Pricing and Planning: Preparing for 2024
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talio.
There are three steps to establishing a pricing plan for 2024.
Many of us have begun planning for 2024. This year, 2023, was a transitional year for many companies. The first real post-Covid year. The year when the impact of higher interest rates and a change in the investment climate settled in. And the year when the transformative power of AI became impossible to ignore.
Early in the year, there was a lot of talk about using inflation to justify price increases, and as a result, some people began to talk about SaaS inflation. One result of this was that buyers delayed purchase decisions and turned to SaaS purchasing platforms to help them rationalize their SaaS spend and to win better deals.
Things settled down as the months passed, and buyers started to buy. Pricing people went back to looking for more foundational ways to improve pricing - adjustments to packaging, additional pricing metrics, and surgical rather than broad brush price changes.
At the same time, there was massive investment in artificial intelligence, and more and more applications were endowed with magic wands to take advantage of content generation AIs and large language models.
The investment in AI has led many SaaS companies to rethink their packaging and pricing. Some acted quickly, but in 2024 there are likely to be a great many changes to how SaaS functionality is packaged and priced.
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What is coming in 2024 and how do we plan for it? What role will packaging and pricing play in driving growth and monetizing innovation? It is time to begin planning pricing for 2024.
Planning pricing in 2024
Here are some basic things you can do to begin to plan for pricing in 2024.
Establish your 2023 Baseline
To know where one is going, one needs to know where one is. Make sure that your planning is based on a real foundation for where one is.
Revenues by package and customer segment
Break this down by pricing metric so that you understand how each pricing metric is contributing to revenue, ideally gather this data month by month and plot trends
Net Revenue Retention performance
Analyse month-by-month trends in each of the 6 NRR factors (depending on your package architecture and business model not all may be relevant)
Retention (or its inverse churn)
Growth in Package (if you have some form of usage pricing)
Up-sell (if you have tiered or GBB pricing)
Cross-sell (if you have something to cross-sell to)
Shrinkage in Package (what can grow can also shrink)
Down-sell (what goes up can come back down)
Price and demand signals:
How many deals do you lose because of price
How many deals do you win because of price
Estimate willingness to pay by market segment, user persona and/or use case
Discounting performance
Does your pricing model represent your actual price
If you discounting predictable and being used to shape the market or is it undisciplined and reactive
Competitor moves
Have competitors changed published prices
Have competitors changed packaging
What is sales saying about competitor pricing actions
What are customers saying about competitor pricing actions
Align pricing with your 2024 strategic goals
Leadership needs to be aligned on how pricing is meant to support overall strategy. Without this alignment, any planning of pricing is largely a wasted effort.
Roger Martin’s Strategic Choice Cascade is one good way to do this. See A simple template to apply Roger Martin's strategic choice cascade to pricing.
Winning aspirations - for each key performance goal, ask how pricing can help achieve that goal, goals can be divided into
Market Goals, like market share, grow the market, shape the market
Revenue Goals like Average Contract Value, Recurring Revenue Growth
Cashflow and profit goals
Unit economics like Customer Lifetime Value (LTV) or Customer Acquisition Costs (CAC)
Winning aspirations are often translated into goals for Key Performance Indicators (KPIs) so another way to think about this is how pricing can be used to achieve KPIs goals
Where to play choices like target market segments, growth motion, revenue model
The details of the How to win choices, like packaging design, pricing design, pricing levels, discounting policy and so one does not need to be part of the strategic planning
Explore how pricing will support your goals
As part of 2024 planning ask what pricing actions you should be considering. Here are some of the possibilities:
A price change - an increase or possibly a decrease in pricing, perhaps an increase for some packages and a decrease for others to optimize your pricing curve
Add a pricing metric - if you do not have a usage or performance metric consider adding one, hybrid pricing models generally outperform single metric models
Repackage to address more of the market - this can be anything from adding a new package or module to a basic restructuring of how the pieces of your footer fit together (see for example AI Pricing: AI as extension or platform)
Leverage value in your go-to-market - move to value-based product development, marketing, sales, and customer success strategy
Tighten up discounts - only give discounts for specific reasons and when the return on the discount is higher than the cost
The best-performing companies of 2024 will have pricing on their planning agenda.
