I’m writing this article because I want to give you guys reading something that can help your companies and also possibly your career, and it's my pricing and packaging roadmap to help grow revenue within your company. It's something I've been working on for many years, and it keeps changing and I keep making it better.
Growing up my favorite show was The Price is Right. I loved watching it, guessing the prices, the packages, I watched all the shows. It got to a point where I started recognizing the products and I started remembering all the pricing.
So the good and the bad was, I felt like if I ever got on that show, I would be able to take down that showcase showdown, win the car for my parents, get the refrigerator, get the vacation. I mean, I think I was really young at the point so I couldn't drive, but I really felt confident I could win.
The downside is I just stopped watching it because it wasn't exciting anymore. I already knew all the prices. But I mention this show because it's been around for over 60 years. It's translated in different languages all across the world. It's been rated as one of the top five game shows in the US. And it just shows how exciting pricing is.
People get jazzed up about it, they've gamified it. And pricing is way more exciting than any of you guys realize. Later on in life, I was fascinated by pricing when I was at the Cornell Hotel School, we were learning how to price airlines, hotel rooms and it wasn't until we got to menus that we realized there’s a whole strategy of psychology about how you price your menu, where you put the items, what numbers you use. And after that, every time I went to a restaurant and saw a menu, I never looked at it the same way again.
So, who reading this owns pricing within their organization? And who collaborates with someone in their pricing team? Everyone should actually be nodding at their screen because we all work on pricing to some degree. And it's really an opportunity for product marketers to get involved in pricing so in this article, I want to arm you with some of the current pricing fundamentals so you can start adding value to your current organization and also to your career. First though, let's define pricing.
Creating, communicating & capturing value
Pricing is creating, communicating and capturing value. As product marketers, we're already doing this for our products, and so you're already making these decisions and now you can add pricing into the mix as well. Now the difference between pricing and subscriptions is that in the subscription business, it's all about the predictable reoccurring payments that those customers give you.
That's a really important concept, that predictable, reoccurring revenue. This is why subscriptions are very important. And this is why SaaS companies who get this right report that on January 1st 70% of the revenue is already booked. So think about that, more than half of your revenue is already known. I mean, that's exciting, that's predictable, and it's reoccurring and you keep getting that all the time.
So this is why investors love subscription businesses. This is why companies are switching to subscription. This is why we did that at Hired. This is why Twilio did that. This is why I know a lot of you are thinking about that as well. And Wall Street is rewarding this, we see it in the multiples that these companies are getting when they're going public from Zoom, Twilio, Slack - Slack growth is a theme that everybody wants to have.
What areas does pricing & packaging impact?
To understand this further, we first need to understand what areas does pricing and packaging impact? And so let's run through this at a very high level.
- Revenue - this is your sales and your customer success groups. They're bringing in all that revenue.
- Finance - thinking about margins that mid dollar retention, all the different ratios to make sure you're profitable.
- Sales ops - they're probably doing deal desk, what are the different discounts that you're doing, promotions that you're running.
- Product - you're building a product, you're pricing it, you want to make sure you're getting value for that.
- Professional Services - what additional services are you offering? That's usually TNM - how do you price and package that?
- Tools - how do you deploy pricing? Is there a pricing calculator? ROI calculator? How do you build a quote?
- Enablement - how do you train sales to talk about pricing so they understand how they negotiate it?
- Customers - they have to understand pricing or they won't buy it, a confused buyer won't buy. Buyers don't want to make mistakes.
- Competitive intelligence - what are your competitors doing? You're not copying their pricing, but it's going to inform your pricing.
- Geographies - you have to think about foreign exchange rates, how do different companies and countries think about value? How do they want to buy your product? How do they use it?
- Legal - you want to make sure if there's third-party hard costs or GDPR or HIPAA if you're dealing with the government, with healthcare you need to make sure that legally you're covered when it comes to your pricing.
- Contracts - you want to make sure the language in your contracts is covered as well.
- Compensation - if comp isn't in line with pricing, I've had reps come to my desk and say I'm not selling that product that you just rolled pricing out for. I don't get a commission for it. The comp team was then on my speed dial after that.
- Revenue recognition (rev rec) - especially for public companies, rev rec is very important. This is not a grey area, it's not routable, if the rev rec rules are changing for SaaS and you're not aligned to that you can't recognize your revenue and that has huge impacts for public companies.
- Partners - how do you extend your product? How do you expand your pricing and packaging? But the most important one here is...
- Senior executives - they all care about this. I've never met a senior executive that doesn't care.
