Note: The following content is adapted and re-published from author Ajit Ghuman’s book, Price To Scale.
Nosto is a multinational company that makes product recommendations like the ones we see on popular e-commerce websites and apps like Amazon and Ebay. Today many online merchants and retailers use its technology to generate additional revenue by intelligent product recommendations.
For its initial pricing, the company started out with a pay-on-performance pricing model. This took off well because it was “ostensibly risk-free” on the client’s side - clients only paid for conversions - i.e. when a consumer clicked on a recommendation to buy something. This gave the company massive product adoption at the outset, allowing them to scale and grow.
But eventually, four to five years into working with this model, the company had to contend with unpredictability. It may have been risk-free for clients, but it was no longer risk-free for Nosto.
So in 2017-2018, the company transitioned to a fixed-fee model, even as they expanded their product offerings – many of which could no longer work within a pay-per-click or a cost-per-acquisition framework.
They needed to incentivize clients to use more products while maintaining a fair price. Nosto then went for a fixed monthly fee that was set, based on the revenue of the merchant.
Kevin Paiser, Global Head of Sales at Nosto says, “We decided to stick to revenue as our main value metric since it is the best measurement that gives the client a feeling that we’re there to grow with them. As they grow, we do, too. That’s the main evolution we had — a fixed model to provide all products within a set plan.”
Modular Pricing – Adapting and Responding to Client’s Needs
Nosto introduced three levels of plans believing that clients would adopt everything, but that was not the case!
Clients wanted some products removed, and a corresponding reduction in fees.
Nosto then pivoted to modular pricing and gave clients a ‘Build Your Own’ plan option. Now, when someone wants to access Nosto, they first pay a flat license fee based on revenue. Based on the modules they want; each costing X or Y is based on their size.
They also started charging for services. Kevin observes, “When you do a lot of things for free at the beginning, and when you change that internally, there is massive reservation, say from the sales team. But when we started doing it, we realized that clients didn’t question it, because they expected to pay those fees!”
Rollout and Sales Enablement
Here’s Kevin doing a deep dive of how they worked on their rollout and sales enablement strategy:
“In our initial pay-on-performance model, our pricing strategy was explained only on our website. There were no contracts signed.
Once we made our pricing change, we began to sign contracts.
We had to get educated on the process of creating contracts, negotiating on them, and the terms that people come back with when you sign 12-month contracts.
A big part has also been educating sales representatives on how to handle objections because they were used to a very easy sales pitch earlier — “Use it, and if you don’t make any sales, you don’t pay.”
We make sure that the reps are prepared on the pricing model. Here’s how we do it:
1. We give them the rate card and ensure that they know how to use it.
2. We recommend doing test pitches and start thinking about how prospects will react. The good thing about the team is that they have a lot of questions on whether something is right or not or can be done a different way.
3. We do a lot of sessions on pricing follow-ups and make sure everyone learns it.
Putting proposals together has been important as well — like how best to insert a nice slide that looks at the pricing proposal but does not confuse clients. At the beginning, a lot of salespeople thought they could send ahead three or four options. But clients would see too many numbers on the slide and get confused.
So, we focused on making nice, presentable pricing that didn’t feel chaotic and was easy for the client to comprehend.
Finally, another thing that comes with pricing is a set of rules of engagement regarding discount approvals. There's negotiation with every client, but you also want to give some freedom for a salesperson to provide some discount levels and know-how and where to ask for certain approvals.
We’ve had to create quite a few processes on how to do these approvals and determine who can give out the next level of discount.”
3 Key Takeaways from Nosto’s Pricing Playbook
1. Optimize pricing from market share to predictable revenue: Once Nosto grew larger from a pure startup phase, predictability became the objective of the next iteration of its pricing. It adapted pricing structures and payment terms to get pre-fixed recurring revenue upfront.
2. Charge for professional services and add-ons: Additionally, while the company previously did not charge for services. Now the company started to charge for professional services packages that the customers were readily willing to pay for. The company was able to further grow its average deal size by adding a series of product add-on modules that gave its clients flexibility while allowing the company to monetize its products commensurate with its value.
3. Don't take sales enablement lightly: Finally, for any pricing change to actually work, it is crucial that the sales team be able to create proposals, contracts, negotiate easily. The operating rules must be made clear with repetitive training that gets the sales motion on point.