From a distance, determining the price of a good or service appears to be one of the easier responsibilities in the evolution of a company. I mean, narrowing down pricing isn’t as involved a task as actually building an app or navigating numerous, and often treacherous, sales cycles. Right?

Wrong.

Despite appearances, establishing pricing is a fluid, nuanced practice that has significant effects on a company’s well being. For instance, growth, retention, and your market’s perception of your company are all related to the price (or prices) you decide to charge.

As such, this is a decision that requires research, input from different departments, and, most importantly, a thorough understanding of the personas you sell to.

“Not a lot of people think about its pricing – not just in sales, but companies as a whole. It’s viewed as this monolithic thing that needs to be solved,” says Patrick Campbell, CEO of ProfitWell, on a recent edition of The Predictable Revenue Podcast.

“But what we found is that pricing is a high-impact feature of growth.”

Persona pricing fit in a crowded marketplace

As companies continue to build (and market) new software platforms, the need for those companies to differentiate themselves from the pack and encourage software migration to their product becomes more and more important.

Response to that competition has, Campbell says, forced the relative value of features and products down. For example, a Salesforce integration that a company used to be able to charge $1,000 for is now table stakes if they want to close a deal.

This proliferation of features – and the expectation that they are offered for free, or as cheap as possible – has refined the skills of sales and marketing teams. You need to be good at acquisition to survive these days, full stop.

An important tool in the acquisition toolbox is pricing. In fact, pricing is accelerating in its impact on a business, in particular, when it comes to both closing and retention. But, stresses Campbell, pricing must resonate with the personas you sell to for it to achieve its optimal effect.

“It doesn’t matter what you’re selling – SaaS software, a cup of coffee, or a giant tractor. Everything you are doing is driving a customer to your product or service, or justifying your pricing. That goes for sales and marketing, product, development, and manufacturing,” says Campbell.

“You need to understand who is a good customer, and who is a bad customer. Because once you do, you align that funnel and have sales cycles that are so much easier. Of course, there are exceptions, but once you have that fit the machine starts to work really well. And you can align your pricing to the personas you attract for acquisition and retention.”

Understanding those personas

When determining the personas best suited for your product or service, it’s easy to assume your ideal market is larger than it is. Who doesn’t want to sell to the largest group possible? But, says Campbell, it’s best to start with a few personas at first. You want to nail down one, and then grow that one cohort in size.

For example, if you decide you are selling to salespeople, you want to break that group down into small, medium, and large salespeople, and then determine what each respective group needs.

To find that information out, you’ll want to talk to each of these groups individually, in dedicated product interviews.

“The bottom line is you want to find out what features they like vs. what features they need. And, you want to ask them about their willingness to pay for those features,” says Campbell.

“Ask them ‘at what point would this feature of product be way too expensive for you? Or, ‘what price would get you to sign the contract today?’

Value metrics

Once you’ve gleaned that critical data from the personas you’ve chosen to focus on, it’s time to determine your value metric. According to Campbell, a value metric is how you charge your customers: either per user, per dollar saved, or a flat fee per month, for instance.

“If you get your value metric right, if your customer sees the value in the same way you do, then there is no reason for your customers to churn,” says Campbell.
“Nailing your value metrics also allows you to get users at different sizes. For example, 5 seats at Salesforce, for a company that only needs 5 seats, doesn’t seem expensive at all. And, 500 seats at a huge organization, on the other hand, is just the cost of doing business. Salesforce is able to capture both of those groups.”

There are three main elements of a value metric:

It has to be as easy to understand as your sales process (if your company has no salespeople, then it has to be simple. If you have a seven-call sales cycle, then it can be more complicated)
It should grow with your customers’ usage of your product (as they use it more, they should be paying you more)
It needs to mirror where the customer sees value in your product (if they don’t see value in a per-user cost, for instance, don’t charge per user)

“Of course, you can always choose against these metrics, but if you do it is more of an uphill climb you are embarking on,” adds Campbell.

Why salespeople aren’t more involved in pricing

Finally, the people determining pricing, and its associated value metric, should be a cross-functional committee, with representatives from marketing, product, and the executive team.

Sales too, should be part of such a committee, but the role of sales in pricing decisions has been diminished over time. That seems counterintuitive, as salespeople are the ones having pricing discussions with prospects each day. But, Campbell says, salespeople haven’t historically been open to pricing changes – even when those changes are to the benefit of the company as a whole.

Price changes, salespeople often argue, make it harder to close deals.

“It’s never been easier to be a salesperson. Yes, it’s not perfect, there are always difficult leads, but there hasn’t been a good forcing function to make salespeople better salespeople,” says Campbell.

“If you increase your prices, sales may need to understand that the company will alter how it does sales to better reflect a higher touch sales cycle, for instance. A salesperson should always be open to matching the price to where the value is, because then you won’t be taking bad leads and forcing them into a bad sales model.”

For more Campbell’s thoughts on pricing, including some tips on how to incorporate effective persona-based pricing strategies in a sales call, and the effect a price change can have on company’s bottom line, check out the rest of his interview on The Predictable Revenue Podcast.