Five Pricing Challenges (that may not really be pricing challenges)
Ed Arnold is a Senior Advisor at Ibbaka. See his Skill Profile on Ibbaka Talent.
Ed Arnold has led product development at LeveragePoint, a SaaS solution for value-based pricing and sales and at Forrester Research where he was VP Products for CX (Customer Experience) Analytics. He is a leading expert in value-based pricing and go-to-market strategies and how these energize the customer journey.
My previous blog discussed the wisdom of diagnosis before changing your product’s pricing strategy. The main idea was that pricing pain points are usually a symptom of a deeper business problem that pricing alone cannot properly address. Therefore a pricing quick fix may result in a cure that’s worse than the disease itself.
Here are five specific situations that illustrate what I mean.
Symptom #1 - Our competitors have lower prices, so let’s lower our prices to be competitive
That can work, but it is only a good idea IF:
a) your solution lacks differentiation;
b) you know for sure what your competitors pricing is; and
c) customers are primarily price-driven in your marketplace.
It can also be the beginning of a slippery slope, where prices for your category trend down. Ask yourself, are you positioned to win a war based on lowest cost? Do you want to get caught up in a price war?
Why it may NOT work:
Your solution is actually better and justifies a higher price position.
Perceived competitor pricing is based on rumor. “I can get it cheaper elsewhere,” is a classic procurement negotiation tactic. And, even if there is truth to it, was this an outlier deal versus a legitimate trend?
Customers care more about total cost of ownership. Many know from past experience that the true cost of a solution is more than its initial price.
Symptom #2 - We can’t meet our revenue goals, so we should raise/lower prices to close the gap
That can work IF:
a) you truly know your market's demand elasticity and
b) existing customers won’t object to a price increase (assuming demand is inelastic).
Why it may NOT work:
Your solution is packaged as “one size fits all” and does not provide enough choice for different customer segments.
A drop in demand is related to other factors in the marketplace, e.g., regulatory, economic, technological, etc.
The revenue goals are unrealistic in the first place given the SOM (Serviceable Obtainable Market).
There is low cross-price elasticity (the tendency to switch vendors in response to price changes)
Symptom #3 - We leave money on the table too often, so we need to optimize our pricing processes
That can work IF:
a) there is a wide variation in deal pricing (among similarly sized deals) and/or
b) you are inconsistent in your selling approach.
Why it may NOT work:
Your various customer segments represent different use cases for your solution, and therefore get different amounts of value from it.
Your solution has lost its differentiation relative to competitive alternatives.
Your solution category is entering the maturity stage of its life cycle.
Symptom #4 - Our customer churn rate is unacceptable, so we need to adjust pricing to keep them happy
That can work IF customers are regularly replacing your solution with lower cost alternatives.
Why it may NOT work:
You have major gaps in your customer journey that need to be addressed immediately.
Your solution is not evolving fast enough to meet your customer needs.
You are not capturing and communicating enough customer successes to earn their loyalty
Symptom #5 - Our current pricing is too complicated for sales and customers alike, we need to simplify it
That can work IF:
a) your voice of the customer research (including win-loss reviews) confirms this and
b) there are prolonged delays in closing deals.
Why it may NOT work:
Your marketing team is not providing adequate customer facing materials on packaging and pricing.
Your sales team lacks the necessary training and tools to be effective.
Your overall team lacks alignment on your go-to-market strategy.
Be sure to check out Ibbaka’s online pricing diagnostic tool to identify where your potential pricing pain points may be.
Perhaps you can relate to one or more of these scenarios. I am certain there are other scenarios as well. The underlying theme across all of these is that pricing decisions are strongly intertwined with other product strategy decisions such as which customer segments to pursue and how to design the best solution. It’s foolhardy to treat pricing as a one-off, one-shot tactic. Therefore having a clear understanding of the root causes along with an integrated set of decisions increases the likelihood of business success.
Implement Customer Value Management with the Ibbaka Value Pricing Dashboard
Is it time to change your pricing (this post)