Conducting Pricing Discovery

Why is pricing discovery necessary? What advantages does it provide? 

It uncovers what your users value and gives you a model for capturing that value – pricing discovery is necessary to uncover what users truly value and test whether your intended way of capturing that value is amenable to both your business requirements and the buyer’s needs.

Pricing discovery improves conversion and retention – good pricing discovery improves the SaaS metrics that matter most to your business. It will increase conversion of leads into paying customers and increase your ability to retain customers.

What does a good pricing model look like?

A good pricing model fits on an index card – anything bigger and more complicated will dissuade buyers and make invoicing more difficult. There’s a strong temptation to make it more complicated than it has to be, but the best pricing models are simple enough to fit on an index card.

Usage/value-based pricing (UBP) models are best in class – in usage/value-based pricing, the price the customer pays scales in proportion to the value they’re deriving from your product. The customers getting the most value should pay more, and those just dipping their toe in should pay less—it’s a principle you want to honor no matter how you price. 

Offer good, better, best packages to target specific segments – a good pricing model has digestible entry points for each of your segments—customers shouldn’t have to figure out for themselves what tier they should be opting into and which features they should leverage. This could mean “good, better, best” packages, or, “free, growth, and enterprise” tier. 

What should you do to get ready for the pricing discovery exercise and data collection? 

If you’re pricing a new product, define your business goals  – before you embark on the pricing discovery expedition, you need to scope out the goals of the exercise and what you want your pricing and packaging to accomplish. What are you trying to accomplish in launching a new product? Make deeper inquiries, like:

• Is it intended to break into a new market?
• Is it your core product? Or is it an additional product that you’ll upsell?
• Do you want to prove revenue traction early on? Or just acquire as many users as possible? 
• Are you launching a platform that has two sides? If so, are you trying to drive adoption on one side and monetize the other?

If you are iterating on a pricing model, know what you want to improve – where did your first pricing model feel insufficient? You might want to change the pricing page, or make changes aimed at increasing conversion, or seek to better target certain buyer segments.

Figure out who is making the pricing decisions (RACI/DACI) – who is responsible, accountable, consulted, and informed (RACI)? Who is the decision maker, responsible, consulted, and informed (DACI)? You need an informed captain to make sure the ball is moving forward and holding parties accountable. 

Note: Product management is often responsible.

What is a value metric and what does a good value metric accomplish? How do you find yours?

Your value metric drives what your customers pay – it’s the variable along which your plans scale. Your metric could be the number of hosts, visitors, or automations. It should also be the core benefit along which your users derive more value as they consume more of it.

A good value metric should check a few boxes – in order of importance, your value metric needs to:

1. Align with your customer’s needs – choose the value metric that aligns with what your customers are seeking out of your product or service. This will lead to a shorter sales cycle and more revenue for your business.
2. Easy to understand – look for a commonly understood noun (visitors, views, automations), don’t use an esoteric metric that your company made up. Nine out of ten customers should be able to easily understand why you price that way.
3. Grow with your customer – the more a customer uses your product the more the value metric should increase. This will align your revenue with the value your product provides.
4. Easily auditable by you or your customer (forecastable) – it creates undue operational burden on you and your customers if you can’t easily sit down and understand how to invoice or what invoice to expect. If it isn’t you’ll waste time invoicing, and your customer won’t be able to forecast their spend and get antsy.

What kinds of quantitative and qualitative data should you collect to inform your pricing discovery? How should you collect it?

Create quantified buyer personas – these are profiles of your buyers that ensure you know who you’re selling to and how they should be segmented. You have to get an understanding of what your customer needs, what they value, and willingness to pay. Often the research that leads to the creation of this feels qualitative but you’ll end up with quantitative insights. 