In my capacity, I've worked directly with CEOs, CTOs and senior executives. At Oracle, Safra Catz and Thomas Kurian had to approve every single pricing decision I made. One time Safra was on vacation and didn't approve a pricing decision and the product was ready to go, but we had to hold back launch because I couldn't get pricing out and live. And so I had to keep track of her vacation schedules after that.
We've worked on partnerships where we're trying to extend the product and white label askew, co-sell it, upsell it, and every time we get into pricing the founders and co-founders are all jumping on the phone and they want to talk pricing and how they can make their pricing better for all of our partners, and so when you have this tool in your toolbox, you are up-leveling not only your career but the revenues for your company.
And we're not talking skip levels here, we're talking leapfrogging many different levels. And instead of being invited to the table, you get invited to your senior executives office to sit on that couch and start strategizing around pricing and packaging. So I know a lot of product marketers want to know how do you increase your influence and take that next level? Well, this can do that for your career.
A strategic cross-functional person should own pricing - like YOU
So ideally, a strategic and cross-functional person should own pricing. I know some bigger companies have pricing groups and so you as a product marketer should work with them, regardless of the size of the company, or you should just raise your hand and own pricing because ideally, it's you, it's the product marketer because:
- We're already strategic,
- We're already cross-functional,
- We're already teamed for a product launch,
- We know our customers,
- We know the market, and
- We know our users.
And so we should understand pricing, and if your company doesn't know who owns pricing you should raise your hand and say, “I already know the elements that make great pricing, I want to own it.” So let's discuss how.
How to own pricing & packaging
Product marketers own go-to-market, and go-to-market for pricing is a component of it, but that's really to organize product and sales. Product management though, they have a product roadmap, and this is to coordinate everyone in the company. And so given pricing touches every single department in the company like I just explained, I think we need to have a pricing roadmap.
When someone doesn't have their eye on this, pricing becomes an afterthought, and you're making unintentional decisions, or maybe it has too many cooks in the kitchen with too many opinions. Then that's when you start losing deals, net dollar retention is down, customers start churning, they're confused, you're not profitable.
But when done right, you can win deals, it can become a differentiator, and you can help companies grow from 1 million to 100 million or even in the billions. So in order to build a pricing roadmap, I need to share two basic pricing concepts with you.
These are very important to master and understand so you can position yourself to ultimately drive the pricing roadmap. These will be the building blocks.
The first one is subscription and it has three key revenue buckets. This is the meat of the pricing concepts and it’s very different to traditional businesses, which cared about winning customers. So Microsoft would sell that CD for PowerPoint and Word, we would download and pay a big chunk of money. But in the subscription business, you're paying little chunks of money on a monthly basis, whatever that period is to use something.
So it's a win-win here because for the customers they think, "I don't have to outlay as much money", so it's a low barrier to entry, "if I don't like it, I'll just stop paying". For the companies it's easy because you can really win a lot of customers. So it's win-win.
Now keep is not something traditional businesses cared about, we care about it in SaaS because we want to keep our customers so they can keep paying month after month. We really care about how they use it and if they're getting value. And this is why the customer success departments were born. They're there to make sure they keep using it, they keep paying us month after month, year after year.
No-one wants churn - usage of our tools is really important. Before, Microsoft would sell me my CD and probably didn't care if I used it.
The last bucket is growing our customers. Now, this is where you're really in the money. People don't focus on this enough and this is where you do upsell and where you do cross-sell. How do you expand on what your customer's doing so they can do more and pay more money with you to really grow your LTV?
When you focus on this, this is where your revenues can skyrocket. And that's where growth comes from - it's in the expansion bucket.
An example - Gmail
I got a free Gmail address 15 years ago, and I still use it. They really kept me as a customer for 15 years now. They keep adding additional features. They've added calendars, Google Sheets, they really kept me as a customer, but where they really got me is how I grow with them.
I now use my Chromecast, I have my Nest security cam, I've got my Nest thermostat, I went from one security camera to four so I can keep track of all my kids. And they've really grown with me and now I'm just throwing my money at them. If I look at work we're a Google shop, we're giving them money, I mean this is where Google's really in the money, why their stock price is doing so well.
Win, keep & grow - the framework for your pricing roadmap
So every marketing tactic already focuses on one of these buckets and when you consider these, pricing does as well, it's no different than what you're doing already. So the term you might have heard consultants call this is acquisition, retention, and expansion. The easy way I like to remember it is win, keep, and grow your customers. So these are all the same things when you hear them, and this is the beginning of a basic yet important framework for your pricing roadmap.
