AMA on Raising Prices Intelligently

So we’ll move into, I’ll let you kick things off by introducing yourself.

All right. Well, I guess it says it right there. Mark, I have been in pricing for 30 years. You could say 50 years if you count when I was 12 years old. I remember going to the grocery with my mother and seeing prices that ended in nine. Cap’n Crunch was $ 0. 49. Now, why do companies do that? We know it’s really $ 0. 50. There’s no real difference. Do they think we’re stupid? 20 years later, I was in a doctoral program at UC Berkeley, and I had a chance to play with scanner panel data.

And this is the data grocery stores collect when you use your loyalty cards. I could test whether this $ 0. 09 thing really works or not. And it turns out it works. It works because we are lazy subtractors. But I became addicted to understanding how people use prices to make decisions. And from there, I went on to realize that it’s really always about value. And how is it that we communicate value? How is it that we create value? And then how is it that we capture more of that value through the pricing mechanisms that we use?

So I’ve been in pricing and value for most of my life, and it is my favorite topic.

Awesome. So we have a bunch of pre- submitted questions. We took some of the most common ones and put them together here. As you have more questions, feel free to put them in the chat, and we will continue the conversation as an AMA. So kicking things off, what are some signals that you could raise prices and you should?

So the list up here is a really good list. So if you’re not losing enough deals, one of my favorites is if you never lose a deal, you are not charging enough. Because we have to lose some deals. Now, nobody wants to lose, but the point is, if I could raise my prices 10% and I lose 1% of my deals, guess what? I just made a lot more money. So the question is, are you trying to maximize your customer count, or are you trying to maximize your profit? And I always think about how do we maximize profit?

If your win ratio is increasing, this is a great opportunity to raise prices. Something’s going on in the marketplace, in your product, your competitors aren’t keeping up. Something’s happening in the marketplace that says, hey, your product is more valuable. Maybe you’re just getting better at selling it. But regardless, it’s a great opportunity to say, hey, we can get away with raising our prices. Your competitors raise their prices. This is a no- brainer in my mind.

If your competitors raise prices, don’t think to yourself, oh, I’m going to keep my price low because then I can take their share. Because here’s what your competitor’s thinking. Well, if they don’t raise their price and follow, we can just bring our price back down, it’s okay. And so we end up missing an opportunity to raise industry profits. If your competitors raise their prices, just follow them. Raise prices, shares don’t change at all, and everybody makes more money. And the last one, you’ve been adding enhancements.

If you’re in software, you know you’ve added a ton of new features, new capabilities over the last year, over the last two or three years, if you haven’t raised prices. What a great opportunity to say, hey, we’ve been adding more value, so it’s time for us to raise prices. So these are all no- brainer times. But by the way, let me give you another time that you should raise prices. It’s a year that’s gone by since the last time we raised prices.

Yeah. What’s, do you have guidelines on annual price increases? Like, should it be tied to CPI? Should it always be X percent?

It should be what you think you can get away with. When we had inflation that was really high, what a great opportunity to be raising prices, at least the rate of inflation, if not a little bit higher than that, because you added a lot more value. There are so many companies who let inflation happen and never raised their prices, they actually fell behind the curve. It’s like they lowered their prices during that period of time. And so we should be thinking at least inflation, and then plus a little bit more because we’ve added value, right?

Because we’re doing more for our customers. I think you want to get in the habit, get your customers in the habit of expecting an annual price increase. I don’t know about you, Kate, in your business. I use QuickBooks. Every single year, I get the email that says, hey, we raised your prices. Can I just tell you that I hate that?

I do too.

But I pay it anyway, because I don’t have a choice, right?

Yep.

How do you think about the value of multi- year commitments versus annual price increases?

I’m, I’m not a huge fan of multi- year commitments, um, for a couple of reasons. Number one, there were a lot of people who had multi- year commitments and they didn’t even written into their contract. We get to raise prices 3% every year. Well, guess what happened when inflation went to 9%? You fell behind, right? My preference is to say, we’ve got no commitment to price, no commitment to price increases. In fact, if I’m, I’m a huge fan of a monthly month by month agreement.

And the reason I like that is because if you’re a SAS company and you can’t keep your clients happy every month, you don’t deserve to have those clients. And if you lock them in for three years, it gives you an excuse to ignore them. It gives you an excuse to treat them badly. One of the best things about SAS businesses is we have no choice but to make our customers really happy every month. So I love month by month contracts.

Now if someone says to you, but by the way, month by month contracts helps you win customers because they don’t have to make a huge commitment. Now, if someone says, Hey, I know I’m going to commit, uh, I’m happy to pay for a year. I’m happy to pay for three years. We can do that and maybe give a little bit of a discount because of the cashflow issue that we get. And, but, but I’m a huge, huge fan of not forcing my clients to make longterm commitments and delivering so much value. They want to stay with me.

That does sound very aligned. So moving on to a next doozy of a question, how much should you charge or how much should you raise prices? And you’ve introduced this first decision, second decision concept. Do you mind talking through that one a little bit?

I do not. So when people, when people make a purchase decision, especially when they’re buying something for the first time, they almost always make two different decisions. The first decision is, will I buy something in the product category? And then after they’ve said yes to that, they then go on to say, okay, now which one will I buy? Um, so imagine for a second that tomorrow morning, your significant other nudges you and says, Hey honey, I’d really like it if you would learn to play the guitar and sing me a love song, right?

