Pricing is probably the most important lever to influence and impact profitability. A McKinsey study reveals that effective pricing strategies and tactics can deliver a 2 to 7 percent increase in return on sales.
If your prevalent concerns are around churn, and not risking your relationship with prospects and existing customers, you are in all likelihood either under-pricing or discounting heavily. An independent research of 2,200 SaaS companies suggests that only 6% have done sophisticated pricing research on buyer needs, and willingness to pay.
Pricing is a dynamic tool for growth and it is imperative that you engage with your pricing strategy consciously. Here is Joshua Bloom’s (Managing Partner, North America, for the global strategy consulting firm - Simon-Kucher & Partners) take on why companies start a pricing project, and the trends he has observed. The following insight is from author Ajit Ghuman’s book Price To Scale.
I’m wary of my own selection bias because I tend to work with companies who feel that they have pricing power — but that’s not always the case.
In about 20 percent of projects I work on, we’re being asked to come in, because they want to get more aggressive, or try to find ways to simplify or gain share, or potentially price more aggressively and figure out how to do that in a controlled manner.
The majority of companies I work with feel that they’re leaving money on the table. And we often find that they are, and their pricing elasticity is pretty low. It’s a bit of a self-fulfilling prophecy — if you feel you’re leaving money on the table, you probably are.
But I have seen elasticities across numerous studies that are fundamentally different from those you get in a consumer study. One of the benefits for Simon-Kucher & Partners is that when we take a step back, we have vertical practices across different industries.
Yet, the elasticities are different. Another way to think about a proxy for elasticity is how important pricing is as a value driver, or as a purchase decision criterion.
If you do a consumer study, price is typically the number one factor for consumer-packaged goods or suchlike.
But if you do the same study in B2B software, it will not be surprising to see that it becomes something like the third to seventh most important factor.
It’s a proxy for saying, “Yes, pricing matters.” It’s not that it doesn’t matter at all, but on a relative basis, I think the software industry has much more pricing power than other product types.