< Back to Main

Pricing Strategies for Optimal Subscriptions Revenue

The Needs of Startups vs. Larger Companies

We asked Patrick, what companies need products for automating pricing. Is it different for different size companies? Do startups need the products as well as larger companies?

Patrick shares that ProfitWell is a multi-product company and one of those products is free. Most startups don’t do multi-product until a hundred million in sales and beyond. He says it’s vital that brands start offering multiple products earlier to meet the needs of companies of different sizes and stages.

Early-stage companies are most interested in ProfitWell’s metrics product which cleans the data and then pushes it to wherever the user wants it through their APIs. The needs of large companies are more specific around product marketing and finance. So for Retain, the churn reduction product, the use case is product customer success, finance, or operations people who are attacking specific problems.

RevOps is More Than Sales Ops

Patrick shares that in the world of B2B products, RevOps is often just Sales Ops with a different name. The role is still morphing into what RevOps is supposed to be. It should not just be Sales Ops; it should be sales, marketing, and customer success ops.

In terms of pricing, typically it’s the head of marketing or product marketing, and to some extent, RevOps. RevOps and product marketing have a little bit of a battle. And the battle with pricing is based on who’s closer to the customer research and who’s going to be closer to implementation. And pricing, more so than churn reduction, is a team sport because everyone’s going to be involved. Who decides on pricing isn’t as important as the process behind the decision on pricing.

The Role of RevOps in Pricing

Sometimes the role of RevOps is filled by decision-makers and sometimes not. When they aren’t decision-makers, what role do they play?

What Patrick is seeing is that a lot of RevOps is tooling and reporting, almost like they are a revenue-focused growth person. So what that means is every single quarter, there’s a focus area or iteration centered on customer success productivity or AE productivity. When it comes to pricing, if you have a proper RevOps function, RevOps is going to be mostly in charge of implementation. That doesn’t mean that they’re deciding what to do.

The reason Patrick makes that distinction is that if your RevOps organization is just Sales Ops by a different name, typically sales should not be in charge of what to do with pricing strategy. They’re a heavy influencer. They should be on board with it or at least committing to it. But the incentives typically aren’t aligned to change pricing dramatically or to even raise prices. And so RevOps is definitely involved in implementation, but not necessarily the decision-maker when it comes to pricing unless they have a proper RevOps function where they are more independent and oversee the entire field of sales, marketing, and customer success.

There are some issues with pricing that, if you’re very sales-oriented, you can end up dumping problems onto customer success or dumping problems onto product. Sales may hit their number but then those customers are churning within two months.

The most important thing is to align how your company is structured to make the best decision. Pricing committees are helpful because many companies are not good at pricing. They either do it in a vacuum or the product marketer or the product person goes off, does the research and is like, “We’re going to do this.” And then the sales person is like, “No, we’re not.” And then it delays the decision and another person gets involved.

Patrick recommends gathering what he calls the four horsemen: sales, marketing, finance, and customer success or product marketing. And also RevOps, if you have that. And then you have someone like a marketing manager or product manager for 20% of his or her time, go off, do the research, bring it back to the committee, committee debates it, go back, get more data, come back. On the committee, there’s one decision-maker. Everyone gets on board with it, and then everyone moves forward with implementation. That process is more important than who’s actually in charge, although who’s in charge is important just because of the incentives.

What does RevOps Bring to the Table?

We asked Patrick if there’s something a RevOps professional could bring to the pricing committee that maybe someone else isn’t thinking about? Are there numbers that they might have that other people don’t have, or that they’re thinking about like discounts or margins?

Patrick says if you have a proper RevOps organization, that person or team is probably the data layer for revenue and version control on pricing. Because the thing that a lot of people don’t realize is you should be changing something about your pricing every single quarter, if not every single month, if you’re very sophisticated.

This doesn’t mean you’re raising or lowering your price point every month or every quarter, it means that one quarter you’re doing localization, one quarter you’re doing add-ons, another quarter you’re doing your discount strategy and so on. It’s a lever just like acquiring customers and just like retaining customers. It’s so crucial. And so the long and short of it is you want to make sure that RevOps is bringing that data layer and also understanding like, well, we did that three months ago and we noticed this, this is similar. They’re kind of that data and analyst voice. But then also from a tooling perspective, RevOps can make sure that once a pricing change is ready, it doesn’t take months to implement it.

Patrick recommends larger companies start with something like localization where you update your currency and maybe even your price depending on the location of people, your leads coming in. And the reason is that ultimately what ends up happening is it’s a good gain, you’ll make more money. It’s not the biggest gain out of the pricing toolbox, but it also forces you to get a quick win because it’s not a complicated thing to get agreement on as a group, as your committee.

The pricing decision is not a vote. The committee helps you move quickly and not have to debate. It also forces you to get your tech stack in order. You could have the most elegant, perfect data saying that a change should be made. But the engineering team goes, “Well, it’s going to cost us somewhere around $500,000 to implement. Our billing system was built 10 years ago and we haven’t done this or we haven’t done that.” The debate of moving engineering off product into the billing system is the worst conversation.