You’ve never had a guitar in your life. You’re all of a sudden you just said yes to the will. I decision. Yes. I’m going to buy a guitar, right? By the way, price didn’t come into that decision. I’m going to go buy a guitar.

Yeah.

What do you do next? You go to the guitar store and you start shopping for guitars. Which one fits me? Which one sounds good? Which one’s worth the money, right? And price becomes a really important decision as we start making that, which one decision. And this is the same way your customers are deciding, Hey, do I need to buy a CR, a new CRM? Yes. Okay. Which CRM am I going to go buy? And they go shop a bunch of different CRMs. And so people are not price sensitive when they’re making the will I decision.

They’re very price sensitive when they’re making the which one decision. The reason this is so important is because a lot of times people only make a will I decision and then buy. They don’t go on to make the which one decision. If you are a SAS provider today and you’ve sold someone, you’ve got an existing customer, you’re in their platform and they want to buy an upgrade to your product. Can they buy that from anybody but you? Probably not. And so that is a will I decision. Am I going to buy it or not?

And what’s so great about that is they’re not looking at how much are you versus how much is the competition. They’re looking at what’s the value of solving the problem that this thing solves. And it’s a very different sale. You get away with much higher prices that way.

So I end up in this situation a fair amount because OneGuide is kind of a, we’re a type of category creator. There aren’t a lot of direct competitors to what we do. But sometimes getting the will I buy anything at all decision is harder than it seems. Convincing somebody that they should buy versus doing it themselves. How do you think about positioning price or price increases versus DIYing it?

So you can think of DIY as the alternative and just like any purchase decision, what we need to do is put ourselves in the minds of our buyers and understand how they’re making this decision. And the truth is in the world of B2B, which you and I both play in all the time, in the world of B2B, the only reason someone pays you money is because they think they’re going to make more profit because they paid you money. That’s it. There’s no other reason. So now the question is, can you get to how much more profit are they going to make?

I have a tool or a framework I use called a value table, which helps us get there. And so we could say to ourselves, give me a feature of a product and you built this feature because it solves a problem for a customer. Can you articulate that problem really clearly in the customer’s words? Now the next question is if a customer, if you find a buyer who has that problem, you can solve it with your solution, what’s the result they might achieve? And can you make this result quantitative? So it’s 3% higher turnover, 5% higher valuations, right?

Can you actually quantify it? And then given that you can quantify it, then the value is how much additional profit did they make, right? How much additional profit are they getting? And so this is a way to think about it. And I can tell you of those four steps, the easiest one is your features because you think in features, everybody thinks in features, right? The hardest one is the problem. We have the curse of knowledge and we don’t know what it’s like to be in our customer’s shoes anymore. We don’t know what it’s like to not know what we know.

And so it’s really hard. When you can learn to articulate that problem, the rest of it happens relatively easily. So my advice to you would be, let’s see if we can find those real problems that people have, articulate those problems, and then quantify what are those expected results.

Awesome. Okay. So here’s one that we got a bunch of pre- submitted questions on. Should we increase prices for all customers? I’ll let you…

Okay.

What should we do instead?

Okay.

So shall I assume that we are in a SaaS world?

For now, yes. Let’s assume it’s a SaaS or maybe business services.

Okay. I’m going to do SaaS for a second because there’s a really great thing for all SaaS companies what you should be doing. And that is you should be monitoring usage of your product. By the way, you should be monitoring usage of every feature of your product. But if you have an overall usage number of your product, we’re going to use that as a proxy for value. So someone who uses your product a lot gets a lot of value from it. And someone who doesn’t use it very much isn’t getting very much value from it.

So what you can do is take your customers, rank order them based on usage, take the top 20%, raise their price, and they’re just going to pay you the money. And then you’re going to go to the next 20% and raise their price. And you might get some pushback, but they’re probably all going to pay you. And then you go to the next 20% and raise their price. And now you might get one or two people to churn and you’re like, I didn’t like that. And then you’re going to go to the next 20% and more people are churning and you say, ooh, this hurts. Let me stop.

And you’re not going to raise prices on any more. And so what we just did was raise prices on people who get the most value from our product, but not raise prices on people. Can I give you a great example of this?

Yes, please.

Netflix recently raised their prices by two bucks or something like that. They’re charging for ad- free video. I guarantee you when that happened, here’s what went through your mind, everybody’s mind who’s a Netflix subscriber. Am I watching Netflix enough that it’s worth the extra $ 2? And if you never watch Netflix, you canceled your Netflix. If you watch it every day, you’re like, oh, I don’t like that, but I’ll pay it because I use it. And this is exactly what we’re talking about.

So here’s an interesting angle on this. Say you have a legacy customer who, let’s imagine they’re a very heavy user and you’ve determined they should pay $ 30, 000 a year, but they’re only paying 10. So tripling their price would be really aggressive. What do you do?

Yeah. So I think as a general rule, and by the way, I have no research other than what I’ve seen and how I feel, okay?

Yep. Yep.

But I think as a general rule, you should limit your price increases to about 20% a year. And so here’s what happens is when you raise prices 10%, your clients or your customers are going to say, I don’t like that, but it’s not worth the hassle to pay it, right? To go find something different. When you get up to 20%, you’re getting at that cusp where they’re really starting to dislike you a lot. When you get over 20%, they’re going to find ways to punish you. So even if they should spend 30K, they’ll take the hit because they hate you so much.

