If you're reading this article, there's a good chance you own, or have some input on, pricing in your organization – after all, every product marketer works on pricing to some degree.
Of course, getting pricing and packaging right is notoriously difficult, but it's a fantastic opportunity for PMMs to really add value and demonstrate their worth to the organization. That's why I'm sharing my pricing and packaging roadmap, designed to help grow company revenue. I want to arm you with some of the current pricing fundamentals so you can build effective pricing and packaging roadmaps for your business, and, in turn, boost your career.
First, though, let's define pricing.
The fundamentals of pricing
Creating, communicating & capturing value
Pricing is creating, communicating, and capturing value. As product marketers, we're already doing this for our products, and so you're already making these decisions and now you can add pricing into the mix as well.
Now the difference between pricing and subscriptions is that in the subscription business, it's all about the predictable recurring payments that those customers give you.
That's a really important concept: predictable, recurring revenue. This is why subscriptions are very important. And this is why SaaS companies who get this right report that on January 1st 70% of the revenue is already booked. So think about that, more than half of your revenue is already known. I mean, that's exciting, that's predictable, and it's recurring and you keep getting that all the time. It's no wonder why investors love subscription businesses.
What areas do pricing & packaging impact?
To understand this further, we first need to look at each of the areas that pricing and packaging impact. Let's run through this at a very high level.
- Revenue - this is your sales and your customer success groups. They're bringing in all that revenue.
- Finance - thinking about margins mid-dollar retention, and all the different ratios to make sure you're profitable.
- Sales ops - they're probably doing deal desk, what are the different discounts that you're doing, promotions that you're running.
- Product - you're building a product, you're pricing it, and you want to make sure you're getting value for that.
- Professional Services - what additional services are you offering? That's usually TNM - how do you price and package that?
- Tools - how do you deploy pricing? Is there a pricing calculator? ROI calculator? How do you build a quote?
- Sales enablement - how do you train sales to talk about pricing so they understand how they negotiate it?
- Customers - they have to understand pricing or they won't buy it, a confused buyer won't buy. Buyers don't want to make mistakes.
- Competitive intelligence - what are your competitors doing? You're not copying their pricing, but it's going to inform your pricing.
- Geographies - you have to think about foreign exchange rates, how do different companies and countries think about value? How do they want to buy your product? How do they use it?
- Legal - you want to make sure if there are third-party hard costs or GDPR or HIPAA if you're dealing with the government, with healthcare you need to make sure that legally you're covered when it comes to your pricing.
- Contracts - you want to make sure the language in your contracts is covered as well.
- Compensation - if comp isn't in line with pricing, I've had reps come to my desk and say I'm not selling that product that you just rolled pricing out for. I don't get a commission for it. The comp team was then on my speed dial after that.
- Revenue recognition (rev rec) - especially for public companies, rev rec is very important. This is not a grey area, it's not routable, if the rev rec rules are changing for SaaS and you're not aligned to that you can't recognize your revenue and that has huge impacts on public companies.
- Partners - how do you extend your product? How do you expand your pricing and packaging? But the most important one here is...
- Senior executives - all care about this. I've never met a senior executive that doesn't care.
Who should own the pricing roadmap?
Ideally, a strategic and cross-functional person should own pricing. I know some bigger companies have pricing groups, and if that's the case, the product marketer should be heavily involved. Alternatively, raise your hand own pricing yourself. Here are a few reasons PMMs are uniquely placed to own the pricing roadmap:
- We're already strategic,
- We're already cross-functional,
- We're already teamed up for a product launch,
- We know our customers,
- We know the market, and
- We know our users.
How to own pricing & packaging
Product marketers own go-to-market, and pricing should be a central component of your GTM strategy. In much the same way as product management own the product roadmap, product marketers ought to own the pricing roadmap – both touch everyone in the company.
In the absence of a roadmap, tied into your wider GTM strategy, pricing can become an afterthought. And when that happens, you start losing deals, net dollar retention is down, customers start churning, they're confused, and you're no longer profitable.
But when done right, you can win deals, it can become a differentiator, and you can help companies grow from 1 million to 100 million or even in the billions. So in order to build a pricing roadmap, I need to share two basic pricing concepts with you.
Key concepts for your pricing roadmap
There are a number of key pricing concepts that form the basis of a solid pricing and packaging roadmap.
The first one is a subscription and it has three key revenue buckets. This is the meat of the pricing concepts and it’s very different from traditional businesses, which cared about winning customers. So Microsoft would sell that CD for PowerPoint and Word, and we would download and pay a big chunk of money. But in the SaaS subscription business, you're paying little chunks of money on a monthly basis, whatever that period is to use something.
So it's a win-win here because for the customers they think, "I don't have to outlay as much money", so it's a low barrier to entry, "if I don't like it, I'll just stop paying". For companies, it's easy because you can really win a lot of customers. So it's a win-win.
Now keep is not something traditional businesses cared about, we care about it in SaaS because we want to keep our customers so they can keep paying month after month. We really care about how they use it and if they're getting value. And this is why the customer success departments were born. They're there to make sure they keep using it, they keep paying us month after month, year after year.
No one wants churn - usage of our tools is really important. Before, Microsoft would sell me my CD and probably didn't care if I used it.
The last bucket is growing our customers. Now, this is where you're really in the money. People don't focus on this enough and this is where you do upsell and where you do cross-sell. How do you expand on what your customer's doing so they can do more and pay more money with you to really grow your LTV?
