Ever felt that that the pricing of a product is a “black box”?! Ever been in situation where you’re unable explain the rationale behind the company’s pricing strategy because pricing is based on mysterious factors? “Street Pricing: A Pricing Playlist for Hip Leaders in B2B SaaS” aims to make a opaque pricing strategies a thing of the past. Its author, Marcos Rivera is a pricing expert with a passion for two important things: capturing value and listening to Hip Hop. Both passions are apparent in Street Pricing, using great Hip Hop references to bring value based pricing to life.
“Pricing is the exchange rate on the value you are creating.”
Rivera uses this great quote by Patrick Campbell, Chief Strategy Officer at Paddle to explain the essence of pricing. Value works two ways: value for the customer and value for the company.
To create company value, Rivera recommends applying the 3-to-1 ratio. This ratio compares Customer Lifetime Value (CLTV), which measures the money you make from a customer before churning against Customer Acquisition Cost (CAC), which is how much you spend to acquire customers. CLTV should be at least three times your CAC.
Rivera describes how pricing is all about signals. A signal is a measure or a metric that indicates that your pricing or packaging is leading your business away from your growth objectives or towards unintended consequences. You can look at your packaging and presentation to better understand the signals.
For instance, a badly designed product package can create a lot of confusion with prospective buyers and ultimately affect conversion. Badly designed packages tend to have been created without data insights or test before going live.
You can look at your packaging through both a horizontal and a vertical lens. When you look at a package horizontally, you assess the progression of value from one package to the next. Through the vertical lens you evaluate the value driving features and services in a single package. There are two important questions Rivera suggests we should ask about each package:
- Are the value drivers clear, and do they directly address the problem our customers are trying to solve?
- Are there other use cases that are incompletely or disjointly solved in this plan?
These questions feed into a baseline analysis, where you gather about how your pricing model is working and not working in capturing value. These are the aspects to look at part of a Pricing Baseline Analysis Plan:
Current state: Show that we understand the client’s business; validate we have the correct picture.
Retention: Understand how price / value impact stickiness in terms of velocity and volume of churn across our base.
Expansion: Understand how the packaging, pricing metric, and price levels impact cross and upsell motions in terms of expansion frequency and revenue.
Acquisition: Understand how the pricing, packaging and controls impact acquisition efficiency and velocity in terms of conversions, deal size, and volume.
Survey: Understand internal stakeholder and customer sentiment to inform value, packaging, and pricing for the new model.
Competitor: Understand competitive position and landscape to inform package and price levels.
Benchmarks: Compare measures against SaaS benchmarks to illuminate areas of opportunity.
Findings: Consolidate insights to support and inform what the new pricing and packaging should do.
In addition to using the Pricing Baseline Analysis Plan you can also apply the 4C model to map pricing data into four categories:
Context — The context around value, like your SaaS product’s growth plan, your brand reputation, and your ability to scale and grow your business. You can, for example, measure which features drive value and which ones don’t to define better packages.
Capture — Your ability to capture value, also known as your “land motion” and how you win new business. You can, for example, gather data on your ability to convert prospects into paying customers.
Competitors — Understanding and know your value positioning versus the competition. When studying your competitors you can look into how they sell, how they grow, and where they differentiate against you. Also worth understanding negative differentiation and how to overcome value shortfalls compared to other options available.
Customers — How deeply do you understand your customers (who they are and what they want)? To answer this question you can break down your customer base into groups of profiles to uncover differences in value and willingness to pay.
In “Street Pricing” Rivera also suggest using the “5Q Framework”, five questions to help figure out what and who you’re pricing for:
- Why are you pricing?
- Who are you pricing for?
- What is your offer?
- How much should you charge?
- What elements are or are not working?
5Q assumes three things about your business that must be true to get the most out of the framework:
- It assumes that your business or product is growth-oriented, trying to grow at scale.*
- It also assumes that you’re product-led, selling a tangible product that delivers tangible value to the customer.
- It assumes that you’re value-focused, wanting to price to value and capture value as it evolves.
- These are the common growth types to consider: core growth (same problem, same customer), horizontal growth (same problem, different customer), vertical growth (different problem, same customer) and diagonal growth (different problem, different customer).
Finally, Rivera recommends applying the “EARN” approach to your pricing strategy. In the vein of all the Hip Hop references in “Street Pricing”, EARN made me think about, the “Hard to Earn” album by Gang Starr, one of my all time favourite Hip Hop records. But I digress because EARN stands for: Estimate, Align, Reinforce and Navigate:
Step 1: Estimate your value — To get started, send a short survey to your prospects, customers, and internal teams to collect ideas on what areas the of the product deliver the most value. This data set should serve as a good foundation to start breaking down your value into categories, like positive vs. negative, or base vs. premium. Rivera suggest asking these questions as you define value in this step:
- What ROI is the buyer expecting by investing in our product / service?
- What outcomes do buyers want to improve? How are they measured?
- How does our value change over time or with increased usage?
Step 2: Align your value, product and market — Get a cross-functional perspective of how value aligns with the product’s maturity and market dynamics. Here are a few questions to ask as part of this step:
- Are customers over-served or underserved in the market today?
- Is our market growing or shrinking and what is our rank today?
- How would competitors react to our pricing?
Rivera shares a common set of pricing strategies to help readers base and position of the value of their products:
Step 3: Reinforce the strategy by making tradeoffs — This is a step that forces us to make tradeoff decisions, things that we say yes and no to with respect to our pricing. For example, if Skimming is your product strategy you shouldn’t give customers deep discounts. Ask yourself in this step:
- Why do we win and lose deals today?
- Who isn’t our customer?
- What explicitly will we need to sacrifice to achieve this strategy?
Rivera shares a tradeoff matrix to help think through the common tensions in pricing strategy:
Step 4: Declare a North Star — This step is about making your pricing strategy measurable. A pricing strategy isn’t static; the moment you set prices, the landscape changes, new information is available, and assumptions have taken a different shape. Ask yourself in this step:
- Which financial metrics are most important to improve next year?
- What other leading metrics influence our North Star?
- What signals should we watch to ensure we picked the right North Star?
Main learning point: There are many useful frameworks and steps that one can work through to arrive at a robust pricing strategy. Street Pricing shows readers how to get started with pricing or how to revisit an existing pricing model.
Related links for further learning:
- https://www.growthunhinged.com/p/your-guide-to-saas-packaging
- https://www.growthunhinged.com/p/the-state-of-usage-based-pricing
- https://openviewpartners.com/
- https://www.paddle.com/blog
- https://pricing.io/blog
- https://podcasts.bcast.fm/e/2n64l7pn-episode-157-aligning-pricing-with-value-in-the-technology-space-insights-from-jean-manuel-izaret-of-boston-consulting-group
- https://openviewpartners.com/blog/usage-based-pricing-2-0/
- https://productcollective.com/deep-dive-pricing/
- https://tomtunguz.com/ai-agent-pricing/
- https://tomtunguz.com/ai-copilot-premium-pricing/