Right.

And so my advice is, you know, tell them up front, hey, you know, new customers that are getting what you get are paying us $ 30, 000 a year. So we’re only going to raise your price 20% this year and say it again next year and say it again next year. Right. But I would not, I would not triple their price.

That’s a slap in the face. So a cousin of that question, a lot of early stage companies have this missionary selling where you give heavy discounts to get traction in the beginning. So let’s say you have some of those early adopters who are not heavy users. Maybe it doesn’t justify really aggressive price increases. Do you just let them hang out if assuming it doesn’t cost that much to serve them?

Yeah.

So I think this is more of a mental problem for the company selling than it is for the customer at this point in time. So ask yourself how much effort and energy are you going to put into raising prices on your first customers versus the return you’re going to get? And would it make more sense to spend that time and energy trying to win new customers at the prices you actually deserve? I think there’s a point at which you can raise prices on existing customers or on your first customers, your initial customers.

But if you think about it, it’s what percent of your customer base, 1%? Does it really matter if you raise their prices? So I think it’s a question that we fret about way more than it’s worth in us fretting, right? It doesn’t matter to me if you raise their prices. It doesn’t matter to me if you don’t raise their prices. I don’t think it hits your revenue very much at all. But what you really should be focused on is can I win new customers at the prices I think I deserve?

Nice. Here’s an interesting wrinkle. Thanks, Ben. Let’s say you sell into multiple lines of business within one enterprise. And so they can talk to each other. They know what each is being charged. Does that mean that even if they have different levels of usage, their price increases should be more or less identical?

Yeah, I think as a general rule, when you sell into a company that has centralized purchasing, or you have a purchasing department that understands your pricing, that you have to be consistent across those companies. I used to be in the semiconductor industry a lot. And we would actually pay attention to huge corporations and know is their purchasing global purchasing, or is it country by country purchasing? Because if it’s global purchasing, we have to charge one price for the entire company.

And if it’s country by country purchasing, we could charge different prices for different projects in different countries. So it’s important for you to understand that. I’m guessing that if it’s all in one country, it’s one purchasing department, you probably need to be consistent for the company.

That makes sense. All right, let’s talk rolling out a price increase. So if you don’t mind walking through kind of the steps of how you would go about rolling out a price increase.

This is kind of what I just described to you.

It is more or less, yeah.

It is. So identify your usage metrics. So how much are people using? Bucket customers by usage. And I had said top 20%, next 20%, next 20%. Start by raising the prices with those top users, the people who are at the very top. And then once your churn loss exceeds margin gain, definitely stop. You might start stop a little bit before that. And since we repeated that, I’ll give you a little bit more information. What happens when you raise prices and someone calls you up and says, hey, I’m leaving because you raised my price.

So you start to get pushback. Well, here are two things to do. The first thing you should do is say, you’ve been a really loyal customer. We really appreciate you. Can we just extend your current price for another six months? And then we’ll hit you with a price increase. Because all they really cared about is that you care about them, that you’re not taking advantage of them. Worst case scenario, they say, no, that’s not enough. You just say, how about we leave your price where it was?

And having that in your back pocket is always an option.

Yes. You do not have to lose the customers, assuming they call you.

So somebody asked, we found that existing sales teams are often the most averse to increasing prices. How do you approach that challenge?

Ouch, this is hard. So I guess the first question is, are existing sales teams selling to current customers or selling to new customers? And I’m going to assume they’re selling to new customers, because most of the time, sales goes after new customers. Salespeople hate price increases. If you think about it, every deal weighs price against value, every single deal. And if we lose a deal, it’s either because our price was too high or we didn’t communicate the value well enough to our customers.

And so salespeople can get away, if we can give them a lower price, they don’t have to communicate value as well, as perfectly. So it’s easier for them. And that’s just one of the tools they have in their toolbox that they want to pull out and use to lower prices, just because it helps them close deals. My very strong recommendation is to compensate salespeople not based on revenue, right?

So if you’re selling, if you’re giving a sales commission on revenue, then what you’re doing is you’re incentivizing them to lower price as much as possible so they can get the deal closed. If however, you compensate them based on margin, and by the way, I’m really reluctant to say these words. I’m going to say another few words in just a second. If you compensate them on margin, then you’ve aligned their incentives with the company’s incentives much better. Because if they give big discounts, the company loses all the margin.

And so therefore the salesperson would lose their margin too, or their compensation too, so they wouldn’t do that. Now, I’m not a fan of giving margin information to salespeople, but what I would do is you could create three different price points. Let’s call it list, target, and floor. And anytime a salesperson sells at list price, they get a phenomenally huge percentage. And if they sell above target but below list, they get a decent percentage. And if they sell below target and above floor, they get a tiny percentage.

And so what you’ll find is you’ve incentivized salespeople to hold prices at target and try to hit list.

That makes a ton of sense. Another question kind of in this vein. So assuming you’re not on monthly, you’re on annual or some kind of contracted period, should you only raise prices when the contract is up? Or how should you think about maybe raising prices outside that cycle?

