This post is by Kyle Poyar from Openview Labs
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After stumbling into pricing jobs early in their careers, Ismail Madni (InVision) and Madeline Stein (SendGrid) are now subject matter experts who love the unpredictability and complexity of working as senior monetization strategists. They thrive sitting at the epicenter of their respective companies, determining the pricing pivots and tweaks that will maximize the ultimate proof of SaaS success: revenue. Both Ismail and Madeline stepped back from their fast-paced days to discuss how growth-stage SaaS companies can run successful pricing projects through a dedicated monetization function.
Wait, what’s a monetization function again?A monetization function works cross-functionally with a company’s product, marketing, engineering, finance and sales teams to create, develop and promote a holistic pricing strategy. Pricing managers track market trends, identity target markets, compare competitor pricing, analyze the effectiveness of past price changes and constantly explore new opportunities for improvement through altering base prices, classifying pricing tiers, offering pilots or
developing discount programs or packaging features together, for instance. Companies structure their monetization function to maximize product development and revenue generation. Many monetization functions report into product while others live in the marketing, go-to-market or biz-ops groups. SendGrid and InVision, for instance, sit their monetization groups within their product teams since they’re both product led growth companies that rely on high velocity freemium models to acquire customers. Reporting into product makes further sense for SendGrid since they’re developing new products now and for Invision since they currently have a particularly strong product leader. LogMeIn, on the other hand, has traditionally nestled their monetization function within their marketing team since they are not product-led, acquiring customers more indirectly.
Timing is everything: when to create a monetization functionAround 42% of expansion stage companies have pricing teams. While it’s beneficial to create a monetization function early since it will eventually become as important as finance or marketing, companies should also ensure that their organization is sophisticated and mature enough to merit and sustain such a singularly-focused team. Usually a product manager will work on pricing strategy part-time before the executive team recognizes the impact that monetization projects have on revenue growth and creates a full-time team. A couple of basic signs that a company is ready to establish a monetization team are:
- The company is transitioning into that ripe growth stage with around $100M in revenue and a lot of opportunity to evaluate pricing
- The company is diversifying its product portfolio beyond one core product and/or expanding into different product lines
How does a monetization group run a pricing project?A monetization function drives pricing projects from end-to-end. If after tracking market trends, competitor pricing and the effectiveness of previous and current pricing, the monetization group suspects that a pricing change is needed, they will conduct customer surveys and interviews. If this customer research validates the need for a change, managers will work with billing and engineering to implement it within their product. Monetization managers will then work with marketing to communicate the change to customers and create promotional campaigns as well as with sales to strategize about how to pitch the new pricing to prospects.
How to ensure a successful pricing project: research and measurementWhile the above breakdown of monetization makes it seem simple, executing even a minor pricing change is an intricate dance that affects every aspect of a business and usually takes over a year to complete. In order to ensure a successful pricing project, therefore, monetization functions must prioritize research and measurement. Since pricing changes take so long to implement, management often bemoans the need for upfront research, which usually takes over a quarter to complete given that pricing managers need to develop and distribute a survey instrument, analyze responses and conduct follow-up interviews. Many executives would instead prefer to intuit and just try different pricing schemes to see what works best. Yet while this more haphazard approach might work for earlier stage companies, an organization with a dedicated pricing team must move slow to move fast since research is the absolute only way to set the scope of a project.
More about measurement: the most important KPI’s are time and churnAs mentioned above, the second most important key to a successful pricing project beyond research is measurement. Pricing managers must create benchmarks throughout every stage of a pricing project and consistently communicate their performance against these benchmarks
to the company. In addition to creating accountability for the monetization function, this approach consistently involves key stakeholders across all functions in the pricing journey so that they can provide useful feedback that improves the project rather than just receive the monetization group’s results and question their efficacy. The monetization function should be predicting and tracking how a pricing change will affect every KPI from revenue to support tickets to NPS. The most important KPI’s for the monetization function to continuously and primarily monitor, however, are time and churn. While signups and paid conversions should be diligently tracked, the time that it takes to acquire and then convert customers should be scrutinized and minimized, especially in a product led growth company. This time is a basic and key indicator of whether a pricing scheme is effective or in need of improvement. Similarly, any change in churn is directly correlated with pricing effectiveness. Meticulously monitoring churn will enable managers to determine the tweaks needed to retain customers, maximize upgrades and limit downgrades. Conversely, if there is no churn, then managers can refreshingly explore opportunities for price increases.