For startups, pricing is one of the most powerful growth lever that’s hiding in plain sight.
A thoughtful pricing strategy will propel new customer adoption, strengthen your unit economics, and promote the adoption of new products. And particularly in an environment that has shifted from “growth at all costs” to responsible growth, it’s doubly important for your team to focus on a thoughtful pricing strategy.
Pricing strategy is both art and science–and doing it well is difficult… even in a single-product, single-plan setting. As you scale, you’ll invariably introduce new features and products that will have to be packaged and priced for multiple personas and segments.
In short, it’s a discipline that even in its simplest forms is difficult–and at scale, turns into a multi-dimensional and multi-disciplinary optimization exercise.
To help demystify the art and science of pricing, we welcomed Kelly Esten (SVP and GM Enterprise at Toast) to share some of her top lessons learned from Toast’s journey to $900M+ in ARR and $2.5B+ in revenue.
Kelly’s leadership at Toast has included owning its pricing for half a decade, and there are few practitioners better situated to share insights from the front lines than Kelly. While the full session is only available to Guilds, our private communities for CXOs across tech, we’re excited to share five of Kelly’s top lessons:
1. Optimize Your Packaging to Eliminate Package Killers
For starters, it’s impossible to think about pricing strategy without considering packaging. Packaging refers to what you’re selling (the composition, or bundle), while pricing is of course how much you’re charging for a product.
There is an art to crafting the perfect package, which if achieved, can unlock massive value. The best way to think about your packaging is using the Leader, Filler, Killer approach.
Leaders are must-haves. These are the features and functionalities that brought the prospect to consider purchasing in the first place. Often, the package is even named after this feature or functionality. Using the fast-food example from Kelly’s slide below, an example of a Leader would be the Big Mac in the Big Mac Combo.
Fillers are nice-to-haves. They might not be the entire reason your buyer is there, but they add value and make sense to include alongside your leaders. An example of a Filler would be the fries and drink that come in the Big Mac Combo.
Killers have no value and are unacceptable in a bundle. These features are fine to sell alongside your leaders and fillers, but not in the same combo. Those who want them will pay extra for them, but those who don’t will likely be dissuaded from buying the combo at all if killers are included. An example of a Killer would be if coffee were included in every Big Mac Combo. Sometimes you want a coffee after you eat, in which case you’re happy to pay for it, however, most people would be deterred from buying a Big Mac Combo if it meant getting a coffee as well.
Source: Presentation from Kelly Esten, citing Simon & Kucher
2. Make Sure The Price Is Right
Much has been written about the fundamentals of pricing, but the critical idea that Kelly points out when it comes to the subject is that “your goal should be to achieve pricing that makes your product easy for reps [or your site] to sell and easy for customers to buy.” She explains that
“pricing is a reason to buy Toast, not an objection. Pricing needs to be simple, clear, and the more customers buy, the better their price should be.”
For those getting started on their pricing journey, Kelly suggests three core concepts to master:
Willingness To Pay
Willingness to pay (WTP) is the most important pricing concept. Meaning, for a given customer, what is the most they’d be willing to pay for your product or services?
Most advanced pricing analyses look at WTP across your entire current and prospective customer base and run econometric calculations that maximize outcomes against your business goals (adoption, revenue, profitability, etc.).
Getting started, though, is simple — just make calls to a handful of customers and prospects, show them a (new) product, and ask them the following three questions:
- How much feels like too much to pay?
- How much would feel too cheap?
- What feels like the right price?
If you repeat this with a few customers or prospects, you will quickly see a trend emerge that will give you a ballpark figure for the right price.
Relative Pricing Levels & Discounting
As you’re getting started, remember that your price levels should reflect how you want to be seen in the market relative to your competitors. If you’re marketing your product as a premium offering, you’ll want your price level to be higher than the competition. If you’re marketing your product as a low-cost alternative, you’ll want your price level to be lower.
