What Nobody is Telling You About Pricing Operations…
The Software as a Service (SaaS) market projections for hypergrowth were recently put to test as part of this McKinsey Study. It revealed that, of 100 public SaaS companies in the US with revenues above $100 million (that were analyzed in May 2021), the median revenue growth rate was just 22 percent. Not 30-40 percent as was touted. The study highlights that, “The purest test of a management team and its operational discipline is arguably how well it can maintain strong shareholder returns as the business matures. That’s especially true for software as a service (SaaS).”
This brings us to the consideration around pricing operations. Creating or transforming pricing strategy must be done while changing and improving pricing operations, that result in actual price improvement and revenue growth.
Zuora’s Senior Director for Product Marketing Strategy, and Pricing Leader Natalie Louie (ex-Oracle) shares her candid views on the importance of Pricing Operations. She shares insights on Zuora’s journey and their transformation, as originally seen in author Ajit Ghuman’s book, Price To Scale.
Pricing strategy is one thing, pricing operations another.
For me, at least, the former is the easy part.
In pricing operations, you face a lot of “no”, and “our systems can’t do this or that”.
This is part of the reason I joined Zuora— I was tired of people saying ‘No’ to me.
At Oracle, and other start-ups I worked with, we were using Enterprise Resource Planning (ERP). ERPs are basically built for one-time sales. You sell the product, then you mark it up with your margin and you sell it. It works beautifully for one-time sales.
But now, when you enter the world of recurring revenue models where the customer is at the center of a new business model -- who is buying your product on a monthly or annual basis, buying based on usage, buying more, buying less or putting things on pause whenever they want - the linear processes of an ERP break down.
Making pricing changes based on how your customer wants to buy, kicks off a six month or more customization project to your ERP. ERPs don’t understand a subscription business model where you have multiple customer touch points and pricing strategies based on value, usage, percentage based pricing, customizable pricing metrics or unique complex billing scenarios, etc... When I worked with an ERP, I had to write use case stories, be mindful of many system limitations, work with PMs and Engineers and wait 6 months until my new subscription pricing changes went live.
I see two common tech stacks in the pre-Zuora world:
- Are you using an ERP? It’s just going to be a lot of customization and change orders, and there’s not going to be any flexibility to launch and automate the pricing strategy and billing scenarios you want quickly.
- Or it’s a lot of manual spreadsheets and human error. I’ve lived in this world of manual spreadsheets, working with teams in the US and even across Europe and India to manually crunch numbers, normalize data and aggregate it back together in order to get my pricing and billing out the door.
I have spent my career “Frankensteining” the entire pricing process together - where I was stitching together people doing some work in manual spreadsheets, plus some customizations and change orders.
And then having to wait for six months until my new pricing was ready to launch!
And this is just launching pricing -- I’m not even talking about billing yet.
I used to tell all product managers on my team that I would need six months to a year for a big pricing change. I would ask them to not even begin architecting or building a product until we talk, because if there’s usage, I need to be able to track the data and feed that back to the customer.
Customers are going to get a bill based on the usage and have questions about it. You have got to make sure the customer can access their usage data and tie it back to their invoice, so they know they are being charged correctly.
Additionally, one critical area is also revenue recognition (rev rec). You don’t want to set off any rev rec red flags. In fact, sometimes, rev rec is the first meeting I have, to understand what the rules are, because their policies and language are black and white and there isn’t much room for interpretation.
If you don’t get rev rec right, your entire pricing strategy can fall apart. I’ve got horror stories about this done wrong and gone bad too, we’ll save that for another time. Rev rec has to be one of your main stakeholders, along with legal, contracts, billing, quoting, payments, collections, all the up and down stream processes the office of the CFO oversees.