Sales – Fuel, A McKinsey Company https://get.fuelbymckinsey.com Sun, 01 Dec 2019 17:52:13 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.2 Software Pricing Pitfall #2: Settling For a Suboptimal Price Metric – Infographic https://get.fuelbymckinsey.com/article/pricing-pitfall-2-settling-for-a-suboptimal-price-metric-infographic/ https://get.fuelbymckinsey.com/article/pricing-pitfall-2-settling-for-a-suboptimal-price-metric-infographic/#respond Fri, 04 Oct 2019 19:09:23 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Price metrics are not a new concept. Defined simply as a scalable quantity to which one ties the price of a sale, they have been around in one form or another for as long as products have been sold.

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So what works for your team? Choose a metric that works. There are 5 Broad categories of price metrics. 

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Software Pricing Pitfall #2: Settling For a Suboptimal Price Metric https://get.fuelbymckinsey.com/article/pricing-pitfall-2-settling-for-a-suboptimal-price-metric/ https://get.fuelbymckinsey.com/article/pricing-pitfall-2-settling-for-a-suboptimal-price-metric/#respond Wed, 04 Sep 2019 23:09:58 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Price metrics are not a new concept. Defined simply as a scalable quantity to which one ties the price of a sale, they have been around in one form or another for as long as products have been sold.

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Boom Times for Pricing Metrics 

Price metrics are not a new concept. Defined simply as a scalable quantity to which one ties the price of a sale, they have been around in one form or another for as long as products have been sold. A price metric’s primary role is to allow a company to differentiate – to adjust prices to meet an individual customer’s (or group of customers’) willingness to pay. 

What is new is the breadth of price metrics that is now available for tech companies. 

In some cases, price metrics can almost transcend the field of pricing and become a key competitive differentiator. Several large markets have been disrupted by companies employing radical new price metrics. However, such creativity in price metrics is still more exception than the rule, and many companies succumb to the pitfall of not thinking beyond the status quo.

The options are so numerous we tend to think of five broad categories of price metrics rather than individual metrics:  

Seat based – metrics closely related to the number of people using the product
Usage-based – metrics related to how much or how frequently the product is used
Hardware-based – metrics based on the number of connected devices, or the amount of system resources required
Company business metrics – metrics based on the scale or performance of the customer (e.g., revenue, number of employees)
Success-based – metrics that align with the output or impact driven by the product (e.g., reduction in costs)

Startups Stuck in Their Seats

More than 20 years after the advent of the mainstream internet, pricing a product “per seat” – the metric closest to the license-based, legacy desktop software model – is still very common. In fact, the proportion of SaaS companies that use a variant of “number of seats” as their primary metric is 39%, making it the most common price metric category – according to a 2018 SaaS Survey by KeyBanc. 

While seat-based metrics can undoubtedly be the right choice for a subset of companies, it would be surprising if seats was the ideal metric for as many as 39% of SaaS companies. We frequently encounter startups that feel their seat-based models are not achieving their objectives. For many businesses, seats as metric fails to satisfy key price metric criteria:

  • Not linked to value – Consider an analytical product used by 100 users at an enterprise company, but with only 3 power users accounting for 95% of the usage. Beyond the initial 3 licenses, the value to the company would not increase consistently as more users are added.
  • Not scalable – Consider a tool aimed at a marketing team, which has remained the same size for 10 years, and shows no sign of changing. As the number of users is unlikely to increase, charging per user will likely never raise the revenue per customer, and so it is not a scalable metric for growth
  • Not auditable – How many times have people shared licenses (or credentials) with their colleagues for an online database? It can often be challenging to know how many users are truly using the product, and to set the price appropriately.

What seat-based models do have, however, is a higher degree of familiarity. This makes them easy to explain and implement, and therefore highly acceptable to the customer. So the very ubiquity of seats makes them the easy choice for companies without pricing expertise, which is often true of startups. In this way the selection is self-propagating. More seat models emerge, and seats beget seats.

