The world of pricing can be overwhelming. There are a lot of moving parts including complex strategies and detailed tactics, and success requires a careful and balanced blending of all the component parts based on science, best practices, and your own research.
It can be tough to know where to start.
How, exactly, do you develop an effective pricing and packaging structure that will reliably convert and help people achieve value?
Monetization practice—the area of expertise that gets into all these questions—is a discipline that can make or break a business. Unfortunately, in far too many instances of the software business model, it’s a discipline that either gets sidelined or is completely missing.
But there are people who have made it their mission to crack the monetization code. Chris Mele is one such person. As the Managing Director of Software Pricing Partners, he has worked with hundreds of software companies and service organizations. The experience he has gained over the last thirty years makes him one of the most knowledgeable people on the topic of SaaS-based pricing.
Chris joined us on the Blindspots Podcast to talk about this topic in depth. He shared some valuable insights to help any organization get started in the right direction with this powerful practice.
The Challenge — Finding the Right Cost/Value Balance
“Most of us come from a product/market fit orientation, which is why product management has developed into such a great discipline,” Chris says. “But nobody really gets into what we would call product/market/profitability fit. That’s where we bring monetization to play, pricing and some of these other levers that you can pull to activate everything.”
The ultimate goal of monetization is to enable rich expansion sales through upsell and cross-sell capabilities. That, however, is not typically achievable until further along in a software company’s evolution.
Before you can start thinking about expansion sales, you need to ground yourself in where your company is right now. Monetization usually comes into play at the point when a company has attracted enough customers to create a substantial jump in the diversity of the customer mix. As different kinds of customers come on board, there will be cases of imbalance between the price of the software and the value it delivers. For example, if a company is only paying $1800 a year for a piece of software that supports a $20M business, there’s likely a cost/value misalignment.
A monetization practice expands the conversation beyond price point into elements like packaging, which help a company ensure a more balanced cost/value relationship. It touches on questions and topics like:
- How do you put together a good/better/best tiered offering?
- What’s the science behind that?
- Should we go with a consumption-based model?
- Do we want to gear our sales team differently for that?
- Can we use a licensing model to scale our revenues?
- What is the most effective way to configure a set of capabilities to improve conversion?
The bottom line is that you need a smarter pricing strategy than a menu of a-la-carte items. As Chris points out, “This is intellectual property, not a car. There are a million things our software can do—what’s a reasonable, rational, and transparent way of computing the price for what a customer is buying?”
Where to Start — Forging Your Own Path
Chris’ first piece of advice about monetization is to avoid the temptation to base your pricing structure on someone else’s. When you copy a pricing model, you’re also copying the inherent risk built into that model; and if you haven’t gone through the legwork to reach that result, you won’t know what that risk is.
Also, a model that works for one category or company won’t necessarily translate well when applied to a different type of business. For example:
- You might assume it’s a good idea to copy the way AWS and Amazon do pricing. They are Amazon, after all. You, however, are not Amazon. And you also don’t have the benefit of having insight into the 170 different pricing iterations that got them to where they are today.
- You might look at the way Apple prices its iPhones, but there’s a big difference between the pricing mechanics that work for B2C hardware and B2B software.
- Or, maybe Hubspot’s model of charging based on the number of contacts in a database sounds like a solid approach. It did, in fact, sound like a great idea to a number of companies when Hubspot launched that model, but—in the end—it didn’t pan out because not all contacts are created equal. Companies copied the model anyway, and only realized later that the number of contacts in a database doesn’t correlate strongly to value.
Chris sums it up, “Copying what the competition is insane.”
What Chris does recommend is to take a measured and holistic approach that’s truly tailored to your unique product, market, and user base.
📚 Acknowledge that there might be a bigger story.
Pricing is complicated, and it’s a trap to focus only on one piece of the whole picture. Step back and look at all the elements that are in play and influencing outcomes.
🤓 Convince your entire organization to recognize monetization as a serious discipline.
“Say you’re given one-fifth of a Lego set, and you’re trying to build the whole Ultraman or whatever it is that your seven-year-old really wants to build,” Chris says. “You just can’t build it if you don’t have all the pieces. You need to admit as an organization that monetization is a serious discipline. You can’t do it on your own. You’re going to need help—frameworks and methodologies.”
🏋️ Develop and maintain an ongoing internal discipline.
“The worst thing you can ever do is mess with your pricing and then never touch it again,” warns Chris. Think about it. You’re always attracting new customers, and the more customers you attract the more diverse your customer base becomes. And the more diverse your customer base becomes, the greater the variety of wants and needs you need to serve. As your audience and your product evolve, you need vibrant and flexible packaging and pricing that evolves with them.
The Power of Simplicity — Building Effective Pricing around Clarity.
“We’re engineers. We love things to be super accurate,” Chris says. “But super accurate means super complex, which means a salesperson ends up scratching their head and wondering how the hell they’re going to price everything.”
Chris defines monetization as “the art and science of the trade-offs you make to keep things simple.” This is so important to remember. It’s easy to fall down the rabbit hole and get tangled up in the endless complexity of all the possible variables, models, exceptions, and everything else that goes into the process of developing pricing and packaging.
You need to explore the possibilities, but you don’t want to end up with a “solution” that means your salespeople need to spend two hours explaining pricing (and customers still not understanding how it works). “A confused buyer never buys,” says Chris. “If you can’t describe your pricing in a few short sentences … if you get to sentence three, and things start to unravel … it’s just too much.”