Continual development of the four pricing levers
The last set of pricing concepts I want to cover is the continued development of the four pricing levers is price points, and this is where the real power comes into play. So this is:
- What do you charge?
- What's the discount?
- Are you doing pricing segmentation?
- Is it value-based pricing?
These are all things you can answer.
What are the shared problems? This is what Pragmatic Institute calls it and I really like it. If you've got a lot of the same problems, and you've got the same problems, you guys are different segments. Product marketers are used to doing or calling it by industry, geography, title or role, size of company, etc., it's basically clustering problems.
This is what do you charge for? What is your customer value? Are you B2B or B2C? Talk to your customers, if they value a metric, that's your pricing metric, because that's what they care about. It's probably what they're thinking about when they think about ROI too. Some examples are users, data, email, message, integrations, there are so many different pricing metrics there's not a finite number on my list.
So you've heard of good, better, best. That's very common, and there's science behind why good, better, best works really well. Some of the conversation options include, where do you put new features? How do you cross-sell? How do you upsell? All of these are very important and they're very powerful.
Picking your price point is like The Price is Right. People gamify it, you get your price point, people are buying it, it's working, you get that rush. It's so exciting. And you want to see that revenue come in month after month.
These three levers, highlighted in red, are more categorized as value levers. Each of these is a very powerful tool, you have to have every single one of them. And if you're not making a conscious decision, you've actually made an unconscious decision on how you're doing these and so you're doing it already by default.
Game of Levers
So you have to use these levers but you have to be extremely careful when you use them. As Tyrion Lannister would say, “when you play the game of levers, your revenue wins or dies. There is no middle ground. So you have to pull these really wisely.”
These levers are powerful strategies and price points and while they’re akin to The Price is Right, I compare it more to Game of Thrones, one of my other favorite shows, and those who know how to control these value levers, control the Seven Kingdoms, they earn their seat in the Iron Throne. So these affect many different departments like I talked about earlier.
They require internal strategy and coordination, they're huge projects within your company and as you saw, they have a lot of reach, reach that goes beyond that wall in the north, into the northernmost areas of Westeros, where the white knights live. And they're always present.
So, when you go back to work after reading this, I would actually think of all the different ideas that you have, think of your to-do list and try to go and categorize it into these different areas. Because as we know, when you're creating, communicating or capturing value, you're already making these decisions.
If you're not sitting down and thinking about what's actually going to happen when winter comes, then you made the decision anyway, and it's an unintentional decision. And we all know that in the Game of Thrones when people aren't thinking a couple of steps ahead, remember the Red Wedding where house Ray took revenge on house Stark, that was really tragic. We want to make sure you're on top of all of this.
What’s the take-away?
So for the people that didn't see Game of Thrones, the takeaway here is that it's all about power, having the right strategy, knowing when to pull it, when to play it. And with that, you can gain a lot of power. And the power here is revenue within our companies, and each one is really complicated. But the more you exercise your brain and the more you think about it, the easier it becomes, the better you are at this to grow revenue at your companies, grow your growth rates, grow your profits, and even grow your career.
Ready for action
Alright, so how do we take all this and execute on it? Your pricing roadmap organizes these pricing concepts. This is a standard swim lane, I use it for our go-to-market, and we can use it in our pricing roadmap. So you’ve got your revenue buckets, which is win, keep, and grow (or acquisition, retention and expansion), so you can always think about it.
Then you layer on your pricing levers. And the pricing levers apply to each of those buckets. And then you can put in dates, I would say initially don't put in any dates into your pricing roadmap, keep that blank. Just start putting in details. As you hear different ideas that work, as you're talking to somebody else, look at your to-do list and start putting them in here and see where it shakes out.
The reason why I have it like this is you usually start with win and acquisition for smaller companies, you need customers first which is why it goes in this order, then you start retaining and keeping them, and then you want to grow them. I've only got one there because people tend to forget about grow. You're not doing everything all at once over time, but you kind of figure out what your cadence is for your company.
A first-hand example of why this is important
When I was at Responses and Oracle for our mobile strategy, I would just riff on different ideas of pricing and packaging strategies. There was a time where Safra looked at the margins for one of our products and she did not like the margins, it wasn't profitable enough. I didn't know this was happening and then it went to Thomas Kurian, there were emails and that email eventually ended up in my inbox and I looked at it and it was, "We're going to get rid of this product. It's not making enough money for Oracle".