Choose Value-Linked Metrics…

Still, does it really harm companies to price based on a metric that is not the best for their customers? The answer is yes. And in a number of ways. Most importantly, choosing the wrong price metric inhibits the ability to price differentiate. For example, if a company is selling some form of capacity when the buyer doesn’t value that metric, one of two things may happen:

  • Buyers will purchase fewer capacity units than intended, thereby pushing the purchase price down. 
  • Buyers will ask forthe needed amount of capacity for a lower purchase price, since they don’t want to pay the list price for the last few seats.

Either way, the buyer ultimately pays less than it is actually willing to pay. This was true of an online reference tool startup that priced its product based on concurrent user licenses (CULs) for their various content sets,  the expectation being that large Enterprises would purchase up to 8 CULs. Company research found that these enterprise clients were actually willing to pay the price levels that corresponded to eight CULs, and yet they purchased fewer than two CULs on average. Because the CUL metric was not value-based it did not work as a price differentiator, and customers were able to purchase a workable solution at a price significantly below their willingness-to-pay.  The vendor was missing out on signicant revenue it could have captured with a more value-based metric.

This can be avoided (or greatly mitigated) if pricing is based on a metric that is more strongly linked to the value that customers receive from the product. For example, a product that increases sales-win-rates might consider pricing on the customer’s baseline new business revenue, since the value realized will be a product of that revenue. A search engine might charge by the number of searches. An analytical tool might charge by the amount of analytical horsepower provided. Smart companies understand how they add value to the customers and align their commercial models.

Choosing the wrong price metric can also negatively affect the value proposition and sales confidence. A price metric, intentional or not, communicates to customers how a business adds value to them. As a result, choosing an inappropriate metric means misrepresenting the source of value creation, or at least not presenting it in the best possible light. This can complicate sales messaging and detract from the sales team’s confidence, ultimately leading to lower sales volumes and more frequent and dramatic discounting. 

… With Sufficient Predictability

One caution when choosing a highly value-based metric – ensure that it meets predictability requirements.  Usage-based metrics (e.g. API calls, # downloads, # site visits etc.), for example, are frequently seen as value-based, but they can be hard to estimate over time.  Even if the customer agrees that additional usage is value-linked and worth paying for in principle, tieing the price to an unpredictable metric results in unpredictable pricing. Budgeting is frequently important to customers, especially large enterprises, and uncertainty here can inhibit sales velocity. 

Predictability can be enhanced by either buffering against fluctuations – providing more usage for the same price, fixing price within a “band” of usage, and/or resetting price based on usage less frequently (e.g. annual price resets as opposed to charging on a monthly meter) – but all of these methods share the downside of reduced future upsell potential.  An unpredictable metric can still be the right choice overall, but should be chosen with visibility of these potential consequences, and with an execution strategy to mitigate them.

Unlock Significant Value

The impact of changing to value-aligned pricing metric is frequently immediate and dramatic. Consider the following examples from the public eye, as well as our own experience.

  • A cloud-based content management provider with rapidly declining growth implemented a new pricing metric which improved correlation with willingness-to-pay by over 10X, and resulted in an almost immediate 10% revenue increase.  
  • Through switching from seats to “active users,” an analytics provider managed to reduce churn by 3 percentage points and saw a large improvement in sales rep satisfaction.  
  • Mention, a social media monitoring tool, raised their average revenue per account by 269% by switching from seats to the number of “alerts” that an organization configures.  
  • An appliance-based network software vendor realized an 8 percentage point  YoY revenue  growth rate increase through switching from a traditional hardware-linked metric to a measure of network connection speed
  • Even Google is an example here, since a big part of its success came from changing the standard price metric for online advertising from cost-per-impression to cost-per-click.

How to Pick the Right Metrics 

The way to find a price metric that could deliver the kinds of results mentioned above is through a combination of brainstorming and evaluation:

Brainstorm possible metrics
Use the categories defined within this article and attempt to think of several metric options that would fit in each. Look to companies in adjacent industries for inspiration. Consider how the company creates value for customers (i.e., does value increase per user?  Per session? Per gigabyte?) and look for metrics that align with the amount of value created.

