Avoid These Pricing Mistakes
And how to fix them
As a tech CFO, pricing is one of the most difficult undertakings I’ve personally wrestled with.
The journey to price optimization is complex, but you don't have to navigate it alone.
BlueRocket's pricing experts have all operated companies before. And they’ve used that hands-on experience to help companies like Salesforce, Gitlab, Brex, Zendesk, and Google optimize their pricing.
Readers of this newsletter get a pricing conversation with BlueRocket’s CEO Jason Kap.
TL;DR:
Putting Pricing in Sales (or in multiple departments)
Sales is bad, Finance is good, Product is best
Waiting too long to update your pricing
Take a peek every 6 months
Over indexing on feature comparison
People shop on the core job to be done, not features
Losing sight of “non-pricing” concessions
Payment terms, legal venue, and liability cap all matter
1. Putting Pricing in Sales (or in multiple departments)
Where geographically in the org does pricing usually sit?
Sales is the worst place - it’s like putting a fox in the hen house. Sales is a slave to quota.
Finance is good - you are making P&L tradeoffs on what you will build and what the return will be. The CFO is all about capital allocation, which is impacted by pricing.
Product is great - price is a part of product. Products have features and they have a price for those features and the associated value proposition. Pricing is linked to value.
Pricing should sit consistently in one department (unless you are a conglomerate, like Yamaha, selling both dirt bikes and electric pianos). This is because you are ideally thinking about the total wallet share you can capture with an ideal customer profile.
And having it in multiple departments can cause intra team conflict if a customer is buying multiple products across multiple business units, and the business unit leaders are measured on margin.
Instead, you’d prefer to have a central org who can look at the customer’s wallet share and importance to the business wholistically, rather than creating a “Lord of the Flys” scenario amongst your GMs.
2. Waiting too long to update your pricing
According to Jason Kap, CEO of BlueRocket:
“All companies should look at their products and what they are priced at every six months.
It serves a couple of functions: The first function is it allows you to determine whether or not you want to build something new or you have all the parts you need. I've never met an engineering organization that didn't want to build their way out of a deficit. And that's not always necessary. Sometimes, reswizzling what you have is more effective than something else.
The other thing revisiting it every six months does is it allows you to see the competition…when you're looking at what I have and maybe repackaging, you're looking at the competition good and hard, and you're saying, where am I relative to the competition?”
Another reason you should look at your prices (and potentially raise them) is because if you are growing, the price change isn’t a change at all to your new customers.
We tend to forget that there are an entire future cohort of customers out there not anchored to a historic price. And their willingness to pay may be more if you’ve improved your product since then.
3. Over indexing on feature comparison
Feature comparisons can be nonsensical. Companies look at a competitor and they say, well, that competitor doesn't do everything that I do. And so that's not actually a like-for-like comparison in the marketplace… No one is going to use that instead of this.
When in reality, people are more practical than that. They aren’t shopping based on features; they’re shopping on the core job to be done.
Companies often over value their features because they’re proud of what they built, and they lose sight of the “main thing being the main thing.” And that’s what the core of your pricing will always be linked to.
4. Losing sight of “non-pricing” concessions
Contract features are a part of price. They all have a value attached to them that either you, the vendor can capture, or can give away to your customers to get a deal done instead of providing a larger discount.
Examples of “non pricing” terms in a contract you can rely upon:
Payment Terms: Number of days (net 30 vs net 60), number of payments (upfront, annually vs quarterly), and financing (buy now, pay later)
Choice of Legal venue: States and countries that are business friendly
Liability: Uncapped vs capped
Take it from Jason:
“You can buy my service at this price, but you have to pay me in 30 days. And the choice of venue and law is Washington state and there's a limit to my liability.
And when we go into a company we ask them to pull us 10 random contracts. We go through and we identify for them where sales has often traded off some of these very valuable things but has not seen a net increase in price.
So if I'm giving you three times as long to pay, there is a time value of money. There should be some consideration for that, right? Or if I'm allowing you to change the choice of venue and law from Washington, where it's convenient for me if anything goes wrong, to the Bahamas, where there, I don't know if there's a rule of law there or not, and I don't have lawyers in the Bahamas, there should be a price.
All these things have a price attached to them.”
-Jason Kap, Founder and CEO of Blue Rocket
Be aware of the chips being traded.
Run the Numbers
Also on Spotify / Apple
I interviewed the Michael Jordan of pricing and packaging - Jason Kap.
On this episode we cover
What the vibe was like at Microsoft in the early 2000’s under Bill Gates
How pricing is a series of strategic decisions a company makes
Where in the org pricing should sit
How often companies should update their pricing
Jason’s philosophy on discounting and how CFOs can better work with Sales teams to find the right range
And how framing and psychology play a role in how a deal is presented and priced to the end consumer
While this is a podcast on pricing, it may as well be one on corporate strategy and buyer psychology.
Great piece CJ. There’s endless mistakes to make when it comes to Pricing and especially packaging — which are the feature bundles, payment terms etc. i often think it’s because price+the package is the most powerful lever you have in getting a customer to buy.
another element to think about here is how the customer identifies the problem, aligns to your solutions and then purchases the product. And finally how does initial price and packaging impact your ability to renew and upsell your customer.
Mistakes when i release your worldwide policy