Step 1: Set the strategy
The goals of this phase are to get buy-in about prioritizing pricing as a cross-functional initiative as well as to generate alignment about what needs to change and why.
Key workstreams in Step 1:
- Crisply state the goals of the pricing strategy, i.e. “increase volume of our lowest priced products” or “increase revenue per customer given the value of our products.” These should come from the executive team and align with company-wide OKRs.
- Appoint a project manager to own and manage the pricing process. This person typically sits in Product, Product Marketing, or Business Operations.
- Conduct internal interviews with executives and customer-facing employees to understand what’s working / not working. I highly recommend involving sellers in these conversations. Not only are they closest to the customer in talking about your current pricing, their buy-in is make-or-break to the success of any changes you want to make.
- Assess competitive pricing and packaging models. Sometimes this information is readily available through public pricing pages or analyst reports. It might also take some digging through win-loss data, Gong recordings, or other inputs. Don’t just look at the current pricing, but instead evaluate how pricing has evolved over time (the Wayback Machine is an awesome tool) and how buyers respond to it.
- Collect benchmarks on how companies in adjacent spaces have changed pricing. VCs can be a great place for this information and/or for making introductions to other portfolio companies that have recently changed pricing.
- Analyze pricing data. This usually includes sales KPIs (win/loss including win-loss reasons, conversion rates by segment, package mix by segment, average discounts by plan and by customer size), customer behavior (churn rate by plan, NDR by plan, NDR by ACV), and product engagement (utilization by feature).
By the end of Step 1, a company should have honed in on a strategic direction for future pricing changes and the leadership team should be aligned about why these changes are important. Now it’s time to figure out the details.
Step 2: Validate with customer research
Any strategy needs to be validated with actual input from customers. While this input could come from running pilots or simply changing pricing and seeing what happens, customer research is a great way to de-risk decisions and generate more buy-in for pricing changes.
Key workstreams in Step 2:
- Conduct voice-of-customer research (qualitative interviews and/or an online survey) on perceived value and willingness to pay. This research shouldn’t be positioned as “pricing research”, but rather include pricing-related questions as part of a broader conversation about the customer’s buying process, the value/ROI they’ve seen, what additional capabilities they’d like to see, and what they’d like to see improved about their experience. I recommend that this research include a healthy cross-section of accounts, ideally including either lost prospects or churned customers rather than just those who are already happy.
- Translate voice-of-customer findings into specific recommendations about pricing and packaging changes.
- Quantify the expected financial impact of the new pricing on new and existing customers. Ideally look at this financial impact on a customer-by-customer level, mapping how much customers would pay if they were migrated into the new packages and pricing.
- Socialize findings and recommendations with the pricing council and get a go / no go decision.
- Set up weekly cross-functional meetings to align on pricing decisions and coordinate implementation.
The team at Cypress took a particularly in-depth approach to customer research as they contemplated launching usage-based pricing earlier this year. I recommend reading about their pricing playbook if you’d like to learn more about Step 2.
Step 3: Prepare for implementation
As challenging as Steps 1 and 2 can feel, Step 3 ends up being the most resource intensive—especially if a company is contemplating a significant pricing change.
Key workstreams in Step 3:
- Build final price list, package names, and business rules. Get formal approval from the pricing council.
- Decide on business rules for existing customers—i.e., keep on current plans perpetually; keep on current plans with limits; offer carrots / incentives to move to new plans; migrate to new plans. Consider an exceptions process for customers that don’t fit neatly into these business rules.
- Pilot the new pricing via a sub-set of the sales team prior to widespread launch. (Optional)
- Create a communication plan—both internally and externally. Emphasize the benefits that this model brings to customers / why it’s in their best interest. As part of this communication plan, decide whether / how to use the new pricing as a marketing tactic with existing deals (“the price is changing soon… lock in your rate now”).
- Decide on exact launch dates (go live date, date when you no longer honor existing quotes – usually give prospects ~30 days).
- Define the appropriate pricing KPIs to monitor(average revenue per customer, conversion rates through the funnel, customer support requests, plan mix, NDR, etc.).
- Review potential billing / invoicing limitations within existing systems. These potential limitations should have also been considered when contemplating what pricing changes to make in the first place. Then implement new SKUs / pricing models into billing (and/or CPQ as needed).
- Publish rate card and discount rules for the sales team. Conduct sales / CS training on the new pricing (talk track for the new pricing, FAQs, responding to potential objections, etc.).
- Build and iterate on new pricing page design; ideally collect usability / UX feedback from folks in the target market or lean on Sales as a beta tester.
- Update financial plans / forecasts(as needed)—pricing changes could have an impact on revenue recognition and cash flow (annual plans).
Step 4: Keep going
Pricing work doesn’t end at implementation. After launch, make sure changes are being effectively implemented and generating the desired impact.
Key workstreams in Step 4:
- Report on the appropriate pricing KPIs decided in Step 3 (average revenue per customer, conversion rates through the funnel, customer support requests, plan mix, NDR, etc.).
- Update the pricing council with post-launch retrospective emails and/or meetings (i.e. 7 days out, 14 days out, 30 days out, 60 days out, 90 days out). Initially companies should look at early signals or leading indicators. Over time there will be a richer set of data that provides a complete picture on the impact of pricing changes.
- Monitor response post-implementation and conduct follow up sales / CS training(s) as needed. It may take extra coaching and time for the new pricing to land across the team.
Pro-tip: If the pricing change was a success, let people know! That will increase the team’s confidence in pitching and defending the new pricing going forward. This data will also help inform future pricing changes. For example, if a company raised prices by 25% and conversion rates stayed the same, that’s a powerful signal that there’s additional room to raise prices in the future.