I looked at that, and my product marketing side said, “We're not getting rid of this product. This is part of our core messaging. It's part of our positioning. It's our differentiator when it comes to the market place, this is what our customers want, our users want it, they're going to go somewhere else, they're going to go to competitors”.
I mean, red flags were going up all over the place. And I was thinking about it and I remembered, “wait, I had some ideas”. I remember I was concerned about profitability for this one product line. A year ago, I was in Vegas talking to one of our mobile specialists and I went and pulled up those notes, and I was like, "Okay, I have an idea here". I remember the senior executives were in a meeting talking about this very topic and I fired off an email that said I've got some ideas, we're going to meet.
So he runs out of his meeting and I run down there and do some numbers in my head. Within 15 minutes, I'm talking to a senior executive telling him why, putting my product marketing hat on, this is why we can't get rid of it, here are some ideas. And I'm going to need to get on a product roadmap, I need to work with engineers, etc. but he approved it. It took us a year to get it together, I worked with product managers, I worked with engineering, and we got that project off.
It went from something that Safra wanted to get rid of because she didn't like the margins, to something becoming profitable, it became a differentiator. The product manager and the engineers I worked with filed for a couple of patents and it hit the news-press.
I'm not at Oracle anymore, but when I look back at that I smile and I'm like, “You know what, as a product marketer, I got involved to influence the roadmap, I influenced profitability” because we already have the skill sets as product marketers on how to position and when to know to keep a product or get rid of it.
When you layer on pricing and packaging and know how it hits the bottom line and revenues, you become a very powerful product marketer.
And so the resource above is what I use to get prof collaboration, how I crowdsource ideas, a lot of my ideas don't just come from me, I talk to different people, I talk to my co-workers, I talk to specialists, and when you know pricing and packaging fundamentals it just sparks different ideas.
The hardest problems that you have are an opportunity for you because in the mobile space, it's very complex, and because of that I knew our competitors probably couldn't figure this out, and when we figured it out we became a differentiator.
Create a detailed summary for sign-off
So then you take this and you create a detailed plan to get sign off. Because it's so cross-functional, you do have to go to different executives, different partners, and you can do different versions of this, I've really tweaked this over the years.
This is an example of focusing on acquisition or winning customers - I took out a lot of our details and I just put in some generic questions in here so you can use it as a framework. I’ve used this to focus on retention, I've used it to focus on growth, but you lay everything out and you put a timeline to it and say “What do we want to do?” so you can start coordinating all the different functions within your company.
You can take action, you can do it by month, by quarter, by year, pick whatever timeframe you want.
Expansion & the importance of LTV
Okay, so let's revisit this one more time.
I'm going to share a bonus pricing concept with you which is expansion. People always overlook this, but when you get expansion right, those are the companies that are on the path to IPO, they have these huge valuations and this is where the money starts falling into the bucket. And companies that are in the hyper-growth phase then go to $100 million, a billion, this is what a lot of people are calling monetization. That's a very popular term right now and this is what we're talking about.
So when we're growing customer revenue, there are really four different areas.
- Raise prices - so Apple raised prices across nearly all their product lines last year. For some of their best products the prices were raised by 20%.
- Cross-selling - I keep upgrading to the iPhone, the iPad, I've got my iWatch on, I've got every Apple product they put out, every time they put something out, I'm buying it and so I'm getting cross-sold here.
- Upselling - when I keep upgrading my phone, they keep putting out new versions and so my phone starts getting old, I want the new one. So we’ve got to upgrade our customers, they keep spending money with us.
- Increasing usage - because I love taking so many photos and videos of my kids on my phone, I keep upgrading my storage plans with my Apple phone as well.
So these are really the only four ways and I've debated this with many people - and if anyone can think of a fifth way, please hunt me down and let's talk about it, because there are many times I thought I had a fifth way and then I realized I didn't. These are really only the four ways that you can grow customer revenue. So get as creative as you want, but it's probably gonna fall into one of these four buckets. And what does this mean?
This actually increases LTV and LTV is so important, because it's about lifetime value, it represents the total revenues your customers will spend with you in their entire lifetime. I am 15 years strong with Gmail. If you look at Google and Apple, I've just been with them for so long.
LTV is a very important SaaS metric. A high LTV drives how much money you can spend to acquire new customers. You don't want the cost of acquiring to your company to ever be more than your LTV, and understanding pricing increases the LTV not only for your company revenues and your growth rates, but also for your career.
So, time to go out there and make sure your pricing is right.