Increasing Prices Intelligently

Increasing Prices Intelligently
Mark Stiving is Chief Pricing Educator at Impact Pricing, an advisory firm specializing in value-based pricing for B2B technology companies. In this guide, he describes how to manage a price increase (which probably shouldn’t be an across-the-board increase) including deciding how much more to charge, which customers should see a price increase, and how to manage the roll-out.

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Questions covered in this guide

What are indicators that you should consider increasing your prices?

If you’re not getting pushback from your buyers – that’s a really good indicator you’re not charging enough.

If your win-loss ratio is going up dramatically – that’s a good indicator that something’s happened in the marketplace. You’re being valued more and you’re not capturing that value through the price.

If your competitors raise their prices – that’s a really good time for you to raise your prices as well. What often happens is somebody in the market will raise prices as a test or trial to see if they can get the market to follow. 

If you’ve been adding enhancements (and don’t have competition) – if you’ve been adding features to the product, but you haven’t adjusted the price, the odds are really good that you can raise the price.

What can you do, other than a straight price increase, to charge more per customer?

There are other ways to get more money out of existing customers:
  • Choose a really good pricing metric – then as a customer’s usage goes up, they just pay you more money. 
  • Build good, better, best products and drive upgrades – once customers have learned to love your product and they want the next set of features, they willingly upgrade and pay more.
  • Cross-sell them more products – once you’ve got them into your platform, and you’ve built a great relationship, you’re in a strong position to sell them more stuff.

What is value-based pricing?

Charge what your customers are willing to pay – cost shouldn’t dictate pricing, value should.

Important caveatvariable costs do matter if your customers’ willingness to pay is below your cost to serve them. In that case, don’t sell to them.  Instead, only sell to buyers who are willing to pay you more.

Think of it as a goal or attitude –  it’s impossible to know exactly how much your customers are willing to pay, so think of value-based pricing as a goal or an attitude of how we think about pricing.

How do you determine what value you deliver to your customers?

You need to understand why your buyer buys your product, and how they perceive value – I’ve created the “Stiving value table” to help companies ask the right questions to zero in on the value they deliver.
  • What’s your solution –  this could be a feature or the overall product. This is what most companies think about the most.  
  • What’s the problem – the problem that causes your customer to buy (to which your product is the solution. Why did you build that product or feature?)
  • What’s the result – this could be as simple as “the problem went away.” Ideally, it’s measurable. Sometimes you need to go a level or two deeper to find something that’s measurable.
  • What’s the value – this is how much a customer values the results. For B2B this is almost always measured in dollars. Ultimately all B2B value boils down to increasing revenue, decreasing cost, or decreasing risk.

How do you determine what your customers are willing to pay?

Customer willingness to pay depends upon the decision the customer is making – when making a purchase, customers ask themselves one or both of two questions:
  • First decision: will I buy something – this first question is about whether the customer will buy anything in the product category? This decision is much less price-sensitive.
  • Second decision: which one will I buy – if there are multiple options in the category, now the customer shops for alternatives. In that competitive landscape, customers can become more price sensitive.

If the customer is only making a “will I” decision, you can capture a % of the value delivered – when customers are making a “will I” decision and not going on to look at the competition, they’re much less price-sensitive. If there’s no competition you can expect to capture around 10% of the economic value that the customer believes they’re going to get. 

If the customer is making a “which one” decision, you can capture a % of the difference in value delivered – with multiple options it’s important you look for the difference in economic value (that you deliver vs. your competitor). A customer should be willing to pay the price of your competitor’s product, plus up to half of the difference in economic value. 

How can you decide exactly how much to raise prices? Is there primary research or analysis you recommend conducting?

Van Westendorp’s Price Sensitivity Meter – a widespread pricing tool that revolves around asking respondents 4 questions:
  1. At what price is the product too expensive to consider?
  2. What price is so low that the quality can’t be good?
  3. At what price is the product starting to get expensive but you still might consider it?
  4. At what price is the product a good buy and good value for the money?

To simplify the analysis, anchor on question 3 – think of the 3rd question as your demand curve and then ignore the other three questions. But, still ask them because it helps the respondent get in the right state of mind for the third question.

The “quick and dirty” willingness to pay question – even simpler, ask “how much do you think other people/companies like you would pay for this?” You can never ask, “how much are you willing to pay”, but you can ask how much similar companies would pay (and you’ll get an answer anchored in their experience).

Don’t do a survey, do lots of conversations – the Van Westendorp questions are easy to ask in the middle of a conversation. What you’re looking for with this research is an understanding of how much value they are going to get from my product, and a conversation is a much better way to get at that.

