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  • Operator Sessions
  • 11 July 2023
  • 4 min read
  • Words: Northzone

Operator Session: Packaging and Pricing for Sustainable Growth

Our recurring operator sessions are based on topics which are top of mind for our portfolio founders and operators. Developing an effective pricing strategy is a critical component of achieving sustainable growth in any business and as companies hone their focus on profitability as well as growth, our latest session, ‘Packaging and Pricing for Sustainable Growth’ was centred around pricing and its impact on revenue optimisation. 

Leading this session we were joined by Johan van der Poel, founder of Northlane, who went into detail on the key areas of focus for pricing optimisation. Formerly, Johan specialised in growth strategies and value creation at Mendix and Simon-Kucher. 

When it comes to pricing, Johan highlights that the ultimate goal is to optimise for revenue by focusing on acquisition, monetisation, and retention—the three levers for growth. While acquisition is crucial at the start, the impact of monetisation and retention becomes increasingly powerful over time. Below we share some of the key points Johan shared in the discussion, and hopefully, actionable items tech companies can use.

Packaging for Value and Differentiation

Customising the packaging structure of your product or service is crucial for striking the right balance between value and price. By aligning the packaging with different customer segments, you can cater to their specific needs and budgets effectively. Two widely adopted approaches for packaging are the “good, better, best” model and the modular approach. The former facilitates upselling by offering tiered options with increasing levels of features and benefits, while the latter provides flexibility without compromising on monetisation. 

Transitioning from an all-in-one bundle to a good, better, best model is a common progression that allows companies to capture additional value and differentiate themselves in the market.

Understanding the Role of Building Blocks 

To successfully navigate the transition from one packaging model to another, it is essential to understand the role of each building block or feature within your proposition. Evaluating the perceived value and expected adoption of these building blocks helps identify the features that customers are willing to pay for. This knowledge can be used to differentiate your packages and stimulate upselling opportunities. Features with high adoption but relatively low perceived value can be bundled together with Leader features (high value and high adoption), while specialised add-ons can be designed for specific segments that highly value them. By aligning your offerings with customer preferences, you can create packages that maximise customer satisfaction and revenue.

Optimising Pricing Models 

Pricing models are undergoing a transformation in response to market trends and technological advancements. While user-based pricing has been prevalent, the current trend is shifting towards hybrid models. These models combine a flat fee with a usage component, allowing for scalability and aligning with the capabilities of AI. 

The advantage of hybrid models is that they offer flexibility to customers while providing the business with predictable revenue streams. Although advanced models like outcome-based pricing are on the horizon, they are not yet widely adopted due to implementation complexities. However, the growing availability of sophisticated pricing systems makes it easier to handle complex pricing structures, enabling businesses to explore more innovative models in the future.

Value Metrics and Segmentation 

It’s important to consider the value metric for your solution, which serves as a proxy for how customers perceive the value of your offering. Around 70% of your customer base will likely align with this metric. However, there will always be segments that score low on this particular metric while still having significant value in other areas. By identifying those segments and understanding where they excel, such as through another metric or a specific feature, you can use that insight to fence them into your premium package and restore balance. 

Similarly, for segments that score high on the value metric but exhibit low willingness to pay, introducing additional sophistication to the metric may be necessary. For instance, implementing a light end-user plan with usage limitations for a segment that consists of infrequent users can bring them back into balance. This bottom-up approach ensures that customers are categorised appropriately and is a critical aspect of optimising your pricing model.

Determining the right metric can be challenging, but considering factors such as value, implementation feasibility, acceptability, predictability, and flexibility can guide your decision-making process. Creating a long list of potential metrics and then shortlisting them based on these criteria can help identify the optimal metric and therefore, capture additional value and cater to diverse customer needs effectively.

Considerations for Regulated Environments 

Operating in a regulated consumer product market presents unique challenges for pricing optimisation. Compliance with regulatory requirements and ensuring transparency are paramount. Collaborating closely with legal experts and compliance officers can help ensure that your pricing strategy adheres to all relevant regulations and ethical standards. Additionally, conducting regular internal audits and staying updated on any regulatory changes is crucial to mitigate risks and maintain compliance.