If you are like most businesses, you don’t spend a lot of time on your pricing strategy. You likely spend an awful lot of time building your products, promoting them, and managing the channels that take them to market. But when it comes to pricing, you probably either make it up as you go or follow a naive strategy that is unlikely to create real economic value. There is a better way: A sound understanding of how your business creates value for its customers, awareness of the differences between buyer personas, and an adaptive approach to running experiments in the marketplace are the keys that can unlock revenue growth and margin expansion.
Let’s start with your value proposition, how you create value for your customers. You must understand your value proposition in order to explain it to the market, and you must understand it quantitatively in order to know how to monetize it. What is your fair share of the value you create for your customers? Under perfect competition — a market structure in which many competitors sell exactly the same thing at exactly the same price — competitors are willing to price just above their cost, and the lowest-cost competitor wins. But to the degree that your offering is differentiated, and harder for competitors to replicate, you will be able to capture a much greater fraction of the value you create for your customers.
Next, in any complex sale there are multiple buyer personas. Which of these should you target? You might be tempted to think that this question doesn’t matter, that “a dollar is a dollar” to your rational, sophisticated customer, but this is a naive assumption. Regardless of their sophistication, if your customers are feeling pain, they are not completely rational. Our research has shown time and time again that a dollar is not a dollar, that some dollars matter much more than others. Under these assumptions we help our customers identify which buyer persona:
- Assigns the greatest value to the product’s value proposition
- Has the greatest willingness to pay, and
- Represents the shortest path to close a sale
Finally, how can you make changes to your pricing strategy without putting your sales prospects at risk? The answer lies in our approach called adaptive experimentation, as described by Len Lodish in his book Marketing that Works. We engage with our clients to understand what they are selling (their value proposition) to whom (their customers and buyer personas). We study market data, business model patterns, and case analogues to generate hypotheses that we can test experimentally. Then we design experiments to test these hypotheses through primary research. We analyze the results of the experiment, create financial models, and make specific recommendations. And because we practice adaptive experimentation, we iterate; we use what we learn from the last experiment to inform the next experiment we propose for you.
We applied this approach with one particular company whose product created millions of dollars of incremental revenue annually for each of their customers, but they were struggling to sell their product for a few hundred thousand dollars at the end of an 18-month sales cycle. We helped them focus their value proposition on revenue improvement, choose a new buyer persona who assigned the greatest value to that value proposition, and used adaptive experimentation to discover the right pricing, packaging, and positioning for that buyer persona. In the end, the company learned it could charge more for its repackaged offering while closing the majority of its sales within 90 days.
After spending so much time and money building a good product, creating awareness, and building a sales organization, don’t fail to invest in optimizing your pricing strategy. It takes just a little time, and the return on investment can’t be beat.