Your tooling and accounting practices should never influence how you price and how fast or quickly you move on pricing experimentation. And that’s where RevOps can come into play, which is having the data to understand what works, what’s going to work, what’s not going to work, all the other things, and then also making sure that things run smoothly. And also bringing a holistic perspective. There are very few people in the company and RevOps is uniquely positioned where it’s like, “Hey, sales guy or gal, I know you really liked this idea, but when we do this calculation, we realize that it’s going to affect retention this way and that doesn’t make any sense. You’re going to acquire a bunch of customers that are just going to churn.” You need a central oracle to look into everything.

Tools to Enable Changing Pricing Quickly

What’s the difference between a company that can change the pricing quickly and companies that are slow to make changes? Are they using specific tools? Are the companies that are moving super slow using tools that are expensive to change?

If you’re a subscription company, and even if you’re not, having a good billing system or subscription management system enables you to change pricing quickly. Everyone goes, “Oh my gosh, they all suck.” The thing with billing is we do not have an appreciation for how difficult the infrastructure is, because we think it should just act like all of our other products, our consumer products or something, or it’s just like, I log in, I press a button and I watch a movie on Netflix. With billing, it’s like it’s a game of the 99.99999%. Every time you add a nine, it just increases the complexity by an order of magnitude. And so people don’t appreciate that, oh, you can plug this thing in, and literally anyone in the world or anyone within this geographical region can buy something. We don’t appreciate how terribly difficult that is.

Having a really good billing system is so important because yes, your engineering team isn’t going to love it. But your ops people will love it because they’re like hey, I don’t have to ask engineering to do all this. And that’s what we actually see when we look at the NPS scores. NPS scores from an engineering perspective for billing are typically very low. From ops and finance people, they are typically very high.

Discounting and Optimal Revenue

Patrick shares that when talking about discounting, it’s really important to understand the purpose of a discount. And when you get into the actual academic economic literature or any pricing theory or actual experiments that have been done, the thing with a discount is that it’s supposed to be a nudge. It’s supposed to be a, oh, here’s this thing that I kind of already wanted, or like, maybe I didn’t quite want, but I’ve thought about wanting in the past. This is the nudge to get me to buy the thing.

The problem is that a lot of us use this in the world of tech as the thing to kind of bludgeon a lead into the reason that they’re buying. And there is a place for that, for example in retail where you’re trying to get people to buy something they didn’t necessarily need but will purchase because it’s such a good deal. The issue is that when you’re selling software or a subscription product, it’s not like the customer didn’t really need the software, but spent a hundred bucks to get this cool thing.

The Subscription Revenue Model is About Relationships

The subscription revenue model is the first commerce model in the history of humankind where relationships with customers are built into how you make money. So if they don’t like the product next month, they’re not getting the value of it, and they’re going to leave. To tie this back to discount, if the reason I bought is because of the discount and not because I was actually ready to go, I’m going to churn. And I might stick around for a year because you forced me into an annual contract, but I never actually get implemented.

Can you do that and maybe activate that person within the first six months and see the value? ProfitWell has data on this. What they found is basically if your discount, and this is typically in the world of B2B SaaS, if your discount is over about 20%, the churn rate on that cohort doubles. There is very similar data in the world of retail or subscription e-commerce and subscription consumer products, but typically the threshold is around 30 to 35%. So you can give a 30 – 35% discount.

The Problem with Discounting

Why is churn a problem? Obviously churn is bad, but it’s also the signal problem. You can see this in really bad sales organizations, where during the quarter they’re not doing well. Then all of a sudden, there’s this backward bending curve where all of a sudden in the last month of the quarter they close all their deals and they hit their number. Sometimes they hit more than the number, but because of the discounts. Then you look at the churn of those customers and you’ve dumped it on customer success, you’ve dumped it on the product team because those customers just weren’t ready. And the customer success team isn’t there to necessarily sell. They’re not there to get the buy-in, they’re there to encourage the buy-in that already existed.

Patrick explains that this problem is pernicious to the extent that, in a study ProfitWell conducted of 8,000 salespeople, about 60 to 70% said that discounting was important if not very important to their job. And when asked what the appropriate level of discounting was, that group of 70% basically said 50% or more, which is insane if you think about it. And you might be asking, well, if I can’t convert people with a lower discount, what should I do? Well, you should lower your list price.

Patrick isn’t against discounting, but it’s just that nudge. And so discounts should be timeboxed. It should not be the life of the account. It should be for the first month or the first term or something like that. It should be discreet unless you’re a discount brand. It shouldn’t be on the front page of your website. And ultimately it should be offered to customers who have already bought into your solution.

Discounting and Approvals in Sales

When your business is based on a subscription model, who should run the discounting and the approval process? What information do you need to know to prevent churn. Do you need to know margins? Do you need to know who the competitors are? How detailed should it be?

