Price— the Neglected Value Lever
Every day I'm flooded by user growth this and user growth that. Companies, VC/PE firms, and shareholders pray at the altar of customer acquisition. Price, the other, arguably more important, side of the growth equation scarcely gets a mention, unless Amazon hikes its Prime fee, Pharma bro price-gouges, or a Wells Fargo scandal hits. Price has become the seedy cousin that comes around once a year for Thanksgiving.
It's understandable. Price is such a permeating feature of a company— underpinning product, marketing, sales, and finance— that we forget about it, like how we forget about breathing or our beating hearts or unlimited free WiFi. But, I would argue that, whether you're a start-up, SME, or Fortune 1000 company, pricing strategy can't be a one-and-done peripheral exercise, but a core strength revisited regularly. I would go one step further and say that pricing is the most powerful (and controllable) lever for creating long-term value.
Ironically, the importance of pricing strategy doesn't lie under the gaze of capturing value or growing margins— though they're attractive byproducts— but rather in understanding the user. After all, the most successful companies are not the ones with the best products, services, funding, or marketing, but those that understand their customers best. No pricing strategy equals no user. At least not the ones you want, meaning the ones that most want you. And not in a scalable, sustainable way. Companies that don't implement a deliberate, data-driven pricing strategy will tread water, losing money on new users acquired/retained, or leave value on the table.
Value-based pricing, or setting and tiering price based on how customers value your product or service, allows you to raise revenue per user through up/cross-selling and reduce churn by better positioning your product and service and over-delivering on value. Moreover, it reduces your user acquisition costs by better targeting the right prospects to begin with. Sure, cost-plus and competitor-based pricing can add more to the picture, plus they beat going with you're gut. But, actionable customer knowledge and effective pricing structure lie in value-based pricing. Investing the time, energy, and resources up-front to understanding what your users need and value most pays dividends in the medium and long term. B2B companies that are dedicated to understanding their customers may discover that large enterprise clients are willing to pay much more than they originally thought. Or that users value certain features, some unexpected, more than others. Or that customer needs and values vary widely by their role and industry. Understanding your users comes with the risk of hearing feedback you may not want to hear. Ultimately, knowing your customers gives you more certainty and confidence and leaves out the guessing game of how they'll react when you update pricing.
The lifeblood of value-based pricing is the quantified buyer persona, or an archetype of your target customer, including their role, industry, organization, specific features they value most and can't live without, specific features they value least and can live without, willingness to pay (expensive vs. a bargain), and cost of acquisition. You can build a handful of buyer personas by surveying existing customers and new prospects, examining your own sales and marketing data, and looking at primary/secondary research. Quantified buyer personas enable you to bundle the right features together that address the right pain points and set a price aligned with what customers believe these feature sets are worth. They help in designing freemiums, trials, pilots, and discounts. Moreover, reverse-engineering your customers and their relative preferences in this way can help you segment your customer base (retain, up/cross-sell), target high-value prospects (acquire), improve user engagement, and fine-tune product development. Another juicy upside: higher long-term cash flow.
Pricing strategy is not a one-off deal. It's an ongoing process. It's systematic and quantitative. Pricing must be tested and evaluated regularly. It's a team sport that needs buy-in from the CEO on down. It needs time, sweat, and resources. But its fruits— better leads, higher deal value, tailored product/feature development, improved customer engagement, and higher recurring revenue— are delicious.