Different segments likely have different willingness to pay – what approaches do you recommend to capture the most value?

As a general rule, don’t do across-the-board price increases – most companies do that because they think they should and it’s easy, but as a general rule, price increases are risky. In some places, we can get away with it, but in some places, you can’t.

There are 3 techniques you can use to charge different prices for identical products
  • Charge based on a characteristic of the customer – for example, we often charge different industries different prices, or we charge different regions of the world different prices. These are based on things I know about the customer that are related to their willingness to pay.
  • Charge based on something learned at the time of the transaction – what can I learn at the time of the transaction that helps me understand what I might want to quote. For example, if a customer needs immediate delivery and installation and they’re not looking at any competitors, that says “there’s an urgent problem here”, and they’re probably not overly price sensitive. But if they don’t need it for six months, they’re shopping around, and they have a competitive matrix out in front of you, then they’re probably pretty price sensitive. Use that data to inform the price you quote.
  • Charge based on hurdles or behaviors – in the B2C world, coupons are the perfect example of this. In the B2B world, it’s things like: are you willing to wait for delivery, or are you willing to do a case study? What are the hurdles that you can put in place so that people who are price sensitive would jump over them, but people who aren’t price sensitive, won’t?
There are 2 techniques you can use to alter the product to support different prices
  • Create versions of the product for market segments – when you can identify different market segments that have dramatically different willingness to pay, you can find features that matter to that high willingness to pay segment. Then you can put those features in one version of your product, which would incentivize them to pay you a lot more. LinkedIn is by far the best example of this because they charge $700 a month to recruiters and they charge job-seekers $50 a month.
  • Build “good, better, best” products – very few people are good at knowing what they need. So if you are price sensitive, if what you’re about to buy is a big part of your budget, you buy the ”good” tier. If you’re not price-sensitive, if it’s a tiny part of your budget, and if it’s of great importance to you, you buy the “best” tier. Everyone else and the majority buy in the middle “better” tier because you don’t want to make a mistake.

If you’re also seeking to re-define your market positioning (e.g. move upmarket or focus on a new segment) in conjunction with your price increase, how should that impact your strategy?

Don’t think that way, do a price increase or change your positioning – I would advise you to not think that way, but instead, say that you are doing a price increase or a different positioning.

Option 1: a price increase – if I’m doing a price increase, it’s because I believe that my current market segment is willing to pay me more.

Option 2: a positioning change (and a corresponding price change) – if I’m doing a product positioning change, and charging more because of it, I’m doing it because I think there’s a different segment I want to go after that’s willing to pay me more.

How should bundling factor into price increases?

Bundle your way into upgrades (by creating or enhancing higher tiers) – let’s say you’ve got two products today, and you call them good and better. Let’s pretend you’ve got a 50/50 split between good and better. Introducing a new, higher “best” tier is a double win because some of the “better” people will upgrade to “best”, and fewer people will buy “good”, instead settling on the middle “better” option.

How should you take competitor prices into account?

You need to put yourself in the mind of the buyer, and how they’re making decisions – to some extent, you just need to think about the way your customers think. As an analogy, imagine a luxury car buyer. There comes a point where a Mercedes is so much more expensive than a Lexus, that they’re going to buy the Lexus. But there’s also a point where the Mercedes is just a little bit more expensive than the Lexus, and they’d rather buy the Mercedes, so they’ll pay it.

You can analyze this with conjoint analysis – conjoint measures the value customers place on a product. Or if you don’t have the ability to do that, you can also always “think” this way. So if you’re trying to put a price on your Mercedes, what you should be thinking is, “if the buyer doesn’t buy Mercedes, what are they going to buy? How much do we think they’re going to value my brand and whatever extra features I put in?”

When should you do conjoint (or other more robust analytics)?

Do conjoint if there’s a lot of risk – e.g. if I’m going to build a hardware product, and then I’ve got to go build a million or 100,000 of that product, I’m gonna study the heck out if. 

With software, there are often other ways – conjoint never hurts (conjoint is powerful and clarifying, and allows you to put a dollar amount on features), but with software you can often figure out the relative value of different features through trial and error, watching usage data, etc.

You need at least 100 respondents for a simple study, 300-500 for a more complex study – the minimum number of respondents depends upon how complex your study is, how many different features you put in, and how many different levels there are of each attribute. Generally speaking, if you have a really simple study, you’re probably looking at a minimum of 100 responses. If you complicated it a little bit more than that, you probably need 300-500 responses, or somewhere in that ballpark. 

Who should be responsible for setting the price book? Who should be involved?

