Getting your hands dirty - How to EARN your pricing strategy
The average SaaS company spends about 6 hours a year on pricing strategy. EARN is a simple way to approach pricing strategy to help you shift from guesswork to framework.
You didn't have the time, data, or energy to derive an intentional and data-driven pricing strategy linked to your business objectives.
We get it. The data you need to review your pricing strategy simply doesn't fall into your lap, and you probably have little chance of freeing up time to gather and crunch the data yourself (you probably have 1000 emails in your inbox right now, don’t you?).
Well, I guess you can hope the pricing you have today is good enough...except, hope is not a pricing strategy!
You're not alone. Studies show that most SaaS companies spend 6 hours a year on setting their pricing strategy, despite knowing that pricing is the most powerful and impactful growth lever in your arsenal ( 4 times more than customer acquisition, per OpenView). Based on this, you've probably spent more time debating over which requirements make it into the next release.
So what gives?
The fundamental root reason behind the lack of attention to pricing strategy is the lack of data, but digging deeper, the root cause is not a lack of resources or capacity, but a lack of structure. If all your meetings for tomorrow cancelled and you had a free day, what pricing research would you do? Where would you start?
This is where you get your hands dirty. We'll cover four steps to setting a clear and informed pricing strategy using what we call the EARN approach (Estimate, Align, Reinforce, North Star), part of our 5Q Pricing Framework at PRICING I/O. Yes, we thought long and hard about the acronym...you really need to earn your value in today’s competitive environment.
Here's how it works, step by step:
“...hope is not a pricing strategy”
Step 1 - Estimate your value
Pricing strategy in the tech space poses unique and interesting challenges. Candidly, it is tough to pull off value-based pricing because value is hard to measure and quantify...not to mention it changes with every release. Spending time to understand your value is the right place to start, and if done well, makes the pricing problem much easier to solve.
To get started, send a survey to your prospects, customers, and internal teams (like sales or services) to collect ideas on what areas of the product deliver the most value. Choose a subset to hold 10-15 minutes interviews to gather more context behind their answers. This data set should serve as a good foundation to start breaking down your value into categories, such as positive vs. negative, or base vs. premium. Here are a few questions to ask yourself as you define your value:
What ROI is the buyer expecting by investing in our product/service? What outcomes do buyers want to improve? How are they measured? How does our value change over time or with increased usage?
Step 2 - Align your value, product and market
If you thought nailing down your value and differentiation was hard, this next one is not any easier. It's best to do this step with other team members to get a cross functional perspective of how value aligns with the product’s maturity and market dynamics. The goal is to draw a figurative line connecting all three vectors. This will take a few iterations to get right, but think through the relationship between value, product and market to formulate an understanding of what you want your pricing to do. Here are a few questions to ask yourself:
Are customers over-served or underserved in the market today?
Is our market growing or shrinking and what is our rank today?
How would competitors react to our pricing?
To help you along, below are a common set of pricing strategies in terms of how you base and position your value.
Step 3 Reinforce the strategy by making trade-offs
Setting a strategic path usually means you need to say yes and no to certain things. For instance, you should deep discount to win deals if your strategy is Skimming. The big trade off is top line revenue and market share for profits. The best pricing changes are designed to max profit, however, we know the realities and pressures to gain market share and top line revenue, especially in the venture or private equity backed arena. Ask yourself:
Why do we win and lose deals today?
Who is definitely NOT our customer?
What explicitly will we need to sacrifice to achieve this strategy?
Below is a trade-off matrix we've used with clients to help think through the common tensions in pricing strategy.
Step 4 Declare a North Star
The old adage you get what you measure. A bigger problem beyond not setting a deliberate pricing strategy is the lack of measurement. When is time to pivot from penetration to neutral? The moment you set prices the landscape changes, new information is available, assumptions have taken a different shape.
You may not get it right the first time...and that's okay. Ask yourself:
Which financial metric is most important to improve next year?
What other leading metrics influence our north star?
What signals should we watch to ensure we picked the right north star?
Here are a few common pricing metrics we’ve seen in the field:
You're probably wondering how long the EARN approach takes. To give you a classic Product Manager response - it depends.
No really, it does. It relies on how much data you have and how many people are working on the project. Step one generally takes the longest, but the remaining steps can be done in much less time. If you have the data and make this a focused effort, completing the 4 steps of EARN should take 2-4 weeks. Aim for version 1.0 and iterate from there...do not strive for perfection, but rather strive for done! Learn and improve from there.
We hope the EARN approach will help you spend more than 6 hours a year on your pricing strategy. We've successfully coached some of the best run software companies in the world in implementing the EARN approach...but that doesn't mean it's the only path to a great pricing strategy. What have you tried? Please share some of your tips, tricks, and hacks you've used to set up your pricing strategy...we love to compare notes.