Mastering Price Metrics: A Key Element to Powerful Pricing Strategies

Introduction

The realm of pricing is inherently complex, and goes well beyond setting a number on a price tag. On top of the organisation and technology stack that enable your pricing practice, the end-to-end pricing process is usually dissected into a handful of key categories. You will see variations across firms and the different frameworks consulting firms leverage, but it is essentially comprised of 4 key categories or process steps:

1. Pricing Strategy: here you define how your pricing model is supposed to drive you towards your business objectives;
   

2. Price Setting: then you figure out what price you should charge to whom for which products or services, and define how to price it;

3. Price Getting: once this is done, you have to actually get your price in the market, in real life. This is how your commercial teams effectively execute the set prices in the market, and is also sometimes referred to as either price realisation or price execution;
   

4. Price Monitoring: effective pricing requires constant monitoring to ensure it actually drives you towards business objectives. If it does not, you need to be able to know it quickly so you can adapt your price setting model, or even your strategy. And so you start seeing how end-to-end pricing actually is an iterative rather than a linear process...

Today we will dive deeper into one specific piece of the Price Setting part: price metrics. At Verdeen we envision Price Setting in four different steps: product versioning (the different version you make of your products or services to cater for different customer needs), pricing metrics (the unit of measure you use to charge your customers), payment or revenue models (fixed-fee, subscription, usage-based, etc.), and finally price levels (the way you come up with an actual number to put on your price tag). And we will cover them all in our articles!

Now what is exactly a price metric and how to define one?

A price metric is essentially the unit of measure that you use to charge your customers. This could be anything from per user, per usage, per feature, or a combination of these. The right price metric does more than just determine the billing structure; it shapes the product's perceived value, influences customer satisfaction, and impacts the overall business model.

"But what is the right price metric for me?" is probably your next question. And as any good consultant would do, we will reply "It depends". In fact, and while the choice is surely more straigthforward for some companies than others, there is not one single answer. What we can do for you, however, is provide you with a list of criteria to take into account when choosing your price metrics structure:

1. Link to value: customers are more likely to engage with a pricing metric that mirrors the value they derive from a product or service. For instance, a telecommunications company might charge by data usage, which customers can directly correlate with their consumption habits. Be customer-centric and put yourself in the shoes of your target: you would probably only accept a metric that evolves in alignment with what you actually get. Consider a licensed software. As a company scales, it wants to roll it out to all its staff. Not all will use it with the same intensity though as it will be more useful for some function than others. Does it then really make sense to charge on a per user basis?
   

2. Accepted by sales: the sales team must clearly understand and support the pricing metric, as their ability to explain and justify these costs directly affects its success. It goes well beyond just understanding how it works, it is all about understanding why a price metric is designed in a certain way so they can explain it to the customer and convince them of its logic. Do not try to cheat on your customers using a complex price metric: this short-term thinking will just throw a spanner in the works of your sales teams, and put you at risk of losing trust from your customers in the long run. Remember that being customer-centric is a win-win strategy.
   

3. Lever for growth: while focusing on delighting your customers is always the right thing to do, you also need to make sure that you capture some of the value you create. If in the beginning of a customer relationship your offering helps them save 100€/Month for 10€/Month, then you should also make sure your pricing does not stick to 10€/Month as they grow given that they likely draw more benefits from your offering. Yes, sure, your role is to help your customers succeed. But make sure you capture the part you deserve along the way.
   

4. Verifiable: it is also essential that the measurement of the pricing metric be straightforward and based on objective criteria to avoid disputes and ensure transparency. This may sound obvious, but it is an easy trap to fall into: sometimes price metrics are very logical and make a lot of sense from the angle of all other criteria, but confounding factors come into play when you actually execute your prices, which can lead to customer pushback and put relationships at risk. Let's take consulting firms for example. Success fees are pretty often considered as the holy grail there: they align incentives, make clients feel more comfortable about their consulting teams, and usually make the potential revenue significantly bigger for consultants. But in the end, it is often very difficult to isolate the impact of consulting engagements versus other ongoing projects or market conditions.
   

5. Present in the market: innovation is great, do not get us wrong here. But innovating on your pricing metric is hard. Employing metrics familiar to customers can lead to quicker acceptance and reduced friction in the sales process. It is just much easier to sell if your customers understand how you sell it and can relate to prior purchasing experiences. This does not mean you can't come up with an innovative price metric, but should you decide to do it, make sure you are aware of the risks related to it and of the change management efforts it will require from you to educate your customers and prospects to this metric they have never seen before.
   

6. Intractable: the metric should be designed in such a way that it is difficult for customers to manipulate to their advantage unfairly. In practice, this is of course easier said than done. One typical example of a tractable price metric is, in some cases, the per user metric per software. As a user, have you never tried to create one single account for multiple people then share your password with someone else? That is exactly what you are trying to avoid here. Delighting your customers is a must, but you also need to prevent them from cheating on you.

So, again, it depend: your specific situation might require specific price metrics. But at least, now you have some concrete tips to help you define a price metric that works. We are aware that meeting all these criteria may be a difficult endeavour. But at least now you are aware of them, and if you are unable to define metrics that meet them all, then you also have tips on where efforts should be focused in your price getting and monitoring processes.

Conclusion

The integration of price metrics into the broader business strategy cannot be understated. Strategic price metrics take into account not only the economic aspects but also customer behaviour, competitive dynamics, and market conditions. For instance, a streaming service might combine a base subscription fee with a pay-per-view charge for premium content, thus catering to varying customer preferences and maximising revenue opportunities.

Choosing the right price metric is a powerful strategy that can define a company's profitability and market success. It requires a deep understanding of one's customers, a clear vision of the product's value proposition, and an alignment with business goals. Effective price metrics resonate with customers, are easy to understand and communicate, and ultimately drive business growth.

And remember, pricing is a broad discipline: defining a price metric is a part of your price setting process, which in turn is only a part of your end-to-end pricing process. You may have defined an excellent price metric, but if it is not aligned with your business strategy or not well executed in the market, it will not lead you anywhere.

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It is time to capture the value you deserve!