Well, I think it depends on what your contract says. Most of the time with annual contracts, we’ve negotiated a price that says this is your price for the year. And so we don’t have that ability. If that’s not in the contract and you’re able to raise prices whenever you want, then I’m okay with raising prices in the middle. I mean, what we always do is say to ourselves, how much am I gonna upset my customer? And anytime you raise prices, you’ve upset your customer. I guarantee you that’s gonna happen.

We wanna make that as easy as possible or as painless as possible. But if you do it in the middle of a contract cycle, that’s almost like throwing sand in their face while you’re raising their prices. So I’d probably avoid it if I could.

Cool. All right. So we’re gonna move into more open AMA. Feel free to add comments here in StreamYard or if you’re on LinkedIn, and we’ll start to move into some of the questions from attendees. So starting with this one, what are some talking points to use to drive home a successful price increase?

Okay, I’m gonna give you a five- step formula. Hopefully I remember all five steps. Write this down. Maybe I’m gonna type this for the chat, who knows. But here’s the five things you wanna say to a customer in the communications you have when you raise prices. Step number one, our costs went up. By the way, some of your costs went up, I guarantee.

Always, every year, yes.

Every year. Item number two, we’ve added value since the last price increase. Step number three, we haven’t had a price increase in three years. If true, you could say that. Step number four, you are still paying less than blah, blah, blah, blah, blah, whatever that happens to be, right? People don’t wanna feel cheated. They wanna feel like they’re getting a good deal. So you’re still paying less than new customers would pay at your price. You’re still paying less than other people like you. You’re, all right, something.

And then step number five, do something nice for them. You’ve been a very loyal customer of ours. We really appreciate it. We just raised prices, or we’re gonna raise prices on July 1st, but because you’ve been such a great customer, we’re gonna hold your price constant for another six months before we give you the price increase.

Those are five good steps. I will absolutely pull those out into some kind of recap.

I was gonna say, all of your customers are now hating me. I just want you to know that, Kate.

I’ve actually, I have been not great at increasing prices historically. And I will probably try to make the balance, but I usually value the relationship with the client. We don’t have so many clients. And so this is tricky. It’s a tricky conversation.

It is.

So here’s a question about annual trends.

So I know that there were, especially last year, a lot of cost- cutting trends where procurement and budgeting were tight. CFOs were getting more involved with more new sales and renewals.

Do you anticipate that continuing in 2024?

Any advice in the sort of trend space of what’s happening on cost- cutting?

So let me say, I’m not a great predictor of the future, so I wouldn’t listen to me when it comes to what do I think the trends are here. But here’s what I will give you that’s important. And that is somebody who is buying your product today, they’re subscribing to you today, they are making a will I decision. So will I buy from you again tomorrow or not? And so if you remember from our earlier conversations, price isn’t driving that decision. Now price might make them rethink the decision, but it isn’t what’s driving the decision.

And so my advice to you isn’t to worry so much about, you know, is a price increase going to keep us, going to help us lose customers? What I would be asking you is, have you proven the value of what you do for your customers? So remember earlier I said, the only reason someone gives you money in the B2B world, the only reason they give you money is because they make more profit because they gave you money. Have you proven the profit that they make?

So if you could take your customer success department and actually go figure out what were the metrics before we started? What are the metrics after we’ve started? What’s the profit to the company because we changed those metrics? And you can articulate those to the company as you raise the prices, you have very little chance of getting rejected.

Here’s another sort of new topic.

How do you structure pricing to encourage customer expansion?

So if you have a land and expand model and you’re going to come in at a low price and you have to be able to increase prices significantly for the model to work, what should you do in that scenario?

So first off, you have no idea how much I love this question. It’s such a great question. Before I answer though, I’m going to say the following words. Everybody says the words land and expand and everybody focuses a ton on land and way too little on expand. So we’re about to talk about expand, if that’s okay.

Let’s talk about expand.

In the world of expand, there are four ways to expand. I call this growing customers. My second book, Wind Keep Grow, Wind Customers Keep Customers Grow Customers. So there are four ways to grow a customer. One way is raise prices. We’ve been talking a lot about raising prices. So that’s an easy thing to understand, not necessarily easy to do, but it’s easy for us to understand. The second way is upsell. Now upsell means we get them to go from good to better, better to best. We get them to buy an option in our packages. Guess what?

In order for us to upsell, we have to have crafted a product portfolio that is open to upsell, right? Did you create your good package so that it was an MVP? So that people would get into it, get a lot of value from it, and then say, oh my gosh, I could get even more value if I upgrade to the next package. So you really have to do your product portfolio design well to make that happen. Another way you can grow a customer is through a cross- sell.

A cross- sell is just other products that you might have that you could sell because you’ve built a great relationship with this client. And then the other one around pricing is the pricing metric. In the world of SaaS, you get to choose almost anything you want to charge for. Now most SaaS companies are still charging by the user, but you can charge by the click or by the download or by the hour or by the minute viewed or whatever the heck you want. There’s so many things you can charge for.

When you define your pricing metric around the way your customers get value from your products, then just by helping them be more successful with your product, use more of your product, they end up paying you more money, and you didn’t even have to raise prices or do anything. They’re just getting value and giving you more money.

Awesome. Here’s an edge case. Let’s say you’re a reseller or you sell through resellers. How does price increases change if the product you resell, if they increase the price, do you pass that through? Do you encourage anybody who resells your product to pass your increases through? How do you think about that?

Yeah, as a general rule, you don’t get to set the price for the end user if you’re selling through a reseller.

