Identifying Readiness for a Price Increase

Product managers often fail to increase an offering’s price even when clear signals indicate a price increase should be considered

SiriusDecisions’ B2B Buying Study indicates that an offering’s promise to meet buyers’ needs is a much more important decision driver than its price. When a product provides an increase in value, most buyers are willing to pay more for it. However, B2B product managers often miss or ignore evidence that it’s time to increase an offering’s price. In this issue of SiriusPerspectives, we describe five signals that indicate a price increase should be considered, as well as a series of questions that product managers should ask themselves to ensure they correctly interpret each signal.

One: The Product Is Exceeding Sales Expectations

Although surpassing volume goals may be interpreted as a sign of success, it may also mean pricing is lower than it needs to be and money is being left on the table. There may be other forces behind unexpected sales activity. Ask the following questions before determining whether it’s time for a price increase:

• Was the market sized inaccurately? Review the initial definition of the total addressable market and resize it to assess whether the number of demand units is more than expected or if the market has grown since the initial sizing. Ask channel partners and industry analysts whether any market triggers have caused an increase in market demand. Review the expected serviceable market and determine if the organization reached more customers through the available sales and marketing resources.

• Are sales being sourced from new markets? Are sales numbers beyond expectations because the offering is being sold outside the expected market? If the jump in sales is relatively recent, review the database of customers who purchased the offering in the past quarter to assess if they are within the expected target market.

Two: Competitors Have Increased Their Prices

An overall increase in market pricing – initiated by one competitor and followed by another – may be a sign that there is room to raise prices. Answer the following questions before deciding to do so:

• Is there is a supply or delivery issue among competitors? Supply issues are not limited to manufacturing delays; providers of software and service offerings also experience logjams that affect their ability to implement the solution and fulfill buyer demand. Review win/loss information to learn more about recent wins. Identify which competitors were vying for the business and the customers’ key decision drivers that resulted in the win. Again, channel partners and industry analysts may have information on competitors’ fulfillment abilities. There may be an opportunity to increase prices to take advantage of competitors’ woes, but a future pricing strategy is required so that appropriate adjustments may be made if normal supply and demand patterns return.

• Do competitors provide more value? If competitors have improved their products (e.g. by adding new features or capabilities, increasing compatibility with ancillary products), their price increases may make market sense. But without commensurate improvements, it may be appropriate to reconsider a price increase. Product managers should consistently monitor market pricing and obtain field input on competitive pricing to ensure they can take timely advantage of any overall rise in market pricing.

Three: Sales Is Discounting the Offering Less Often

For some offerings, regular discounting is expected, and a decrease in the discounts offered can indicate that prices are too low. Ask the following questions to assess whether higher pricing is the answer or other elements need to be examined more thoroughly:

• Has discount authority changed? In some organizations, the price policy allows sales reps and managers to award discounts without escalating negotiations. If there is a sudden drop-off in sales requests for discounts, determine whether changes have been made to the price policy and how any changes may have affected requests for discounts. Ensure clarity on the minimum price allowed by segment, the authority sales has to discount, and the escalation path (if applicable).

• Are sales reps using non-price levers instead of discounting? It may be that customers are continuing to ask for discounts, but sales is deploying non-price levers (e.g. lower service levels, extended terms, longer contract terms) rather than discounting. In this case, a price increase may not be needed, and sales should be applauded for maintaining price levels.

• Has discounting continued, but at the transaction level? Often when organizations have a high volume of transactions or their transactions are complex, they award off-invoice discounts (e.g. volume discounts, rebates, promotional discounts). Review transaction data to see if this is the case with the offering in question.

Four: Customer Feedback Indicates Strong Value and ROI

Ask buyers about the offering’s value and ROI. If the feedback is more positive than expected, strongly consider a price increase. Answer the following questions:

• Are buyers getting too much value? Ask buyers how they would characterize the offering’s value. Do they feel the offering is cheap? Too expensive? Not cheap but worth the money? If buyers generally indicate that the offering provides very good value for the money, there may be room for a price increase, especially if new features have been added without a price increase (see the following section).

• Is ROI higher than expected? Work with buyers to calculate the offering’s ROI. If the return is greater than expected or has increased over the years, the price should likewise increase.

Five: Product Improvements Have Been Made With Few Prices Increases

Consider the last time the offering price was increased, especially in the context of the improvements made to the offering. Consider the following questions to determine if it’s time for a price increase:

• Was the last price increase in the distant past? Product managers often set the offering price at launch and then never revisit it, or go more than a year without increasing the price. At this point, assuming that buyers are satisfied with the offering, it is time for a price increase. Many organizations set price increase escalators at a specific percentage (e.g. 5 percent to 7 percent) or tie it to the consumer price index; those that do not are likely falling behind market pricing. Review the company’s standard contracts and terms, and discuss adding annual escalators.

• Have there been multiple product improvements with no corresponding price increase? With the increase in as-a-service offerings and agile development, companies are adding improvements to products faster than ever and creating increasingly differentiated products. These newer offerings often offer more value than previous versions and the competition’s offerings by making users more efficient, providing additional paths to revenue or decreasing risk. These improvements often provide more benefit to some segments or use cases than others. If multiple product improvements have been made that provide increased value to buyers, a price increase – perhaps targeted to specific use cases or segments – may be appropriate. These increases can be executed through changes in product configurations and packaging.

The Sirius Decision

Very often, both the organization and its product teams lack a price increase strategy; ownership of pricing is unclear, and increases are not proactively considered and enacted. Should increases be the same for every product and every customer? In organizations that seek to move to value-based pricing, increases should not all be uniform. When planning for price increases, product lines should be assessed for the readiness of a price increase using the signals discussed above, and customers should be segmented based on the change in value they are receiving vs. the price they pay.