Determining the right pricing strategy for your subscription-based offerings takes more than sheer luck. Given that pricing significantly impacts revenue, why do enterprises often neglect this vital piece of the monetization puzzle? There are a variety of reasons why avoiding implementing an enterprise pricing strategy is common. One of the main culprits is a misunderstanding of what a pricing strategy is or how it is different from a pricing model. Let’s clear this up by providing definitions for each of the terms.
A pricing strategy refers to the processes and methodologies used to set prices for the products and services offered. It takes into account segments, ability to pay, market conditions, competitor actions, margins, costs, as well as other variables. Additionally, pricing strategies and tactics vary between companies, as well as across countries, industries, economic conditions, and industry maturity.
A pricing model is a framework used for setting prices and takes into consideration how products and services are packaged. For subscription-based enterprises, there are plenty of pricing models to choose from, each with unique advantages and disadvantages. This Overview of Enterprise Pricing Models blog shares more information on today’s popular subscription-based pricing models and those just now gaining traction.
A Solid Pricing Strategy is Essential
Studies have shown that even small variations in pricing can raise or lower revenue by up to 50%. With that being the case, why are companies – small, medium, and enterprises – overlooking this golden opportunity to optimize their revenue? A lot has been said on this topic and reasons range from a general misunderstanding of the enterprise pricing strategy, through the resources and time required to feeling overwhelmed.
Instead of focusing on why pricing strategies are typically a low priority, let’s focus on the benefits of developing and implementing an enterprise pricing strategy.
- Value: Allows for tight alignment of the value your products and services to price points
- Profitability: Ensures the profitability needed to keep your business in the black
- Target market: Provides insights into your buyer personas
- Customers: Provides a better understanding of your customers, their needs, and what they are willing to pay
- Competition: Improves your understanding of the competition
- LTV/CAC: Provides the ability to stay on top of customer lifetime value (LTV) and customer acquisition costs (CAC)
- Growth: Accelerates growth since pricing is four times more effective in improving growth than acquisitions
If these reasons aren’t enough, as previously mentioned, pricing can raise or lower revenue by up to 50%. Convinced that your enterprise can optimize revenue and profitability with a pricing strategy? If so, there are criteria you should follow to ensure that you’re not leaving money on the table.
The Do’s and Don’ts of Implementing an Enterprise Pricing Strategy
As with virtually everything, there are preferred methods and pitfalls. To help you on your pricing strategy journey, we’ve highlighted enterprise pricing strategy best practices and what to avoid.
What To Do:
1) Determine business goals
Increasing profitability and cash flow are typically a given. However, what other benefits do you expect from your pricing strategy – improved market share, increased revenue per customer, reach new market segments, convert more prospects, enhance competitive advantage, etc.?
2) Know your cost of goods sold (COGS)
Determine the cost of developing and producing the products and services, customer acquisition costs, marketing and operational costs, staff hiring costs, and include a reasonable profit margin.
3) Understand your target market
Identify your customers, their needs, what they value, what they are willing to pay, and CLV (i.e., buyer personas).
4) Determine product/services value
Understand what your customers value about your products and services, what needs are met, and which remain unmet, how your offerings can be more relevant, etc. This process may take the form of customer surveys.
5) Conduct competitive research
Consider a SWOT (strengths, weaknesses, opportunities, and threats) analysis. Be sure to include at least three direct competitors, as well as a couple of indirect competitors, and take into consideration their revenue, market share, competitive differentiators, products and services, packages, promotions, discounts, pricing structure, etc.
6) Select and execute the pricing strategy
With information in hand, you’re ready to create the strategy and put it into action. However, with nearly 30 pricing strategies at your disposal, determining the right one may seem daunting. Here are five of the most common pricing strategies, advantages, disadvantages, and when best used.
- Premium-based: Leverages the quality of your products and services over the competition and helps promote customer loyalty. However, if the price doesn’t match the quality expected, customer churn is a possibility. This strategy is best for brands, products and services that outpace the competition in quality.
- Cost-plus: One of the simplest strategies, you take cost plus a profit percentage. Considered a safe choice that nearly always provides profitability, it won’t maximize revenue, and revenue loss is a possibility when unforeseen costs arise. This pricing strategy is commonly used by companies selling physical goods.
- Competitor-based: This is based on setting prices in line with the competition. It helps drive customers to your brand and away from your competitors. Companies that get the best results from this strategy can keep their costs low, offer products and services in saturated markets, have little product and services competitive differentiation, or are businesses just starting out.
- Penetration-based: Typically used in highly competitive markets, this strategy is for companies entering the market, expanding into a new geographical location, or launching new products/services. The hallmark of this pricing strategy is attracting customers by offering products and services at a lower price than the competition. While it’s not financially sustainable long term, it can be used as a first step in building customer loyalty.
- Value-based: One of the more complex strategies, its goal is meeting customer expectations, while providing products and services at a price that customers believe your offerings are worth. On the plus side, this is a flexible pricing strategy that helps to build customer satisfaction and loyalty. The downside is that determining the right price takes time and effort. Additionally, customers may value different things about your products and services, making it tricky to lock down pricing. Most experts believe this pricing strategy is best for SaaS enterprises.
What Not To Do
With how best to select and implement an enterprise pricing strategy covered, let’s look at what to avoid.
Determine the strategy in a vacuum: Obtaining the information needed to determine and implement an enterprise pricing strategy that best suits your business model needs to be a team effort. In addition to management, be sure to include employees from sales, marketing, and product development. And depending on the size of your company, it’s beneficial to also include finance and operations.
Consider your pricing strategy a one-and-done activity: To ensure enterprise pricing strategy optimization, it must be analyzed and evaluated on a quarterly basis. Having a dedicated team that monitors your pricing strategy to ensure ongoing profitability is critical.
Pricing Strategies in Action
Some companies have mastered the art of enterprise pricing strategies. Known for quality products, Rolex and Mercedes Benz easily outpace the competition when it comes to providing superior products, which makes the premium-based pricing strategy the one of choice. There are plenty of companies to choose from that are successfully using competitive-based pricing strategies – think Coca-Cola or any streaming service. Finally, Starbucks best illustrates the value-based pricing strategy. Their loyal customer base is more than willing to pay a bit more for a daily latte.
One enterprise pricing strategy we didn’t cover is price-skimming. Salesforce provides an excellent example. They were first to market with a cloud-based customer relationship management (CRM) solution, enabling them to charge whatever they wanted. As competition grew, they lowered prices and created new offerings/pricing tiers to capture new market segments. Those were primarily small and medium-sized businesses (SMBs).
Unlock the Full Potential of Your Pricing Strategy
The right enterprise pricing strategy can set you apart from the competition and help you grow a loyal customer base. However, the pricing strategy processes previously described will be for naught without the ability to optimize revenue and automate operations. The final component to creating a profitable enterprise pricing strategy is found in an enterprise billing solution.
The right enterprise billing system not only enables you to monetize any revenue opportunity, but enables you to minimize or even eliminate errors, simplify the collections process, accelerate revenue recognition, enhance customer interactions, and more. Your pricing strategy is too important not to have a billing solution that can easily and automatically support billing tactics. BillingPlatform’s cloud-based billing platform is a complete enterprise billing and revenue management solution that provides everything needed to bring your pricing strategy to life. Give us a moment to answer your questions and set you up with an enterprise pricing strategy that fits your business now and in the future.