Changing Your Pricing Strategy is Useless Unless You Fix This First

Moving from Pricing Chaos to Continuous Monetization

I recently sat down with Chris Mele, Managing Partner of Software Pricing Partners, for a wide-ranging discussion of trends in software pricing.

One particular issue jumped out that I would like to highlight here.

Early in the life of a SaaS business, only one thing matters -- bookings and, more specifically, new logos. Forget CAC, NRR, the Rule of 40, and all the other metrics. A new business must prove one thing -- it has something people want to buy. Because of this imperative, sales-led early-stage SaaS companies aggressively manipulate pricing to win deals. 

Whether the founder or a sales rep is making the sale, the list price often means nothing, and the range of discounts is from zero to one hundred percent. In addition, the original list price is usually set arbitrarily without market vetting. This approach can be effective deal-by-deal, but it drastically sub-optimizes revenue and creates unfair pricing and an unscalable process. 

The chart below exemplifies the ineffectiveness of this pricing approach as revenue increases. Software Pricing Partners modeled this dataset based on actual discounting patterns from IaaS, PaaS, & SaaS offerings in sales-led companies.

The horizontal axis is the list price for each product or bundle, and the vertical axis is the percentage discount offered. Each green dot is a landed deal, with a sister red dot showing where it should have landed based on the company’s price book. One hundred percent discounted deals are at the top, and the axis is compressed to the far right for Enterprise deals approaching a two million dollar list price.

The chart is hard to read, but the takeaway is this. Every single product and bundle had tremendous variability in the discounts offered. 

This is pricing chaos.

Your company may not be this bad; however, when discretionary discounts are even half this level, pricing strategy does not matter.

For example, imagine increasing list prices by 20% in this environment. What would happen to the company's actual realized price? Absolutely nothing. The list price would go up, and so would the discounts. Other pricing strategies would be similarly ineffective.

The red dots are where the deals should have landed. Not surprisingly, if the company converted sales based on the list price and standard discounts, bookings for the year would have increased by 2.5 times.

The chaos exemplified here happens during the sales process, but if you add usage-based pricing to this mix, the chaos extends to the monthly billing cycle, where each customer has a bespoke amount of usage and rates. It’s an ugly spreadsheet with overly complicated sales ops and billing requirements.

And let me re-iterate, lower prices are acceptable, but varying discount levels for the same product at the same volume are best to get rid of asap. As the company matures, not only will growth be compromised by chaotic discounting, but so will efficiency and profitability. Supporting chaotic pricing schemes is complex and expensive, and heavy discounts reduce revenue for customers that cost the company the same amount to attract, onboard, and support, thereby driving profitability down.

So what do you do if your discounting is out of control? Chris suggests the following:

1. Don’t try to fix it overnight. Discretionary discounts must be reigned-in incrementally, or your will lose your salesforce.
2. Develop a fact-based set of net prices you test and validate in the market. Your results will be better because your pricing will be more accurate, and your reps are likelier to buy into validated price points over arbitrary numbers.
3. Modify the compensation plan to reward salespeople for moving toward the scheduled net price. Celebrate reps who are making the transition.
4. Approach future discounting as a formulaic set of trade-offs. Never give anything away for free. Examples of things you can ask for include longer contracts, video testimonials, site visits, etc. Each trade-off is documented and is applied uniformly to each customer. Share the list with your prospects to build trust.
5. Many high-performing companies set up a “deal desk” very early on so that it’s easier to apply pricing more consistently.

Tracking customer usage is a practical method of validating pricing and developing solid ROI models. Even if your company chooses not to charge based on usage, knowing and monitoring the usage details of each customer provides valuable insight into how they are using your application and the value they are receiving.

Once you have discounting under control, then there are a variety of pricing strategies you can adopt. Chris’s firm is a big believer in a Continuous Monetization Strategy, which covers a broad set of capabilities and encourages companies to approach pricing as a continuous process, not an episodic event. We will discuss this in more depth in later blog posts.

And one final thing to think about that Chris and I discussed. 

What if your company went to fully transparent pricing? Imagine a sales rep starting a call with, “In terms of pricing, I just want you to know that all of our customers receive the same pricing and ability to earn discounts based on our published price list, which I will share with you now.” 

As a buyer, wouldn't you love to hear that?

Bamboo software scaled from $22 million to $250 million in five years and credits transparent pricing as its breakthrough strategy for driving growth. How might fully transparent pricing impact your sales cycle and net realized price?

Fully transparent pricing is the ultimate version of controlling discounting, but it won’t be the right solution for everyone. However, having some process for managing discounting is imperative, with direct benefits in profitability and as the foundation for all future pricing strategies.