Evaluate the shortlist
Teams should evaluate the shortlist of metrics against the 5 key criteria for a price metric:

  1. Link to Value – A great price metric aligns with the amount of perceived value that customers receive from the product. If customers agree that as the metric increases, they get more value from the product, they will not question that the metric is a sensible basis for pricing.
  2. Scalability – Ideally, a price metric provides a pathway to future growth.  If a metric is scalable, it is expected to grow following the initial sale, and so tying it to growth will help increase revenue per customer over time.
  3. Predictability – Being able to budget is important to customers, so a metric that does not allow them to predict what their prices will be in the short- and long-terms can be a barrier to adoption.
  4. Auditability – To prevent abuse of the system and/or ambiguity around prices, a metric should be able to be objectively measured, without relying primarily on the customer to provide the relevant information.  
  5. Acceptability – Finally, for the metric to be successful it must be acceptable to the customer. Even if the metric satisfies the above four criteria, if customers don’t feel it is fair to tie this metric to price, the customers may reject the pricing model, hampering initial sales velocity.

Rigor and confidence can be added to this step by launching customer research to achieve an ‘outside-in’ perspective of the metrics.

Select the best overall metric(s)
Given a business’ objectives and strategies, some of the criteria defined above will be more important than others. Startups should agree on which criteria are most important and create a weighted performance score for each metric.  The metrics with the top overall scores will be your best candidates.

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It is worth mentioning that, having picked your preferred metric, you still have work to do in (a) deciding how price scales with that metric, and (b) verifying through careful revenue modeling that converting to the new metric will be revenue positive. But aligning on an optimal metric is undoubtedly a hugely important step that is trodden too infrequently.

Choosing a price metric doesn’t have to be difficult or complicated. But for the reasons we have discussed, startups shouldn’t just make the easy or default choice. By being thoughtful and taking these few simple steps, startups can choose a price metric that can be a critical lever to accelerate growth.

In our next article in this series, we will be exploring the startup Pricing Pitfall #3: off-target value communication.

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Pricing Pitfalls: The Four Most Common Packaging Mistakes https://get.fuelbymckinsey.com/article/pricing-pitfalls-the-four-most-common-packaging-mistakes/ https://get.fuelbymckinsey.com/article/pricing-pitfalls-the-four-most-common-packaging-mistakes/#respond Mon, 03 Dec 2018 20:00:51 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ The Rise of Tiered Packaging Several years ago, much of the guidance with packaging was just “make sure you create packages!” This sounds almost redundant, but it spoke to the fact that we frequently observed companies using the monolithic “one size fits all” approach. The implicit message to the customer is: This is our product. Take […]

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The Rise of Tiered Packaging

Several years ago, much of the guidance with packaging was just “make sure you create packages!” This sounds almost redundant, but it spoke to the fact that we frequently observed companies using the monolithic “one size fits all” approach. The implicit message to the customer is: This is our product. Take it or leave it.

Thankfully, we see this far less frequently today, particularly with SaaS companies. Most startups we encounter have adopted a “Good, Better, Best” (GBB) approach. This means creating several tiers of packages which vary in terms the price level and the amount or quality of items included (features, services, usage levels, etc.).

The Many Benefits of Good, Better, Best

Adopting the GBB approach has many benefits. Since customers typically dislike “take it or leave it” offers for anything other than very simple products, providing choices can make a customer more likely to buy. If nothing else, moving from a single offering to a GBB approach will likely increase velocity of sales.

However, GBB can also offer a highly-effective method of price differentiation. In swapping one price level for three (usually), you can accomplish two things. First, you make your product viable for customers at the lower end, who would not have purchased it previously (therefore adding sales volume). Second, you create a higher price point to monetize customers who would value a premium offering. All of this equates to more value capture at the initial sale. These packages can then even be used to grow your base business through upselling customers from basic to premium packages. It’s encouraging that we’re seeing more innovative GBB models in the startup community.

