Pricing is one of the most important decisions a company can make. Revenue, sales velocity, customer satisfaction, and the longterm viability of the business are all wrapped up in pricing. But even with such high stakes, many startups either leave pricing as one of the last items on their pre-launch to do list, or forget to iterate on pricing as their product matures. Enter a newish discipline focused on optimizing growth, aptly called the Growth team. Neil Patel defines this team’s overarching objective as “every decision… is informed by growth. Every strategy, every tactic, and every initiative, is attempted in the hopes of growing.” With this singular goal Growth teams have naturally turned their attention to one of the core components of growth- pricing. Tactics to optimize their company’s pricing might include creating a scraper that aggregates the pricing plans of all their competitors. Or perhaps A/B testing the pricing page to see which copy resonates more with prospects.
While these types of projects help provide useful data they overlook a crucial question- how do customers feel about current and past pricing models? Exclude this priceless real-world feedback at your own peril. It’s easy to “optimize pricing” in a way that results in a failed business. Customer Success teams are in a unique position to provide insights into how customers view a company’s pricing model. Growth and Customer Success teams should work together to create pricing plans that are in line with the value customers receive from the product and maximize revenue.
A value-based approach to pricing
Exceptional Customer Success teams are obsessed with providing value to their customers in order to help them achieve their goals. When this value is directly tied to their company’s pricing model it’s a win-win for them and the customer. However, only 41% of seed stage companies take a value-based approach to pricing (source). Starting off with simple pricing is a viable strategy for an early stage startup, but as the company narrows in on its ideal customer profile the pricing model should match up with expected use cases.
Pricing along a value metric that aligns with usage ensures customers get more of the service as they grow — and that the company captures more revenue in sync with this increased value.
For example, a document storage company might start off by offering 3 storage tiers. The Growth team has ensured that their pricing is slightly below average and they can feature-match their main competitors. Over the following months the Customer Success team discovers that customers want the ability to control where their data is stored. This company’s pricing plan could be missing a key value component because by not accounting for the value derived from localized data storage. Pricing along a value metric that aligns with usage ensures customers get more of the service as they grow — and that the company captures more revenue in sync with this increased value. Additionally, other teams across the company might not be aware of this element of their company’s value proposition. Product Marketing might not be prioritizing changes that will enhance this feature. Marketing could be attracting more customers by highlighting this feature. And so on.
A pricing model that includes a 3 Part Tariff (3PT)
Components of a 3 Part Tariff (source):
1 Part Tariff/ Linear Pricing (LP) — Each hosted document costs $0.10.
2 Part Tariff (2PT) — The software has a base platform fee of $10,000 and each hosted document costs $0.10 more.
3 Part Tariff (3PT) — Again, the software has a base platform fee but the fee is $25,000 because it includes the first 150K hosted documents are free. Each additional hosted document costs $0.15.
3 Part Tariffs capture more value from customers while also leading to higher customer satisfaction rates. Opting into a predetermined usage plan removes psychological and financial barriers customers might face when they have to pay for each incremental usage tier. Providing an element of fixed cost allows the customer to adequately budget and increases the likelihood that they will commit to annual pricing for a plan that might be even be larger than they initially need. Because the variable pricing element tied to value remains customers are willing to pay for incremental usage that surpasses the base platform fee. Figuring out what is a reasonable base platform fee, what incremental increases to the value metric should cost, etc. are the bread and butter of brilliant Growth teams.
Customer Success driven growth
Early stage companies who are most concerned about attracting new customers might be less focused on capturing more revenue from their existing customer base. However, hugely successful companies know to tap into this revenue source as much as possible. Companies bringing in $10MM-$40MM ARR attribute an average of 23% of new revenue to upsells and expansions. Attracting this revenue also requires a lower Customer Acquisition Cost (CAC) with the average SaaS company spending $.93 less to expand $1 of ACV for an existing customer versus bringing in an additional $1 of revenue from a new customer (dig into more SaaS revenue and Customer Success insights here). This is Customer Success driven growth. When Growth and Customer Success collaborate on pricing the customer and the company win.