However, your reseller has a standard margin that they probably want. So they want their 22 points if it’s a distributor. They want their 50 points if it’s a retailer. And so you know what it is that they’re going to do to your product. What you should be thinking is what is the end customer willing to pay? And let’s say it’s $ 100. The retailer is going to want $ 50. So we know that we’re 50%. So we know we have to get it to the retailer at $ 50.

So all we’re doing is working backwards.

So just know that if you raise your price, you don’t have a choice. And I can almost guarantee you, your reseller will raise your price to.

Resellers tend to work. I don’t like this. They tend to work on markups, meaning whatever product and price you give me, I mark it up by this much. And here’s the price I’m going to sell it for.

That is not value- based pricing.

That’s cost- plus pricing. I don’t teach that in any respect whatsoever. But resellers typically carry thousands of different products.

And it’s hard for them to do value- based pricing on each individual product. So they almost always use some version of markup. And know that they do that for your products.

Awesome. Here’s another special case, global pricing. So if your customers are globally- based, how do you think about pricing for different regions?

I’m going to take a step back for a second and say, first, price segmentation is the second most profitable pricing decision you could make. Price segmentation simply means I get to charge different prices to different companies, different customers, for whatever reason I feel like I want to charge different prices for.

And so when you think about global pricing, what you really want to do is ask yourself, if I’m in China, how are they thinking? How are they making the decision? Maybe I have different competitors in China than I have in the U. S. Maybe they just are more price- sensitive, which they tend to be, than they are in the U. S. And so it is perfectly okay to have different price lists for different regions of the globe. Now, you may recall the story I told earlier today, in the semiconductor world, I had to know if someone was centralized pricing or not.

So if you’re dealing with, I’m just making up a name and I don’t know, but if you’re dealing with Honeywell, and Honeywell has centralized pricing that buys for the entire globe, guess what?

It’s one price for Honeywell. But if not, if they’ve got purchasing in China, purchasing in the U. S., you can probably get away with different prices for different locations.

Awesome. This one, I think, is a layup for you. If you don’t like cost plus pricing, what is your preferred method?

Can I just say, Dan, thank you so much for asking that question. And the other question I kind of expected is, well, if price segmentation is the second most profitable pricing strategy, what would be the most profitable pricing strategy? It turns out the answer is the same for both of those questions.

And that is called adopt value- based pricing.

And so value- based pricing simply means charge what a customer is willing to pay. Now that is impossible to do perfectly because you can’t read a customer’s mind.

You don’t know how much a customer is willing to pay. However, we can always get better and better at this. So when we adopt this as an attitude or a goal, we can figure out, oh, if I think they’re willing to pay this much more, I could raise my prices and see if that’s true or not. Or we could say these guys are solving this problem, which is so much more valuable than these guys solving that problem. I can charge different prices and I could charge higher prices to the ones who are solving the valuable problem.

Or I could say, hey, when they’re solving this problem, I have this really tough competitor and I have to be aggressive in price.

But when they’re solving this different problem, there’s no competition. I don’t have to be aggressive in price. So in our mind, it’s what’s the value to the customer always. And so when you adopt this attitude and way of thinking, it’s by far the most profitable decision you can make in terms of pricing.

There isn’t a specific question about this, but there’s one that emerges in my mind, which is when should you use these methodologies like Van Westendorp or Conjoint and get really into analytics to determine willingness to pay and value delivered? And when do you use… I know that sometimes you don’t go deep into analytics and instead you have other arguably more efficient ways to make pricing decisions. When do you want to go deep into analytics? When do you not need to?

That’s such an awesome question that I haven’t thought about for a long time. I rarely use those techniques anymore. And the reason is I don’t do consulting. I coach companies on how to think about all of this. But occasionally I run into companies that say, hey, we want to, we want the data to show us what we can do, what we should do. So let me give you, by the way, if you’re a big company, this makes a lot of sense.

If you’re just launching and you have absolutely no idea what price to charge, you could go do a Van Westendorp and get in the ballpark.

By the way, if you don’t know what that is, Google it. It’s easy to find. But you could get in the ballpark and say, hey, I ought to be in this area.

But if you’re not a pricing expert, these techniques are easy to mess up.

They’re easy to not get the right answer because you’ve missed something somewhere along the way.

As a general rule, I use Van Westendorp for will I type products. So think of, if you’re the very first one in a product category, then there’s nothing to compare it to. Van Westendorp works relatively well for that. Use Conjoint if I’m in a very competitive market. If you have no competition in a marketplace, Conjoint doesn’t help you very much.

You’re using Conjoint to figure out how much more would someone pay for my capabilities than my competitors’ capabilities.

And so these are good statistical techniques.

They’re done by relatively large companies. So let’s say $ 50 million to $ 100 million before you start actually spending money on market research to go find the answers to these.

And so what are some things you can do instead if you’re at a much smaller company? You don’t have a pricing analyst. You’ve got the CEO and the CFO and the head of marketing and the head of sales talking about this and the head of product.

So from an analytical point of view, I think the CFO should be driving this, whether they’re doing the work or not, I don’t care, but they should be driving the fact that we’re monitoring ASPs. ASP stands for average selling price. So we’re monitoring ASPs.

We’re monitoring all of the things that we think might be driving ASPs. We’re watching for trends.