Opaque and confusing pricing also makes it impossible to calculate the total cost of ownership, which then creates uncertainty and hesitation in the buyer. So, to work, pricing needs to be very simple and straightforward, otherwise it just slows everything down.
The Deal with Discounting — Avoiding an Outdated Trap
In the 90s, selling with a side flexibility on discretionary discounts was the norm. That’s no longer the case. Now—especially on the heels of COVID—transparency is the thing.
Scheduled or structured incentives are a valid and viable way to influence conversion and other KPIs, but discretionary discounts wreak havoc, and can even destroy a brand from the inside out.
“Some organizations are really many organizations in one with each sales person acting as its own business,” says Chris. “I’ve never seen more value vaporized from inside a revenue model than with discretionary discounts gone wrong.”
There are a lot of ways that this outdated tactic can drag down your revenue model:
- Issue 1: Prospects calling in and dealing with multiple reps in order to basically pit one rep against another
- Issue 2: Sophisticated enterprise procurement teams exploiting pricing inconsistency by pushing every sales cycle to the limit to make sure they’re not relinquishing any advantage
- Issue 3: Competitive intelligence revealing massive pricing inconsistencies that expose disingenuous dealings and leave some customers really angry
Avoiding these issues requires an approach that’s centered on transparency and logic. “You need to be able to describe the rationale behind your pricing,” says Chris. “It needs to be less about the song-and-dance, magic-discretionary-discount model, and more about being able to articulate the menu and how discounts are earned and which criteria need to be met to qualify for specific deals.”
This approach is especially important when you don’t have a strong ROI story to tell, and you need to rely on a bit of a trust fall. It’s also very beneficial at times (like during a pandemic) when buyers are feeling uncertain and/or overly cautious. People need clarity and certainty. They want to be able to accurately project the value, not be left shooting darts in the dark.
When buyers are in a place where their main concern is mitigating risk, that’s not the time to lower or raise your prices. That will only give the perception of instability and unreliability. Instead, try to activate those other aspects of pricing and packaging to create a way forward. For example, instead of lowering your overall price, you might offer a lighter, entry-level package for new buyers who are just wanting to get their feet wet without a big commitment.
Pricing as Differentiator — Standing Out By Looking Out For Your Customer's Best Interests
A great monetization strategy can be a powerful differentiator in a mature, commoditized market. Opportunities to use this differentiation strategy often arise when competitors fall into pricing traps.
For example, say a company that sells AI facial recognition software decides to go with a consumption-based pricing model. “So now you’re going to sell this product to a customer who will hook it up to 170,000 cameras with a mix of 24x7 footage, and some cameras may be running M/W/F and some may be running on weekends. And now that customer is supposed to figure out what they will be charged on the number of times the model runs even though they have no idea how many faces it can detect or even what’s in the guts of the software.” It gets really complicated really quickly, and leaves a lot of room for uncertainty about month-to-month expenses.
A competitor in the facial detection algorithm space could differentiate themselves very effectively by employing a monetization strategy that delivers a much simpler, more streamlined pricing and packaging model that minimizes the financial risk to the client.
Another example is the way some markets charge for overages. “Education software commonly charges based on active monthly users,” explains Chris. “In this model, the customer pays for a batch of students—say 200. If only 100 people take the course, the customer still pays for the 200 participants. However, if 250 people sign up, the customer is charged an overage fee of one-and-a-half times the standard rate for those extra 50 people. Does that sound fair?”
If your pricing helps customers mitigate risk and gives them a stronger sense of stability and confidence, it will be a very influential factor in competitive situations, especially in those commoditized markets.
The Role of Research — Uncovering Insights and Opportunities
“Targeted research is really, really important,” Chris says. “It helps you pull together the big picture so you can close the gaps in your understanding and get the whole story of what’s happening.”
Before you even get into competitive research and formal win-loss research (both of which Chris strongly recommends), you may want to start by mining internal sources. “Most software companies have an enormously rich landscape of valuable intel right at their fingertips, but they don’t see it because it’s not all in one person’s brain,” says Chris. “Instead, that intel is dispersed among a variety of people and teams who each have a piece of the puzzle. People in customer success, onboarding, partner channels, the sales team, product management—all of these people are chatting with customers and getting insight into the workflows and building the product and building the roadmap. That’s all super valuable information.”
As an example, Chris’ company was working with a customer in the HRIS space that had historically sold to SMB and mid-market clients. They had always steered clear of enterprise because they assumed it was too complicated. However, once they took a closer look at the transaction data analysis, it became clear that they were already selling to some big overseas companies. They redefined complexity so that it wasn’t based on the number of employees, but rather on the configuration of an organization’s HR department. That one research insight removed a perceived obstacle, and now that HRIS company is selling to enterprise with great success and experiencing hyper-growth.
A Winning Monetization Strategy — Starting Early and Sticking with It
While it can be a little daunting to start up a monetization practice, you’re doing your organization a great disservice by putting the venture off. In fact, failing to step up and address the risks and opportunities around your pricing and packaging in a structured, committed, and holistic way can put your growth at risk.
Investing in developing a monetization practice sooner than later is always the best bet. It will take some time to figure out the best path forward for your product, business model, and market. Ongoing research is a great place to start as you begin to map out where you are now, who else is in the picture, and how you can use pricing and packaging to give yourself a clear advantage.
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