Pricing at all stages of company growth is hard, and emerging technology companies are no exception. Tech companies face several distinguishable challenges when it comes to efficiently monetizing their products and services. In an effort to understand how CEOs and management are approaching this topic, we teamed up with Bessemer Venture Partners, interviewed over 30 growth-stage portfolio technology companies, and combined those insights with our experience over hundreds of projects with tech companies. Here is a summary of our findings.
Tech companies often take a ‘kick the can down the road’ approach to pricing. With the majority of founders coming from a product-led or technology-led background, there’s often an unconscious bias toward focusing resources on delightful customer experiences, and pricing becomes an afterthought. Meanwhile, even in the best of times, growth-stage businesses can be described as organized chaos. When revenue begins to scale, there are a series of thorny multi-dimensional challenges facing the broad go-to-market motion. Pricing becomes just one of a series of sub-optimal pieces in a much larger puzzle.
Based on our recent research conducted in collaboration with the venture capital firm Bessemer Venture Partners, we identified four factors that commonly drive the delay of pricing exercises within emerging technology companies:
- Adoption at all costs mentality
Throughout our interviews we found that unsurprisingly, many early stage companies are focused on product development, identifying customers, and putting the teams in place to drive adoption. Pricing is usually viewed as a point in time decision and in some cases even considered an inhibitor to adoption rather than an accelerator of revenue. However, pricing is one of the more important decisions they will make.
- Lack of a multidisciplinary approach
Unlike most strategic initiatives that can fit tightly within one silo of responsibility and therefore one senior leader, pricing requires input from all corners of the company. We heard that because, by design, it’s harder for a CEO to delegate to a team, pricing projects often get delayed. The faster early stage companies create an iterative and collaborative culture around pricing, the better.
- Absence of data in pricing decisions
When new products are released or new categories are created, it is tempting for teams to assume that because there are no customers (yet) and because there are no true comparable offerings (there usually are), that it’s impossible to use data to inform this decision. But while initial price discovery is usually a data-light decision, it shouldn’t be a complete shot in the dark.
- Pricing is a moving target
A customer’s willingness to pay is the guiding force for all pricing decisions. However, during the early stages of a company’s formation, willingness to pay is dynamic, and generally increases as the product matures and customers gain a better understanding of the value proposition being delivered.
Pricing is the most efficient means for incrementally driving revenue
If pricing is as hard as advertised, and even the world’s leading companies wait for years to circle back on pricing, why should early stage companies care? A pragmatist might argue that after wrapping up the initial pricing work, it should be placed on the back burner in order to free up capacity to tackle the most pressing needs of the business. However, our research shows that most companies would benefit from shifting priorities from a product-first orientation to a more customer-centric perspective, allowing price to play a key role in determining the product roadmap. Additionally, pricing initiatives alone can result in a substantial revenue uplift, making pricing comparatively cheap versus other ways of driving value, such as demand generation, product enhancements, strengthening renewals, etc. Meanwhile, the data gained in the pursuit of pricing improvements can also be used to inform additional customer-centric initiatives that drive value.
Pricing priorities at each stage of product growth
Pricing challenges naturally evolve over time as businesses mature. As companies shared their stories with us, we identified different priorities along the pricing journey, as summarized below. Our research also highlighted numerous best practices and pitfalls to avoid at each stage of company growth. Although we have found that this is the general order in which technology companies go through these stages, we also want to make it clear that this process is not a linear one. It is usually cyclical in nature and cycles as a company launches new products or enters into new markets.
This framework is a good overview to show which questions need to be asked and answered as products mature. However, we have also found it is most helpful to enable leaders to know what they should tackle in their current situation and what they can wait to tackle at a later date. Pricing can overwhelm companies when they try to take multiple of these stages on at once without experienced support, which can lead to a situation where nothing is done at all. In the pricing life cycle it is just as important to know when not spend time on a stage, as it is to know when you should be devoting effort to a stage.
Pricing is an ongoing paradigm
Pricing remains one of the last levers that even successful operators think to optimize, and this needs to change. At its best, pricing can be a precise science. At its worst, a complete shot in the dark. Instead of the ‘Set it and Forget it’ mindset that is the hallmark of many companies today, growing companies need to embrace a mindset of continuous iteration supported by a multi-disciplinary leadership team. The faster we can nudge all companies closer toward an ongoing pricing paradigm, the healthier the broader startup ecosystem will be.