Pricing Model Reevaluation: Tips & Steps to Success

During periods of slower economic growth, companies may be under pressure to find new ways to grow and maintain revenue and margins. 

In times like these, companies should take a fresh look at their pricing — especially if it’s been a long while since that has last occurred. 

As experts in helping organizations develop scalable and sustainable pricing strategies, we’ve outlined a few tips on refreshing pricing for companies with B2B offerings.

Tips & Steps to Successfully Reevaluate and Refresh Pricing Models to Drive Additional Growth & Revenue

1. Define business goals
2. Evaluate from three different perspectives
3. Add (or remove) a price dimension
4. Consider additional methods

1. Define business goals

Developing new pricing schemes effectively can consume a significant amount of time across your organization. Accordingly, before embarking on developing new a pricing scheme, having clarity of your company’s financial, customer acquisition and customer retention goals is essential. 

Also, understanding your customers’ perception of your firm’s products and services is equally as important. The company should ask itself several questions, such as:

Guiding questions to ask when defining business goals and pricing strategies:

• What do your customers and clients think of your pricing currently?
• Is the company trying to prioritize new customer acquisition, upsells, or customer retention?
• In order to grow operating income dollars, is the company willing to accept a lower gross margin percent?
• What other systems and processes are impacted by pricing changes such as billing and sales commissions?

2. Evaluate from three different perspectives

When new pricing is developed, a healthy exercise is to apply different pricing development methods and see if you arrive at the same or perhaps a different answer. 

Evaluating the pricing build across the following three lenses helps ensure that key considerations are not missed:

• Cost-Plus.  The cost-plus method forms pricing by applying a mark-up to the unit cost of the product or services.  Despite its lack of sophistication, this method forces one to understand the variable unit cost of their product or service, which is especially valuable when trying to understand unit economics.  This method is generally less straightforward for software and e-commerce related companies.

• Market Based.  Probably the most straightforward method is developing pricing based on what your competitors are offering.  The advantage is market awareness whereas the disadvantage is taking focus off understanding your unit costs, as mentioned in the previous paragraph.

• Value to the Customer.  One of the more challenging but insightful methods of developing pricing is understanding the value that your product or service creates for the customer.  For professional services-based companies, they may view the cost of their services as a percent of the total future labor savings their clients may realize.

3.  Add (or remove) a price dimension

Adding a dimension can help align what your customer’s value to what your business does best. 

At the same time, removing a dimension that does not ‘move the needle’ in the eyes of your customer could increase customer satisfaction and reduce business complexity.

Real-world example of adding or removing a price dimension:

Bridgepoint was engaged by a U.S.-based identify security company to help develop its B2B pricing scheme to support international expansion. 

After listening to the challenges associated with the current pricing scheme, Bridgepoint recommended adding a dimension to the pricing table based on a key operational metric. 

The added dimension aligned the client’s and their customers’ expectations on pricing and allowed the client to achieve their target profitability across their range of response options.

4. Consider additional methods

The following is a list of other considerations when developing new pricing schemes to improve profitability, customer acquisition or retention, or to reduce business complexity.

• Marginal Gain.  When possible, it is important to understand whether the amount of incremental margin gained increases or decrease as customers attain higher levels of revenue.

• Fixed vs. Variable.  How your pricing is structured between fixed and variable fees is one consideration that usually commands the most attention.

• SaaS Impacts. Based on our experience, this is a growing consideration within the SaaS industry as traditional SaaS offerings are moving to a mixture of fixed and usage-based pricing.  For example, the number of recurring SaaS services that customers need may grow on a monthly basis.  Adjusting from 100% fixed, traditional SaaS to a fixed-variable combination helps align the customer with the SaaS provider.

• E-Commerce Impacts.  Bridgepoint worked with a leading on-line vacation rental company that switched their pricing model for homeowners from 100% fixed annual fee to a pay-per-booking (100% variable) model.  The overall transition was successful and also resulted in simplified financial operations.

• Tiered (Banded) Pricing.  Another key consideration is providing customers with a discount for higher usage levels.  To simplify the offering, usage tiers may determine what pricing band the customer pays.

• Tip: Tiered or banded pricing is a form of fixed-variable pricing that can be tricky to design especially for new service offerings when the volume of usage is not yet well understood.  For new services offerings, deploying a fixed pricing model in the beginning is a good way to test the waters before companies can better understand how to align with customers and capture the upside with higher usage.

• One-Time vs. Recurring.  If a company incurs a material upfront cost to set-up a recurring service, the company needs to balance its financial needs in terms of working capital management with its long-term customer goals to determine how and when to charge for set-up costs.

Final Thoughts on Reevaluating Pricing Models

Revisiting your pricing models can improve profitability and also provide an opportunity to assess your understanding of your clients’ and customers’ needs. 

Moreover, bringing in an external resource can offer an objective perspective on your pricing goals and help remove decision roadblocks to future progress.

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