When you take into account the cost of operating a business, paying your employees, providing benefits, taxes, office cost, equipment, etc., how you price your product or service can really make or break your business. That’s why pricing is one of those most-discussed topics in business writing:
Pricing is a sensitive topic to bring up internally. Talking about changing prices can be scary because of the potential backlash from existing and new customers. Whether it’s competition offering a similar product at lower price point or a new tier you want to introduce, you’re going to have to carefully consider how your potential new customers and existing customers will receive your pricing.
As part of UX Research, pricing has become an important consideration in competitive research (where you are VS your competition), market research (where you are in your vertical/industry), and even growth.
Super-Simplified Pricing Economics
I’m not claiming to be an economic expert. But if you’ve taken a class on economics before, you’ve probably seen the supply and demand graph before. If you price too high, you’ll turn away potential buyers. If you price too low, you’ll undervalue your product but create a lower barrier to entry. Anyone can sign up and you don’t have to account for inventory (just operational costs, consider that a sunk cost you have to pay anyway to operate).
From a software subscription perspective where your product is readily available to anyone, there really isn’t a supply issue (unless your processing gets overloaded). So your demand looks like this:
So that’s all good if we’re assuming we’re selling either one product or one tier of subscription. There will be some amount of customers that will be willing to pay the price that you set for the service or product you offer. They will see the value of your product (hopefully) and are willing to pay for it on a recurring basis (for subscriptions) or convert at that price point (e-commerce).
What if we added more products or more tiers?
This graph models a very typical SaaS business. You have your lowest plan, a middle plan (which is always outstandingly-pitched by big graphics or says MOST POPULAR), and then a high tier. Sometimes you even have the whole “custom” tier that is meant for the big deals. You could also imagine this to be an e-commerce scenario that only has 3 products or packages (e-book packages from Nathan Barry look like this).
It’s actually surprising how well a simple economic graph can measure the likeliness of actual market forces. To put this in terms of revenue, you can view the same graph like this:
In many of the subscription businesses that I talk to that have multiple tiers, there ends up being a gathering at each end. Enterprises that have money will pay a premium for features (if your plans are feature-limited) , and startups or small businesses will start off at the low price plan and grow into the larger plans over time. Sales uses the term “land and expand.”
So how does this all matter to UX and research?
Churn and Loyalty
If you’re a savvy shopper, you will definitely do comparison shopping. You’ll look on multiple sites for the same item in order to get the best deal. That’s why websites like Slickdeals exist. However, if you’re a loyal customer, you might just return to the same site to get something, even if you pay a higher price. It’s because you had a great experience.
I’m talking about companles like Zappos that differentiate on service experience. These companies try to go out of their way to provide an extraordinary experience over their competitors, even when the price is higher than what they want to pay.
But in a business where you’re trying to earn repeat business (SaaS), repeat client work (Agency), or repeat buyers (E-Commerce), considering customer feedback on why people churn or go somewhere else is important in figuring out how to prevent your leaky bucket from leaking even more. On the flip-side, some of my research activities also involve finding out what are some early signals that someone might churn soon and setting up processes to retain customers pro-actively instead of reactively.
Also, knowing why people churn in your own business is important because you can grow your business by addressing the pain points of the people who left your competitor. This is huge. So how do you get there?
The Final Ask Process
One way we gather this feedback is through one final “ask”. You may have seen this already, but here’s what it looks like:
This method of gathering feedback at the potential last touchpoint with a customer is great, but it’s not foolproof. People, of course, can leave bullshit answers. And that’s just going to happen. But that’s okay because of the answers that are legitimate, people are surprisingly open to talk, and even tell you about why they switched away (more on that another time if you’re doing jobs-to-be-done interviews).
When you setup a system like this to automate cancellation feedback and combine it with the feedback from sales when they lose a deal to a competitor, you’ll be able to start figuring out what you can change with your product to meet demand. For us, price was a big issue in the feedback loop.
And that’s how we got started with changing our pricing.
How We Changed Our Pricing 5 Times in 2 Years
Starting in 2012, we started aggressively changing our pricing model in response to both customer feedback and business needs. We pretty much changed it every quarter until we found something that worked for both our customers and our business.
We had 4 tiers that were feature-limited. At $149/month and up, you got access to another report and a raw data export. In the 2012, we launched a re-design of our marketing site because alot of prospects and customers told us that they didn’t really understand what we did and that our pricing was unclear.
Here’s the result of that re-design.
