Pricing in 2019 - Where to find leverage
By Steven Forth
I recently published a post over on OpenView ‘Five Pricing Resolutions for 2019.’ The five possible resolutions proposed for the the coming year are …
Update your segmentation
Compare customer lifetime value (LTV) and value to customer (V2C)
Monitor your tiered architecture and see if it is doing its job
Talk value before price in your sales process
Make discounting strategic
Most companies will not want to take on all five of these, as least not at one time, so here are some questions you can ask to set some pricing priorities for 2019.
Are the executive, marketing, product management and sales aligned on pricing goals?
Pricing is a powerful lever to achieve many different business goals: grow top line revenues, improve gross margin, increase market share, build a larger market, or shape a two-sided market. But it cannot do all things at the same time. Pricing execution requires a strategy that everyone is aligned on. Have multiple people in your company use the Ibbaka Self Assessment tool and compare the results.
Do you understand how different sets of customers get value from your solutions compared to the alternatives?
If you can answer ‘yes’ to this question, you have built the foundation for pricing excellence. If you believe that all of your customers get value in the same way, you are probably fooling yourself. There are several ways to check into this. Begin by looking at usage patterns. Do all users use your solution in the same way? Probably not, but what drives the differences? You should also be talking to enough users to see the differences in value perception. Complement these conversations with more formal surveys if you can (but remember that people are over surveyed and there is a a lot of selection bias built into most surveys).
A good segmentation model is the key to successful pricing. A good model clusters customer and potential customers by what they value and how they get value. If you have questions about this, start by reviewing your market segmentation.
Have you mapped customer lifetime value (LTV) to how much value your customers will get from your solution?
Over the long-term, we should all provide more value than we capture. This means that customer lifetime value should be lower than lifetime value to the customer. (V2C). To answer this question you will likely need to segment your customers by how they get value. Do not assume that either LTV or V2C is the same for all customers, it almost certainly is not. Part of your work is to segment your market by customer lifetime value so that you can focus on the most valuable customers. See Peter Fader and Daniel McCarthy’s work on this. Then, see how you are creating value for these customer segments and ask if you will continue to create value for them over the course of their engagement with you. You can model their total ROI on their investment in your services (you should probably do this using a Monte Carlo model to reflect the uncertainty and to explore the risk). If you are claiming more value than you are delivering your estimate of LTV is probably too optimistic.
Is your pricing still doing the job it was intended to do?
Too often pricing is a frozen accident. Price was set long ago, often by people who are no longer even at the company, and for an offer materially different from the most recent release. Even when there is a clear set of agreed on goals, the pricing model supports the value proposition and sharpens differentiation, and is well communicated, it is easy for things to drift out of focus. Check the goals and assumptions of your current pricing model. Make sure they are written down. Test them. Set up a system by which you are collecting the data you need to assess pricing and are reviewing it monthly (or more often if your sales cycle is measured in days or weeks, not months or years). See: ‘Is your pricing a frozen accident?’
Do you know the role played by pricing and value along the customer journey?
Customer experience is emerging as a core concern for leadership. As commodification accelerates and customers look for solutions, not simple products and services the customer experience delivered becomes central to competitive positioning. Value needs to be central to this. Pricing is subservient to this. Ask how prospects and customers understand, resonate with, receive and pay for value across the full customer journey. Look for disconnects where pricing is communicated out of context, or where discounts are made reactively and not as part of the overall sales and pricing. Laying this out visually and showing who is responsible at each touchpoint is critical to an effective longterm pricing strategy, one that keeps value to the customer higher than customer lifetime value and sees pricing problems coming before they arrive. For those of you in Vancouver, this is the theme of our January 17 Meetup: Value and pricing along the customer journey.
Pricing should be a top level concern for all executive teams in 2019. If you do not have clear answers to these five questions, make sure you have a plan to get the answers you need.
Are the executive, marketing, product management and sales aligned on pricing goals?
Do you understand how different sets of customers get value from your solutions compared to the alternatives?
Have you mapped customer lifetime value (LTV) to how much value your customers will get from your solution?
Is your pricing still doing the job it was intended to do (or has it become a frozen accident)?
Do you know the role played by pricing and value along the customer journey?
