How much

In some ways, this can be the most difficult aspect of pricing and monetisation. Knowing at what point customers will stop purchasing your product because of the price is tough to predict. It will also depend on your commercial objectives, packaging, metric and model decisions and who the customer is; resulting in a particularly complex picture to navigate.

Factors and data sources

There are a number of factors which will impact the prices you can charge. Different data sources should be used to triangulate the price level which will drive the optimal outcome in terms of profitability. Fundamental to this is developing a detailed understanding of customer perceptions of your business and the value it provides, how users actually deploy your products, and what key decision makers in those customer organisations view as successful outcomes.

Economic value: You will want to gain an understanding of the economic value your proposition can drive for the customer:

  • Identify the outcomes that customers are looking for
  • Work with them to identify the metrics in their business which your proposition will improve
  • Show how that links directly to the business outcomes they are seeking.

In some cases this will be straightforward. For example, revenue automation software such as ProfitWell can directly demonstrate revenue impact. Conversely, a business such as Udemy (an online learning platform) will face a greater challenge in identifying the right metrics to track and then demonstrating an impact on outcomes.

But it’s worth the effort: gaining a deep understanding of this ‘economic value’ will not only be useful in identifying the right price level, it will also help your sales and marketing team to demonstrate impact during their pre-sales activities, and then to track and demonstrate the value the customer is receiving post-sale.

Alternatives: The price or cost of alternatives is fundamental. This includes:

  • the price of competitors (obtain intelligence on all relevant opposition),
  • the cost of doing nothing (many customers will cling onto outdated or manual processes because they are used to them)
  • the cost of alternatives sitting outside of the typical competitive set.

In many cases, for SaaS businesses focusing on the SMB market, pricing is published on their website, and discounts are more limited. In other cases where the average deal size is larger, pricing will be more opaque and discounts perhaps more prevalent; and hence the price of competitive offerings will be harder to establish with certainty.

Buyer psychology: Asking customers directly through a survey or interview often yields significant insight into perceptions of price, value and willingness to pay. Here, are a couple of the many available scientifically-validated approaches; these should not be considered a comprehensive guide to this hugely complex area. Links for further reading can be found at the bottom of this section.

  • The Van Westendorp approach asks customers four variations of a willingness to pay question:
  • At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
  • At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
  • At what price would you consider the product to be starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
  • At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
  • The Gabor Granger approach asks customers how willing they are to buy at different price points. By testing multiple price points, one is able to identify the highest price where the customer is still willing to buy, which can then be translated into a demand curve.
  • Conjoint analysis, which can take a number of forms, is a type of indirect questioning technique used to tease out customers’ product preferences and price sensitivity. It is therefore extremely useful in determining your packaging strategy as well as for setting your price. Indirect questioning isn’t sneaky: for many innovative or sector-defining products, a bald question (“Would you buy this for $1,000?”) can be too hard to answer.

Switching costs: Switching costs are a double edged sword when it comes to pricing. If you are the incumbent supplier, it provides an opportunity to increase prices over time due to the lower risk of churn during the transition. On the other hand, if you are attempting to displace an alternative solution with high switching costs, you may need to be more aggressive with pricing initially to land the account and then expand over time.

Cost dynamics: You should, of course, have a good handle on your cost dynamics; understanding how costs scale across customers based on the scope of their purchases, their behaviour, and the level of service you provide for each tier of customer.

Transaction data: In cases where there is a high level of negotiation between sales teams and customers, and a history of transaction data to analyse, it is possible to identify patterns in the data which can be exploited. You may, for example, find that customers with certain characteristics tend to pay higher prices; this type of insight can then be systematised and exploited. Transaction analysis also provides a window into what the best negotiators do vs. the rest. Those learnings can then be applied systematically to improve the outcomes of all salespeople, e.g. through automated segment and deal-specific price guidance.

Usage data: Understanding how customers use your proposition is critical to evaluating what aspects of it are most valuable and to whom. The insights you gain from usage analytics won’t tell you the ‘right price’ to charge but they will help you to identify customer types which are gaining more value than others, and hence allow you to create different price levels or engineer price increases based on traction with customers.

Objectives: The price you charge is a decision; your decision. You should therefore consider your commercial objectives when setting your prices. Depending on the maturity of the product, its role in your portfolio, whether there are network effects you’d like to exploit etc. All of these will have an impact on the prices you charge. (The supermarket ‘loss leader’ is a great example of objectives in action: the loss leader is sold at a rate below profitability because it encourages other more profitable purchases).

Different customers, different prices

There is no such thing as a ‘market price’. Customers all vary in terms of what they are truly willing to pay for your proposition, as:

  • they will need it to different extents in their business operations
  • they will have different perceptions of its value, and
  • they will also face their own constraints specific to their situations.

Through the right packaging strategy, metric and model design, you can effectively tap into these differences in willingness to pay, allowing you to better maximise both volume and price.

There is also, however, a significant opportunity to differentiate prices directly based on the customer and the specific context of an individual deal, especially at the enterprise level.

The limiting factors are:

  • Transparency of pricing between customers – do they talk to each other?
  • Defensibility – can you justify the price you wish to charge?

The more opaque prices are between customers and the more defensible pricing differences are, the more opportunity you will have to differentiate deal values individually.

The customer dimensions which correlate well with willingness to pay will be specific to your business; however, there are a number of categories which can frequently be leveraged effectively.

  • Customer location: Where customers are located can have a large impact on willingness to pay, due to differences in purchasing power across economies, differences in local competitive intensity and the availability of regional alternatives.
  • Customer industry/sector: Product-market fit and use case can often vary by industry, as well as the underlying profitability of the industry itself.
  • Customer size: In most cases, the price metric will scale naturally with customer size, however, if that is not the case, there may be a difference in willingness to pay based on size metrics such as revenue, number of employees etc.
  • Deal specifics: In large or complex negotiations there may be an opportunity to use price as a parameter for change in a deal. There may be differences in the balance of power and competitive intensity across deals which open up the opportunity to optimise win rates through price.
Framework to differentiate prices for pricing strategy

You will need to strike a balance between the simplicity of your pricing guidance and the potential to optimise prices. Just because you can differentiate prices and generate more revenue doesn’t mean you should. Businesses are increasingly global and work to centralise procurement. Having different price points which are not defensible can be confusing and may slow down the sales cycle (or shut you out completely).