There are many other approaches to packaging. Use-case and buying center-based strategies can be effective for more mature companies selling to enterprises. But GBB is simple and readily accepted by customers. A GBB model – when well designed – is a highly-effective packaging strategy.

The Four Frequent Flaws in GBB Design

The key words in the above sentence are “when well designed.” The reality is that while many startups now realize the benefits of GBB, few have taken steps to create a robust approach. We commonly hear “we didn’t put a lot of thought into our packages.” We estimate that this oversight translates to a loss of 5-15% percentage points of revenue growth a year.

In order for a GBB system to work effectively for both price differentiation and sales velocity, GBB packages must be designed with well-defined customer segments. Each package should provide the target segment with a product it will be satisfied with, at a price it is willing to pay.

Customers vote with their wallets. The clearest indicators your packaging strategy is flawed will be the buying choices your customers make. If the distribution of package purchases does not match your expectations or desires (e.g. 75% of customers purchasing “good,” when you forecasted 40%) or your sales reps are consistently unable to upsell customers to higher-level tiers, you can be confident your issues lie within your packaging strategy.

The specific packaging issues we see most frequently are outlined below:

(P Axis = Price; V Axis = Value)
  • Too Much in the Base – The base package is just too good. The vast majority of customers are happy with what is included in the base package, and they don’t value the extra offerings in the higher-level packages enough to justify an upgrade. The majority of the business then shifts to the entry price point, which drops revenues unnecessarily.
  • Decoy Choices – A company has followed the conventional wisdom that the goal of GBB is to draw customers to the middle version. Now the good version is too light. And the best version is so incremental in value to the better version, that the middle option is the only realistic choice. In this situation, the other packages serve only to make the middle option look better. You will get the sales velocity benefit of packaging, but nothing more.
  • Unrealistic Comparisons – The difference in price of the packages so large that any differences in value between packages are immaterial. It’s easy to imagine a customer choosing between packages costing $200, $500, or $750 a month. But can you imagine them truly considering options that cost $200, $2,000, and $20,000? When this is the case, the customer doesn’t really have a genuine choice anymore. They will feel forced into the one option designed for them. Now the benefits of having a choice-based packaging system erode.
  • Too Many Sources of Difference – Tiers do not work when the packages differ across too many attributes, particularly attributes that cut across different and unrelated use cases. It is likely that a customer will attach value to some of the sources of package differentiation, but not to all of them. This can result in the customer objecting to paying the premium for the higher-level package, since they feel that much of that premium is for items they don’t need (this effect is particularly marked when the price difference between packages is also high).

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Best Practices for Designing the Good, Better and Best Tiers

The solutions to poorly-tiered packaging are not complicated, but require a solid understanding of your customer segments, needs, and willingness-to-pay. All of this can be obtained through robust customer and prospect research.

  • Align on a suitable base – Developing a base (“good”) package, with the necessary minimumfeatures, is a critical step in the design journey. Price differentiation is about giving your customers something that they are satisfied with at a price they are willing to pay. The segment of your customers with the lowest willingness-to-pay should be satisfied with the base package. Thus, the base package should be the lowest spec package you can produce while preserving this satisfaction. All items which are “table stakes” should be included, along with any low-value items that would be a distraction while selling.
  • Tier by only the key value drivers – The next step is to determine what are the few key value drivers that truly drive value perception to the segments with higher willingness-to-pay. These value differentiators can be comprised of multiple features, but the breadth of overall functionalities or capabilities that they enable should be limited. Less is more in this case, since this will allow sales and marketing to build a clear value story around the higher tier packages and will make the upsell case more compelling.
  • Build in up-sell triggers – You can further strengthen the upsell pathway by incorporating thresholds into your package design. Placing caps on capacity or usage by tiers can drive upsell to the next tier when the customer’s needs outgrow the current tier. This is a particularly effective strategy when the threshold is the customer’s amount of usage of a highly valuable feature or function, since the up-sell trigger will then be self-selected and a natural reflection of increased value consumption from the product.
  • Consider scaling prices separately – Large price differences across packages are often primarily driven by companies trying to address large differences in customer scale and willingness-to-pay through the packages alone. For example, “we will make our ‘best’ version focused on Enterprises, and so will put capacity constraints on the ‘better’ version.” As mentioned above, this creates unrealistic choices. A better approach can be to remove ‘scale’ factors from the packages (make packages vary by quality components alone) and use a price metric to scale the price of each package to the customer (for example, package A may cost $500 to a customer with 500 employees, but $5,000 to a company with 100,000 employees).
  • Break out niche functionality – Sometimes certain features or functionality will be valued very highly by a small portion of customers. However, unless this group happens to be the highest willingness-to-pay segment that you’re targeting your “best” package towards, these features do not belong in a GBB framework. Similarly, if these features address very different use cases to the core product functionality, their inclusion in the GBB framework could cloud the value stories. The best practice is to monetize these niche features separately as add-ons instead.
  • Price the tiers to value delivered – For most buyers (especially B2B), low-priced offerings signal poor product quality. This can create a perception of risk, and so bring doubt into the purchase process. Therefore, for sales velocity as much as value capture, it is important to price each tier at an appropriate level for the amount of value delivered.

