Business-to-business (B2B) technology companies always seem to be exploring new ways to grow top-line revenues. Companies look at new channels, products, and sales processes to achieve this growth.
These work, but companies often overlook a far easier way: optimizing pricing and packaging.
Tech companies often set their prices, and develop their packages of features, based on anecdotal information, such as feedback from their sales force, client requests, the intuition of their senior executives. They are getting feedback based on wins and losses, but without undertaking a disciplined analysis. That iterative, and insular approach to pricing and packaging can often leave money on the table, or prevent the prospect from ever reaching the table at all.
Pricing and package optimization is one of the fastest and easiest ways for you to increase revenues. Relative to building new products, building a new channel, or any other growth initiative, it requires very little time and effort.
The research takes a few weeks, but the insights can be applied to generate additional revenue immediately, and continue to produce value for years to come.
What Is Pricing and Package Optimization?
Pricing and package optimization is made up of two parts: Market Pricing Dynamics and Price Modeling analysis.
Market pricing dynamics evaluates data from your wins, losses, sales reps, and competitor research in a systematic way. The goal is to understand the role of pricing levels and pricing models in decisions, and how it affects prospect and client behavior.
This analysis uncovers major pricing ‘themes,’ which help you create policies to align your pricing with the market.
Market pricing dynamics helps answer questions like:
- How important is pricing to your clients’ purchase decisions? Is it a primary or secondary factor for customers
- What role does price play when we win? Why do we win when we win and lose when we lose?
- If we lower our prices, will we win more often? Can we raise our prices and still win the same number, or close to the same number of deals?
- Are we using the right metric for pricing? Is it aligned with customer value?
- Does our pricing metric cause us to be priced way above value for some customers and way below it for others?
- How are your competitors pricing their products, and how should you respond?
That’s the first step in addressing price and packaging.
The second step is using the themes and patterns revealed to undertake price modeling analysis. Price modeling analysis helps you optimize your pricing, packaging, and product roadmap using an AI-assisted, quantitative model.
The methodology for this research is Discrete Choice Conjoint, which presents prospects with different packages at different price points and asks them which they prefer and which they would buy.
Since your customers assign different values to different features, and have different perceptions of value when different features are combined in a hypothetical package, the data gets very complex very quickly.
These responses are analyzed using a conjoint simulator, to develop precise pricing and packaging decisions. The simulator makes heavy use of artificial intelligence and advanced analytics to analyze this massive, complex dataset.
When completed, Price Modelling answers the questions:
- How many packages should you offer?
- How much should you charge for each package, and what are the revenue optimizing price points?
- What new features will maximize revenue and share growth?
Which Companies Need This?
Many B2Bs never undertake a structured analysis to develop an understanding of their basic market pricing dynamics.
Companies need this understanding before they can undertake more sophisticated analysis, such as conjoint analysis, which allows firms to fine tune their packages, and determine the value of potential features in the product roadmap.
This analysis, in turn, requires more analytical processing than a human can manage. The volume and complexity of the data require specialized tools that are usually out of reach for most companies to manage on their own.
The bottom line is that most B2Bs have not taken the time to get a clear understanding of how customers value their products, or how different feature-sets impact revenues.
That translates to lower revenues.
Return On Investment:
There is no heuristic for how pricing and package optimization will impact revenues at a particular company, but the result is nearly always positive. Reaching optimal pricing, especially for a portfolio of products or packages of features, doesn’t happen by accident.
Most companies that undertake a pricing analysis end up selling more at higher prices — generating a return that is a multiple of the cost of the analyses themselves.
In addition to higher revenues, companies also make discoveries about their businesses that were counterintuitive, but revolutionary for driving growth.
For example, a Healthtech company set pricing for hospitals based on their total billings, a metric that was neat, elegant… and wrong. Some huge hospitals had very few doctors on staff and found it way overpriced while some smaller hospitals had many doctors and viewed the company’s software as a huge bargain
Sometimes the most valuable outcome of an analysis is determining a strategy NOT to undertake. A client considering the development of a very expensive feature was able to test demand, and impact on its packages of offerings, using price modeling analysis before it made the investment in that feature. Although the return on that feature would have been positive, it was shown not to be strategic, nor worth enough in terms of its impact on price and overall sales, to make it worth the cost of development.
Higher Revenues Hiding in Plain Sight
Companies that are willing to take radical new approaches in human resources, marketing, and technology are often reluctant to address something as fundamental as pricing.
In some cases, this reluctance comes from the fact that a company’s pricing methodology has the weight of history and culture behind it. In others, it may be because a company’s management is unaware of the best practices and methodologies for setting prices.
Whatever the reason, there is a huge opportunity for nearly every B2B company to modify their pricing, and their offerings, to quickly increase revenues.
This money is hiding in plain sight, and can be harvested quickly by the firms that are willing to invest in their understanding of the markets they serve.
To learn more about pricing and package optimization, see our additional resources on our Pricing Strategy page