How to execute on your price change
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
In some ways designing your pricing and setting the price levels is the easy part of the job. What really makes the difference is bringing your customers into your new pricing model and price levels. This is a process that is full of opportunity and fraught with risk. Execution requires careful planning, repeated testing and follow up.
Let’s assume that you have followed best practices in pricing design and price changes.
You are providing enhanced value as part of the change
You have mapped value paths and understand how your customers get value
You have checked the V2C/LTV ratio (Value being delivered to the Customer vs. Lifetime Value of the Customer)
You have segmented your existing customers and know
Who is has high usage stats and is completing a lot of value paths
Who is paying more than the trend line based on use and value
Who is paying less than the trend line based on use and value
Who has data flowing through integrations (that may make them more sticky)
You have a plan with your customer success team to make sure new functionality will be used and value realized
You have war gamed how your competitors could respond, and played this out several steps
Sounds like you are ready. What could happen? Here is the good and the bad.
Opportunity and risk during price changes
On the positive side, you are making the change to improve your business by increasing recurring revenue (MRR and ARR) and customer lifetime value (through upsell and cross sell and by decreasing churn) .
Price changes are a great opportunity to communicate value and set up a process to document value being delivered.
On the other hand, price changes come with risks. You can lose customers that were on the edge, customers that don’t fit into the new packaging and pricing can be left behind (orphaned) and competitors are quick to take advantage of any price moves, sometimes by changing their own prices, others through aggressive messaging and spreading of FUD (fear, uncertainty and doubt).
The core issue in a pricing change is trust.
Will your pricing change help to build trust or will trust be lost?
Have a pricing change dashboard
No matter how good your planning, you have to track the impact of your pricing change and the progress you are making. A dashboard is a good way to do this. Rather than clumping all the accounts together and giving an aggregate number (averages are not your friend), you will need to look at your progress in four buckets.
The happy story is the customers who have been transitioned, are generating more revenue and who are completing more value paths (they are getting additional value to justify the additional money they are spending).
There will be some customers who have transitioned and are now paying less. This is in principle fine. You should expect that with new packaging and pricing some customers are paying less. These should be the customers who are getting less value.
And you will also lose some customers. This is also a natural outcome of a price change and should have been part of your planning. Hopefully these are the customers you did not really want to keep anyway, maybe because they had a high cost to serve or because they were not really able to get value from your solution. Companies that try to be all things to all people often end up being of little value to anyone.
Then there is the most problematic bucket. Customers that are stalled. They have been led to the new packages and pricing, and have balked. Maybe they see this as a breach of trust (remember, value based pricing depends on trust), or maybe they are using this as leverage to win a concession, or maybe the new packages just don’t make sense for them. You need to dig in and understand why the transition of these customers is blocked and come up with tactics to carry them over. One tactic that we have seen work is to use some form of usage-based pricing to bring these laggards over the line.
Paths for pricing migration
There are a number of paths that lead to these four buckets. Understanding these paths and guiding customers along the paths that are best for them (and you) is the key to a successful migration.
This is a simplified view, there are many more possible steps and side paths, but it captures the key transitions. Let’s look at the positive path first. Here where you want to end up is a positive feedback loop where greater value is driving growing revenues and as the customer increases engagement and adoption they get more value. This enabling this feedback loop is the ultimate goal of pricing design.
Not all of the paths lead to good outcomes though. Customers can resist the price change. Sometimes they can be kept by discounts or by grandfathering them into their existing package and pricing. But most of these customers will eventually churn. And even if they don’t, dragging a wet blanket of customers caught in old packages on retired pricing will slow the business down.
How do we get customers who are on these negative paths onto a different course? The most important tactic here is not to offer more discounts or price concessions. When you find yourself in a hole the first thing to do is to stop digging. What you need to do is to get the customer to start using your solutions in the ways that create value for them.
This means getting them to complete more value paths. Remember, a value path is the sequence of actions on your solution that a user takes that culminate in something of value. If you need to provide them with access to new functionality in order to do this then so be it. Just make sure you are not giving away the new functionality, there should be strings attached and the offer should be for just long enough for them to begin to see value. Get them started on the customer value journey, and help them see the value, before charging the toll.
Pricing transformation is not complete when you have a new pricing model and pricing levels. That is where the journey starts. Pricing’s job is to be the guide on this journey, to get people on the right path, and to guide them back when things get off track.