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Although more detailed decisions will need to be made, following these simple guidelines around pricing will help startups avoid falling into the common pitfalls of ineffective good, better, best packaging.

In our next article in Pricing Pitfalls, we will be exploring the next startup pricing challenge – selecting an undifferentiating price metric. You can email the authors at Fuel@McKinsey.com for more information. And please follow Fuel on LinkedIn and Twitter for more pricing insights.

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Unlock the Skills to Lead High-Performing Sales Teams https://get.fuelbymckinsey.com/article/leading-high-performing-sales-teams/ https://get.fuelbymckinsey.com/article/leading-high-performing-sales-teams/#respond Mon, 24 Sep 2018 19:03:16 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ There is a major misalignment in the startup sales world. Fuel’s Sales DNA research on 42 growth companies uncovered the following insights: Sales reps are not only open to good coaching and pipeline management but think it is critical to their development and success They also don’t get coaching and training on the skills that […]

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There is a major misalignment in the startup sales world. Fuel’s Sales DNA research on 42 growth companies uncovered the following insights:

  • Sales reps are not only open to good coaching and pipeline management but think it is critical to their development and success
  • They also don’t get coaching and training on the skills that matter for driving successful sales
  • Systematic coaching, using ride-alongs, tailored sessions and the like, is not routinely deployed in startups, leaving a significant missed opportunity

Think about this. In the highly-competitive startup world, where sales is often the lifeblood – sales managers are often not trained in the two most important skills that determine whether a startup grows fast or dies slow. Getting the right training accelerates good sales managers into great sales leaders. Beyond increased sales, becoming an effective leader increases job satisfaction, helps attract/retain high-performing sales reps, and can have a strong impact on a manager’s career trajectory.

  • Time: “There is no time to spend on training and run a sales team.”
  • Options: “There are too many options; which is the right one for me?”
  • Applicability: “Will this be applicable to my team/needs?”

Fuel has designed a solution specifically to bridge this divide. We created Sales Manager Academy, training for startup sales managers in coaching and pipeline management. For a limited time, startup sales managers can now take advantage of frameworks and methods used by the many of the top sales organizations in the world.

Get In Touch

Let us know what you’re interested in and we’ll be in touch.

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You access Sales Manager Academy at your own pace, online, and across devices. Totaling 4-5 hours for each track, the digital lessons are supported by practical offline exercises, as well as by exclusive webinars with McKinsey and Fuel experts to address any of your questions. The insights, frameworks, and templates can be implemented immediately, to achieve in-quarter results.

Erase any doubt about your ability to lead high-performing startup sales teams. Get training in the skills that have outsized impact on the success of sales teams. Tackle Q4 with confidence and accelerate your career in 2019 and beyond.

