This week, Phuong and I are discussing pricing strategies. Pricing plays a critical role in various aspects of your business. You can either position yourself as the lowest or highest price player in the market, while being in the middle can cause confusion for customers.
Deciding whether you want a high or low volume business is essential. Choose a pricing model that aligns with your value proposition, such as monthly, annual, metered pricing, or revenue share. Ensure your pricing aligns with your overall business strategy, focusing on either high price and high quality or low price and high volume, but avoid mixing the two for the best results.
MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of interplay. I'm on a mission to help entrepreneurs advance society. And this podcast is definitively part of that effort. All right. Today we've got Phuong back on for a segment around pricing strategy. Now she's talked about pricing before, but today we get a little bit overarched.
Overarching business concept how you're positioning in the market and the overarching strategy. It's very important segment I think this is actually a topic that most people do not pay enough attention to they dismiss it as a given And then don't follow it, recommend people take it to heart.
miss Phuong. How are you?
Phuong: Hi mark I'm good. How are
MPD: you? I'm doing pretty good. Yeah, i've been traveling a lot, but Excited about slowing down for next week. I got a couple more trips this month I'm hitting palm beach and then dubai.
Oh nice A
Phuong: Lot of movement around there's some good weather for you.
MPD: Yeah, palm beach is easy. It's the same time zone It's the dubai stuff that gets you This yeah, they're saying, just time zones don't work for me what they used to just not. It's a thing. What about you? What you got going?
Phuong: Nothing. I'm just got some hollow, some Thanksgiving travel going home to see my parents in Saint Louis.
And just really, there's a just really going hard at it until the holidays. I feel like that's a big stretch from a work perspective. And you're nursing a year end. And I'm nursing my dog who got spayed today, which I didn't really know what that meant, but I googled it and it's horrifying.
MPD: It's it's a full historectomy, right?
Phuong: Yeah, they take out everything, which doesn't sound like that when you say spay.
MPD: They branded it. Does it have like bad hormonal impact? Side effects? I don't think
Phuong: Yeah, I don't think, I think like for males, there might be like... Yeah. Yes, I think for males, like it makes them maybe a little bit less aggressive.
I have a female dog, so I don't think that there's anything behavioral. I hope not. Cause she's the best dog.
MPD: I know you love your dog. Okay let's jump into it. What are we learning today?
Phuong: So today I wanted to revisit a topic that I've talked about before the, on the podcast, but I wanted to take a different angle on it.
And that's pricing strategies. The last time we talked about this I talked at a very high level about pricing, regardless of what kind of product or distribution channel you have, but in reality, we know that pricing in B2B versus B2C companies is very different and even more so in B2B SaaS companies, which we'll focus on today.
Now there's no magic formula in creating the strategy. It's very much an art and you've got to consider a lot of factors. It can get really confusing and really overwhelming quickly. So I'm going to try to simplify some of it for you guys. Now, why is pricing so important that I'm talking about it again after I've already covered it?
It's because it impacts so many things. Obviously, it impacts profitability, so how much you charge directly impacts how much you make. But it also impacts your ideal customer profile, your product, how it's built, its value proposition your sales and marketing model, so how big of a sales team you have and the marketing budget you have.
Also affects your win rates and new accounts and your ability to convert customers and it even affects your churn. So where do you start? I think the best starting point is to decide if you're going to be the lowest price player on the market or the highest price player on the market. I generally think these are the two options because it's easiest to differentiate yourself on these ends.
People immediately get it. If you're somewhere in the middle. Customers don't know what to do with you. You can land somewhere in between, but there's got to be a really good reason. At the ends of the spectrum, there's some major implications depending on where you choose to be. So if you're the cheapest guy, you're not making that much for a customer.
So you have to be high volume. You need a lot of customers. And if you're cheapest, you also don't have a lot of margin, so you're not making that much per deal and you probably can't hire a big sales force to sell your product. So your product pretty much has to sell itself. You need to have product led growth versus sales led growth.
Also, if you're cheapest, keep in mind that you don't have a lot of margin to spend on marketing, especially if you're in a competitive market. So just factors to consider if you're the most expensive option. You don't need as many deals to make money, so you can do a lower volume. But you have to differentiate yourself as a premium brand with a premium product.
