To better understand the factors at play in a successful pricing and packaging strategy, the Product Marketing Community’s Megan Heuer sat down with Kyle Poyar, VP, Growth at OpenView, an expansion-stage venture capital firm, to get his advice for the modern marketer.
Megan: I’d like to start with asking, broadly, how should marketers today approach pricing and packaging?
Kyle: A marketer’s approach to pricing and packaging should be customer-driven, meaning you should design the pricing and packaging model to fit the way customers want to buy. That’s going to be a crucial way that you're ultimately able to drive conversion and land and expand with customers.
Think about the bottled water industry. You can get water effectively for free from your tap, but companies are still selling bottled water successfully. Ultimate success depends on who your customer is, what their use cases are and how good you are at telling the story of why that customer should buy your product. Instead of trying to go head-to-head against other companies or products that look just like yours – design a cohesive story that is differentiating and gets to the heart of the value you offer.
“A marketer’s approach to pricing and packaging should be customer-driven, meaning you should design the pricing and packaging model to fit the way customers want to buy.”
Megan: What do you see companies missing in their approach to pricing and packaging today?
Kyle: There’s not clear ownership of pricing and packaging as a strategic pillar in many organizations. It’s something that is a distributed responsibility across functions, such as product, finance and business operations, which may have more of a cost and profitability margin perspective as opposed to a wholly customer-driven point-of-view.
For this reason, product marketers are the ideal group to own pricing and packaging as they are the voice of the customer in the organization and should understand customers’ motivations, including why they buy the product and how the product compares against competitors – the “why we win” piece. Product marketers enable the rest of the team to tell that story and can lend more creativity and customer focus to the pricing and packaging process.
"Product marketers are the ideal group to own pricing and packaging as they are the voice of the customer in the organization and should understand customers’ motivations."
Megan: What can marketers do to improve their pricing and packaging?
Many people might be more likely to approach a problem in terms of “what is urgent” versus “what’s important.” In many cases, pricing and packaging is never the most urgent thing on a product marketer’s mind, but it is actually the most important thing because of the opportunity to drive incremental revenue growth through pricing and packaging changes alone.
In fact, through surveys I’ve done, I’ve found that the average company that changes pricing and packaging increases their revenue growth about 10-to-25 percent just as a result of that change. While that’s specific to fast-growth startup companies, that tells me that pricing and packaging is something that is probably one of the quickest and most powerful revenue levers that a product marketer has. If they haven't really prioritized it, they definitely should.
"Pricing and packaging is never the most urgent thing on a product marketer’s mind, but it is actually the most important thing because of the opportunity to drive incremental revenue growth through pricing and packaging changes alone."
Megan: What trends are you seeing in pricing models? Is there anything that’s really worked for the companies you’ve surveyed?
Kyle: One trend I’ve seen is a shift toward product led growth and changing the paywall so that you’re charging your customers after they’ve seen value. That would include a combination of freemium, free trial or limited free product strategies which can open up the number of potential customers who have exposure to the product and really increase adoption. It can also drive a much better customer experience and a higher conversion rate because, if they put in work to customize the product, they're seeing value in it. Odds are they're also probably not evaluating as many other products and they have a loss aversion where they don't want to give up something that they're already having success with and have invested time in.
The other trend I’m seeing is the incorporation of usage as a factor in pricing. User- or seat-based pricing has been the norm in software for decades. To me, it's a relic of how on-premise solutions used to charge when software was limited to a specific device or instance. Now, in the SaaS world, especially given the plethora of platforms on which to monitor and track usage, it's clear to me that usage is probably the best predictor of customer health and expansion. Usage indicates the unique value people get from your software and also corresponds well with the ROI that a company is going to receive in terms of reduced costs, increased revenue, risk reduction, etc. The more customers use your product, the more value they are probably receiving from it.
“It's clear to me that usage is probably the best predictor of customer health and expansion. Usage indicates the unique value people get from your software and also corresponds well with the ROI that a company is going to receive”
Megan: Given these trends, what is your recommendation to marketers who are in the throes of planning for next year? What items should be on their to-do lists with regard to pricing and packaging?
