A cardinal consideration when assessing value is that it needs to be measured by business outcomes, and impact to the mission or consumer. This BCG report speaks of the need to build a ‘value bridge’ that avoids substantial dips in enterprise value, and leads to the future high-growth state. Knowing which pricing levers you should use to minimize price erosion and maximize opportunities for upselling over time, is imperative.
In a nutshell, selecting the right value metric/s can have a tremendous impact on your business. Evaluating the best fit requires you to look into some basic principles like alignment with your customer’s needs, how easy it is to understand (is it intuitive to the user), and if it will grow with the customer base.
Pricing Guru, Johnny Cheng delves into the details of how to set your value metric, by highlighting examples from his time at Gainsight and Marketo. The following insights were originally published in my book, Price To Scale.
The main benefit of a solution selling model is that you could have zero to two value metrics per product.
At Gainsight, our primary metric was users; our secondary metric was the number of customers (i.e. customers of our clients).
If you think of the individual modules (belonging to the product), they were either based on:
1. Users, or
2. Customers, or
3. Users and customers, or
4. None (which is a flat fee)
With that kind of flexibility in a model, we could start to hone in on where we really capture value.
Certain things just do not make sense when aligned to users. For example, if we had this capability that basically communicates out to customers, like marketing automation for CS. In this, you cannot just pass on the number of users — the value of this module has nothing to do with users. It has everything to do with customers, though. If I have 5,000 customers, I’m going to reach out to them and charge you based on those customers.
So, certain things are measured on different levers, and what’s nice is that you can tweak this on multiple axes. That was a really big change because Gainsight, as with a lot of SaaS companies, relied too heavily on users. A lot of SaaS companies just go ahead with users as the metric, not caring if it doesn’t align because they don’t know how to price.
A lot of pricing professionals aren’t willing to change the value metric or explore other options because they’re afraid it will mess up ASP or sales cycles. But it is one of the few things you just have to get right, even if it means tweaking it. I learned this from my time at Marketo. When I first started there, the industry used sent email volume as the pricing metric. If you think of how that lever aligns to value — it doesn’t! You can send a bunch of emails out, but it doesn’t mean that you're going to capture more value from them or get more contacts. It’s also extremely hard to predict how many emails you’re going to send in the following year.
So, we were one of the first to pioneer the concept of pricing per contact, which actually aligns very closely to value – “If you use my product to get more leads and pay us more money, you’re still more successful in return.”
Finding this lever is almost like a silver bullet, which a lot of companies fail to do.