Exercise 10: How much your customers are willing to pay for your solution?
Let’s start with your current pricing. Based on pricing model and a number of customers, define your ideal average deal size. Now, take your average deal size that you defined previously while mapping your customer profiles and compare to your ideal average deal size according to your pricing. If they are close to each other, then it means your pricing is working and you got it right. You can just take it and test in the USA market. If your average deal size based on your pricing model is much higher than your average deal size from your customer profile mapping, then your pricing is too high and you are giving a lot of discounts. If your average deal size from your customer profile mapping is higher than your average deal size based on the pricing model, it means that your pricing model is not adequate to what you offer and you customize it for different customers. In both of those scenarios, we recommend the following exercise in order to decide on the pricing model that you are going to test in the US.
Step 1: What are your current business goals?
Consider the goal you created while discovering your ICPs in the last phase. Is this still compatible with your ICPs and buyer personas for the US market? If yes, keep this goal in mind while defining pricing strategy. However, if you think it is not compatible, step back to identify the mismatch until these three pieces fit together: your current goal, ICP for the US, and buyer personas.
Step 2: Analyze market and competitions' pricing.
Once you are clear about your strategy, you can move on to address external factors such as competition and substitute products. Simply spend some time listing and analyzing packages and pricing of your competitors (check competitive analysis).
While focusing on your competitors, do not forget to check substitute products that can solve the customer’s problem in a very different way. The biggest competitor for a business class seat in one airline is not another airline but a good web-conferencing system.
Step 3: Analyze your target audience.
Steps 1 and 2 give you a direction but always define your pricing based on the value you provide to your customer. This is called Value-based pricing. What does your product help your customer with? Does it save time/money? Does it help them make more money? Does it help to reduce risk? Does it help them to comply with regulations?
Always try to put a dollar amount for the value a customer gets by using your product. Value-based pricing has two main benefits. First, you can potentially start with a higher price point if you can show a higher value-add and willingness to pay among your customers. Second, you can raise your prices as you find out more about your customers and add features to your product providing more value.
Step 4: Define pricing options and packages.
Most companies have more than one type of customer or target market segment. In such cases, we advise you to break down your market segments into 3-5 ICPs. Find out as much qualitative and quantitative information as you can for each ICP with extensive research. Based on your research and current customers, list all features and the main value proposition each ICP is looking for. At the end convert this into dollar amounts both in terms of value proposition (step 3), customer acquisition cost (CAC) and lifetime value (LTV). This will not only define your packages and pricing for each ICP, but also might tell you that some ICPs are not worth targeting.
Step 5: Comparison
Now take your current pricing model and compare with what you have created in this exercise. If they are very different, we recommend to test the new pricing in the US market. If they are not, that means that your pricing is right and you need to dig deep to answer the question why you give so many discounts or you customize pricing.
Who should perform this activity:
Founder | Head of Sales