More and more companies are moving to redesign their pricing models. This surge in pricing model innovation is being driven by many converging trends.
- Pressure from customers to better align value and price
- Innovations that deliver value in new ways and need to be priced in new ways
- Business and growth model change, especially the desire to support product-led growth
- Better access to data that provides new insights and enables new pricing models
- Realization that frozen accidents are not a good way to price
Designing a pricing model is a difficult challenge. Competing pricing goals need to be prioritized and aligned. A great deal of data needs to be collected, organized, and analyzed. Creative ways to connect value and price must be developed. Dependencies (often hidden deep in CRM and financial systems) need to be called out). This is complex work. High stakes. High value. High impact.
But designing the pricing model is only the beginning of the journey. What comes next is critical.
In my pricing career, I am committed to building a community around value, pricing, customer value management, and the skills needed to execute. So, when I encounter an important issue, one of the first things I do is to reach out to communities in my network and invite people to share insights. I did this recently with a simple question (that does not have a simple answer).
What is the most difficult thing about introducing a new pricing model?
This little LinkedIn poll, which was posted to the Professional Pricing Society’s LinkedIn group, got a good response and provoked some debate. There was not one dominant answer, but the clear winner was “alignment.” Some people felt that getting leadership alignment was the biggest challenge (31%) while others felt that getting sales buy-in was the biggest challenge (42%). Together these accounted for 73%.
The Strategic Choice Cascade for Pricing is the path to alignment
In my organization, we use Roger Martin’s Strategic Choice Cascade (also known as Play to Win Choices) to organize conversations around alignment and choices.
We have even taken the trouble to create a specialized version of the Strategic Choice Cascade for Pricing (you can download a copy here).
The leadership alignment on the new pricing model comes at the “Winning Aspirations” level and the “Where to Play” level. Everyone at the company needs to be aligned on these for the new pricing model to succeed.
Once one has alignment on the “Winning Aspirations” and “Where to Play” choices you can begin working on your “How to Win” choices. This is where sales comes in. Marketing, sales and, customer success each play critical roles in the value cycle and their actions have to support each other.
It is often relatively easy to bring marketing and customer success into the new pricing model. The friction generally comes with sales. Why is this?
Based on many engagements and conversations with people at all levels in sales teams, I think there are three key reasons for resistance.
- Salespeople feel the new model does not address their concerns and will just lead to new objections. (Sales sometimes refers to pricing as the “revenue prevention function.”)
- Salespeople are unsure of how the new model will impact their compensation.
(Salespeople are “coin operated.”)
- Salespeople are not prepared or trained to sell the value of the solution.
(Value-based selling requires new skills and a lot of industry knowledge to succeed.)
All three of these doubts must be addressed for the new pricing model to succeed.
The best way to address objection 1 is to make sure that members of the sales leadership are part of the team designing the new pricing model and that insights from field sales are used in the design process.
Compensation conversations are often challenging and complex. Salespeople should be assured that they can make more money under the new pricing model and shown how this can happen. I have even seen some companies go so far as promising that commissions under the new model will match or exceed the previous six months. (I’m not advocating that; one has to be careful with such promises.)
Objection 3 is at the “Capabilities” level of the Strategic Choice Cascade. Note that little feedback loop going back up from “Capabilities” to “How to Win.” This means that “How to Win” choices are constrained by the organization’s current and potential capabilities. A best practice is to include an assessment of the organization’s capabilities as part of the initial research. (This seldom happens in my experience, though it is something I advocate.)
Building the skills needed to deliver on the new pricing model
A new pricing model often requires new capabilities. This is true for all phases in the value cycle as well as for the people responsible for delivering them. Depending on the growth model (Sales-Led Growth, Product-Led Growth, Service-Led Growth, Relationship-Led Growth, Community-Led Growth) new skills might be needed for several different functions.
- Product needs to be able to design and deliver a platform that delivers on the value creation promises and that collects the data needed for the value and pricing models. (In value-based pricing, there are formal value and pricing models that are connected at the hip.)
- Marketing needs to communicate the value messages that connect to the value drivers and inform the pricing model.
- Sales needs to be able to conduct value conversations, communicate the value, and connect value to price. This often requires sales to deepen its knowledge of its customers and current industry trends.
- Customer success has to make sure that the value promised by marketing and sales is actually delivered and that the value delivery is documented.
- Finance has to be able to invoice and collect on the new pricing model and manage revenue recognition issues (revenue recognition can change when the pricing model changes).
This is in addition to all the work that must be done to reconfigure the invoicing and accounting systems, the CRM, and other tools that support marketing and sales.
Migrating the existing customer base to the new pricing model
I was a bit disappointed that “migrating the existing customer base” was not called out by more people. It was only chosen by 18% of respondents. In fact, this is one of the biggest challenges of introducing a new pricing model. And getting all customers onto one pricing model is often an explicit goal of the new pricing model.
WHY CAN INTRODUCING A NEW PRICING MODEL BE DIFFICULT?
Migrating the existing customer base can be a complex challenge.
- Some customers will see a price increase, some will see a price decrease.
- Connecting price to value can surface customers that are not actually getting value.
- Customers may already be on different pricing model with different contract terms, making the migration complex and time-consuming.
In other words, not all customers are the same and they will respond in different ways to the price increase.
One way to think about this is to segment the existing customer based on Value to Customer (V2C), the value provided to the customer, and by Lifetime Customer Value (LTV). When you do this, you often find there are some customers that have a low V2C and a low LTV. Perhaps these customers should churn. It is alright to see some churn when you introduce a new pricing model.
Given these challenges, why do it? Some say ‘let sleeping dogs lie.’ Resist this temptation.
Getting all customers onto the same pricing model will pay long-term benefits:
- Good pricing is transparent and consistent – having customers on multiple pricing models is neither.
- Pricing needs to evolve – having all customers on the same pricing model makes it easier to collect and compare data and use this to evolve the pricing model. Having many different pricing models generates a lot of noise.
- Consistent pricing models reduce costs – managing exceptions is an expensive distraction. If speed of execution is important to your business, squeeze out pricing exceptions.
Understanding and supporting the implementation of a new pricing model is every bit as important as designing a compelling pricing model.