Think back to when you first launched your product: How did you come up with your pricing plan? Did you have a strategy or did you just go with your gut? Maybe you were afraid to charge too much for fear of scaring away potential customers at such an early stage. Perhaps you decided it was easiest to just charge a flat fee per user. Or maybe you didn’t really have a strategic game plan at all, and figured you could tweak your pricing structure once you actually grow your customer base.
And no matter how you came up with it, your pricing plan isn't a “set it and forget it” proposition. In fact, Patrick Campbell of Price Intelligently asserts that if you haven't revisited your pricing structure in the last year you're almost certainly losing money. “The companies we’ve seen with the most success with revenue and adoption are reviewing pricing at least once per quarter and making tweaks or changes every 6 to 9 months,” Campbell says.
But coming up with a pricing plan — new or tweaked — is tricky. Nerve wracking, even! We get it. On the one hand, you don’t want to feel like you’re overcharging and pricing yourself out of the running. On the other hand, you can’t charge too little if you hope to generate sustainable revenue for your business. But the truth is, you should care -- deeply -- about optimizing your pricing structure. Your pricing page may be the first interaction people have with your product, and the right plan can help you drive adoption -- and the wrong one will turn potential customers away.
If you have any doubts about just how important it is to give your pricing plans careful consideration, consider this: In a 1992 study published in the Harvard Business Review, two senior pricing strategists at McKinsey determined that a “One percent price improvement results in an 11.1% increase in operating profit.”
Clearly the stakes are high. And it can feel like a guessing game, but it doesn’t have to. There is a logical way to optimize your pricing structure, and it all comes down to value. Look at it this way: When potential customers are deciding whether or not to pay for a subscription to your product, they’re looking at the value you can provide. They then go on to choose whether or or not to sign up at a given tier based on whether that value seems to be worth the asking price. So doesn’t it make logical sense that your pricing structure should clearly reflect that perceived value? People need to feel as if they’re getting a lot of bang for their buck -- without you having to undersell yourself or shortchange your revenue.
Of course what all this boils down to is that first and foremost you must understand the unique value you’re providing with your product. And you then have to find a way to simply and clearly convey this value and how it relates to the subscription price at each tier. But before we explain how to do that, let’s first look at some of the things that can go wrong.
What Not To Do When Creating a Pricing Plan (Or, How To Damage Your Revenue in One Easy Step)
Charging Per User
This is one of the most common pricing mistakes. After all, it seems like common sense to just set a per-user price and leave it at that. But this approach is potentially a big growth killer. Think about it: Most customers don’t relate the value of your product to the number of users. So there’s no clear connection between what you’re charging and the value they’re deriving. Per user fees may also have the unintended effect of restricting growth because users will end up sharing seats. Not only that, but a per-user fee simply doesn’t scale in most cases. Sure, maybe a 10-person team will justify signing up for your product, but what happens if that business grows? And how will that translate to enterprise? The short answer is that it usually won’t. A large company may decide that it simply isn't worth it to pay for each additional user when the numbers get too big.
But there are some cases where per user pricing can work, but only in communication mediums when the value is directly tied to a user's identity, such as email, messaging, or conference lines. Slack's pricing plans, for example, include a per user fee. This makes sense because you can't use another person's chat account. So, charging each person for their chat alias aligns with the perceived value, because that alias is directly tied to each individual. That said, Slack still aligns each pricing tier with greater value beyond the number of users. In the free plan, for example, up to 10,000 messages are searchable — then users hit a pay wall. An upgrade allows unlimited message archive searches. The free plan also limits the number of integrations to 10, but offers greater value — unlimited app and service integration — at the next highest plan. (It should be noted, though, that even though there is a value alignment with the number of users on the platform, Slack has still felt some pain translating this to enterprise, and has had to create a different structure for very large corporations.)
Only having one pricing tier
Sure, it seems easy to just set a price and charge everyone the same amount based on their usage. After all, you figure that you’ll get more money from bigger companies with higher usage. But one size does not fit all. In a scenario like this, a SMB might feel like they're getting great value -- while larger companies may feel like they’re getting ripped off. This method doesn’t scale, and you’ve eliminated the possibility for upsells to higher tiers that provide greater value.
There are notable exceptions that prove this rule, however. ProfitWell, for instance, has made the bold move of having only one plan — and it's completely free. They make their revenue entirely through upsells. This is a risky bet to make, and it lives or dies on having a crystal clear understanding of the product's value. Of course, the biggest risks also carry the greatest potential rewards — but if you choose to go this route, know the potential perils.