Look to collect data in all of the following areas: 

• Customer/prospect segment – segmentation is all about the buyer’s values, needs, and willingness to pay. These can correlate with observable demographics/firmographics, but not always. Figure out what traits make a difference and be able to articulate how their needs or benefits are different. 
• Customer/prospect behavior/history (e.g. how long they’ve been a customer, which products they bought, usage data)
• Customer preference data (e.g. which features/services do they care about)
• Customer willingness to pay data
• Customer value data 

When launching something new, try to have at least 20 1:1 conversations – a pricing discovery sprint might look like 4 interviews per day for a week (20 total), between 30 minutes to an hour each. The rest of the year, 10 interviews per week should suffice. These provide the quantitative and qualitative insights you need to build your buyer personas. Hold live conversations and ask the why behind each answer to understand your user segments.  

Answer as many empirical questions as you can before entering interviews – look at your data warehouse and take in demographic and usage information about the firm so you have context entering the interview. These can help guide follow-up questions and save time.  

Use as few unmonitored surveys as possible – When launching something truly new, too much gets lost when you ask  people to asynchronously fill out a form. It will be more difficult to segment your buyer personas if respondents are just ticking through a survey and not providing you with the “why.”

Get the opinions of existing customers, the market, and prospects – if current customers sniff out that you’re doing pricing discovery, they’ll immediately think you’re going to increase prices. Prospects often give the best insights because they’re actually evaluating. Getting prospect intros is difficult because sales typically don’t want you interfering with deals—but prospects you’ve already lost or that went dark can lead to great conversations.

What are examples of some questions to include in a pricing survey /interview? What value does each provide?

A best practices pricing interview includes the following components: 

1. Start with a conversation about the interviewee’s role – ask them to describe their role, their priorities, and what gets in the way of accomplishing those priorities. Ask: “If you could wave a magic wand, what would you change about how you accomplish your objectives?” If they don’t mention your product, then you’ve probably already lost and you’re not talking to a potential customer. 
2. Build awareness of your product – you need to help interviewees understand the product or features that you’re going to gather feedback on. In a lot of surveys, respondents provide answers on features that they don’t understand. In an interview, you can show them a prototype, give the features clear names, and share your screen. 
3. Do a FigJam-type activity – show the interviewee proposed features on cards on your screen and then ask them to sort the features in terms of importance. 
4. Ask MaxDiff questions – MaxDiff asks people to rank the most and least important features among those presented, ignoring features that land in the middle. People are bad at differentiating options in the middle but they’re usually pretty good at identifying the extremes.
5. Ask Van Westendorp questions – ask four questions:

• At what point is this so cheap you’re suspicious?
• At what point does it seem like a bargain? 
• At what point does it start to get expensive?
• At what point is it prohibitively expensive? 

Tip:  Take all of their answers and plot them. You get four curves corresponding to the responses for each question, they’ll intersect to create a diamond and that diamond provides you with your pricing range. Each of your segments should have its own pricing range. Most often, you can use the responses to the middle two questions to find the willingness to pay sweet spot. 

Ask for 30 minutes to an hour for the interview – an hour is unbelievably good, half an hour is more typical. Even with 30 minutes, you can hit on the best practices of pricing discovery.

How do you create a quantified buyer persona?

A quantified buyer persona builds an understanding of three customer traits: 

• What needs they have – identified by asking them for a qualitative description of their needs and role. 
• What features they value – identified using MaxDiff and FigJam activities.
• Willingness to pay – identified using Van Westendorp questions.

Use buyer personas to segment customers and create targeted pricing – you will eventually be able to align your pricing to target the different segments that you’ve identified with your buyer personas, tailoring the pricing and features to each.

Use cluster analysis to segment – look at how those three areas are answered, and then begin to group them and segment customers. It doesn’t have to lean on a fancy statistical analysis, it can be intuitive and visual, looking at two variables at once and seeing how your respondents plot. That’s usually good enough for launching an early-stage product. 

Tweak personas as you get more data – early on, your buyer personas may be more speculative and anecdotal than quantitative. As you talk to more customers and get a better idea of your buyer, tweak your personas to account for the data. 

What are the different types of analysis you might run on your data? When can/should you use each?

Who owns the pricing discovery exercise, and who else is involved? 

