Pricing is not sexy. Even in the wake of the nerd takeover the past few years, us pricing folks are still the eccentric statisticians and economists left to wallow in our algorithms and data. We’re one of the last resorts for desperate founders and marketers who’ve been tasked by frustrated investors, C-Levels, or board members who look to pricing as the last ditch effort to boost profits and revenue.
What’s funny is that if you had your pricing right up front, you wouldn’t be in that type of situation. After all, it’s never a churn or revenue problem; it’s a pricing problem, because if your price aligns with customer value the only reason someone would churn is if they’re going out of business or broke.
Pricing holds the key to not only knowing more about your customers than you’ve ever known before, but also to unlocking the revenue and profits for which you’re so desperately accountable. Still seem like a sales pitch? Well, let’s walk through the philosophical basis of pricing as the center of your business before digging deeper into the analytical justification for pricing as the most important lever in your business.
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Pricing: Quite Literally the Center of Your Business
Businesses aren’t complicated. No matter how much we hack this and viral that, the basic concept behind a business is that you’re providing an efficiency and value for a customer. The medium of that efficiency can vary wildly, but usually takes the form of time or cost savings, eliminating a hassle, or even giving me something to do to waste time in the form of fun and procrastination. Your job is then to align this value add with the right type of customer.
Once you’ve discovered this value-customer fit, the way you stay in business is you decide how much that value is worth to the customer and charge them accordingly. In this manner, your pricing is the exchange rate on the value you’re creating in the world.
Pretty simple concept, right? Well, where most businesses go wrong is in the determination of this exchange rate. On one end of the spectrum, some C-teams just guess (Did you know the average amount of time a SaaS company thinks about their pricing is only 6 hours?), and on the other end analysts come up with exceptionally complicated models that attempt to read the minds of their customers.
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Unfortunately, both models have exceptionally dire consequences in terms of revenue impact (more on this below). Yet, those consequences can be avoided by just talking with your customers, who are the only ones who can truly tell you how much they value a product. More on collecting customer value and willingness to pay data can be found here, including the method for culling it correctly.
Pricing: A Lever That Will Make or Break Your Business
When speaking with folks at this point, most “get it”, but then wander off thinking about that A/B test they need to run on their landing page and that new partnership that can add a potential XXXX customers. Those hacks are important, but are ephemeral compared to the quantitative impact pricing can have on your business. After all, more customers don’t mean a damn thing if you’re not monetizing them properly.
In your business, at the end of the month, there’s only one cell on the spreadsheet that truly matters: profit. Revenue is important. Customer acquisition cost is important. Active user counts are important. All of the indicator metrics are important, but profit determines whether you have a business or a really sweet idea that’s heading to the deadpool. You know what has the highest impact on profit? You guessed it... pricing.
Pricing affects your business more than any other lever, including costs and volume. In fact, a 1% improvement in pricing equates to an 11% boost in profit, compared to only 2.3% and 3.3% boosts from 1% improvements in fixed costs and volume, respectively.
Let that sink in for a moment. Pricing is that huge, and you’re only spending six hours in the history of your business on it.
Why would you try to increase landing page conversions by 1% when figuring out your pricing can have almost a 4x return on a similar improvement? More often than not, you’re probably missing out on multiple 1% improvements, because your positioning (who you’re selling to), packaging (what you’re selling to those individuals), and your pricing (the actual number on the page) are all probably off.
Start Taking Pricing Seriously
Fortunately for you, pricing doesn’t have to be the big black box of difficulty. At it’s core, you simply need to quantify your customer personas (positioning), figure out what they want (packaging), and then how much they’re willing to pay for those packages (pricing). That still sounds like a lot, right? Well, check out the step by step guide to value based pricing, which goes through each step in more detail. The great part is that you don’t need to go overboard to start making gains. You just need to start thinking about pricing as a lever and not something that you can just set and forget. Your company and product are constantly evolving, which means your pricing strategy needs to, as well.
If you want to dive into pricing page best practices, check out our latest eBook, The SaaS Pricing Page Blueprint, which offers in-depth data and analysis on building the perfect pricing page.