A sound pricing program can increase margins and propel growth for SaaS companies. How you get to your pricing is probably just as important (if not more) than the pricing itself! For 64% of technology customers, the pricing model was important or extremely important in their purchase decision – according to aGartner study.
Factors like strategy & implementation, data & resources, and overall culture and mindset play critical roles in setting up and managing a pricing program, as observed in this McKinsey article.
What then are the essentials to consider, when organizing a Pricing Program?
In my book, Price To Scale - Kevin Christian who is an Industry Guru (and is currently Director of Pricing, Licensing & Packaging at Infoblox, says, “In most software companies you can break down a Pricing Program into three big areas, or legs so to speak:
1. The first leg is Strategy which includes programs and policies, financial analysis, market analysis, and competitive analysis. Typically, the changes are planned as short term, say over 6 to.12 months, and long term over the coming 2 to 5 years.
2. The second leg is Pricing of Specific or Individual Transactions. The elements here are what is often referred to as the Deal Desk. The activities in this area are about approving non-standard discounts on special, large deals and any non-standard contract terms.
3. The third area is Tools and Processes. This consists of processes set up for reviewing prices and setting new prices or changing existing prices. Also covered in this group are activities like publishing the price list, setting up SKUs - it is any system related changes and whatever the quoting process is.”
In terms of pricing competencies, a multi-faceted approach could go a long way. Inferences from this Deloitte guide suggest that integrating the six core pricing competencies - strategy, execution, governance, analytics, technology, and tax considerations, is essential to a pricing program. Depending on your company’s pricing maturity, you need to also routinely take stock of existing capabilities and fill gaps, while being cognizant of market changes, customer preferences and the prevailing competition.
This PWC study emphasizes that pricing management is integral to pricing success in SaaS. If the true value of a product is not captured, it can reduce or eliminate profits. Not considering legacy products within pricing strategy or underpricing your new offering, will also impede profits. The study further notes that excess discounting can lead to a price war amongst competitors that can damage the category’s entire market.
To conclude, while approaching a pricing project is to remember that it isn’t about ‘pricing’ alone.
This project will require you to confirm, evaluate, or even set product strategy, positioning, and packaging. It will touch multiple teams within your organization: sales, product, marketing, operations, professional services (yes, them too), and finally, the executive team.
Often, there is a tendency (especially in the sales team) to think, "Oh, I have seen enough deals, and so I know how to price our product!" - Avoid this tendency! This approach assumes many strategic considerations and could very well mean that you may not see 'the forest from the trees' view, which is required to make this work over the long term and for your entire market.
