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Marcos Rivera on optimizing pricing & packaging, monetizing new products, and experimentation
Product State Q&A
EC: What are the biggest pitfalls in pricing and packaging optimization initiatives?
MR: Most pricing and packaging initiatives start out of urgency, with little data and a narrow focus. Each change in pricing is a window into the value exchange equation with your customers. I see the following three pitfalls as the most common:
a) Segmenting by size only:
Not addressing the customer segmentation is a big miss. Most companies segment by size, but good packaging and pricing rests on how well you know your customers and offer them exactly what they need — no more and no less. And do so in a way that meets them where they are in their journey, but provides a path to provide more value as they grow.
For this reason, it is critical to revisit your segmentation assumptions and look for ways to group your customer base by something related to how much value they need, such as business maturity or operational complexity.
b) One-dimensional packaging:
Packaging is a delicate mix of art and science, and most companies should not rush to a tiered good, better, best model like the others. It's important to choose a packaging structure that fits with your growth strategy and the spectrum of customers you are trying to serve.
Serving a wide audience with varying needs? Then, a modular packaging model, such as core + more, will help serve a wide audience — while a more narrow focus is suitable for either use case-based or a good, better, best tiering.
In the end, the structure determines how much value to offer different customers, so the more narrow the spectrum, the more simple the packaging.
c) Charging by seats only:
The pricing metrics determine how much money the customers pay for the value they receive from the product, and the mechanics should allow you to capture more value as the customer gains more value. It's the good mechanics behind any good pricing model.
Many companies, in a short-sighted effort to keep the billing simple, will opt for a per-seat pricing metric that may not align with value — or, even worse, be at odds with value. Avoid this pitfall by breaking down the customer journey, from inputs to outputs, and aligning your pricing model with how the customers measure value. The more they get, the more you earn.
EC: What are the key questions when considering how much to charge for a new product?
MR: Nailing down the right pricing metric and price points is elusive for most companies. To make it clearer on what to charge for and how much to charge, ask the following questions:
Is my pricing metric easy to track and invoice? (Does it have a unique instance that is irrefutable?)
Is the pricing metric easy to understand and perceived as fair by our customers? (Would they feel good about paying for it?)
What value ratio does the customer need to buy? (Value ratios is the exchange rate for your type of value; average is 10X, but can range from 5X to 20X)
What price will support my go-to-market motion and economics? (Selling a $1000 credit card purchase is much different than a $100K deal with a 6-month sales cycle)
What price will position me to win against the most common alternatives? (Typically, you want to price between your closest competitor and the cost of building it in-house or doing it themselves)
EC: At what point should a SaaS business build a team to focus on monetization experimentation?
MR: Pricing is a marathon, not a sprint. And most start their pricing journey too late. A good rule of thumb is to start formalizing your pricing and packaging as soon as you find product-market fit.
For companies under $5M ARR, the founder is typically heavily involved with pricing decisions. Once you start to scale past $5M up to $30M, it's best to assign pricing to a functional leader like Product Management or Marketing — and make it part of their success criteria.
For companies with multiple products and scaling past $30M to $100M, it's best to build a team of a dedicated pricing leader and 1-2 analysts to capture value across the growing portfolio and customer base.
“Each change in pricing is a window into the value exchange equation with your customers.”
- Marcos Rivera, Pricing I/O
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