Pricing as a Growth Lever
Joshua Bloom, Managing Partner @ Simon-Kucher & Partners
Ascent Conference 2019
[00:00:07] I actually have a pretty ambitious agenda, I want to talk to you all about pricing and kind of the strategic side of why it’s a growth lever. But I also in the next 15 minutes, want to give you a few tactical takeaways that you can go back and take your own companies. So maybe just as a start, a show of hands, who has had to grapple with pricing at their companies? OK, that’s great. About 80 percent and my question, hopefully the other 20 percent who didn’t raise their hands after this, they will be inspired to go tackle pricing.
[00:00:37] All right. So I’m coming in with a kind of fact base that I’ll I’ll share a little bit of context.
[00:00:44] And I work for a company, Simon-Kucher and Partners, that has been around for thirty five years. And I’ve been with the firm for the last 16 years. I lead our software, Internet and media practice here in the US and we focus on top line growth activities, marketing, pricing, sales and kind of underneath there. We’re best known for our work in pricing. It’s about 60 percent of the work we do. We have thirteen hundred people worldwide and at 35 year history we’re doing over a thousand projects a year at this point. So a really solid kind of benchmark fact base to start from. And as I said, I focus on the tech vertical and that covers all different types of software companies that you can imagine, as well as kind of consumer Internet companies, two-sided markets and media companies.
[00:01:31] So let’s start talking about pricing. So why is this important?
[00:01:36] One of you don’t have to necessarily take my word for it. We do a lot of outreach to companies, to investors. One of our recent surveys, we surveyed 70 private equity and venture capital firms and looked at where they spent their time and effort and money during their holding period and what the actual return was. And in good news for us, pricing was the highest ROIC activity, kind of outpacing sales investments, marketing investments, cost or Operation Focus, which are traditionally the areas of the highest, highest investment, but actually somewhat under invested. So this is an area for continued continued improvement, but definitely something with higher ROIC. Just taking one more macro step back, why are so many companies tackling pricing, monetization and revenue model challenges? You could say part of it is a a result of a long term trend, which is that that kind of transactional business of goods is largely being replaced by services and ultimately subscription revenue models. So I’ll have a lot of material in this section. Pricing covers a lot of different topics, but I’m going to focus on this subscription topic and what it really means, why pricing is an important lever inside there and what are what are some of the tactics you can apply. So obviously there’s a lot of buzz words when you when you dove into the topic of subscription businesses, things like land and expand, expand and renew, et cetera.
[00:03:08] I wanted to give us a little bit of a data driven fact based to start this discussion and why land and expand really matters. And especially that expand component is pretty much captured in this chart that if you think about the customer acquisition cost for a dollar of annual contract value for a new logo customer, you’re paying on average more than a dollar. So your payback period is maybe 13, 14 months. On the other hand, if you’re able to land that customer and focus on cross-sell up sell opportunities, metering usage, getting increases at renewal, those are all cheaper activities to drive. And you’re looking at thirteen to twenty seven cents on the dollar on average to drive that type of ACV. So it’s a fundamental lifeblood of the of the subscription business model. And it’s where I’m going to focus so I can look at those three levers to kind of drive a land and expand strategy. I’ll focus on upswell, which could be tier upgrades, it could be cross-sell to another product. Look at usage, how to think about metering and licensing. We’ll think about retention. What is the best way to take advantage of that kind of particular point in the customer lifetime journey? And maybe to inspire you all with a little bit of a benchmark here. The top 20 percent of SAS companies are able to get one hundred and twenty percent improvement on their ACV year over year. So if they have a dollar that’s up for renewal next year, they’re getting a dollar, 20 cents.
[00:04:40] OK, so now I’m going to dove into some of the tactics, so the first land and expand topic is, is that land peace and how to upscale if this website pricing page looks familiar to you or looks like your own companies?
[00:04:57] I apologize, but this is often referred to as the before picture or something we call feature shock that it’s incredibly tedious list of features with no clear value statements.
[00:05:13] Going through an exercise of looking at what are the true value messages that you’re trying to convey, focusing on communicating those, there really is not just beauty and simplicity in that clear value messaging, but but increase conversion. So in an online channel, this is kind of a before and after test, zero additional features, only changing the skin of the pricing page to focus on what customers are getting as they step up in each package. This resulted in a 60 percent higher conversion contract value.
