How to Launch and Iterate Your Pricing Model

Mastering Your Value Metric and Other Tips for Establishing Your First Pricing Model

DEAR STAGE 2: We have been in stealth for over a year and have a handful of design partners using our software, but have not started monetizing yet. We’re trying to narrow in on our initial pricing model for launch later this quarter. Where should we start? ~Ready to Launch

DEAR READY TO LAUNCH: What a great question! There are so many mistakes made in pricing and this initial launch is critical. I called on Peter Zotto, former Managing Dir and Subscription pricing expert at Price Intelligently by Paddle and Co-founder of ProfitWell, to weigh in. 

My conversation with Peter covered a lot of ground, but I want to highlight two specific points at this stage:

1. Selecting the right value metric

2. Having a framework to iterate on pricing over time

First, when it comes to pricing you have to get your value metric right. Peter advises that a good value metric:

1. Matches the exact component the customer is seeking

Peter offers the following rule of thumb: use the closest proxy for increasing your customers’ revenue, efficiencies, etc.

2. Is easily understood

Don’t force your customers to jump through hoops! It should be straightforward and a customer should be able to quickly figure out where they would land in your pricing model. If your customer can’t understand your pricing or has to do research and math to figure it out, there is no way they are going to internalize the value.

3. Grows alongside customer

The more your customers use the product (and perhaps the more successful they are with it), the more they'll be willing to spend. Make sure your value metric aligns with this growth, as it will help with upsells/cross-sells and lead to higher NPS and customer satisfaction.

The most common mistake Peter sees in selecting a value metric? Copying competitors. Too often, new entrants to a space assume the incumbents got it right. But you'd be shocked at how often companies get the value metric wrong. You need to do your due diligence, talk to your customers (and prospective customers!), and make sure you're picking a metric that hits all three points above.

Peter offered a great example to showcase a clear, easily understood value metric that scales with the customer: HubSpot.

HubSpot determines its pricing model by using the number of contacts as a pivotal value metric. For HubSpot, particularly in its nascent stages, the focus was on small businesses, often termed SMBs, or "mom and pop" shops. These businesses were guided into the realm of inbound marketing by HubSpot, with the primary aim of improving lead generation and conversion rates, which in turn bolstered their revenue streams.

Measuring the direct impact on revenue is a formidable challenge, as HubSpot lacks access to internal sales data or credit card transactions of its clients, so HubSpot had to find a proxy., HubSpot landed on using the number of leads or contacts within its system as an alternative metric. This choice is predicated on the logic that as businesses grow their contact lists, they experience increased lead generation and conversion rates, translating into higher revenue. This growth trajectory compels businesses to allocate more funds toward HubSpot's services, establishing a clear and justifiable pricing strategy based on the value delivered.

This model has served HubSpot well for nearly two decades!

Second, have a plan for how you establish, experiment with and change pricing. Peter has laid out a simple framework that takes you through defining goals, experimentation, and implementation:

There’s so much more we could share on this topic, but hopefully, this gives you a place to start as you select your pricing metric and begin testing pricing with your customers. 

Until next week!