Wouldn’t it be easy to just pull from a list of B2B customers and know how they get value out of your product? While that database doesn’t exist, value is a huge component in any product’s monetization strategy. How can B2B companies not run in circles figuring this out? Software Pricing Partners Managing Partner Chris Mele shares insights into value and how a pricing strategy is important to product development.
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On Pricing Strategy Factors
Host Nikki Ahmadi started the conversation with Chris about how companies can formulate their pricing strategies and the number of factors that can go into it. What we learn is the way forward isn’t always clear.
“You are trying to craft a strategy to attract a very particular or well-defined group of customers that we’ll call your ideal customers and we’ll call that your go-to-market strategy. Often the go-to-market strategy has been formulated in the traditional marketing stack where eventually we drive down to a list of names that we want to feel a target, a list for example, for our sales team or our partner channel. In doing that, we have to pull those names, so we tend to describe those customers and things that are easily pulled from a database query: number of employees revenue, size, SIC, industry, etc. The problem with that is it doesn’t really align us very well to group customers in ways that they are easily seen in a different perspective as to how they obtain and get value.
How customers get value from your software is typically from some aspect of using the software, and herein lies the trap: There’s no database that says, Well, can I just pull all the customers that want to use my API for my new product that I’m launching? It just doesn’t work that way. It doesn’t exist in a database anywhere, to formulate the pricing strategy first. One of the major factors that goes into it is you have to get really specific about what it is that you’re trying to attract. It’s a game of nudging and incentives and packaging and structures and things that you wrap around this thing that we call a monetization strategy that’s trying to get these folks. If they’re not identified properly as an input, you’re kind of chasing your tail from the beginning.
In fact, that’s kind of what happened to us. When I had my software company, we were chasing our tails around and around. After six months, I just said, this is madness. I reached out for help because we just couldn’t figure it out. It was too complicated. It’s actually not that complicated. But if you don’t have frameworks and things to figure it out, it feels like it’s almost impossible.”
On Value-Based Pricing
There is an idea of value-based pricing, but what Chris points out is there are two definitions: one sounds like used car sales while the other is much harder to truly pull off with product sales.
“Value-based pricing is largely misunderstood. What often is interpreted by that term is, how do I get the most out of every transaction, which leads us down a bit of an ethical quandary in the opposite of the world today that demands transparency on the buying front. What that ultimately gets us down the road is well, if you and I were to buy the same thing from HubSpot, for example (and I don’t have any data on HubSpot, I’m just using that as an example), but odds are, you and I would buy the same thing at two different price points. You’d pay X, and maybe I pay half X, because it was the end of the quarter, or there’s some other reason. Maybe I just negotiated more, or maybe you negotiated more than I did. Value-based pricing rapidly becomes a conversation of, well, if I’m selling this product in version A, and then I’m going to switch from manufacturing to pharmaceuticals — which pharmaceuticals make a killing right now — they have a bigger willingness to pay, so I should charge them more. That’s not value-based pricing; that’s used car sales. …
In this parlance of value, there are a lot of challenges and problems that go along that road, most specifically is just the aspect of trust. You can’t really say that we put the customer at the center of our universe and be okay that Nikki got a 60% discount and Chris got a 90% discount for the exact same thing. That’s just not treating the customer fairly.
So on the other side of value, the other value base, this is the true definition of value-based pricing. It says, we understand our customers so well, and that includes their use and how they derive value from the use of our software and how they return that value back to their organizations for their customers. We have very sophisticated packaging capabilities to isolate customers into groups. I don’t have a million packages, but I have advanced techniques to do that. That means that I can let Chris and Nikki buy the same thing at the same price, but in aggregate across the portfolio of customers, I’m optimized to get paid fairly for my value, such that if Nikki and Chris buy the same thing, they earn the same discount. That’s really the trick. That’s a lot harder to pull off than the other definition of value-based pricing.”
On How To Keep Pricing Simple
As product offerings get more complicated, the pricing strategies might follow suit. It comes down to keeping pricing simple, easy to understand, and effective to drive sales and customer value.
“This is what software monetization goal ultimately is designed to do. It is the antithesis of an ever more complicated product. And so as the product matures, we start bringing in third-party components that have different costs: this tableau thing might be licensed by a flat fee plus user that we’re reselling, and this other component over here might be transaction-based. Still, this other one might be on some other basis. We start having more complications and broader configurations by which we begin to sense as a software company that we could get hurt. The natural reaction to that …
Monetization at its heart is how do we mathematically understand the costs of the decisions that we make to simplify things for the portfolio? How do we make the money that we want across the broad array of customers that we serve by making those decisions not to make the monetization model on par with the complexity of the product? That turns out to be very challenging work that you do need tools and modeling and other things to understand so that you can play that game better. Those that truly understand that monetization is really the intersection of pricing and selling. The more that we can make that description of how the pricing works roll off the tongue in a few short sentences is absolutely crucial to be able to do five deals in the time that the competitor does one deal. That intersection of pricing and selling, that dialogue is often missed in these kinds of projects and efforts that ultimately product teams, I would argue as product part of the product design process need to start having a purview or bringing in the sales teams into their spectrum so that they understand that the decisions that ultimately are made here are going to make the sales team’s life a little bit easier.
If I have to on sales, get past my second or third sentences … we just started unraveling deals. That is unfortunate because I’ve seen a lot of really great technology not make it as far as it should because the technology is profound. It’s potentially very game-changing, even on the humanitarian front, but its monetization model has failed ultimately to make that intersection of pricing and selling easy. It sounds easy that we could just simplify the model, but the act is to simplify the model and make the revenues that you still want to make when you simplify the model — that’s hard to do. Therefore, if we keep the model more complicated, it’s more accurate. If it’s more accurate, we don’t get hurt. But if it’s more accurate, it’s more complex and therefore, it’s harder to sell.”
About the speaker
Products That Count is the original and most influential product acceleration platform in the world. Almost 300,000 product managers globally read, watch, attend and listen to our 3,000+ free blog posts, videos, webinars and podcasts. C/VP-level product executives such as Netflix Product VP, Coinbase CPO, and Box CPO share best practices and raise their profile at our curated product salons, podcast show and mastermind circles. Leading brands such as Autodesk and Capital One join as corporate members to turn their product teams into a competitive advantage. Hyper-growth companies like Amplitude have generated 10X ROI from marketing partnerships. Learn more at productsthatcount.com
About the host
Nikki is a cloud and software product Director who works with a global team of talented engineers and architects in designing and implementing innovative solutions from product inception to production. After spending over a decade working in product engineering and management for multimillion dollar technology and start-up companies, Nikki believes what truly drives innovation is not only a commitment to technological breakthroughs but also people’s passion in improving everyday lives by building products that leave a lasting impact, disrupt the industry, and are vehicles of change, while providing the best user experience. When Nikki isn’t working on her next big product release or entrepreneurial endeavors she is spending much needed time with friends and family discussing the latest politics, or simply the meaning of life. She’s an adventurous traveler who also enjoys capturing moments through photography. Nikki also holds a B.S. in Computer Engineering , M.S. in Electrical Engineering and has a corporate innovation certificate as part of the LEAD program.
