variable fee to be based on a volume metric so that it would scale with customers and they would have thought it was worth it to continue paying for the product as they grew.
Kathleen (26:49): And we wanted pricing to incorporate elements of a tiered approach by providing customers in higher price brackets with premium feature sets. So it could be more support or other value-added features like enhanced reporting, things like that. That was what we went in thinking, three-part tariff. So then we needed to segment our customers. Again, this is where your competitive research can really come in handy. But we decided to segment them based on order volume, the number of orders they process every month, which was sort of a proxy for revenue, which is also kind of a proxy for stage of growth, if you will. And we did a lot of research using publicly available database information on how many companies in our addressable market fell into each of those price buckets so that we could see “do these pricing segment sizes make sense?”
Kathleen (27:53): And a lot of that information you'll find whatever industry you're in. It's very publicly available with all of that. Then we went out and did the survey, and of course, the survey was those four basic Van Westendorp questions that I explained earlier. But then it also had other questions I threw in because I simply wanted to know the answers to them. So I wanted to be able to segment people's answers based on their company size and some other demographic criteria. So I asked them for how many orders they processed every month. That would give me a sense of which of our customer segments they would fall into. I asked what their job title was, what their job function was, or are they marketing? Are they finance? Are they sales, etc. And all of those questions [were] super helpful. Then I asked them a few other questions that had to do with whether they were a good fit for our product. But in any case, we got the results back.
Kathleen (28:49): And I think we … I want to say it was thousands of answers, which was really helpful, and we processed it and what's great is on the internet there are actually Excel spreadsheet templates that you can download that do Van Westendorp analysis for you, and they will show you where your pricing sweet spot is. So as a result of this, we literally knew exactly where we needed to land with pricing. And then it was just a matter of assigning that pricing based on customer tier and coming up with our feature sets for each customer tier so that they felt differentiated. Sort of the last question we had to answer was, should this be a monthly subscription or an annual one? And we started out with it as a monthly subscription, because that seemed to be what was most in our marketplace.
Kathleen (29:43): I'll get in a minute to why we've changed that in what we're playing with, but we felt like monthly would help us focus on new customer acquisition, which is what we were optimizing for at that moment, versus later down the line, when maybe you're optimizing for reduced churn when annual contracts can be really attractive. So there are a lot of different considerations there, but I think you need to look at what is your competitive set doing? What is the customer going to expect? And you know, honestly, what can you get away with? I know a lot of VCs like to see annual contracts because there's more revenue predictability. And especially if you're going out to raise another round of venture capital funding, that might be really important to your business. So sometimes it has nothing to do with the customer.
Kathleen (30:30): And it has a lot to do with positioning yourself as an investment target. Now that has to be balanced with customer needs, because you can't structure pricing fully in favor of investors in a way that would harm your ability to acquire customers, but they're all things to consider. So we made that decision and then honestly, once you've “settled on pricing,” the most important thing to understand is it's going to change, right? You will have gone through this massive exercise and feel like you've accomplished so much. And you pat yourself on the back and you go to market with pricing, and then you're immediately going to start to get impact from the market, right? As soon as you start to try to sell, and you begin talking about pricing with people, they're either going to love it, or they're not.
Kathleen (31:15): In our case, we knew we were going to need to change it, but we wound up changing it much more quickly than we thought. We started getting immediate feedback that people either didn't understand the pricing or it wasn't exactly what they would prefer. And so we did adjust, not so much the amount of the pricing, but how we were determining our variable fee. I think it started out as a percentage of revenue, the customer’s revenue, and we switched it to being a percentage of their monthly orders or based on a percentage of their monthly orders. It just was a metric that they could wrap their head around more easily. So, your feedback could be different. Somebody might say “that's too expensive,” or “that seems really cheap. Is it really worth it? Is it good?”
Kathleen (31:56): “Is it any good?” That's why a pricing committee is so important and that's why it's so important to have multidisciplinary people on your pricing committee so that you start in the beginning, you meet once a week after you launch your pricing, and you get sales feedback immediately. “What are you hearing in the market? What are people saying on your sales calls?” And as soon as you start to see consistent patterns and feedback, that's when you can test different variations to pricing. This was one reason we did not publish our pricing on our website in the very beginning, because we wanted to retain the ability to test different pricing models in our sales conversations. In general, I'm a huge fan of published pricing, but this is a great reason why in certain cases you might not want to do it.
Kathleen (32:43): So in the beginning, test those different pricing levels, structures, etc. Get it to the point where you're really happy with it and you feel comfortable with it, and then you can always publish it, and then you can still adjust it once it's published. It's still easy to do. It's just that you can do it much more quickly and nimbly in the beginning if it's not published. So that is a very quick overview of how I approached pricing. I have a huge swipe file on this, including, like I said, sample customer interview decks and links to articles on Van Westendorp pricing methodologies. I'm happy to share all of it. You know, when I first started this podcast, it was all about helping people learn how to get better results from their marketing in a way that was really actionable.
Kathleen (33:35): Nothing drives me nuts more than going to a conference, sitting through a session that's supposed to be educational, and coming out and feeling like somebody talked all about why to do something — like in this case, it would have been like why to do pricing. Or why do you use the Van Westendorp Method and not how to do it? How is so important. We're all under tremendous time pressure. We all need to produce results. So we all need to know how to do things. So I hope that this was helpful to you. And if you do think that my swipe file could be valuable, like I said, Tweet me @workmommywork. Or, if you're not on Twitter, you can reach out to me on LinkedIn, and I will share all of my resources with you. And hopefully then if, and or when you are made responsible for pricing, you'll have an easier time of it than I did when I first set out to learn how to do this.
Kathleen (34:26): But it was a great exercise to go through, and I'm grateful I had the opportunity to do it, and it made me understand so much more about our customers than I otherwise would have. Those customer interviews were invaluable. So with that I will just segue and say that the podcast is slightly over 200 episodes. Now it's been going for four years, which I can hardly believe when I really think about it. And we're at the point where I need your feedback. I want to keep going. I learned so much from my guests. But I want to do it in a way that provides value to you. So whether you're a longtime listener, or somebody listening for the first time, I would really be grateful if you would just take a moment, and again, either Tweet me or DM me on LinkedIn, or email me if you have my email address and do two things.
Kathleen (35:21): No. 1, tell me what it is you love and don't love about the podcast in its current format. And to send me the name of somebody you think would make a great guest who I have not yet interviewed. Let's figure out who the next kind of chapter of great marketers are in the history of the Inbound Success podcast, and let's do it together. So with that, thank you so much for listening. The fact that you dedicate 30 to 60 minutes of your week listening to this podcast, it means so much to me, and I truly hope I'm delivering value to you. Have a great week. Thanks for listening. Leave a review if you haven't done so already, and Tweet me @workmommywork if you know somebody else who's doing kickass marketing, cause I would love to make them my next guest. Thanks for joining me.
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