When you focus on this, this is where your revenues can skyrocket. And that's where growth comes from - it's in the expansion bucket.
Win, keep & grow - the framework for your pricing roadmap
So every marketing tactic already focuses on one of these buckets and when you consider these, pricing does as well, it's no different than what you're doing already. So the term you might have heard consultants call this is acquisition, retention, and expansion. The easy way I like to remember it is win, keep, and grow your customers. So these are all the same things when you hear them, and this is the beginning of a basic yet important framework for your pricing roadmap.
Continual development of the four pricing levers
The last set of pricing concepts I want to cover is the continued development of the four pricing levers is price points, and this is where the real power comes into play. So this is:
- What do you charge?
- What's the discount?
- Are you doing pricing segmentation?
- Is it value-based pricing?
These are all things you can answer.
What are the shared problems? This is what Pragmatic Institute calls it and I really like it. If you've got a lot of the same problems, and you've got the same problems, you guys are different segments. Product marketers are used to doing or calling it by industry, geography, title or role, size of the company, etc., it's basically clustering problems.
This is what you charge for? What is your customer value? Are you B2B or B2C? Talk to your customers, if they value a metric, that's your pricing metric, because that's what they care about. It's probably what they're thinking about when they think about ROI too. Some examples are users, data, email, message, and integrations, there are so many different pricing metrics there's not a finite number on my list.
So you've heard of good, better, best. That's very common, and there's science behind why good, better, best works really well. Some of the conversation options include, where do you put new features? How do you cross-sell? How do you upsell? All of these are very important and they're very powerful.
These three levers, highlighted in red, are more categorized as value levers. Each of these is a very powerful tool, you have to have every single one of them. And if you're not making a conscious decision, you've actually made an unconscious decision on how you're doing these and so you're doing it already by default.
Ready for action
Alright, so how do we take all this and execute it? Your pricing roadmap organizes these pricing concepts. This is a standard swim lane, I use it for our go-to-market, and we can use it in our pricing roadmap. So you’ve got your revenue buckets, which are winning, keep, and grow (or acquisition, retention, and expansion), so you can always think about it.
Then you layer on your pricing levers. And the pricing levers apply to each of those buckets. And then you can put in dates, I would say initially don't put in any dates into your pricing roadmap, keep that blank. Just start putting in details. As you hear different ideas that work, as you're talking to somebody else, look at your to-do list and start putting them in here and see where it shakes out.
The reason why I have it like this is you usually start with win and acquisition for smaller companies, you need customers first which is why it goes in this order, then you start retaining and keeping them, and then you want to grow them. I've only got one there because people tend to forget about grow. You're not doing everything all at once over time, but you kind of figure out what your cadence is for your company.
When you layer on pricing and packaging and know how it hits the bottom line and revenues, you become a very powerful product marketer.
Create a detailed summary for sign-off
So then you take this and you create a detailed plan to get sign-off. Because it's so cross-functional, you do have to go to different executives, and different partners, and you can do different versions of this, I've really tweaked this over the years.
This is an example of focusing on acquisition or winning customers - I took out a lot of our details and I just put in some generic questions here so you can use it as a framework. I’ve used this to focus on retention, and I've used it to focus on growth, but you lay everything out and you put a timeline to it and say “What do we want to do?” so you can start coordinating all the different functions within your company.
You can take action, you can do it by month, by quarter, by year, and pick whatever timeframe you want.
Expansion & the importance of LTV
Okay, so let's revisit this one more time.
I'm going to share a bonus pricing concept with you which is expansion. People always overlook this, but when you get expansion right, those are the companies that are on the path to IPO, they have these huge valuations and this is where the money starts falling into the bucket. And companies that are in the hyper-growth phase then go to $100 million, a billion, this is what a lot of people are calling monetization. That's a very popular term right now and this is what we're talking about.
So when we're growing customer revenue, there are really four different areas.
- Raise prices - so Apple raised prices across nearly all their product lines last year. For some of their best products, the prices were raised by 20%.
- Cross-selling - I keep upgrading to the iPhone, the iPad, I've got my iWatch on, I've got every Apple product they put out, every time they put something out, I'm buying it and so I'm getting cross-sold here.
- Upselling - when I keep upgrading my phone, they keep putting out new versions and so my phone starts getting old, I want the new one. So we’ve got to upgrade our customers, they keep spending money with us.
- Increasing usage - because I love taking so many photos and videos of my kids on my phone, I keep upgrading my storage plans with my Apple phone as well.
So these are really the only four ways and I've debated this with many people - and if anyone can think of a fifth way, please hunt me down and let's talk about it, because there are many times I thought I had a fifth way and then I realized I didn't. These are really only the four ways that you can grow customer revenue. So get as creative as you want, but it's probably gonna fall into one of these four buckets. And what does this mean?
This actually increases LTV and LTV is so important, because it's about lifetime value, it represents the total revenues your customers will spend with you in their entire lifetime. I am 15 years strong with Gmail. If you look at Google and Apple, I've just been with them for so long.
LTV is a very important SaaS metric. A high LTV drives how much money you can spend to acquire new customers. You don't want the cost of acquiring your company to ever be more than your LTV, and understanding pricing increases the LTV not only for your company revenues and your growth rates but also for your career.
So, time to go out there and make sure your pricing is right.