A confusing pricing structure
People shouldn’t need a manual when they look at your pricing page. It should be self explanatory, and the value you're providing should increase at higher and higher tiers. Essentially, when a potential customer looks at your pricing page they should think: “Ah, I get this much value for this much money.”
You don’t care about people on the “cheap” plan
Your higher-paying customers are generating more revenue, you reason, so you put most of your efforts into keeping them happy. But it’s a mistake to neglect your customers on the lower tiers. If you keep them happy, they’ll want to upgrade as they grow. Think of it as cultivating leads -- without any CAC. Ignore them, though, and they’ll churn -- leaving you scrambling to replace that lost revenue.
The Right Way To Optimize Your Pricing: Charging for Value
As we mentioned earlier, the right way to optimize your pricing structure is deceptively simple: Charge for value. Think of the value you’re providing as a unit of measure. That’s your value metric, the basic unit of value that you’re charging for. To optimize your pricing structure you need to identify that value metric and then create a tiered system in which greater value is delivered at higher pricing tiers.
How do you go about this? Here is a good framework to help you create your optimized pricing plan.
Step One: Set a Baseline
Before you create a new pricing strategy, test out what's working — and what isn't — with your current one. Test your strategy with users and observe how they interact with your pricing page. Find out if customers are seeing value in your current pricing structure. Where is there a disconnect between the plans and the value you want them to perceive? What do your customers want the product to accomplish for them? Does your current pricing plan perfectly align with where they place value? Use the knowledge you gain to inform your new pricing plan, and as a baseline for comparison when you test your new plan with users.
Step Two: Identify the value your product is providing
We like to frame this in terms of the job your product is doing. Your customers are hiring your product to do a job for them because they have an unmet need. For example, people hire Google Maps to do the job of helping them get to their destination as quickly as possible. So ultimately, the key to uncovering your value metric lies in the job people are hiring it to do. Hopefully you've gained some valuable insights into your product's value through the user testing you performed in step one. But keep digging.
A great way to hone your value metric is by creating a Job Desirability Map. As we've discussed, this map can help you discover the Big Job and sub jobs people are hiring your product to do. It also uncovers the areas where you can remove struggles and provide the most value. And you can use this knowledge as a tool to ascertain the biggest unit of value you're providing (along with other clusters of value) to determine a logical value-driven tiered pricing structure.
Step Three: Create a Plan That Aligns With Greater Levels of Value
Let's say you have a social media posting platform and you've discovered the the Big Job people are hiring your product to do is “reach a wide audience with their message.” Perhaps a sub job is providing a simple way to include videos or images along with scheduled posts. Your basic value metric -- the value that people want to get from your product -- is that you’ll provide social media account integration to simplify your multiple scheduled postings. So perhaps your lowest pricing tier allows users to link 10 social media accounts to your service. A second, higher, tier might include 20 accounts, with the a certain number of videos and images. For your highest pricing tier, perhaps you offer unlimited social media accounts, videos, and images.
Video marketing platform Wistia does a good job of clearly and simply conveying how their value relates to price. The lowest tier allows space for up to three videos; the next tier offers significantly more space (150 videos); and the highest tier offers unlimited space with added value in the form of marketing automation integrations. It's easy for users to see, at a glance, how they would receive greater levels of value at each successive tier. The price, then, is clearly linked to the perceived value of the product; and this plan scales well, as the highest tier offers unlimited space.
Step Four: Test Again
Now that you've set a baseline, identified your product's value, and created a pricing plan that you believe aligns with this value, test it out with users. Ask the same questions and make the same observations you did when you were setting the baseline. Make sure your new pricing plan does a better job of conveying value and aligning it with price that your previous structure.
Remember as you work through this process that there's no one-size-fits-all pricing structure. Optimizing your strategy must be customized for your business. And don't be afraid to charge a hefty fee for your service -- with a caveat. Harvard Business School professor Clayton Christensen uses the case of Quickbooks to make this point in his book, Competing Against Luck. The software, he notes, offers half the functionality of its competitors at twice the price, and yet remains the global leader in online accounting software. Why? Because QuickBooks realized that people wanted to do less, and be less hands on with their accounting,while still having the confidence that their finances were operating efficiently.
“When customers find the right product to respond to their Job To Be Done,” Christensen concludes, “they're often willing to pay more.” And to successfully charge more, your job is to figure out that job and clearly convey the value you provide.