Can we figure out what those trends are? So I think that’s okay for our analytics for relatively small and mid- sized companies. What I think is really valuable for every company is to understand the value of their product from their customer’s perspective. Once you can do that, you can start to say, oh, I’m delivering a million dollars of value to this client and we’re only charging them $ 10, 000.

How is it that we could get more of that million dollars in our pocket? But if we don’t know that we’re delivering a million dollars in value, we don’t know that we’re leaving all that money on the table. And by the way, I might be delivering a million dollars to one client and only $ 10, 000 to another client.

And so can we figure out why we’re so successful with one and not so successful with the other? I think that one thing can drive the success of companies and the way they do pricing more than anything else.

Know what the value is.

There’s another question I didn’t include because it was kind of specific to the company, but I can extrapolate it. So the company was one that charged by cost per square foot, whereas their competitors charged by time and materials. And sometimes that would lead to their price being higher versus their competitors and sometimes it would lead to their competitors’ price being higher relative to theirs. How do you think about matching or not matching your pricing metric to what your competitors are doing?

There are probably reasons you chose your metric, but there might also be value in making things comparable.

Possibly the best pricing metric is the one that makes the most sense to your customer. So I got to say, if you’re quoting time and materials and it’s a fixed bid quote, then it doesn’t matter. But if you’re quoting time and materials with a margin on top of it, then that puts the client at risk for when someone goes over time, over materials, spends too much, whereas when you’re doing it dollars per square foot, you’ve made a commitment. Hey, I know how many square feet this facility is. So therefore I know what the price is.

So I don’t think the pricing metric in this case is what’s driving it. But what you want to do is ask yourself – let’s say that you know that your competitors are using time and materials and that you could calculate out the way they’re going to do pricing and how much they’re going to charge. It actually doesn’t matter what your pricing metric is. It only matters what that bid was at the end, right? Am I going to charge $ 10, 000 for this job or am I going to charge $ 12, 000 for this job?

And knowing what your competitors charge or being able to estimate what your competitors charge, that’s what matters.

Because when you can put yourself in the shoes of the buyer, they didn’t say, oh, I preferred this time and materials fixed bid than the square foot fixed bid. They said, I like $ 10, 000 more than I like $ 12, 000. And that’s the way they choose it. So I wouldn’t fret so much about the pricing metric that way.

Cool. I want to go back to kind of a combination of two questions that we had early on. One was, how do you justify price increase? And one of the pieces was, we’ve added more value. And one was this discussion of actually expanding from land and expand. So how do you land and expand after the fact? So you’ve been adding a bunch of new features. How do you think about sequestering them into something you can upsell, so that you’re in a place of upselling versus just increasing prices?

So first I’ll give you the easy answer, and then I’ll give you the good answer. How’s that? The easy answer is, stop putting new features in your product today. And from this point forward, all new features go into the next version of the product.

Yep.

Okay. And so now we’ve got something we can upsell. Now that’s not a great answer, because it wasn’t well thought out, but at least it gave us something we could upsell. A great answer is to think this through, and by the way, this is not an easy thing to do, but if you could go back to that usage and say, which customers are using which features and who has the most willingness to pay, you could probably start to figure out these features are my MVP. I’ve got to have it in my good package. And then these features are in my better package.

These features are going to be in my best package. You craft that portfolio. And let’s say that everybody today is in your best package. You can start to do what, did you see what Amazon Prime did recently? Love this.

No.

Love this. Well, they did the same thing Netflix did, which was, they said, hey, we’re going to start giving ads in the videos, but if you want to pay us an extra $ 3 a month, you can still have video free viewing.

Yep.

So what they did was they took a feature away and then they offered it as an upgrade so that people could buy it. And you could do the same thing, by the way, with your market. Now you’ve got to do this relatively slowly. And maybe the easiest way to do is you take all the people who aren’t using features that you put in the best package and just say, here’s the package that you have. And they don’t even know you took it away. It had no effect on them.

But thinking through how to craft that good, better, best package is really valuable when you want to start thinking, how do we do upsell?

So another wrinkle. Say you already had a good, better, best package. You introduced it five years ago. You sold some customers onto best, and now you’ve added some new stuff. Do you just keep adding even better? Or how do you avoid package proliferation where you’ve got too many different SKUs? Yeah.

I’ll give you two answers to that. Number one, try to limit it to three. If you’ve got more than three, then you can have four. I’m going to let you have four. You have my permission to have four. But the fourth one has to be either a freemium product or it has to be the enterprise call us product. But the good, better, best, we want people to be able to make relatively easy decisions. And that’s one of the key values to good, better, best. It’s simple and easy to use. But if you’ve got this huge proliferation of packages, here’s why.

It’s because you didn’t start with market segmentation. If you start with market segmentation, so let’s use LinkedIn, because LinkedIn is such a great pricing example.

They get a lot of money out of me every month.

Oh, me too. But if you think about LinkedIn, and first off, all they are is resume storage and search. Resume storage and search. We get it. They could have done market segmentation and saying, hey, we’ve got Asia and North America and Europe, or they could have said, hey, let’s do it by industry. We’ve got medical and consumer goods and software. They didn’t do any of that. They said, what are the problems our customers are trying to solve?

