Pricing and Packaging Technology Offerings

Why focus on packaging and pricing vs. just pricing?

Packaging and pricing together drive the customer decision – the choices you give drive the choices made by the buyer. Packaging structures what you provide in enticing and desirable formats, thereby informing a buyer’s price to value equation. 

Letting customers build their own offerings makes scaling hard – if you give buyers a choice of options that you can repeatedly and profitably deliver, they’ll choose one of those options and you’ll be able to scale. If you don’t, customers will end up with all sorts of combinations that you have to maintain and you won’t be able to scale. 

You’re forced to think about value – your pricing will reflect the market’s willingness to pay by deeply understanding the value of your offering, which is rooted in what is included and not included in your offering. 

Who is involved in setting the pricing and the packaging of your offering? How does this change as your business matures?

Pricing should be driven by product – they’re in the best position because they understand the solution, the problems it solves, and the value it delivers. In smaller companies, founders typically own pricing themselves before relinquishing it to the product management team in larger companies. 

Create a pricing committee – the pricing committee is a standing group who is responsible for making decisions on pricing and monitoring results. It might include individuals from: 

• Product – from a value perspective
• Sales – from a revenue perspective
• Finance – from a profitability perspective
• Marketing – from a branding, positioning, messaging and competitiveness perspective

Whoever owns the P&L is ultimately accountable for price – pricing is the most powerful lever any company has over their bottom line. So whoever owns profitability needs to be able to have visibility and input on the pricing, otherwise they’re fighting with one hand tied behind their back.

Leverage third-party resources to help price if needed – pricing efforts are challenging, time consuming and require consistent, iterative efforts to get right. Plus, outside experts are familiar with broader market trends and best practices of other companies.

What are the phases of the pricing and offering process?

Building market knowledge 

What do you need to know about your market before developing your offering?

Understand your target markets and your TAM – understand your addressable market and the segments within that have different expectations of value and willingness to pay

Competitive Landscape – understand what the competitors in your market offer, what features and capabilities they highlight, and their price points.

Buyers/Buyer persona – develop a picture of your economic buyers and influencers in order to build an offering that meets their needs.

How do you develop the buyer persona? What should your buyer persona tell you?

The buyer persona is a semi-fictional representation of your ideal customers – use market research, and qualitative and quantitative data to understand who will value your product.

Use interviews and surveys to input a qualitative description of the customer – understanding your target market problems that are urgent to solve, pervasive in their occurrence and have willingness to pay, will allow you to inform your offering structure. 

The more quantitative metrics you can add to the buyer persona, the better. Try for:

• The value of solving the problem
• How buyers perceive and measure the value of your solution
• Willingness to pay to solve the problem
• Preferences on preferred pricing metrics
• Preference for contract terms (contract length, payment frequency, payment methods)

Building your offering  

What do you need to do to build your offering and understand its value to customers?

You need to identify:

• Willingness to pay by market segment
• What features have more value

Segmentation is the most powerful tool a company has – since different customers have different expectations of value, you should value the ability to charge different prices to different buyers with different offerings.

How do you measure and find your customer’s willingness to pay? 

Ask the buyers what they’re willing to pay – in either surveys or interviews. Once you have a statistically representative sample, you can infer a range for the price point. Using demographic information, you’ll be able to slice and dice willingness to pay by segment and figure out what plans you want to create. Ideally, it’s best to have at least 30 respondents for a measured market segment. 

For price sensitivity analysis use a Van Westendorp approach – ask the four Van Westendorp questions in interviews/surveys once you state the offering in question and the value it delivers to the buyer: 

1. At what price would you consider this offer to be a bargain?
2. At what price would you consider this offer starting to get expensive, so that you are still in the market for it, but would have to give some thought before buying it? 
3. At what price would you consider this offer to be so expensive that you would be out of the market and not consider buying it? 
4. At what price would you consider this offer to be priced so low that you would feel the quality couldn’t be very good and would be out of the market and not consider buying it?

Note: You can also just ask buyers “what are you willing to pay”? – answers to this can give you an alternative and simpler look to Van Westendorp that actually works pretty well. 

A price point somewhere between “a bargain” and “starting to get expensive” is your sweet spot – the responses for questions 4 and 1 will tell you the outer bounds of your pricing range, and you can narrow it down from there.

Use a quantitative approach to articulate the value of your product – when presenting the value to the customer, it’s important to understand how they perceive it, but also to show them in numerical terms the value your product or service delivers to them. 

Conjoint analysis can help tell you what customers will pay for each feature package – rather than having to test individual packages, conjoint can tell you what customers would be willing to pay for the different feature packages you design and test against each other.

What can you do to learn how customers value different features and functions within your offering? 

Option 1: MaxDiff

• MaxDiff is a survey research tool for discovering respondent preferences, in pricing it is used to show respondents a set of features and ask which are most and least important in terms of value.
• For a new product or a repackaging, MaxDiff is the preferred approach – it allows you to cast a broader net when you don’t know what features are more important than others. You can test many features and then narrow down to those you can focus on pricing for.

Option 2: Conjoint

• Conjoint analysis is a survey-based statistical technique to help determine how people value different attributes that make up an individual product or service.
• For an existing offering on the market, conjoint analysis might be better – this will allow you to make minor tweaks and compare different versions of the product. You can take five different versions of the current offering structure and pit them against each other. It’s a technique for mature situations. 

Remember: buyers don’t buy features (but some matter more than others) – there are clearly some features that resonate more with buyers–so you want to identify what matters most to buyers and what they are willing to pay for. Separate features into categories (table-stakes, differentiating, not valued etc.), then start to make decisions on what to put in the offering.

How can you use a value matrix to inform packaging? 

