Prepare your company for change

2023 will be a pivotal year for pricing strategy. The trends of the last few years will come together leading to fundamental changes in the operating environment. Pricing will need to change as well. This is the 1st in a series of posts to help investors, directors and C-level leadership prepare. Ibbaka is publishing an eBook that will serve as a guide for people accountable for pricing strategy and its contribution to growth.

Part 1: Questions Boards Need to Ask CEOs about Pricing (this post)

Part 2: The Pricing Landscape in 2023

Part 3: Market Dynamics and Pricing in 2023

Part 4: Critical Uncertainties and Key Scenarios for Pricing in 2023 (in preparation)

Part 5: Pricing Plans at Key Technology Industry Vendors (in preparation)

Contact info@ibbaka.com to subscribe to this series.

TL:DR - These are the key questions

• Are we delivering value?

• Is the value we are delivering changing?

• Is our customers’ willingness to pay changing?

• Are competitors outcompeting us on value?

• What is it costing us to communicate value? (Can we communicate value cost-effectively?)

• What is our NRR (Net Recurring Revenue) and how is it trending?

• What is our Net LTV (Lifetime Customer Value) and how is it trending?

• How do we need to rethink our market segmentation?

• Can we construct a few likely scenarios we can use for business planning as we look forward?

Questions Boards Need to Ask CEOs about Pricing

The 4Cs of pricing provide a compelling way to frame a conversation on pricing strategy for 2023

• Customer Value - How and how much value is being delivered to customers? How does that shape pricing strategy? Do higher interest rates or a recession change the value being delivered?

• Customer Willingness to Pay - How much are different types of customers willing to pay for the value they are receiving?

• Competitors - How are competitors communicating value? How much and how are they charging for that value? How will they respond in a recession?

• Costs - How much does it cost to communicate and deliver value?

Answers to these questions should be used to segment the customer base. Different customers will be impacted in different ways and the differences are critical for pricing strategy. No ‘peanut butter spreading.’

1. How is the value we create and deliver to customers changing?
   (Customer Value)

   1. What value drivers delivered the most value in the past?

   2. What value drivers will deliver the most value in 2023?

   3. What is our strategy for creating value after a recession?

2. How will economic changes affect our customers and their ability to spend?
   (Customer Willingness to Pay)

   • Inflation

   • Interest rates

   • Recession, should one occur

3. How are our competitors responding to the changing economic conditions?
   (Competition)

   1. Raising prices?

   2. Cutting prices or increasing discounts?

   3. Introducing new offers?

4. How are our costs changing?
   (Costs)

   1. Long term cost trends (cost of capital, R&D, G&A, Marketing)

   2. Customer Acquisition Costs

   3. Cost to Serve

The metrics that matter may be changing. Ask about trends in key metrics and if the critical metrics should change in 2023

We have seen two major changes at leading SaaS companies as they prepare for 2023.

• More focus on Net Revenue Retention (NRR)
  Companies that are able to grow revenues from within their existing customer base are getting higher valuations.
  NRR should be better than 100; companies with NRR over 120 are in a very strong position.

• Aggregate Net Lifetime Customer Value (Aggregate Net LTV) is the best predictor of long term success
  Net as Lifetime Customer Value should be net of cost to serve (hosting, support, customer success).
  LTV measures the future value of your current customers, it is a forward looking metric, one that integrates the number of customers, the average subscription value and retention.

Market segmentation changes as the economy changes

Well run sales, marketing and pricing organizations have formal market segmentations and use them to target segments with messages, packages and offers. When the economy changes the position of a customer in the segmentation can change and the logic of the segmentation itself can change.

Ask the following …

1. How have economic changes changed our market segmentation?

2. How has the distribution of customers across segments changed?

3. How do these changes impact strategy?

Market dynamics also change as the economy changes, so question this as well.

Price elasticity of demand is a foundation for pricing strategy. In fact, there are two types of elasticity to consider, and they interact with each other.

Price elasticity of demand: how demand volume changes with price level

Cross price elasticity: the tendency for a customer to change suppliers based on price changes

How these two forces interact defines market dynamics, and market dynamics can change with inflation, higher interest rates, or a recession.

Ask the following …

1. Have market dynamics changed?
   Inflation can change both price elasticity of demand and cross price elasticity. These changes can force you to change your pricing strategy. Different industries, and companies, respond differently to a recession. Some will see demand go down regardless of price, price increases will not lead to higher demand no matter how low you go. Some companies are less likely to switch vendors in a recession, others are more likely. Understanding these changing dynamics is critical to pricing.

2. How does this impact our pricing?
   Do not offer companies with low price elasticity of demand prices concessions. All you will do is to reset price anchors to a lower level without increasing demand.
   Some companies become more cost sensitive during a recession and will be more willing to change to a lower cost vendor (cross price elasticity can increase). For these companies you may need to create a lower cost, lower value defensive offer so that you can keep them through a recession.

The future is not set, so prepare for different scenarios

We do not know for sure what will happen with inflation, interest rates and economic growth next year. There are complex interactions between these three factors and complexity economics is at work. Rather than over index on predictions, identify the critical uncertainties and prepare for different scenarios. You should have a pricing strategy for each of the different scenarios.

These scenarios do not need to be global. They can play out differently in different industries. Even if there is a general recession, there are indications that demand for B2B Saas will remain firm. Gartner has been predicting that the B2B SaaS growth will be higher in 2023 than it was in 2022. Will this happen? No one knows. But it is one critical uncertainty that can be used to build scenarios. 

See Brian Arthur on the Foundations of Complexity Economics in Nature and Scenario planning for pricing (managing through uncertainty) on the Ibbaka blog.

Make sure that any actions taken for 2023 will contribute to future success and not hobble it

Recessions are temporary and usually last only a few quarters. At this point a global depression which would go on for several years) is not being predicted, at least not by mainstream economists. So even if there is a recession in 2023 you have to prepare to grow once the economy emerges from its funk.

Practically speaking, this means that any pricing actions should not

• Reframe prices to set a new anchor price at a lower level

• Offer discounts that become internalized as the new standard price

• Undermine the value your customers can create for their customers

• Undermine the value you provide to your customers

Pricing tactics deals with the present. Pricing strategy prepares for the future.

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”

Sun Tzu, The Art of War

Ibbaka ebook - Pricing Strategy for 2023

This ebook will be published later in 2023.

Send an e-mail to info@ibbaka.com if you are interested in getting early access to this ebook or in getting notifications about the rest of this series.

Table of Contents

Executive Summary

Questions Boards Need to Ask CEOs about Pricing in 2023

The Pricing Landscape in 2023

Market and Pricing Interactions

Scenarios

Market Dynamics

Relative Importance of Value Drivers

Resegmenting the Market

Should Prices Increase?

Setting Up for Success in 2024

Conclusions

Ibbaka Valio

Ibbaka Talio

About Ibbaka

Read other posts on pricing design

• Pricing for NDR (Net Dollar Retention)

• Executing on usage based pricing

• What to price? What to optimize? How to optimize? Three key pricing questions

• When and how to change your pricing metric

• How to introduce usage-based pricing

• New skills for usage-based pricing

• Value paths are the key to usage-based pricing

• Pricing under uncertainty and the need for usage-based pricing

• Enabling Usage-Based Pricing - Interview with Adam Howatson of LogiSense

• Usage-based pricing a complement and not a substitute