And then they crafted their market segments around salespeople, recruiters, job seekers, and then everybody else. So those are their four defined market segments. Once you go into one of those market segments, let’s call it sales. Now they have good, better, best offers inside that market segment. And that’s how they can do that, because everybody in the sales is really trying to solve very similar problems. It’s a matter of how much of the problem do you have? How much capability do you want? Are you willing to pay for?

And so if you think about it from that perspective, LinkedIn has at least four market segments times three packages, at least 12 different packages sitting out there. But if you’re a salesperson, you only ever see three of them. It looks really simple to you.

That makes a lot of sense. You mentioned a couple sentences ago the, hey, you can have the enterprise call us package, which begs the question, when should you be publishing your prices on your website? It actually makes me realize, if I am a legacy customer and I’ve got a really good deal and I see on the website, oh, I would be charging twice as much, all right, fine, I’ll pay you 20% more. That’s interesting. Should you always have prices public?

I think my gut says most of the time you should have prices public, and here’s why. How often have you gone to shop for something, you go to the website, they don’t have a price there, you’re thinking one of two things, either it’s too expensive, I don’t want to spend that much, or I don’t want to talk to a salesperson. Those are your two choices. So the only time I would not put pricing on my website is if I had to have a salesperson talk to them in order to figure out what the value is of the product.

Now what that really says is that you have to be able to communicate the value of your product on your website, because I never want to give a price until I’ve communicated value.

That’s a really important connection. And so would it be fair to say that the more expensive your product, the harder it is to fully convey its value on your website?

Oh, absolutely. And I think it’s also fair to say that if you don’t know what you’re going to charge someone, you can’t put a fixed price, it is totally okay to put a range on there to get people to say, yeah, that’s reasonable for me. So you could say somewhere between $ 40, 000 and $ 1 million depending on your usage. That’s perfectly legit.

I guess if you were something like Snowflake, Snowflake probably publishes their pricing, but it’s usage- based and it grows like crazy.

Right. Right.

Fantastic. So we’re getting towards the end of our hour. If there are any other questions, pop them in the chat now or forever hold your peace. One more question that I had. How should you think about giving salespeople price books? How should you share? We talked about the sort of list price, acceptable price, floor price, and corresponding compensation, which is awesome. Are there ways that giving salespeople price collateral, like should it be on one page?

I’ve heard that sometimes you need to keep things as simple as possible to make sure that sales can communicate them effectively. In what form factor should you give price books or price increase materials to salespeople?

I’m not sure I have a great answer to that because I don’t think it matters. So here’s the thing that matters way more than the question that you asked. What are you giving salespeople to be able to communicate the value of the product?

You’re right. That is a more important question.

Because I got to say, salespeople don’t communicate value. You hear a lot of people talk about value selling or value based selling, and they think they know what that means, but you could ask salespeople what value is and they can’t describe it to you. They don’t know it. You could ask, here’s a general rule for you. Specific value beats general value every day. And so I was working with a client and the CEO absolutely believed he was selling value. And he could tell me, look at this spreadsheet, they’re going to make 3000% ROI when they buy this.

And they’re going to make it here and here and here. And I’m like, I don’t get it. But he thought he was selling value. And here’s the question. What was the actual problem that he was solving? Where were the dollars that this customer was either not picking up or spending too much because they didn’t have this solution to the problem? It’s easy to say, hey, I deliver a 5% return on your revenue with this investment. But nobody believes it until you can start to articulate, do you have this problem? How bad is that problem? That’s where value is.

So we talked about, hey, the value is always tied to profitability. But I can think of some potential exceptions. One would be like a security product, like an insurance product, where most of the time nothing happens. But if something bad happened, it’d be really expensive. Or like a compliance product where, hey, you just have to do this to be legally compliant. Check the box. How do you think about value and price increases in those situations?

Those are hard. So there’s three different ways that companies care about value. By the way, it’s always, always increased profit. Always. But now let’s talk about how we do that. One, we could increase revenue. Two, we could lower costs. Three, we could reduce risk. And they actually go in that order. CEOs care a lot about how do you grow my company? How do I increase revenue? And by the way, most of the time when we have solutions that can grow revenue, it’s much bigger than the other numbers anyway.

Number two, CFOs, COOs care a lot about cutting costs.

So can you prove, and by the way, those feel real, right? I know what my costs are. You mean you could take this out? I’d love that. So those are very real. And then we get to the hardest one of all, which is reducing risk. And reducing risk, it’s impossible to buy insurance for everything. And so now the question is, what is it, this is gonna be more storytelling and can you get someone to empathize with the problem? But the value is calculated by taking what’s the probability of an event times what’s the cost of the event happening.

And your CFOs know how to do this, but those two numbers are really hard to come up with. And that’s where the profit comes in. That’s where the expected profit comes in.

That makes a lot of sense. Here, okay, we do have, we have a couple more questions to squeeze in before the end. First, who should own pricing in an organization?

Love that, it depends. I know you get that answer. But the reason I say it depends is because pricing is a really, really big topic. There’s so many different things involved in pricing. When you say the words who should own pricing, you’re probably thinking who should set the price, the list price. And to answer that, I would say it’s usually product management or product marketing. So it’s somebody who knows the value of the product to the customer. That’s who should be setting the prices.

But when we think about pricing, there’s also who does the negotiations? Who does the quoting? Who’s monitoring the prices that go out and are we actually achieving those prices and making adjustments? Who’s creating the product portfolio so that we can capture the right price points in the marketplace? So all of these have to do with pricing. Who’s teaching sales how to communicate value? Every single one of these I think of as pricing. And so it really does depend on which piece of pricing we’re talking about as to where it goes.

