Pricing Strategy

Tomasz provides a summary of pricing frameworks that covers strategies (Skimming, Maximization, and Penetration), philosophies (cost-based vs. value-based), structure, and position.

Kevin provides a case study of a pricing change he made that increased ASP and revenue retention, but was difficult for his sales team to explain to customers. Kevin then came up with a new framework for pricing change decisions that incorporates the buyer's experience.

Early-stage B2B startups often make pricing mistakes like setting prices in a vacuum without customer input, sticking to an initial price point too rigidly, pricing too low, and overcomplicating structures. Tyler Gaffney advises startups to have pricing conversations with customers to determine an upper bound price and an anchor point of comparison. Start by qualifying prospects before discussing price and delivering the price in real-time conversations. Don't panic if customers object initially but keep fact-finding to understand constraints. Track key data from pricing discussions in a simple spreadsheet to gain insights that inform future pricing tests and strategies.

HubSpot initially set prices arbitrarily as a startup but realized they needed to update pricing to match the value they delivered. They conducted a three step process: 1. Analyzing retention and competitor pricing 2. Getting feedback internally and from customers 3. Implementing with consistent Meetings while having the right people involved. The contact feature pricing change was initially scary but worked out well due to their sales model. They grandfathered in existing customers to remain generous. The Freemium sales product launched quickly with an autonomous team and shifted their frame of reference internally. The Freemium approach has generated good NPS results and upgrade economics.

Kyle provides data from a survey and individual case studies that show that pricing changes are a significant source of revenue growth for high-growth companies.

Saa S prices are not usually lower due to competition from developing countries. While Zoho initially charged lower prices from India, as they grew they normalized their prices. Most Saa S products are not commodities that can be easily swapped, so customers are willing to pay fair prices for trusted brands. The total cost of ownership and risk of switching makes customers unwilling to switch for just slightly lower prices. While competition does limit how high prices can go, truly free competitors do create some downward pressure on pricing. Overall though, Saa S prices have not come down significantly over time.

Mathilde provides a case study on how Front started rapidly iterating on their pricing with tests in small cohorts, in order to test their LTV/CAC, market position, buyer Personas, and pricing to value.

GitLab uses a buyer-based open core pricing model where features are tiered based on who cares most about the feature. The free tier contains all major features to promote adoption and growth. Lower tiers have more relative value per dollar to make it easier for free users to upgrade. GitLab aims to balance capturing value from paid tiers while promoting adoption of the full product scope. They default to moving features to lower tiers quickly to increase usage and contributions. The CEO makes final decisions on pricing and tiers based on recommendations from the product and other teams.

Bill Gurley discusses optimal pricing strategies for online Marketplaces, arguing that a lower "rake" or commission rate is often better than a high rake. A high rake can create friction, make suppliers unhappy, and allow competitors to disrupt the marketplace. Examples of Marketplaces with low rakes like Booking.com and oDesk show how they were able to dominate their industries by charging suppliers less. However, some companies like Facebook and Apple charge a high 30% rake, which has alienated potential partners and even launched competitors like Amazon's Kindle Fire. An optimal rake balances what a marketplace can extract from suppliers with what it should extract to maintain a healthy ecosystem.