Kyle: The first thing I would do is organize a cross-functional pricing and packaging steering committee to at least start to have an executive-level conversation about pricing and packaging. This creates a good reason to really look at pricing KPIs and pricing data to see if changes need to be made. It also helps to get marketing, product, finance and sales on the same page and ensure everyone is looking at the same datasets. I think that increasing that alignment and visibility can help uncover a lot of opportunities to take budget and repurpose it into more product-driven efforts that help increase the efficiency of the way you acquire and convert customers.
I challenge product marketers to think more creatively instead of just collaborating on the next big demand-gen campaign for your target buyers. Think about what you can do with your product assets or your IP that can offer value quickly before a pay wall and be a great source of lead nurturing into your paid product.
To give a quick tactical example, I created an SaaS pricing calculator for OpenView, which is essentially just a form embedded in a blog post. People fill out about 15-to-20 questions and they get a customized grade and a report on how they're doing when it comes to pricing and packaging. That form has now been filled out more than 2,000 times and the customer data we’ve gotten from it has been extremely valuable to us in creating impactful infographics and other amazing content about what companies in SaaS are doing. I think that there's a lot of similar things that other software companies can do that are unique to their product and their target audience to ultimately help drive demand for your paid product.
"I challenge product marketers to think more creatively instead of just collaborating on the next big demand gen campaign for your target buyers. Think about what you can do with your product assets or your IP that can offer value quickly before a pay wall and be a great source of lead nurturing into your paid product."
Megan: What data should companies be looking at to inform their pricing and packaging?
Kyle: Win-loss data is extremely valuable – specifically, what percentage of deals do you win and lose, how that varies based on price point and the reason codes for lost deals. You can either get that from sales team or going out and doing a round of win-loss interviews with customers and lost prospects. If you're finding that price comes up as a regular reason, that might be an indicator of the pricing is too high. Although, I think it's actually probably an indicator more that the sales team isn’t positioning price in the right way or the pricing model might be an issue where the pricing model works for a certain kind of customer but not another kind of customer. You might also find – and I see this frequently – that deals typically aren't lost with pricing as the primary reason.
I’d also suggest looking closely at KPIs such as what happened the last time you changed pricing. What happened to the sales cycle, to the conversion rates and to the average deal size? I think that kind of post-mortem doesn't really exist in a lot of companies. They might make a change and if the sales team is happy or not complaining about it, they think whatever they did worked, and they move on.
I would challenge marketers to be looking at standard pricing KPIs, such as: What discounts are being offered? What’s the average discount based on the size of the company? Are discounts even correlated with the amount that customers are spending or are you offering big discounts to small customers? I’d also ask questions like: What are our customers buying today? How much are they paying? What packages are most common and generate the most amount of revenue? What’s the retention rate on different packages? The answers to these questions are fundamental to uncovering insights about how to evolve your pricing and packaging.
Megan: Do you advise companies to look at their competitors as a part of this process? How do you factor in what others charge to inform your own pricing and packaging?
Kyle: You need to think in terms of what the buyer is comparing to your solution. I would think about the competitive set not just as the one or two companies that you run into most frequently, but also in terms of your peers. Ask yourself, what are some of the other budget items that your customers spend money on? How much do they pay for those? And what value did they get relative to your software? A lot of times the competitor isn’t another tool in your space, it could also be another category of software vying for the same budget.
“Your pricing doesn't need to be competitor driven but does need to show off what makes you different from the competition and that gives customers a reason to buy from you.”
The other thing to think about is your pricing doesn't need to be competitor driven but does need to show off what makes you different from the competition and that gives customers a reason to buy from you. Think about your differentiating capabilities when you approach pricing and packaging and don’t just mimic how others are doing it – really come up with something that's customized that allows you to tell the story to your customers about why they should buy from you and the kind of value they’ll see as a result.
Megan: Thank you so much for this amazing advice, Kyle!
Did you find this interview valuable and want to see a similar discussion with an industry leader on another topic? Let us know.