Value-based pricing is key to higher margins and growth, and it requires really knowing your buyer, says Patrick Campbell, co-founder and CEO of Price Intelligently, a Boston-based consultancy and software vendor focusing on SaaS businesses.
Many MSPs are new to this concept, Campbell says. “The two most ineffective ways to price are cost-plus based and competitive pricing,” he told an audience of MSPs at Continuum’s Navigate user conference in the fall. Moreover, customer acquisition costs are rising, and “there is a race to the bottom for feature-based pricing,” both of which are squeezing margins.
In contrast, says Campbell, value-based pricing is a growth lever. “Customers don’t care about our costs—they care about their costs,” [For] most of us, our margins could be higher if we understood the value of the product.”
Start with understanding the buyer, Campbell says. “We don’t really know our buyers. We’re obsessed with [customer] acquisition.” He adds, “The age of throwing stuff up against the wall, and seeing what sticks from a marketing perspective, and an acquisition perspective, and a pricing perspective, that age is essentially over.”
Developing Buyer Personas
There’s no magic formula for value pricing, he says. Rather, it requires conducting research to quantify buyers and develop buyer personas.
He suggests starting small, perhaps using a spreadsheet to list categories of buyers (dentists, lawyers, and so on), categories of features, and willingness to pay. Then in customer development conversations via phone, email surveys, or in-person—not a sales call, he stresses—ask what features they value the most and which they value the least. “The reason this is so powerful, you not only get rank order, but you get magnitude.”
Continually refine, he says. “If you know dentists don’t like it when you talk about some feature or value proposition, get it down on paper, and then start to challenge yourself.” For example, if you have insight into just one or two dentists, do you believe that insight represents most buyers in this category? As you learn more, update the persona.
Then ask customers and prospects about price points. At what price is a product: so expensive that they’d never consider buying it; expensive, but they’d still consider buying it; a really good deal that they’d purchase immediately; or so cheap that it makes them question the quality. “You might find you’re selling something for $50 a month but the willingness to pay is $100, or vice versa.”
That information, which is added to and refined over time, is the foundation of value-based pricing, Campbell says. “It starts with a hypothesis driven by buyer personas, collecting data from target customers, and consolidating that data and making strategic decisions about how to implement that data into your pricing.”
Don’t Lose Efficiency
Michael Boone, vice president and general manager, IT Services Division, at Duluth, Ga.-based CompliancePoint Inc., says his company has not developed formal buyer personas, “but we have some knowledge in our head [about customers] and certainly discuss price tolerance of the customer, and if we have to tailor the service to get the sale. But there’s only so far we will go so we don’t lose our efficiency.” However, he adds, “We will do things on the financing side.”
The concept of value is what CompliancePoint stresses when discussing pricing, says Boone. “We lead with value, and try not to discuss number of devices and breakdown. We will if the customer wants, but it’s about showing where there are cost savings or efficiencies in their business. If it’s healthcare it’s about how many patients you can see in a day/month/year.”
He adds, “We will never make the assumption we’re the least expensive option; we’re not using the least expensive tools, so we’re always tying [services price] back to cost savings, efficiencies, or an increase in [their] revenue.”
Coming up with a pricing formula for recurring services is not as simple as charging per user, Boone says. Employee costs, time expended, number of devices, and more all need to be factored in, he says.
“We also have a 90-day period in the contract where we go with the rate quoted, but then we can adjust up or down. We sit down with the customer and review the time spent over 90 days. We’re trying to avoid a dissatisfied customer because we charged them X; and vice versa, we’re not in the business of losing money. The more you do it the better you will get at pricing decisions.”
Different Perceptions of Value
Value-based pricing does make it more difficult to develop a pricing formula, says Rayanne M. Buchianico, owner of ABC Solutions LLC, a Clearwater, Fla.-based firm that provides accounting and tax services to MSPs. “Everyone perceives value differently; it’s difficult to have a standardized formula based on value alone; there has to be some basis for what you’re charging.” For example, as a starter, she says, MSPs need to understand the full scope of work by doing an initial network audit so they can properly price the services.
Campbell says pricing also needs to be adjusted and updated periodically to grow revenue. “You should be looking at your pricing every three months, and doing some sort of update every six months,” he says. “This doesn’t mean raising all your prices every six months. It means maybe moving a feature to an ad-on, maybe putting the feature into another tier, maybe changing your positioning in who you’re going after. Remember, your product is improving, so is your brand. Your price should be improving.”
Continue using this process, he says, recommending that a designated staff person devote 20 percent of his or her time to pricing.
“Your price is the very exchange rate on the value that you’re providing,” Campbell stresses. “You start looking at it that way, all of the sudden it’s one of the biggest growth levers you can use in your business.”