1. When to Revise Pricing

Talking to a prospective client earlier this year, they had a horizontal product serving a dozen distinct verticals. The pricing metric for financial services and healthcare verticals were ‘assets under management’ and ‘beds’ respectively.  Pricing on the remaining verticals were still seat-based and they wanted help migrating to something vertical-specific, and less sensitive to than headcount. 

This is the most common repricing situation I see: existing product with lots of engaged customers, price points may be approximately right, but the underlying pricing metric is misaligned against market trends, so ACV growth is hampered.

Inflection points to review pricing:

• Leadership/Ownership shifts: a change in leadership means a change in strategy. Note: Executives in their first 18months make up my largest client segment.
• Market shifts: customers market conditions change, competitive market changes, customers segments change. This is usually evident before visible in sales or even usage numbers. As I’ve talked about elsewhere, the changes in headcounts are driving a migration away from seat-based pricing.
• Technology shifts: new technology capabilities change both what is possible and what is expected. Specifically in this moment, customers, vendors, and service providers are all experimenting with LLM capabilities.
• Absent any of these shifts: Every 6 months.

2. Who, Specifically, are Your Customers?

Pricing an existing product starts in the same place as pricing a new one: figuring out what customers value through who they are, what they do, and what they say. The great thing about having existing customers is we already know what they’ve paid and that price is somewhere within their willingness to pay. It may no longer be the most appropriate price – but it was a price both parties agreed on. 

3. How Much Do They Value You?

After that, I like to normalize current prices across all the customers by calculating the percentage of their annual revenues committed to this product. This helps highlight trend lines and outliers of overall value, and dial-in willingness to pay across segments. Next, identify the industry metric – the most valuable noun – these customers use to measure their own success. Every industry has one: AUM, beds, transactions, studies, DAU, revenue per square foot, etc, etc. The right metric segments customers naturally, sharpens willingness to pay, clarifies tier boundaries, and is aligned with the customers’ own growth.

Sometimes these two exercises are enough to identify clear and obvious pricing improvements, even if those improvements don’t change the top-line price points for any customer.

The third exercise is identifying what I call: Unpriced Value. It’s the stuff customers value that has never been part of the price. This is free setup, free implementation, free customer training, instant support responsiveness, free custom development, accommodating billing terms, even something as amorphous as “easy to work with.” We don’t need to put a price on all of them, but we do need to acknowledge all of them as customer value.

In addition to the data analysis, I always include some qualitative interviews (‘Hows My Driving’) to get at customer sentiment and find those customers that won’t blink at a 30% increase.

4. Test the Model

Once the new pricing is developed, back-test the new model against the current model and current sales to confirm it’s a clear and obvious improvement. From my time working on machine learning projects, it can be valuable to leave some customer records out of the initial analysis and instead use them in backtesting the proposed pricing.

5. Transform and Rollout

One of the reasons leadership so often hesitates on changing pricing is an assumption that new pricing must be rolled out to everyone all at once. This is absolutely not the case. It can be rolled out to just new customers or just new customers within a specific segment. Existing customers can be migrated at renewal or never. It all depends on how the math maths against the strategic goals. Sometimes a price change for one customer segment means everyone else can stay put. One of my favorite examples of this is Craigslist, where charging for job ads, apartment rentals, and car sales is sufficient that everything else can remain at $0. 

One of the other reasons pricing don’t change is a dependency on the ‘price getting’ side of the house:

• in sales-led growth companies, any change in go-to-market likely impacts the sales commission structure. Again the changes may be limited to a specific customer segment. I’ve been fortunate to collaborate with some fantastic sales leaders to handle the sale team impacts of the pricing strategy work. 
• What changes to the product does this necessitate? For B2B sales-led products, my preference is for contractually-enforced rather than product-enforced entitlements. But in some cases changing in pricing and packaging still require changes to the product.