[00:05:50] So that’s the land. Let’s talk a little bit about how to expand, so one of the biggest questions you’ll tackle and what we say is how you charge is more important than how much you charge that fundamentally pricing is an exercise in dollars and cents.
[00:06:06] It’s an exercise in understanding the right business model. I’ll take an example of a public company. We work with Blackbaud CRM software that had historically been priced on a per user basis and in general per user pricing was the dominant mode in the 90s, early 2000s. But obviously with cloud deployment models, we have a lot better telemetry to measure kind of value and use. So we help them look at both alternative metrics and how to migrate people to their new service offering a number of years ago. And one of the things we found was as opposed to users which remain flat records, kind of donor records as a CRM system focused on fundraising, grew 14 percent a year in their customer base. So if you did a cohort analysis and said we land a customer in year one, what does that customer look like in your for they’ve got forty two percent more records than where they started changing that metric and getting ninety five percent of the installed base also migrated to that metric and as they made this conversion, helped their stock price grow forex in the last few years. All right, another example, a kind of cross-sell, everyone’s favorite hardware company to look at is kind of industry leaders, even in the hardware space, more, maybe more traditional industry. Apple has been known for being the pricing leader. That’s how they’re often referred to in the cell phone market, smartphone market. And they have been consistently increasing prices with the launch of their flagship product each fall, essentially over the last few years. But something changed. If people have been watching the news, they made headlines with the iPhone 11 Macs launching net pricing announcement a couple of weeks ago by keeping prices flat. Any idea why they did that? Any ideas from the group? Well, it’s no longer just about hardware, they’re trying to cross-sell other services, the main point of that, that announcement was all the news services are launching a TV platform for five dollars a month, publications platform for ten dollars a month, credit cards, no fees, interest only. Essentially, they’re starting to look at the phone as a beachhead for other cross sale opportunities. And at that point, the economics of the model of just maximizing profit on the hardware itself start to lose appeal and you start to see that it’s more the land entry point. OK, you have a customer, you’ve expanded the customer, how do you keep that customer, retain that customer? But also don’t you shoot for attention, shoot for increase to offset churn. A lot of companies will look at targeted price increases at renewal. So they’ll say, well, especially in an enterprise sales environment or mid-market sales environment, we might have had people coming in at different prices, different discount levels. And at renewal is an opportunity to revisit some of that pricing and say are they actually where their peer group is? Can we say with a straight face that a customer walking in right now with a similar characteristic would see a similar price? That’s more of a lift of kind of the underperforming price points from the past. There’s an opportunity to say, have we added value? That’s part of the exchange. And have we fundamentally invested in the product since they first purchased kind of shift the whole pricing curve? And are there other things we know about their customer behavior that would allow us to differentiate pricing even on the customer specific level? So this is an example from an EdTech client where we looked at some of those differentiating factors and we’re able to see there were differences in churn based on things like customer tenure. And it wasn’t necessarily even linear that there might have been a honeymoon period in the first year, but actually it’s a year or two. That is really the critical moment when people decide are they going to stick with this software or are they going to find something else? But once you make it to kind of a long tenured customer history, then then there’s there’s real value in use. So we looked at these different type factors, applied this type of program of differentiating price increases and was able to we’re able to realize double digit price increases this past year with basically all of that flowing to EBITA without significant churn. The last piece retain this is maybe going a little farther afield from pricing, but fundamentally another project we worked on that that maybe you were all familiar with is Hubers loyalty program. So the writer loyalty program that was rolled out this year, again, if you if you focus on what’s been happening with Uber and Lyft, a lot of the financial coverage is about not just their rates, but the degree to which they are retaining customers and driving loyalty. So using loyalty programs to create different price levels for your most loyal customers and keep them engaged is part of that exercise as well.
[00:11:01] OK, so hopefully I’ve given you all a couple of different ways to think about the pricing problem, but maybe closing thoughts, I’ll let others close for me.
[00:11:13] Warren Buffett says if you have to have a prayer session before raising prices 10 percent, you’ve got a terrible business that that is the determination of whether you have a good business. And obviously, I think that’s that’s a relatively strong signal from the investor community. Let’s try from an operator, Steve Ballmer. This thing called Price is really, really, really important. And Steve Ballmer fashioned deep in thinking through revenue, price and business model is the difference between a successful company and a failure. So a couple of closing thoughts are on the importance. I hope you taken away a few things. And thanks for having me. Happy to connect with all the folks in this room here. LinkedIn. Thank you.
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