The Long View: Pricing Decisions for sustainable growth
In my previous blog posts, I discussed the basic building blocks of a pricing structure for enterprise software licenses.
In this blog post, I would like to take a longer-term view of pricing decisions, because nearly every company will invariably have to make major changes to its pricing model over time to accommodate its growth and evolving target markets.
Most companies start out with a pricing model that is very straightforward, simple to understand, and easy to sell. As the company grows its product platform and evolves upstream to larger, more potentially profitable customers, however, this model eventually ceases to be appropriate.
Therefore, even as you’re taking the first steps to develop an enterprise pricing structure outline, you have to consider the long term consequences of your decisions and make sure measures are put in place to ensure the company’s revenue model is appropriate at each stage of the company’s evolution.
1) Building Flexibility into Your Pricing Structure
If you know the way you price a product will change in the future, then don’t hamstring yourself with a simplistic but unscalable pricing model. Think through the dimensions of growth and complexity that customer implementation may eventually grow into, and build these into your pricing model.
At first, when you are just beginning to get enterprise-level paying customers, you may have to do this on a case-by-case basis, but over time the experience tailoring these deals and their pricing structure will allow you to evolve your pricing model.
2. Decoupling Entry Level and Enterprise Solutions
Many companies start out selling a simplified, SMB-oriented business application that eventually acquires enterprise-level features and functionalities (especially requirements around security, scalability, and user management). One way to evolve the pricing model is to try to decouple the entry level and the enterprise solutions as much as possible, going as far as making your branding and marketing for them very distinct.
Even if both products might rely on the same technical platform and infrastructure, decoupling the products can help reduce the sticker shock when early clients have to adjust to new pricing models. It can also help enforce more focused marketing activities, since the target markets for the two solutions — and therefore the go-to-market strategies, as well — are very different.
3) Price Consistency with Cost Structure
This sounds like a basic thing that applies to all pricing decisions, but it is very often overlooked when a company starts making adjustment to its pricing models. Even though we do not suggest a “Cost Plus” pricing model, it is important to recognize the different types of costs that go into serving a customer beyond the standard Cost of Goods Sold and Cost of Sales data.
For example, a company might be tempted to build out an incremental, module-based pricing model to fully “utilize” or “monetize” the breadth of its platform offering. However, the long term costs of these add-ons may not be just the cost of goods sold or product development, but the costs of the incremental customer services and professional services that are required to fully utilize these add-ons, as well.
4) Establishing a Culture of Pricing Discipline and Transparency
Knowing that pricing structure will change in the future, it is important that the company gains customer trust that its pricing decisions are rational and ultimately made to ensure the company’s long-term sustainability, which is important for the customers’ success as well.
Therefore, even before any changes are contemplated, the company needs to enforce a culture of price discipline and establish a reputation for pricing transparency. Customers should be confident that the company is always consistent with its stated pricing policies, and that any change the company puts in place is the result of rational and careful considerations, rather than a last-minute or temporary measure puts in place to raise revenue or profits at the customers’ expense.
5) Collaborating with Customers to Evolve Pricing Strategy
When it comes to reconsidering its pricing structure, a company’s customers may be the best sources of information. A company should engage with a sample of customers from its target segments to propose any potential changes to its price structures early on. The customers’ feedback is important to help the company understand whether a price change will be accepted or not, and lets the company tests out communication and transition strategies to ensure that the changes do not cause a drastic backlash.
Working with customers to develop a new pricing structure will also let a company learn more about the pricing models that the customers are aware of and used to — and determine what they really care about most. At the end of the day, pricing should really reflect the value the product/service is generating for the customer and how the customers perceive this value.
In the next post in this series, I will explore the idea of value and how it can be communicated to your customers via your pricing strategy.
Image from KukuChew.com
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