So you mentioned early on, CFO should be deeply involved. If you have to have one point person, and maybe it varies based on company stage, who’s typically the point person?

Definitely varies based on company stage and anything less than $ 10 million, it had better be the CEO. Yeah, that one makes sense.

All right, another one. If your company is charged a premium price for years because of great market share, but competition is gaining on you, how do you react to some loss of market share due to a more cost affordable competitor?

Let’s think through how buyers make this which one decision, which is what you’re describing to me. So a buyer makes a which one decision by saying, what’s the price of your product? What’s the price of your competitor’s product? Your product is more expensive by $ 20, is it worth it? That’s the question. Now, can you articulate why your product is worth $ 20 more? Now, if you say to me, because we have a great brand, I’m gonna say that doesn’t mean squat, right? Nobody cares, right? You can’t tell me a great brand gives me more profit.

It doesn’t solve a problem for me. So there’s no value in that. I’m not saying it’s not valuable, but there’s something else there. If you can tell me that we’ve got a 99% success rate and our competitors have a 97% success rate, okay, this is something that I might be able to sell and justify an additional price point because of that. But if you don’t have good differentiation, then you don’t deserve a higher price than your competition. So the question is, can you justify your price point?

Now, the other thing to think about is different buyers care about different things. So maybe it’s time to, I’m gonna say the words white label. It’s a different brand name, maybe it’s a different product, but you could easily come out with a lower end product and use that to compete with the lower end market and still maintain your high positioning. But the sad thing about competition is we don’t get to control their decisions. They try to do what’s best for them and it’s usually at our expense.

Any tips? So that was my follow- up question. If you’re trying to go down market with possibly another product, any tips to avoid cannibalizing your upmarket success?

Yes. So first.

In the world of good, better, best, let’s say that you have two products today and you want to add a third high- end product. What happens is your market share for each of those three products actually moves up in the category. So more people buy the mid one because you added a high- end one, okay? The exact same thing happens when you add a low- end product, right? So you get people who used to buy the high- end to move down to the middle.

Yeah.

So as we add low- end products, but by the way, maybe we have to do it to be competitive, right? But as you add low- end products, you make your mid- level, what used to be your low- end product more attractive to your marketplace.

Yep.

So that’s why I said the words white label is you may not want to come out in your own name, your own brand. I often, in my presentations, I often talk about Del Monte green beans and Safeway select green beans, right? And I don’t know this for a fact, but I’ll bet you they’re the same beans in the same cans.

Yeah.

Right, made in the same factory with different labels on them. The point is Del Monte can’t sell them at a lower price calling them Del Monte cheap or Del Monte good.

Yeah, yeah, yeah. Because that would be tricky. I’m thinking about, in business school, we learned that there was a case about Intel and the chips and they intentionally, effectively kneecapped their chips to be lower performing, to be able to sell them at a lower price. Does that work or is that a bad idea?

Oh, so that was actually the story you’re thinking of. I love the story.

By the way- It wasn’t Intel, my bad. That’s okay.

No, no, it was Intel.

It was Intel.

Okay, yeah.

And this is, I usually use this as a reason why you don’t want to do cost plus pricing or why you don’t want to think about cost plus pricing. So Intel in 1989 came out with the 486 DX. So it was the first dual core microprocessor, very powerful, very expensive. AMD came out with a pin compatible version that was only a single core and it was much lower price and they were taking business from Intel.

And so what Intel did was they created the 486 SX, which is a single core version of the DX and they priced it more comparable to AMD so that they could have this battle. And what’s fascinating about the story, the story makes sense, until you learn that the way they built an SX was they took an extra manufacturing step to disable the coprocessor. So they made a good product worse so they could sell it at a cheaper price.

Yep.

And so it has nothing to do with the value our customers get, the price we should charge, has nothing to do with the cost of making something. It has everything to do with how much value is our customer getting from something.

Awesome.

So here’s something else that we would do in semiconductors all the time. And by the way, you can do this, right? Any company can do this today, is take your product, whatever it happens to be, take a couple specifications, reduce the specification and you have a lower end product.

All right, we’ll let Emily have the, oh, sorry.

I was gonna say, it doesn’t matter if you actually deliver lower performance. It only matters that you only promised a certain level of performance.

Yep. As you say, we’ll let Emily have the honor of the last question. Any advice on pricing when you sell to mission- driven organizations that don’t put as much of a priority on profit?

So Emily, you have to know that my entire brain works around maximizing profit. But if I were gonna maximize something other than profit, what I would do is articulate what it is I wanna maximize. And then say, how do I do that? The pricing, you probably need pricing because you probably wanna sustain or at least contribute to the mission of the organization. So there might be some sustainable level of pricing.

But you’re really looking at, God, I rarely talk about demand curves, but you’re really looking at demand curves to say, I wanna get the price as low as possible so that I get as much usage as possible or as much purchasing as possible so that we can deliver on our mission. That’s the only advice I could give.

Awesome. Well, we are right at time. Thanks, everybody, for joining. We will share recap materials, including a recording and Mark’s contact information if you’re thinking about specific pricing challenges for your business. Thank you. This has been a fun one.

Thanks, Kate.