Promotions and discounting can be very useful tools to have in your pricing toolbelt, but should generally be used thoughtfully and sparingly. Discounting makes go-to-market motions challenging to scale, creates discrepancies between similar customers, and can in fact shape the perception of your product as a “discount” product. For this reason, you should make sure your standard pricing is data-driven, fair, and properly set for your market, and only use promotions and discounting in rare situations that call for a bespoke, strategic approach.
Pricing Metric
A pricing metric refers to the unit or variable(s) by which your customers pay. The number of seats/users is the most common pricing metric in SaaS. Pricing metrics are an often-underestimated and under-examined pricing lever.
As Toast and many other companies have discovered, there is a massive benefit to choosing a price metric that aligns you and your customers under a common goal–for example, pricing against transaction volume (“the more you sell, the more we make”) or cloud analytics usage (“the more valuable analytics you run, the more we make.”) A “we grow when you grow” approach is vital, and it’s important to remember that “more seats” does not always equal “more value derived.”
3. Establish Your Pricing Team & Meet Often
Your pricing team is a critical consideration when evaluating your existing pricing strategy, conceptualizing new ones, and subsequently implementing them.
At early-stage companies, the pricing team generally consists of the founders and Marketing leader. At growth stage companies with larger teams, the pricing team should generally consist of VP/C-level executives from Marketing, Revenue, Finance, Product, etc. actively debating and discussing to formulate new strategies. Important things to consider during these discussions are the customers’ willingness to pay, competitive levels, and cost.
Given that your product is going to continue evolving and changing, your pricing team should be meeting at least twice every year to do a complete evaluation of your pricing strategy and determine any changes or updates that need to be made. The team should also convene on an as-needed basis when new products are being introduced that require pricing calibration, reconfiguration of packaging, or Sales/CS enablement.
4. Give Your Customers Many Ways to Pay
Ways to pay is an often very underleveraged pricing strategy that can be an absolute game changer.
When you want to buy a used car, you can pay cash, you can finance your purchase, or you can lease. If car dealers only allowed customers to buy who could pay the entire amount upfront in cash, they would lose 99% of their business.
The same challenge applies to the tech industry. It’s highly likely that many of your potential buyers will not be able to pay the entire amount of their contract upfront, so if you are inflexible on your payment methods and terms, you will lose a large swathe of potential customers.
By giving your customers many ways to pay (for example, based on usage or on a quarterly basis), you nearly eliminate the “it’s too expensive” objection and make your product far easier for customers to buy.
5. Test, Implement, and Properly Enable Your Team
Once your pricing team has decided on your new strategy, it’s important to test it before implementing it, as making changes to your systems can be very costly and time-consuming. It is much easier to begin by selling and marketing things that are not yet built into your systems to see how they are received. Then, once validated, the proper changes can be implemented in your product, CRM, and/or any other relevant systems.
In addition to system updates, changes must also be made in order to ensure the new strategy is adopted by Sales. New collateral needs to be created, your website needs to be updated, and most importantly, your Sales comp model will likely need to be changed to align with your new strategy. In sharing her experience with this at Toast, Kelly said that Sales enablement and compensation model alignment are critical accelerants of new pricing adoption.
Key Takeaways
It’s important to remember that pricing is never final. Your pricing team should convene regularly, you should continually be monitoring the performance of what’s currently in place, and you should always be thinking of ways to use pricing to fuel growth.
Some of those methods might include:
- Optimizing your packaging to add Leaders or eliminate Killers
- Adjusting your pricing to reinforce your positioning and match what customers are willing to pay
- Establishing a cross-functional pricing team that meets regularly
- Introducing new ways for customers to pay
- Investing heavily in sales team enablement when launching new pricing to drive adoption
Innovation when it comes to pricing is a trademark of top-performing companies. To properly leverage pricing to drive revenue, you need the right people on the pricing team to analyze the right data to determine the right levers to pull at the right time. It’s no easy feat. However, as Toast and many other industry leaders have shown, it’s entirely possible, and when done right, can unlock incredible growth.
Guilds by FirstMark are private, invite-only communities for exceptional C- and VP-level leaders from breakout technology companies. The Guilds come to life through regular live events, an online community, and a library of resources and insights that are only available to members.
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