Pricing. It’s one of the topics in the entrepreneurship/startup world that’s full of ideas and anecdotes like “raise your prices!” (which isn’t necessarily wrong most of the time) and “charge for value, not hourly.”
This advice isn’t wrong, but it’s incomplete. Once you’ve implemented these, you’re making more money, but you’re also missing out on something much bigger:
The ability to use pricing to strategically drive or pause growth.
Most companies view pricing as a static thing that can’t change. My view is different. I’ve seen that you can strategically use pricing to change your metrics based on your ability to deliver, or when you’re not able to deliver for any number of reasons.
You can strategically use pricing to change your metrics based on your ability to deliver, or when you’re not able to deliver for any number of reasons.
John Doherty
Here’s What I Mean
Here’s what I mean, and what I explained recently on a podcast.
Say you charge $1,999 per month on average for your services. You get 50 leads per month, which is the maximum your sales team can take every month and still close enough deals.
It takes you 6 weeks to recruit a new sales person and another 6 to get them up to speed where they can handle 50 leads per month as well.
What do you do? Do you overload your sales person? Let good deals die on the vine? Cut back marketing spend? Close down your lead forms?
Some of these could work (cutting back on marketing spend is always a lever you can pull, if your marketing is effective), but this is also where strategic pricing comes into play.
Your minimum has been $1,999 per month, and you’re closing plenty of deals. Leads aren’t scared off by it, and your close rate is better than average with 60% of qualified leads closing into customers.
One move you could make is changing your minimum monthly engagement to $2,499 per month, or even $2,999 per month. If that doesn’t slow leads enough, you keep dialing it up.
This buys you time to hire a new sales rep and get them up to speed.
But what do you need to get them trained? You need to get them leads.
Lucky for you, you have a lever to pull again. Lower your minimum and increase your marketing budget, and boom.
You have leads for your new sales person.
Now take this same principle and apply it to losing an account manager, or maxing out an account manager, or having a lot of bugs to fix, or rolling out a new feature that you want to get adoption quickly from new users only.
This is the power of using pricing strategically. If you can increase leads or usage by lowering your price (and/or increasing your marketing spend), you can also decrease leads and usage strategically for a time by increasing your prices.
More leads is not always better if you can’t handle or serve them. More leads is only better when you can take the calls and close the deals. More usage is not always better. More usage is only better when your product or service is working well and you can deliver the value you’re selling.
So how do you find the pricing that the market will bear, and then adjust from there?
Four Steps to Using Price As A Growth Lever
Here’s how it works.
1. Establish Initial Pricing
It probably goes without saying, but you can’t optimize something you don’t already have.
A cardinal rule of pricing is that everyone starts out charging too little at the start. This is usually because you lack confidence in what you’re selling and you’re trying to get traction of any sort.
The easiest way to establish pricing is to see what your competitors are charging and what they’re including, and mirror that. You may have to adjust this down (and ideally remove something from the offering, though this could backfire if you remove something necessary) because your brand isn’t strong enough to charge the same prices as a more established provider in the space, but it’s a good place to start and better than licking your finger and sticking it in the air, which is approximately what too many companies do when setting their initial pricing.
2. Track the Metrics
Now, track your funnel metrics to see how it’s performing. At minimum, track these:
- Traffic to your website
- Views of your key pages
- Leads scheduled (or accounts created, or whatever your flow is)
- Calls had / trials started
- Number of qualified calls / activated accounts
- Number of closed deals and total revenue added
- Churned accounts and churned revenue (logos and dollars)
We track these weekly, and have for years, in a simple company metrics scorecard spreadsheet. By doing this, we can track how our metrics have changed and what we need to do to continue growing while also fulfilling our promises to prospects and customers.
3. Experiment to Find Your Optimal Pricing
Once you have pricing that drives you consistent leads that close at the price you’re charging, start adjusting them to find the point at which the metrics (leads, sign ups, activations) change. Usually, this means changing your pricing and then giving it enough time (a few to some weeks, to be scientific about it) to see changes, while also accounting for seasonality and changes in other metrics, like a big press hit or increase or decrease in traffic.
My preferred way to do this is to keep raising prices until the numbers decrease by about 20% with a single change. At that point, you know you’ve hit your ceiling. I think back it off so that the numbers come back, and now I know where the line is.
4. Raise and Lower Prices to Drive Results
Now that you have this knowledge, know that you’re in the minority of people. Most people are terrified to change their pricing, when the reality is that they’re almost definitely underpriced.
If they’re scared to change their pricing, then they don’t really understand their pricing.
You, on the other hand, now do.
You now have the power to strategically grow lead flow by lowering pricing, or to lower lead flow by raising prices.
Have fun!
