An overview of pricing strategy
Jessie Tai is a Consultant at Ibbaka. See her Skill Profile on Ibbaka Talent.
Pricing Strategy - How To Price
At Ibbaka we love problems, specifically pricing problems. We like to seek out challenges that excite us and turn seemingly complex questions into strategy and action. With some of the leading minds in pricing, we’ve created a growing library of pricing strategy blog posts that outline what is currently on our minds. Take this as a starting point to your work on pricing strategy.
A Framework for Pricing Strategy
When we discuss pricing strategy, we can first look to key frameworks that can help us introduce and give structure to pricing choices that need to be made. When we talk about pricing, we begin with understanding the pricing choices. To help us do so, we can utilize Roger Martin’s Cascading Choices to provide the framework.
The strategic choice cascade helps us to see the connection and flow for our strategy. Following this, we will need to know who will be responsible for the types of pricing choices. Different pricing choices will affect different departments, you can read more here.
Value-Based Pricing
To provide more context on pricing strategy, have a look at our introductory post on value-based pricing. This a critical concept to understand before moving forward.
With this structure and context we can move on to more complicated problems. We plan on growing this list, but here is what we will cover in this post:
How to price new functionality
How to price learning resources
How to price for integrations
How to price predictive analytics
How to use index pricing
How to price customer success
How to price SaaS
How to hire a pricing consultant
Pricing New Functionality
New functionalities for products are what keep solutions alive and relevant, so how should you begin to price these? First off, the pricing strategy for new functionality needs to be part of the innovation strategy. In the past, pricing was much easier for new functionalities such as software version upgrades. But now we see the pace of this it is a lot faster.
To help think about the strategy, let's start with your customer segment, value drives and differentiation. Here are 3 questions to ask yourself as you frame for pricing:
Is the new functionality for existing customers and market segments or is it meant to attract new customer segments?
Does the new functionality enhance existing value drivers or introduce new value drivers?
Is the goal to increase positive differentiation or to reduce negative differentiation (turn your competitor’s advantages into table stakes)?
To expand on this concept further, you can read more on these strategies here.
How to Pricing Learning Resource
Another important question we have had to answer is how to price learning resources. With distance learning and learning programs in high demand, it's critical to first understand the value to each stakeholder in order to price effectively. We’ve outlined the three points of view to understand: the individual, customer and vendor. Once we understand the value to each of the stakeholders we can go through a simplified decision tree to help us think about our pricing. Here is an example of one of the decision trees:
Read this blog post to see the second figure of the decision tree and more detail.
Pricing Integrations
As digital transformation becomes accepted as a standard, the need for software integration grows. Customers are now asking more from their vendors and integration platforms are continuing to establish themselves and compete.
In this blog post we touch upon the basics of software integration, go through some examples of integration pricing, talk about value creation, the role of IPaaS vendors, and finally discuss some approaches on how to price.
Here is an example of one of the decision trees you can use to help you think about pricing integrations.
How to price predictive analytics
There are a lot of things happening in the predictive analytics space. There is endless amounts of data that is collected, which can be used for advances in machine learning, in algorithms to grow applications and much more. So how do you price these things? Here at Ibbaka, we have seen many different approaches:
Offer predictive analytics as part of professional services
Create an independent product with its own pricing
Have predictive analytics as an optional add on to the existing product
Make predictive analytics part of the standard offer
Use predictive analytics internally to increase engagement and reduce churn
Machine learning is actually a commodity, and how the data that feed machine learning and predictions are the key differentiators linked to pricing. This leads us to the 3 basic questions to answer when thinking about pricing predictive analytics.
Are the predictive analytics of value to your current customers or to a new set of customers?
Do the predictive analytics support new use cases or existing use cases?
Do the predictive analytics create value for your customers by enhancing existing value drivers or by creating new value drivers?
You can read more on this and see our simplified decision tree for pricing predictive analytics here.
How to use index pricing
What is index pricing and why would you want to use it? Indexed pricing connects the price you charge to one or more external economic indicators. This external variable can increase and decrease which dictates whether you would charge at a premium or discount. There are a couple reasons why you could consider index pricing.
Indexes can be based on the customer’s industry. Airlines and restaurants would get a discount. Makers of video conferencing would not.
By connecting the price to your customer’s industry you signal that you are in it with them. This is also a first, small, step towards outcome-based (performance-based) pricing.
As an industry recovers, prices automatically come back to normal.
If you are interested in understanding the process of index pricing, you can read more here.
How to price customer success
In B2B SaaS customer success is a critical factor. In order to ensure renewals and drive revenue growth, businesses need to invest in customer success. Customer success is focused on understanding your customer's business and how you contribute to their success. This shouldn’t be confused with customer support, which is more about your own products and services and how to use them. You can think of it as customer success is focussed outwards on your customers and customer support inwards on your own solutions. Before you think about monetizing and price customer success, first make sure you aren’t confusing it with customer support.
Once you have determined this, you can use the principles of value-based pricing. If you are interested in seeing the breakdown in a simplified decision tree, read this blog post.
Pricing for Software as a Service (SaaS)
SaaS transformation isn’t something that will go away, in fact within ten years the majority of software will be hosted in the cloud. Ibbaka is very interested in solving SaaS related problems, and pricing for SaaS transformation is one of them.
How to price for SaaS transformation
Like many other pricing problems, pricing for SaaS transformation relies on economic, emotional and community value drivers. The critical questions are if there are new value drivers or it a situation of improving delivery on existing value drivers. We can see how these alternatives play out in the following decision tree.
Pricing Professional Services is a Challenge for SaaS Companies
When one thinks of SaaS, we might immediately think of the product that drives it rather than professional services. But in order to understand how to better differentiate within B2B SaaS offerings, we can look at the two types of models.
Although most of the leading SaaS companies are typically pureplay, there is a hybrid model that can be adopted. By including professional services in your offer, you have a way to layer in revenues, gain a better understanding of the customer and build differentiation.
We know that many B2B SaaS companies struggle with the pricing implementation and professional services. We must first look at the type of strategy in order to get into the pricing.
We need to look at the factors around business problem complexity and application complexity. This will lead to the one of two strategies: serviced by consultants or serviced in-house.
To understand how this translates to your pricing, you can read more here.
When to Hire a Pricing Consultant
Now that you have gotten a taste of all the types of pricing problems Ibbaka is interested in, you may be thinking, how does one even hire a pricing consultant? When assessing a pricing consultant think about the problem you are trying to solve given these three lenses:
Did the consultant help me understand the possible causes of my pricing challenge?
Did the consultant ask about my customers and how they do business?
Did the consultant probe on our pricing goals and how they support our larger business objectives?
You can read more about hiring a pricing consultant in this post.
Pricing is the most powerful of the four Ps (product, price, place, promotion)
Pricing is the most powerful of the four Ps of marketing (product, price, place, promotion), but it is also one of the least understood. Many times companies do not have the strategy or the structure to tackle these pricing problems. Hopefully this article has opened your eyes to the many different sides to pricing strategy, and of course, if you have any questions Ibbaka is always happy to schedule a conversation.
Convinced? Here are the first steps you can take to planning your 2021 pricing strategy.
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