Just with a re-design (and the same price points), we were able to increase our conversions and subscriptions. However, it got to a point where it didn’t make sense anymore to have a $29 plan. It worked for our customers but didn’t work for sustaining our business.
What happened was that we simply grew. We grew too fast to support ourselves. At $29/month, it’s a no-brainer for a lot of businesses to sign up for our service. However, at that price point and that level of service, we were actually losing money due to the time we were spending and the support staff we had to hire on to handle it.
Customers at the $29 plan were also reluctant to pay up to the $150 plan just for the extra report feature and data export if that was a business requirement. That meant “the land and expand” upsell model was not working out as well as he had hoped.
We also got feedback from our enterprise clients that our “$499+ contact sales” model was cumbersome from a buyer’s perspective. They didn’t want to engage if all they wanted to know was what they got at a higher tier. Enterprise clients wanted transparency and higher end plans to consider before being put into a drawn-out sales cycle. They wanted to reduce the friction for them to just sign up and know what they get.
So, we changed our pricing across the board.
We increased prices across the board, but made the features equal across the plans. Customers were grandfathered into their old plans until they wanted to get access to the new features at a higher price point. This made our customers happier because they were able to get access to features they wanted at a lower price point.
From a business perspective, this let us break about even on the lower end $49/month plan to cover operational costs. In SaaS, the “land and expand” model is very popular in order to get the customers in at a low entry point and have them become loyal customers year over year.
At the higher end, we introduced new enterprise tiers as well as a new feature that was only available on enterprise plans. This let us have more sales transparency with potential buyers about how we structured our pricing versus getting a custom quote which people sometimes thought we were just pulling out of nowhere. This made our prospective buyers happier so that sales could engage more openly and freely without determining some arcane formula for where a customer fit.
However, three months later, we changed the pricing again.
We ended up getting rid of the lowest tier $49/month plan because the support volume still didn’t make sense at that price point. If we continued on that route, we would have burned through our run rate a lot faster as well as burn out our employees. We continued to honor the price for people who had signed up for it originally, but we no longer offered it to new customers.
However, we started to get feedback that our pricing tiers were pretty weird. The jump from $99/month to $199/month made sense, but then there was a huge gap going straight to the enterprise level plans at $499. Prospects felt that they had to choose between going really low at $99/month or five times that at $499/month.
So, we ended up changing it. Again.
When we were trying to figure out what price point made sense, we actually looked to our competitors. A competitor had a similar solution for $300/month. We decided to settle at $150/month as a starting level in order to position ourselves strategically lower when pitted against them in sales deals. This also made sense for the business because we were able to hire more support and onboarding staff to build out a customer success team.
However, in order to secure a healthy cash flow, we started to push for annual contracts.
This was successful in the sense that we were able to get the cash flow that we were looking for when we closed deals, but it was an uphill battle with prospects who didn’t want to feel like they were getting locked in. Some even told us they were willing to pay us more in order to have the flexibility of going month to month. Thanks, customers!
So, we actually did it.
Since we got overwhelming feedback from prospects and existing customers, we decided to listen and change up our pricing to offer a monthly option, but at an extra premium. People who signed up for an annual contract saved 20%. People who wanted monthly got their flexibility.
So, does feedback affect pricing?
For us, absolutely. By setting up systems to track why people canceled/churned, we were able to learn about why people left us. This laid the groundwork for us to investigate what prices would make more sense as well as let us talk to our previous customers that were willing to share more about their experience of switching away from us. It also allowed us to learn about what people were switching to (which I’ll save for another post about competitive research and jobs-to-be-done).
Sales also was able to learn about where the sales process was broken when talking about pricing. The lack of transparency at the enterprise-level deals was brought up by prospects, which is why we ended up introducing higher-level plans.
In the end, we needed to balance our needs to run the business with the needs of our customers. And that’s hard to do without people scoffing at you for raising prices multiple times. But, if you do it right, you’ll be able to gain the respect of your customers and even turn some of them into fans that are happy to pay more. That’s what we did. We grandfathered everyone into their old plans until they wanted to upgrade and get the features they wanted.
Hopefully this also helps you see that changing prices isn’t all that scary or a big deal. If you execute it well, treat your customers with respect (by letting them keep their plans and giving them the choice to upgrade), and listen to them, they will support and understand your decisions.
How you price your product can make or break your business. I mentioned that in the beginning of this post, and now I hope you can see why the process is so difficult (and how you can do research in order to gather feedback about your pricing in the first place).
This post originally was published on my blog at hichuck.com.