It needs to be someone who understands and cares about the value delivered:
  • First choice: whoever owns profit and loss responsibility
  • Second choice: product manager or product marketer – they’re the closest to understanding the value of the product because it’s understanding what the customer is willing to pay.
Others to involve (but who should not own pricing):
  • Finance – finance wants to be involved, and they should be. Ask for specific KPIs from finance – they’ll do a fantastic job monitoring them.
  • Sales – sales needs to be involved to give feedback from the marketplace.

In every startup, the CEO starts by owning pricing and continues to drive the model – the CEO or executive should almost always be involved in choosing pricing models. When a company first starts, the CEO certainly sets the model and prices. As the company matures, the CEO should still be involved in deciding the pricing formula or process for price-setting but can step away from the actual price setting.

How should you prepare your sellers to support the value you deliver and defend the price you set?

First, understand the value of your product – if you’re the product manager, and you’re trying to teach sales, you need to first make sure you understand the value of your product. Product or product marketing should do a good job of documenting the ways that you drive value.

Train sellers to have a value conversation there’s no way a customer knows how much value your product is going to deliver to them. And there is also no way your salesperson knows how much value your product is going to deliver to any individual buyer. But when they come together in conversation, they can establish the value that could be created for this particular company from this particular product. You meet in the middle because the customer knows their company and the seller knows their product. You each have a piece of information that the other doesn’t have and together you can come up with what the value is.

How can you prevent sellers from discounting after a price increase?

Many price increases don’t get implemented – because sales reps went and renegotiated with their customers. So you need to combat that with monitoring and incentives.
  • Monitoring – the first step is actually tracking to see if they’re changing the new prices.
  • Incentives – pick incentives that do what you need them to do, which is for the salespeople to win at higher prices. Give the salesperson a different commission rate if they sell a target price, or if they sell below the target price.

How should you announce and roll out a price increase to prospects and existing customers?

For prospects, offer to hold the past price to some point – and then raise the price, but give the warning to drive purchase behavior.

For a subscription business, it’s more complex for customers – a price increase risks causing your customers to re-think their decision. The beauty of a subscription is that they don’t think about it usually. As soon as you’ve raised the price, you’ve caused them to rethink the decision. Think about when you join a gym and you pay $50 a month, but let’s say you don’t go to the gym that often and they send you a note that says, we are raising your price to $51 a month. Now you’ve reminded the customer that they aren’t using their gym membership and you could lose their business.

Bucket existing customers into tiers of how much value they get from your product, and handle them accordingly – don’t treat all customers the same.
  • Identify a usage metric – use this to measure value, assume the people who use the product the most get the most value from your product.
  • Bucket customers by usage – e.g. 5 buckets, 20% each, heavy users down to light users
  • Start raising the price from the top – start with the top 20% and raise their price. And odds are really good, zero of them will churn. Then move on to the next 20% and raise their price. And I’m going to get a little bit of churn, but not much compared to the amount of extra profit I got.
  • Stop when the profit gained is less than the profit lost monitor whether the profit that you’re gaining is more or less than the profit that you’re losing from churn.

How long does it take to put together a solid price-increase plan?

About a quarter – when I advise companies, I typically do weekly calls for about a quarter to put a plan in place where they can be comfortable raising prices.

How should you think about price increases in times of inflation?

Inflation can be an excuse to raise prices, but it shouldn’t be the reason – the fact that the cost went up might give you increased incentive to try to figure out how to raise prices, and during inflation, people are more willing to accept price increases, but the costs themselves should not be what’s driving your price increase.

Keep an eye on what your competitors do – if your competitors raise prices, follow instantly. Don’t think about it, don’t debate, just follow. If they don’t raise prices, try raising prices and hope that they follow (if they don’t you may need to bring your prices back down).

If you sell subscriptions, keep churn in mind – in the world of subscriptions, you don’t have to worry as much about competition, but you do have to worry about churn. As with any price increase, monitor usage and raise prices on the people who get the most value (typically, those who use the product the most). Don’t raise prices for customers who rarely use the product.

What are the most important pieces to get right?

Know what value your product delivers – before you get to price-setting, spend time making sure you know what value you’re delivering. Otherwise, the pricing exercise will lack a foundation.

What are the common pitfalls?

Don’t do across-the-board price increases – different customers have a different willingness to pay, and you miss the power of a price increase if you apply it at places where it shouldn’t have been applied. 

Not having a plan to reverse the decision – think of a price increase as a test, and roll it out gradually. Use your top 20% users as a test cohort – if you upset the top 20%, there’s no chance you should continue to roll out the price increase among lower-usage customers.

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