There’s no one right answer. You do want to give reps some level of flexibility, but that level of flexibility should be probably like 10 or 15%. And I would even give an accelerator if they close things without a discount. It depends on how pernicious this is across your team.

If discounting is really pernicious, you don’t even need to raise your prices. I would just be like, oh, our average discount right now is 20%. Let’s just put a ceiling of 10%, and you can’t go over 10% unless you go through this big process. And what you’ll notice is that just a little bit of friction results in discounting going down, which effectively makes prices go up. Let the reps have 10 to 15%, and then once you start going over 15-20% it should go through some sort of a process.

RevOps should definitely have a report that looks at discounting. And, depending on the size of your organization, it should be done on a weekly or monthly basis, or a quarterly basis if you’re smaller.

Putting Guardrails on Discounting

Once companies start putting guardrails on their discounts, it changes the culture also. We’ve seen more confidence in the sales reps that sell without giving a discount. If there are guardrails placed, they realize they could have actually made more money on their bonuses because they actually were selling it with only a 10% discount.

It’s the path of least resistance unless you add some friction. People just intuitively think like, oh, this is the thing that’s going to get the deal, rather than being like, what objections do you have? Let’s talk through those objections.

It’s using that energy and just directing it in the right way. And this is why sales compensation is so powerful. You change it one quarter or one month and then all of a sudden it’s like, oh wow, we saw this number go way up, this number goes down. Ooh, we don’t want that number going down so let’s adjust it. And that’s what’s really, really powerful. You have to align incentives properly, and when you do you get the results you need.

Revenue Per Customer

In a subscription business model, the number you should be looking at to see if you’re pricing effectively is revenue per customer or revenue per user. So you might measure it as ARPU or ACV. That number, in most organizations, is flat. Just flat across the board. If you were doing something with your pricing, that number should be going up over time. Now, it’s probably not going up as much as your leads are, these types of things. That’s okay because you get a higher impact when that number goes up. That number can go up by 10%. Your leads can go up by 30%. You actually might be getting equal impact in your overall revenue just based on all kinds of things.

A lot of people think about pricing, but the only thing I have is the number of how much I charge. But for most folks, Patrick argues that until you’re 70 to hundred million in revenue, the specificity of that number does not matter. You should just know: am I a $10 product, am I a $50 product, am I a $1000 product? That level of specificity matters at that stage. But am I $19 versus $20? Unless you’re just going insane with growth, that number does not matter until you get bigger. A dollar increase is not going to matter until you have big numbers. (See also: Scaling Revenue Operations in High Growth Firms)

There’s so much more that impacts revenue per customer. You can sell add-ons, and come out with different add-ons each quarter. You can do localization. People like to buy in their own currency. Typically the revenue per customer lift is somewhere between 20 and 30% of those customers coming in because all of a sudden they trust your product. It doesn’t matter where they are in the world.

Also, there’s different purchasing power. For example, in the Nordics, they’re typically willing to pay about 40% more than the folks in the US for instance, and that controls for VAT and exchange rates. So it’s an apples-to-apples comparison. There’s your value metric, how you charge, changing the metric that you charge on, changing how much of that metric you give for each tier or each plan, whatever it ends up being.

Subscription Revenue Strategies Beyond Pricing

To maximize subscription revenue, you need to look at several strategies. There’s your discounting strategy. There’s your annual strategy. Like how are you getting people on longer-term plans? There are features and differentiation. There are freemium models, if you haven’t done that. There are so many different things, and when you start working on one thing, answers beget more questions. So you’ll be like, oh, we did this localization thing. Great. Let’s make sure our prices are set up for the main regions that we sell into.

There’s a lot to dig into with pricing because it’s uncomfortable and it’s important. So whenever you have something at the intersection of uncomfortable and important, we get all skittish. We don’t want to touch it because everyone’s got an opinion. It’s just a process like any other thing in your business. It’s just that most of us are avoiding it because we don’t know anything about it.

Surprising RevOps Data

We asked Patrick to tell us the most surprising data point he ever saw from any of the surveys they’ve done at ProfitWell.

A lot of people hate surveys because we’re terrible as an industry at sending surveys. ProfitWell has sent about 70 million surveys. The most interesting data point is about the willingness to pay or the value of a certain thing over time. There are two findings that Patrick finds most interesting. One is things like priority support. Good support used to be an add-on or a luxury and now it’s expected.

Another trend Patrick has noticed is the willingness to pay has gone down over time. Over the past 10 years, features or core types of products tend to have gone down about 70% in value. And it’s not because products are worse today, it’s just that software used to be magical 10, 20, 30 years ago. But it’s lost that sheen because you used to be able to put a login screen on a database and you were a god. Now, if it doesn’t have good support, good design, and all these other things, I’m not even going to give you the time of day.

Be sure to tune into Patrick Campbell’s RevOps and Hops podcast to learn about the mysteries and truth surrounding revenue operations.

Follow Patrick on LinkedIn