Key questions to ask when setting up or revisiting a pricing structure
Pricing a product is one of the most important decisions a leadership team can make for a software business. Whether you are revising your pricing structure or setting it up for the first time, your choices will ultimately have a long-term impact.
But the process of settling on a pricing model can be fraught with uncertainty. Price too high, and you could alienate customers, or possibly even drive them toward a competitor’s product. Price too low, and you could sell your own product short, and lose out on an opportunity to invest in ongoing product improvements.
The ideal pricing structure sets your business up for sustainable growth and helps fund new product innovations that keep customers loyal and eager to try your new product offerings.
Recently, Volaris CEO Mark Miller hosted a fireside chat for our employees featuring a guest speaker with deep expertise in pricing – Patrick Campbell, Founder and CEO of ProfitWell.
Patrick Campbell, Founder and CEO of ProfitWell participated in a fireside chat with Mark Miller, CEO of Volaris Group
ProfitWell helps businesses tackle the challenge of researching pricing. Their research is based on a belief that businesses should put dedicated thought toward pricing. ProfitWell’s belief is also shared by Volaris, as a company that holds a wealth of data on pricing, gleaned from acquiring and overseeing the management of 140+ software companies. As a benefit of being part of Volaris, our member companies are regularly invited to best practice discussions organized by the strategy team.
“Pricing sits at the intersection of uncomfortable and important. Whenever you have something at that intersection—like religion or politics—most people just avoid talking about it.”
–Patrick Campbell, Founder and CEO, ProfitWell
Key Questions Every Business Should Ask About Pricing
The first hurdle businesses must overcome is the fear or reluctance to revisit pricing, which can be a sensitive topic. It’s important for businesses to accept that optimizing pricing is just like any other aspect of fine-tuning a business, and there are many ways for businesses to influence the value used to justify fair pricing.
Below, we go through fundamental questions to help businesses get started with examining their pricing models.
1. Does your company dedicate resources toward the study of pricing?
Campbell recommends building a pricing committee within the company. Ideally, the people chairing the committee should have the closest knowledge of the customer. In a small company, this person may well be the CEO. Campbell says sales and finance people may not be the most ideal people to spearhead the committee.
Once your company has set up a pricing committee, it will be easier to explore the finer points of optimizing pricing, such as terms and contract lengths, localized pricing, licensing models (including SaaS), discounting models, or packaging product features differently, such as through add-ons which are sold to complement the core product.
2. What kind of conversations are you having with your customers?
B2B software companies shouldn’t underestimate the value of strong customer relationships. At Volaris, we encourage our businesses to engage in conversations with customers about how they can best provide value.
A best practice for software providers is to see customers as partners in the product innovation process, Miller mentioned. This practice of customer engagement is key to understanding how value is created, and to align a revenue model with a customer’s buying process.
Campbell emphasizes that having recent customer research is key to success, and the best starting point is to have an up-to-date profile of target customers and buyers.
“Growth rates at companies that do the most customer research are usually higher than companies that do none.”
–Patrick Campbell, Founder and CEO, ProfitWell
3. What insights do you have into the market?
A business that collects its own pricing data will gain the most helpful insights for its specific market. Competitor research may also be helpful, especially in highly saturated markets where it can be more likely that competitors have done their research.
However, in less developed industries and markets, businesses are warned against overreliance on competitor data when making pricing decisions. Campbell cautions that following the competitor can be a flawed strategy because competitors can’t always be trusted to do the best research.
4. What added value can you offer to your customers?
Consider offering upgrades and services that will offer new value to your customers, while also driving additional revenue for your business.
In the case of SaaS pricing models, service is key. This is because since SaaS is typically licensed as a subscription, businesses risk customer churn at each renewal period. For this reason, service and support are even more critical than with traditional software. Many SaaS products build support and regular upgrades into the standard licensing fee. Consider whether your customers would find value in additional support and maintenance, and if they would be receptive to paying additional fees to sustain that part of your service offering.
Finally, Campbell says that businesses can consider developing a value metric that measures a core functionality of feature that customers use. Pricing can scale with usage – for example, by the number of transactions completed.
“Customers don’t care about your costs, they care about their own costs. Even if they’re understanding about inflation, they’ll ask, “What did you do for me to raise my price?”
-Patrick Campbell, Founder & CEO, ProfitWell
Pricing in an Inflationary Environment
In an environment of high inflation where businesses are spending more on operating costs, Campbell challenges companies to build value in a software product that outpaces even high rates of inflation.
“Inflation-based pricing increases means that you as a company have not done your job,” he asserts. He advises that software companies should strive to make all price increases based on added value that they are providing for customers, as opposed to justifying a price increase because of inflation.