In a recent podcast, we spoke to Patrick Campbell about how to create a pricing strategy. This article summarizes some of his most important points.
As a new startup founder, you likely didn’t focus too much on your pricing strategy. In the beginning, any revenue was good revenue. You may not have even had a pricing strategy in place.
That’s an issue as you scale.
Your pricing strategy plays a big role in building predictability into your business. Without a model, you have no idea what you’ll end up charging new clients. Some may end up paying far less than your service is actually worth.
That can kill the company if it’s left unchecked.
In a recent podcast, we spoke to Patrick Campbell about the pricing conundrum.
Patrick is the CEO and founder of Price Intelligently. The company helps SaaS (Software as a Service) companies and startups create pricing strategies.
He shares some crucial information that all CEOs should take on board, starting with a common conundrum that many startups face.
What’s the Hardest Thing About Pricing Your Products?
How do you price your products?
According to Patrick, many startup CEOs look at pricing as a “once every so often” thing. They’ll set a price for what they’re offering and they don’t revisit it with any regularity. It may be years before they come back to it.
The common mistake that founders make is believing that the best way to grow is through acquisition. Startups focus on the number of clients they have rather than the pricing model they’ve developed. They may quickly gain 100 clients at a lower price. But they’re undercharging for the value that they provide to these clients.
The hardest thing to learn about pricing is that it’s a process. Think of your pricing model as a piece of software. You constantly iterate and make improvements to your software.
Your pricing model should undergo the same iterations to account for how your business evolves.
Over time, you’re adding new services and bringing new knowledge into your business. That all leads to an improvement in your services, which your old prices don’t reflect. You end up charging far too little for an amazing service.
What often happens is that founders recognize this disparity between price and service a few years down the line. They’ll then raise their prices to bring them in line with what they provide to clients. However, their clients may have spent several years on the previous pricing model. This sudden change can lead to arguments that result in the business losing clients.
Patrick encourages people to look at their pricing model as a process in the same way that they look at sales and marketing. It’s constantly evolving.
Revisit your pricing structure every quarter to see what little gains you could end up making. For example, you may be able to increase prices based on delivery speed or improvements to your packaging.
He also warns against the dangers of having a single price point for all of your services.
Your value metric, which is basically what you’re charging for, comes into play here. Such metrics might include the number of calls you’re helping a client to get. Or it could be that you’re adding leads or getting them more users.
You can use those value metrics to create multiple tiers for your products. When a client starts hitting a plateau with one tier, you can bump them up to the next.
Only having a single price point for your product limits your options.
The Pricing Misconception
Patrick also talks about all of the secrecy that tends to surround pricing.
A lot of founders try to maintain secrecy in regards to the reasoning behind their price changes. They don’t reveal the thought processes behind their decisions. This lack of transparency can cause issues with clients.
They may believe that you’re just making arbitrary changes to get more money from them. However, the reality is that you’re adjusting your prices based on the increased value that you offer.
Patrick recommends being as open as possible when it comes to your pricing. Talk to your clients if you’re planning on increasing the price. Provide them with solid reasoning backed by data.
Focus on the value that the product offers. Show the client that you’ve increased that value since the last time you set a price with them. For example, you may have helped the client generate 20 leads per month when you first started working together. If that’s increased to 50 or 100, you can point to that as an added value to justify a price increase.
Of course, you’ll always have the fringe clients who’ll complain and leave. That’s just natural churn and they likely weren’t good fits.
However, if you’re truly offering value and saving time for your clients, they’ll accept the price increase. Being honest and transparent about it makes them feel more involved. It also helps them understand why you have to make the increase.
The Four Questions That Reveal Your Product’s Value
Product value is an issue that’s worth exploring in more depth. According to Patrick, a lot of CEOs and founders don’t really know the true value of their offering.
He recommends collecting some data about your product using a survey. Create a survey that describes what your product does and the value that it offers. Then, set a price and ask the following questions:
At what price would this be too expensive?
At what price is this product getting expensive?
What price would make this seem like a good idea?
What price seems too cheap for the product?
Distribute this survey to between 50 and 100 people.
Collect the data and you’ll get an instant impression of how the market values your product, based on how you described it. You’ll see how much they’re willing to pay, which helps you to see the value that potential clients place on the product.
This helps you determine an appropriate price. It may also reveal that you’re not doing a good enough job of communicating the product’s value. In some cases, you may realize that a product simply doesn’t offer enough value and thus isn’t worth retaining as part of your offering.
As mentioned, Patrick focuses primarily on SaaS companies. He challenges the traditional idea of paying per seed. If you operate a SaaS company, you likely charge per user. The user pays a flat rate for full access to the software.
Patrick proposes a different model. Instead of closing the software off until the user pays a fee, make 10% of it available for free. The user gets to experiment with what the software has to offer. If they like what they see, they then pay a fee to access the full version.
It’s a bold idea that you may find difficult to implement. After all, your clients have likely gotten used to working with the traditional model. This is especially the case with SaaS, where the model’s been in use for some time.
The key is to consider which model your clients view as the most valuable. If your clients see more value in a per-user model, you may have to stay with it. However, that doesn’t mean that you can’t challenge the traditionalist mindset.
Overcoming the Traditional Mindset
The per-user mindset comes from an era when licensing was the big thing in software. Many of your clients may have never used any other model. Thus, they stick with what they know instead of considering other options.
Consider the value that you’re offering to your customers. For example, a per-user pricing model isn’t going to work for you if the true value of your product is the amount of bandwidth you offer.
In that example, you should charge based on bandwidth tiers. Otherwise, you’re charging your biggest clients the same amount as your smallest ones. That’s despite the fact that they’re using more of the value that your product offers.
The same goes for cloud storage services. A company like Dropbox gives you so much storage space for free. When you inevitably use that up, you hit a tiered system where you can pay subscription fees for different amounts of storage.
Their value lies in the storage space that they offer. A per-user model would see them charge the same amount across all users. One company might use 100 terabytes of storage whereas another might only use 20 gigabytes.
The former should pay more because they’re getting more value. Highlight the additional value that clients receive from you and you may be able to move them away from a per-user model.
The Final Word
The key takeaways here are as follows:
Pricing is an iterative process that you need to revisit constantly.
Established pricing models may not work for your business. You have to price based on the value that you’re offering to your customers.
Failure to create the right pricing strategy could kill your business. You may end up charging far less than you’re worth, only to lose clients when you try to course correct.
This only scratches the surface of the discussion that I had with Patrick. We dug into much more detail about all of these issues. Plus, we discussed how to avoid churn and retain customers when you raise your prices.
There’s so much more for you to learn. Subscribe to our podcast on Spotify or iTunes today to listen to the full conversation.
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