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The Hidden Competitive Advantage of Pricing https://get.fuelbymckinsey.com/article/the-hidden-competitive-advantage-of-pricing/ https://get.fuelbymckinsey.com/article/the-hidden-competitive-advantage-of-pricing/#respond Tue, 29 May 2018 19:16:13 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Running a growth-stage company is hard. Founders and CEOs face constant demands from their investors and pressure to grow fast or die slow. In the midst of building and managing a sales force, figuring out marketing channels, and scaling up product and operations, pricing is often relegated to the list of to-dos with an indefinite […]

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Running a growth-stage company is hard. Founders and CEOs face constant demands from their investors and pressure to grow fast or die slow. In the midst of building and managing a sales force, figuring out marketing channels, and scaling up product and operations, pricing is often relegated to the list of to-dos with an indefinite deadline.

So, how do companies establish their pricing strategies?  In our experience, it goes something like this: early in the business the CEO needs to set a price. She has little or no data from which to extrapolate, so she takes an educated guess. The product begins to sell! The price is tweaked a little bit if the product evolves significantly, or if the product offerings are expanded.  For the most part, however, it stays the same.  More fundamental changes are considered briefly, but are dismissed due to concerns for messing up and seeing revenue decline or churn increase.  In short, that initial guess becomes an unmovable anchor point.  Does this sound like the way you set your pricing?

Companies worry too much that changing their strategic pricing architecture and tactical policies risk leaving significant value on the table. Getting pricing right should be a key part of any startup’s strategy, and should be considered early in the growth trajectory.“For those companies with the foresight to undertake pricing transformations early in their growth trajectory, it will be a consistent source of competitive advantage.”

For those companies with the foresight to undertake pricing transformations early in their growth trajectory, it will be a consistent source of competitive advantage.

Growth through pricing

Our research and experience shows that startups that tackle pricing issues strategically and tactically see a 10-15 percentage point increase in their revenue growth rate within 12 months of implementation. Those pricing changes can result in higher average customer value (ACV), decreased churn, and the ability to reach new customer segments with better-tailored offerings. And this result holds across a range of industries and business models.

So, why are the potential gains so great for startups in particular?  Startups are exceptional at creating new sources of value for their customers, but they are far less effective at capturing that value. Pricing optimization allows them to reverse that “value leakage,” and they can do so across each of three key levers:

Increase ‘perceived value:’ Customers pay for the value that they perceive in a product, not for the value that is actually there. The relationship between the two is determined by how well a company communicates to its customers the value it delivers. Startups always know they are adding value, but often don’t understand which parts of their value proposition resonate with different customer segments – often resulting in an undifferentiated offering to the middle of the market. Startups can increase customers’ willingness to pay by tailoring their price and product positioning to the specific segments they serve.

Set price to willingness-to-pay: What customers are willing to pay for the value they receive is highly variable across any customer base. This is especially true for startups, which frequently serve customers across industries and sizes. But when startups pursue diverse customers with the same go-to-market motion, they often have little understanding of what different customer segments need and might be willing to pay. Even if they did possess this understanding, pricing to willingness-to-pay requires a system to effectively differentiate pricing based on that willingness-to-pay. Common challenges include:

  • Linking packages to value: How can you package features in a way that leaves customers with low willingness-to-pay satisfied with a truncated offering, but ensures that those with high willingness-to-pay will always upgrade?
  • Linking pricing architecture to value: How can you charge different prices to different customers for the same product in a way that will be perceived as fair? This is about linking your pricing units to customer value. Companies frequently default to metrics like seats and licenses. These metrics are fine so long as the value of the product truly increases with the number of users. But where it doesn’t, usage-based metrics like GB of storage or hours of usage may work better. Some companies are also experimenting with success-based pricing.  Here, they price with metrics based on customers’ revenue or profit so that the price scales in lockstep with the value delivered.
  • Setting price levels to willingness to pay: How do you know what a customer is willing to pay? And if you do know, how can you use that information to optimize market share, revenue or profit? Figuring out the answers to these questions requires not only customer interviews and surveys but a working knowledge of the sophisticated quantitative methodologies used to get customers to reveal their true preferences.