Product owns the pricing discovery exercise – they should quarterback the pricing discovery efforts, leading the conversations and talking to customers. The other responsible parties include: 

• Data scientists – help pull available usage and demographic data for existing users, they can also help you analyze and visualize the data from conversations.
• BizOps or Finance – helps take the proposed pricing and packaging and forecast and model the financial ramifications. This will give you a best-case and worst-case scenario.
• Product Designer – should be joined at the hip with the product managers—the interview should familiarize users with the product, a designer can help you think through the best way to do that. 

Consulted parties include: sales, marketing, customer success, founders, and RevOps. Crowdsource knowledge with internal interviews to learn what’s worked and what hasn’t in the past from each function’s perspective.

What tools or resources should you leverage during pricing discovery and analysis?

For sourcing conversations from the buyer perspective: 

• An industry-specific sourcing tool like SageTap can help you get connected to a desired audience
• Source from your existing CRM 
• Run paid ad campaigns with incentives 

Outreach tools – like Apollo or ZoomInfo will help you identify and contact survey respondents. 

Survey fielding tool – Qualtrics or even Google Forms allow you to actually field your survey and dump responses into a spreadsheet. 

Live interview tooling – Gong for recording and transcribing your interviews, FigJam for card sorting exercises, and Figma or another prototyping tool to help build understanding of your product live. 

Third-party pricing consultant – the benefit of using one is that some PMs won’t know how to run this exercise—and you only ever do it once a year at most. A consultant will help you take advantage of the best new pricing discovery methodologies. The disadvantage of outsourcing pricing is that you get further away from the people that actually know your product. 

Once you have your initial pricing and packaging, how do you monitor its success and ensure it is meeting your changing needs?

Use A/B testing – once your sales of the product are live, look for chances to do A/B testing on your pricing and packaging, putting different options head to head and comparing their performance. Custom enterprise deals are a great opportunity to test out changes. 

Monitor changes in northstar SaaS metrics to gauge your success – look at the most important SaaS metrics (net revenue, retention, etc.) to gauge the success of your pricing and packaging model. 

The healthiest thing you can observe is faster adoptions and scaling usage – these are the results of a successful usage-based pricing discovery exercise that all companies should aim for. 

What are some activities or practices to foster learning and experimentation in pricing discovery 

A/B testing – A/B testing will help you continuously evaluate your current practices against alternatives. Most startups won’t have the scale to conduct thorough A/B testing, but can still look for discrete opportunities to conduct it. 

Training data periods – these give a portion of customers alternate packaging and pricing that is time constrained. That way if the change has adverse effects, you know it reverts on a specific date. Training data periods also help build a culture of openness to experimentation and improvement in pricing across your organization. 

Deploy ceilings on volatile pricing metrics – these limit either what the customer will pay or what they can consume when you move to usage-based pricing. It can bring comfort to you or the customer when moving to usage-based pricing knowing that neither of you will end up with obligations that threaten your operations. 

Partner, don’t sell  – you’re trying to discover a pricing model that is mutually beneficial to yourself and your customers. Approach interviews as an opportunity to work together to find the best possible pricing model for yourself and your customers.

PR FAQs – you want to socialize any pricing changes within your organization as much as possible, and using a PR FAQ (a document that answers key questions in announcing changes to product pricing/packaging), is one effective way to do that. 

What are the most important pieces to get right?

Understand the business objective of pricing discovery – if you don’t, the whole exercise is fruitless. This requires C-Suite buy-in and consultation—align with them on the process and the end goal before you begin. 

Identify the right value metric – identify what scales in proportion with the value that customers get from your product. Hopefully, it’s obvious enough that you don’t get it wrong—you shouldn’t be reinventing the wheel—but the metric is hard to change if you do get it wrong.

What are common pitfalls? 

Failing to segment appropriately – if you don’t, segmentation falls to sales and all your customers will end up on the enterprise package with custom pricing. Revise the quantified buyer personas as you get more data, and design plans that work well for each segment. Otherwise, you’re either going to lose business or steer everyone towards custom pricing.