Testing the alignment of your pricing strategy
By Steven Forth
Pricing is one of the most powerful levers we have to achieve our business goals. One can use pricing to improve top line revenues, gross profit or cashflow. If you are concerned about the overall market, it can help you to grow the market or increase your share of the market. In SaaS businesses pricing is increasingly being used to improve unit economics, such as the cost of customer acquisition (CAC), the lifetime value of a customer (LTV) or to reduce churn. All good things. But you can't use pricing to achieve all goals at the same time. So how do we test pricing alignment? Let’s start by looking at key problems organizations have around pricing.
The three main challenges we see with Ibbaka Market projects are:
No pricing goals
Too many pricing goals
Conflicting pricing goals in different parts of the business
It is hard to say which of these is worse.
A surprising number of companies cannot answer the simple question "What do you want to optimize with your pricing strategy?" The price was set once upon a time, and has basically been left alone. Even if there was an intent back in the grey mists of time, it has been lost. But the pricing model continues, often under severe discounting pressure.
Then there are the enthusiasts, who love to manipulate their pricing, and are trying to use it for too many things. Pricing is a multipurpose tool, but it cannot be used to solve every business problem at the same time. Imagine you had every tool open on your Swiss Army knife. It would be hard to use it and you would likely cut your hand!
The worst situation of all is when different parts of the business are using pricing for different purposes, often without even being aware that this is the case. Sales get a bonus on top line revenue, so they use discounts to make sure they get the deal. Product marketing believes it has a premium product, and has set a price to reflect this. Customer success is responsible for renewals, and wants a pricing model that distributes revenues across the customer lifecycle. Finance needs cashflow, and wants pricing to bring in cash quickly. Like most aspects of business, alignment is critical.
To test alignment, survey several people from your company compare the answers.
We recommend you have at least three, but preferably five to seven people take the survey. Make sure they come from different business functions. Gather the responses together. You may want to compile them into a spreadsheet.
Once you have the results, ask the following questions:
Do we have the same score for Pricing, Segmentation and Marketing?
If you do great, but go deeper.
Did we give similar answers to each question?
Yes? Great. You are most likely in alignment.
Where are we most out of alignment?
It could be pricing, segmentation or value. If all three are giving you a range of answers, start with value. Understanding how customers perceive the value you create is the foundation to market segmentation, and segmentation is the frame you should be using to design pricing.
We realize this is a clunky process. We will provide better support for this in the future. Until then though, this simple approach can give great insights.
Testing alignment: a case study
I did this with a customer recently and they found they were in great alignment on how they created value for customers. (Do the customers agree? We don't know that yet.) Their answers on segmentation were more varied, with Product Marketing most confident about segmentation and Sales the least. It was Finance that was the most skeptical about pricing practices.
What to do with this data? The next step is to dig in and see what is behind the differences. Some of this will come out of an analysis of the answers to each individual question. Interviews will be important too. Get behind the data and probe, using the results as a way to question assumptions and easy answers.
Getting alignment on pricing is mission critical. Lack of alignment will undermine any market strategy you may have. Ibbaka can help you with this. We have data analysis tools that can help you see who is aligned and how. Our clustering and market segmentation software can be used on alignment data as well. Contact info@ibbaka.com to learn more about how we can help you get alignment on pricing.
