10 Surprising Things I Learned After 75 Price Changes
1. People underestimate both the time it takes to change prices, as well as the impact. When we changed prices, we might not realize the gains until 1 year after the “go live” date, but the net revenue impact was always enormous.
2. Margins matter, but not as much as you think. At Alpine, I was able to work with both software (high margins) and services (low margins) businesses. Any manager should understand that the revenue-optimizing price and the profit-optimizing price are different. In practice, the difference is a rounding error, and focusing on it is a distraction. Rather than focus on cost, our companies focused on maximizing revenue, and addressing cost separately.
3. Having a process is more important than having the right process. When price increases went poorly, it was always due to a lack of planning, rather than missteps in the plan. The most common area to leave out? How to escalate customer complaints.
4. You don’t need churn assumptions. This one is controversial, but I found that in B2B industries, churn was negligible when raising prices. Instead, we often saw a “lack of price realization” – i.e. we would shoot for a 25% price increase but only be able to negotiate a 15% increase.
5. The “flavor” of price change matters a lot. I help companies execute 3 different types of price changes: straight increases, repackaging, and business model transitions. I’ll do a longer post about each of these but suffice it to say that the magnitude and timing of revenue impact differs significantly between the 3.
6. The hardest thing about pricing is convincing yourself you can do it. Most of my job involves assembling airtight evidence that a company can achieve its monetization goals. The single biggest obstacle to changing prices was internal.
7. More research, less A/B testing. A/B testing is extremely popular in the business guru space, but I found that it is only applicable to a small set of companies: those with extremely high sales velocity. B2B companies almost always need to rely on good ol’ primary research.
8. Identifying underpriced assets (products or companies) is easier than it sounds. We developed a dataset of metrics and methods to look for in diligence that allowed us to underwrite price changes. It took years to be comfortable with the data, but we could eventually underwrite both the magnitude and timing of a change.
9. Words matter more than numbers. Tweaking the price change messaging (i.e. why we are changing prices) had a greater impact on churn and customer complaints than the actual price change. It just goes to show that pricing is an emotional decision, and customers need to trust you.
10. Pricing is transformational. I saw companies on the brink of collapse come back from bankruptcy. I’ve also seen mediocre and stagnant companies turn into market leaders by changing their monetization strategy. I’ve even seen despondent teams feel a sense of renewal when realizing that their product commands more value in the market.