Combine willingness to pay (from Van Westendorp) and value data (from conjoint or MaxDiff), to create a value matrix –  this will give you an idea of both which features are important/have value to customers, and which features customers are willing to pay for. From here, you can segment responses and design your offering. 

Bucket features into groups to inform feature packaging – there are four kinds of features to be aware of: 

How should you take competitor prices into account? 

You are not your competitors, so look but don’t touch – you are competing against them so it’s good to know what they’re charging. But they are their own company with their own product, methods, and constraints. Craft your pricing to your own unique value prop.

Competitor research helps you stay abreast of what’s current in the market – do the research because maybe there’s a feature or packaging that they’ve caught onto but you’re missing on your roadmap.

How do you find the value/price metrics for your offering? How can they help you package and price your offering?

Pricing metrics need to:

• Align with the value of your product – it needs to have a relationship with the value your customer sees from the product.
• Grow as the value of your product grows – it needs to scale with your customers’ value so that you increase revenue as the value of the solution increases.
• Be simple to understand and administer – From a vendor perspective, you want it to be easy to administer pricing, and customers want to easily project their costs. 

First, create a list of potential metrics that are good options for companies – there should be a proportional relationship between the metric and the value/price customers are willing to pay. Talk out the pros and cons of each and settle on a primary one. 

To get to an initial list, go through key demographic information that is important to customers and try to find the following: 

• Input-based value metrics – correlate with usage of the product (e.g., GB of storage, users, data, records, workflows managed, etc.). They track functional use but don’t correlate with an outcome your solution produces. 
• Output-based value metrics – correlate with output achievements of the solution (e.g., marketing contacts in a database, chat sessions completed, customer tickets processed, automations completed, etc.) They measure the utility of your solution in completing a specific job. 
• Outcome-based value metrics – correlate to whatever business objective the customer is trying to achieve with your product (e.g., increased revenue, reduced cost, etc.)

After selecting your pricing metrics, you might select others as gating factors – this won’t drive pricing but will protect your business’s operations. It might be for margin protection or unit economic protection; for example, you might limit the number of emails that can be sent or the amount of storage space used. 

Learn, Monitor, Adjust

What metrics should you track and report on in order to measure the performance of your offering structuring? 

Track and report on sales information – 

• Deal size – monthly recurring revenue (MRR), average revenue per user (ARPU), annual contract value (ACV), one-time fees, Total Contract Value (TCV), etc. 
• Contract terms – length of term, payment terms, etc.
• Discounts – contractual, channel-specific, or deal-specific
• Price – divide on a unit basis
• Time to sale and revenue recognition
• Solution footprint – what were they considering and what did they end up buying 
• Usage of different features – this can help inform future product development

Demographic information – you should track this information for customers and pipeline (won and lost):

• Who they are
• Location
• Revenue size 
• NAICS code 
• Employees 
• Devices number and type 

How often should you evaluate pricing? How often can you adjust it for new customers?

Evaluate pricing at least every quarter – assess the data and see what’s working and what’s not. Depending on the size of the organization, you can evaluate every month if you think there is a reason to. You should make major changes less often. 

Major changes should only occur every six months to a year – the tolerance for pricing change will depend on your business and its size. Don’t be afraid to make slight changes quarterly, especially if you’re a smaller startup, you can afford to be more iterative on pricing.

What are the signals that you need to alter your pricing and packaging? 

If your unit economics are not performing to forecasts – then you need to do a deep reassessment of your pricing. If you forecast 60% gross margin and nine months to profitability, but you’re seeing 40% and 12 months to profitability, you will need to do something about it.

Evaluate your pricing if your competitor makes a major shift – whether it’s a shift in pricing, or bundling, any dramatic change from competitors is reason to pause and reassess your pricing and packaging. 

How should your approach to monitoring and adjusting pricing differ for enterprise sales? 

A large sales team makes pricing and packaging changes harder – with a large sales team you might make changes less frequently. You must be more careful about messaging to ensure reps are prepared for the change. 

Enterprise sales with a longer pipeline require a long lead time – if deal size and time to close are longer, changes in packaging or pricing require a change management process. You want to ensure deals in the pipeline close, but also get the new pricing into some of the new deals. 

You can employ a drop-dead date for pricing – customers will be encouraged to make a yes or no decision if you say “new pricing goes into effect July 30th.” 

You may end up modifying contracts if you have a small number of firms in your TAM – if you change your list price but you only have 15 customers and new sales are onerous, the pricing change won’t necessarily override contract terms to change revenue. To make up for that, you might propose contract modifications. Start a conversation with CS, account management, lawyers, and maybe even executives. Then you have to propose to the customer that they go along with your price change. It’s a more involved process than changing the list price.

Overall 

What are the most important pieces to get right? 

Keep your pricing and packaging simple and straightforward – it’s easy to make it complex and hard to make it simple. Some companies use too many pricing metrics or too many packaging options. Simpler pricing and packaging will be easier to scale.

You have to use buyer data – if you don’t, and just using your opinion, you’re guessing and will make the wrong decisions more times than not. 

What are common pitfalls? 

Don’t let small revenue drivers have an outsized influence on your strategy – when trying to be simple and send a cohesive message to the market, don’t make the mistake of pinning your revenue to a metric that doesn’t correlate with revenue.

Don’t focus on one-time revenue – don’t lose the war, to win the battle for services or implementors. Recurring revenue is the name of the game, don’t bend over backward to chase one-time revenue. 

Don’t fall into “feature barf” – sales tend to show buyers everything that your product can do. Take the time to empathize with buyers and put forward them the highest value prop features. Sales conversations and messaging should be structured around those features that meet the most urgent, highest-value needs.