Pricing Optimization
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Find out more Learn MoreThe Rise of Tiered Packaging
Several years ago, much of the guidance with packaging was just “make sure you create packages!” This sounds almost redundant, but it spoke to the fact that we frequently observed companies using the monolithic “one size fits all” approach. The implicit message to the customer is: This is our product. Take it or leave it.
Thankfully, we see this far less frequently today, particularly with SaaS companies. Most startups we encounter have adopted a “Good, Better, Best” (GBB) approach. This means creating several tiers of packages which vary in terms the price level and the amount or quality of items included (features, services, usage levels, etc.).
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Find out more Learn MoreThe Many Benefits of Good, Better, Best
Adopting the GBB approach has many benefits. Since customers typically dislike “take it or leave it” offers for anything other than very simple products, providing choices can make a customer more likely to buy. If nothing else, moving from a single offering to a GBB approach will likely increase velocity of sales.
However, GBB can also offer a highly-effective method of price differentiation. In swapping one price level for three (usually), you can accomplish two things. First, you make your product viable for customers at the lower end, who would not have purchased it previously (therefore adding sales volume). Second, you create a higher price point to monetize customers who would value a premium offering. All of this equates to more value capture at the initial sale. These packages can then even be used to grow your base business through upselling customers from basic to premium packages. It’s encouraging that we’re seeing more innovative GBB models in the startup community.
There are many other approaches to packaging. Use-case and buying center-based strategies can be effective for more mature companies selling to enterprises. But GBB is simple and readily accepted by customers. A GBB model – when well designed – is a highly-effective packaging strategy.
The Four Frequent Flaws in GBB Design
The key words in the above sentence are “when well designed.” The reality is that while many startups now realize the benefits of GBB, few have taken steps to create a robust approach. We commonly hear “we didn’t put a lot of thought into our packages.” We estimate that this oversight translates to a loss of 5-15% percentage points of revenue growth a year.
In order for a GBB system to work effectively for both price differentiation and sales velocity, GBB packages must be designed with well-defined customer segments. Each package should provide the target segment with a product it will be satisfied with, at a price it is willing to pay.
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Take our simple evaluationCustomers vote with their wallets. The clearest indicators your packaging strategy is flawed will be the buying choices your customers make. If the distribution of package purchases does not match your expectations or desires (e.g. 75% of customers purchasing “good,” when you forecasted 40%) or your sales reps are consistently unable to upsell customers to higher-level tiers, you can be confident your issues lie within your packaging strategy.
The specific packaging issues we see most frequently are outlined below:
(P Axis = Price; V Axis = Value)
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Find out moreBest Practices for Designing the Good, Better and Best Tiers
The solutions to poorly-tiered packaging are not complicated, but require a solid understanding of your customer segments, needs, and willingness-to-pay. All of this can be obtained through robust customer and prospect research.
Although more detailed decisions will need to be made, following these simple guidelines around pricing will help startups avoid falling into the common pitfalls of ineffective good, better, best packaging.
Our market-leading benchmarking tool for SaaS companies helps you understand where you stand against your peers on crucial financial and operational metrics.
Learn MoreOur market-leading benchmarking tool for SaaS companies helps you understand where you stand against your peers on crucial financial and operational metrics.
Fuel’s SaaSRadarIn our next article in Pricing Pitfalls, we will be exploring the next startup pricing challenge – selecting an undifferentiating price metric. You can email the authors at Fuel@McKinsey.com for more information. And please follow Fuel on LinkedIn and Twitter for more pricing insights.
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