Get the price you deserve: Even if startups have a good system for determining the list price, that system can be undermined during the course of the sales cycle. Companies often willingly bend on price in order to meet logo or volume targets, or they grow so fast that a rigorous approach to discounting is discarded. In either circumstance, there is value to systematizing and rationalizing discounts. For example, you should determine up front what levels of discounting are justified by the value derived from new customers justifies discounting, and you should align reps’ incentives with price to discourage excessive discounting.

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Overcoming barriers to pricing success

Given the demonstrated potential impact of pricing optimization, why don’t more startups proactively take the necessary steps?  Several common internal barriers often prevent companies from pricing effectively.

First, there is usually a significant knowledge gap that must be overcome. In contrast to sales, marketing or product development, startups usually don’t have personnel with expertise or experience in changing pricing models, and therefore don’t have the robust quantitative approaches that give real insight into value perception, customer preferences or willingness to pay. Bringing in pricing expertise, from outside the company if necessary, is critical to establishing a more robust pricing function and making sure that pricing changes increase revenue rather than cause churn or declines in ACV.

Risk aversion is another understandable barrier to price optimization. Changing the price, particularly for existing customers, is perceived to be a dramatic and risky move that many companies are afraid to make. That fear arises less from any risk inherent to changing price and more from the same lack of understanding described above. Targeted market research using proven approaches can mitigate the perceived risk of price changes.

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Finally, growth-stage companies have limited management bandwidth, and often see pricing changes as a secondary priority. This arises in part because of the common misconception that revenue growth is more easily driven by volume than by price, leading management to focus on customer acquisition over pricing optimization. It is amplified by a perception that pricing is always a long-term profitability play rather than a short-term revenue accelerator. But as we’ve shown in this article, there are significant gains to be made from getting pricing right.

Pricing optimization is not an overnight growth lever for startups. But for those companies with the foresight to undertake pricing transformations early in their growth trajectory, it will be a consistent source of competitive advantage, and an undeniable growth accelerator.

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Land vs. Expand: Finding the Right Balance for Your Salesforce https://get.fuelbymckinsey.com/article/land-vs-expand-finding-the-right-balance-for-your-salesforce/ https://get.fuelbymckinsey.com/article/land-vs-expand-finding-the-right-balance-for-your-salesforce/#respond Fri, 02 Mar 2018 20:24:01 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ We all know that landing any new customer is something to celebrate, particularly because you can then “land and expand,” using sales and marketing resources to grow revenue from that same customer. But how much precious salesforce time should go to cross- and up-selling existing customers, versus new logo acquisition? We answered that question using SaaS […]

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We all know that landing any new customer is something to celebrate, particularly because you can then land and expand, using sales and marketing resources to grow revenue from that same customer. But how much precious salesforce time should go to cross- and up-selling existing customers, versus new logo acquisition? We answered that question using SaaS Radar, Fuel By McKinsey’s proprietary database of nearly 200 SaaS companies. Our analysis suggests that companies need to take a Goldilocks approach—not too little, but not too much. Companies that devote about 10-25% of their sales resources to farming instead of hunting do best.  If you devote more than that, the upside is less than it would be from devoting those resources to new customer acquisition, and the opposite is true if you invest less than 10%.

Source: Fuel By McKinsey SaaSRadar.

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In our post “Want to Accelerate Value Creation?” we described our approach to determining how efficiently a SaaS company is growing—we measure how much net new ARR each dollar of sales and marketing generates. Using that metric, we determined that if more than 25% of your customers are upsold in a quarter your growth efficiency is over 1.6. If less than 10% of your customers generate new revenue for you in a quarter your growth efficiency is less than 1; this means you are not generating sufficient new ARR to cover your sales and marketing expenses.  At the same time however, since upselling distracts from new customer acquisition, it is important to find the right balance. Your growth efficiency is at its optimal level when you invest between 10-25% of your existing sales resources on upselling and cross selling, as seen in the chart above.  This doesn’t mean you shouldn’t invest in customer success, but your salesforce should be spending the majority of its time on new logo acquisition.

The post Land vs. Expand: Finding the Right Balance for Your Salesforce appeared first on Fuel, A McKinsey Company.

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