Your value to your customer has to be higher because each customer has a higher value to you. And you need to have, as you scale, a sizable, dedicated sales team. Because converting accounts is just going to be a lot harder. But because you're making more per deal, you can afford to spend more on sales and marketing to acquire each customer.
Start by asking yourself, what kind of business am I building? Do I want to be a high volume business or a low volume business? There's no right or wrong answer. But once you answer that question, a lot's going to fall into place. And then you've got to think about the type of pricing model you're going to have.
Right? There are a number of them. Most companies fall into monthly pricing. Within this, you can have some layers based on the size and maturity of the customer. I recommend having 3 layers and keep it simple. Make it super simple. Don't nickel and dime for low value features.
Just make it really simple. Then you can do annual. This is where the next biggest chunk of SAS companies land. And there are different ways to structure this that could be an annual amount based off of a discount off of the monthly or you can sign a 1 year contract, but pay monthly, but it's all based off of an annual commitment.
And then some other less common options are metered pricing, which is based on monthly usage pay as you go or revenue share. So this is like the Shopify. Model where you can do like a monthly fee, and then you get a percent of revenues, but regardless, choose the right model that aligns with your value proposition, your cost structure, and your customer lifetime value.
And then, regardless of where you land, here are some helpful benchmarks to keep in mind. The 1st is if you have a sales led model, that is, if you have a higher price product, and you're paying for a sales team to 1 high value customers. A general benchmark is that each deal should be about $25,000 to make that economics work, remember, you have to pay for the marketing to generate the lead, the salesperson, the time of a longer sales cycle, and the math doesn't end up working unless you're making about $25,000 lifetime value of that customer.
Second benchmark is 10 times value. This is the idea that you should be delivering 10 times. The cost of your product and value to your customer, if you're able to say this and be able to back it up, that's a really compelling sales pitch. And then how do you calculate that? Let's say, for example, you have an analytics technology that makes pulling and extracting value from data so easy that you can confidently say it saves companies the need for data analysts.
And let's say a good data analyst makes about 100, 000 dollars a year. You can price your product at 10, 000 dollars annually and still be delivering tons of value to your customers. Then the last benchmark is 5%. And this is in reference to pushing your higher price points. Keep testing higher pricing.
Once you think you found the right price point, keep testing 5 percent increments of higher price points. And if you don't get... Get resistance. That's your new price point and keep doing that until you get about 20 percent of your customers pushing back. And that's generally the right level of price to price resistance.
So no magic bullet here, right? You really have to figure out a lot of stuff on your own, but just some guiding principles that hopefully can help simplify things for you. This
MPD: is so powerful and I just wanted to double click on one thing you said that I just think is the most overarching concept is folks should not be thinking about price.
In a vacuum price should be considered in a framework of overall strategy for the firm, and usually there's a whole bunch of things where you need to put them in line. So there's an alignment to the strategy. If you go higher price, higher margin, you need to have the higher service. Typically, the higher value proposition, there's low end place where people get in trouble is when they mix the two, they try to be the higher value proposition, low price or vice versa because it doesn't work out.
thAt's a dangerous move. So the key is to find alignment and the pricing and the overarching strategy. And so this is a very powerful concept. We generally most of the things we do in underplay, we, we have more fun focusing on higher price, higher quality, which I think is more inspiring work generally.
So that's my favorite quadrant to be in because you get to do really high quality work and invest in wowing, but it's, it has to be very intentional. It's when people mix and match that they get in trouble.
Phuong: Yeah. The math's got to work out, right? So if you're a low volume, low high price, then you have a lot of room to work with.
If you're high volume, low price, then, you don't really have that much. Yeah, I tried to be unbiased in, what quadrant you should be in in the way that I explained it. But, yeah, I think, having Transcribed That the higher price points and being able to service your customer with this kick ass product and amazing customer service is just a lot more fun.
MPD: It's more fun. And they're both can be great business strategies. Just more inspiring if you're trying to build a cool product. Thank you, Phuong. Appreciate you as always.
All right. Thank you. Awesome to have Phuong on as always. There's a really cool library. Of business wisdom that she's building. If you're interested, you can find more of her topics on all the various media sites that we produce on. But there's a Phuong wisdom library that I think is becoming a startup playbook.
So hopefully that's helpful to you. Catch you guys soon.