For Starters #35: 3.5 Tips for Pricing

Price is Never the Problem. One of These Might Be Though.

Since announcing my pricing practice, my calendar has been filling up with conversations with B2B SaaS CEOs talking through their current pricing models and pricing struggles. Here are three takeaways from this week’s conversations:

• Pricing Must Incentivize the Unique Value Prop
  ”Price is a signal wrapped up in an incentive”. Pricing should highlight, encourage, and incentivize utilization of the products unique value proposition. The classic consumer example is Netflix. In a previous world, Netflix subscription were priced against number of DVDs rented, if you were paying for the “3 DVDs rented at a time” plan and you only had 2 rented, you had an incentive to rent just one more.
  
  In my conversations with CEOs we were always able to identify one or two tweaks to the pricing model incentivizing use of their unique differentiator a bit more. These tweaks have the added effect of further separating the product from the (perceived) competition. The inverse is also true, if pricing is disconnected from the unique value proposition, the product is indistinguishable from its competition and customers won’t have a reason to enjoy the special sauce.
  

• Precisely Know and Deliberately Accelerate Time-to-Value
  Every CEO I talked to had some kind of initial onboarding process. None of them expected customers to onboard themselves. Some framed it as a setup phase, some a pilot phase, others a training session. All of these performed the same function - deliberately accelerate time-to-value for the new customer. Some priced this phase separately and high relative to the recurring fees, others priced it indistinguishable from those fees. All of them described an intense hands-on effort with the goal of getting the new customer to directly experience the value quickly. Some of the CEOs knew precisely how long this would likely take (
  ”3 weeks”) others were less confident - suggesting closer to 12 weeks (“We’ve got work here”).
  
  This reminded me of For Starters #28, “While many Pennant customers can self-onboard and completely self-serve, it was those the Pennant team directly helped that were brought to tears.” 
  
  Getting your B2B customers to experience the value quickly is the responsibility of the service provider - not the customer. How this setup effort is factored into the pricing model depends on the product, the contract value, and the number of stakeholders. Knowing and reducing this time helps everyone.
  

• Price Against Customer Progress, Not Perfection
  It’s not unusual for a founder of any business to not really know the value of their offering out of the gate. It’s also not unusual for an artists, designer, founder, creator, to see all the glaring deficiencies of their product. Ira Glass has a classic two-minute video essay on this exact issue (embedded below). No matter the creative endeavor - seeing all the deficiencies is also one of leading causes of not shipping, this I learned from Eric Maisel’s “Mastering Creative Anxiety”.
  
  A product will always be underpriced if priced against its future perfect vision. Customers aren’t demanding this perfect vision - just a substantial improvement. They can’t and don’t see the same bugs in the product. So, price against the customer’s next best alternative, an I suspect you’ll be surprised just how much faster you can reach your product vision.

• Never Price Against Labor Costs
  I never recommend competing on price, and a new sub-bullet to that is: Don’t price against existing labor costs. I have run the numbers against replacing people multiple times and never found the resulting savings compelling. This week’s conversations confirmed it’s not just me. Unless your product eliminates the work of entire teams - that would need to be hired from scratch - the incremental savings of an hour here and there of existing employees isn’t actually worth the switching, opportunity, and setup costs. We need to find something else.

If you’re struggling with any of these pricing principles, grab a 30min time off my calendar: