OpenView Venture Partners is known for the high level of support and advice it provides its portfolio companies and for the ideas and best practices it shares through OpenView Labs (Ibbaka partner Steven Forth is an occasional contributor on pricing). One area where OpenView excels is pricing. They understand that it is a critical capability for growth companies and have invested in the area. This work is led by Kyle Poyar, who joined OpenView from the pricing advisory firm Simon-Kucher Partners. Kyle also writes a lot about pricing for OpenView (you can see his posts here).
Ibbaka is also committed to helping growth stage companies execute on pricing strategy and we reached out to Kyle to get his insights into emerging best practices and what it was like to move from a large consulting firm to an agile venture capital firm.
Ibbaka: What drew you into pricing?
Kyle: It was Frank Luby who drew me into pricing. He was a co-author of Manage for Profit Not Market Share with Hermann Simon and Frank Bilstein. He showed me that pricing is really about understanding how people make decisions. A great pricing strategy is to shape purchasing decisions.
When I moved into management consulting, I wanted to work on the growth side and not on cost cutting. Pricing is the most impactful way to help grow businesses.
Ibbaka: Interesting, can you say more about pricing and decision making?
Kyle: Pricing is about understanding what will help someone make a decision to buy. This means understanding the buyer’s motivation. Not all buyers behave in the same way, which is why market segmentation is so important. There are some people who buy because they think they are getting a deal but there are many more who buy because of the brand and the buying experience. People who are good at pricing are able to get into the mind of the buyer.
Ibbaka: What previous experience did you bring to your work as a pricing consultant?
Kyle: Before joining Simon-Kucher, I was a researcher at the National Oceanic and Atmospheric Administration and I have a degree in Economics and Environmental Studies. I was conducting primary research into the decision drivers behind how and why local governments have pursued climate change adaptation in the absence of federal resources. I was looking for ways to operationalize change.
Ibbaka: Was it difficult to move from climate and sustainability to pricing and growth?
Kyle: It was hard to get my foot in the door when I went to move to management consulting. A lot of recruiters are looking to ‘copy and paste’ people into look alike jobs. They don’t really understand the transferability of skills. This means they miss many of the best candidates. I had developed good skills in economic analysis and understanding decision making but I had to convince someone that my skills could be applied in a new area. There was also the change in language. I went from talking about ‘sustainability’ and ‘environmental impact’ to ‘pricing’ and ‘profitability.’
Ibbaka: What was it like to move from Simon-Kucher to OpenView?
Kyle: I love pricing work and the problem solving it involves.
At Simon-Kucher, I was supported by teams of analysts who would collect reams of research and data, which is what our customers required. It would often take months or even years before large clients were willing to make even a small change.
At OpenView, I am working with fast growing, open and innovative companies that are willing to test and learn as they grow. I am seen as being part of the team, since OpenView is an investor in the companies I work with. There are fewer barriers when working in this context.
In other words, most of my management consulting was with large, risk averse companies. The firm hasacademic roots and there is a focus on precision, best practices and research. The clients are cautious about out of the box solutions or any sort of big change.
Early stage companies have shorter attention spans. They are innovating rapidly and need answers fast. We need to come up with hypotheses in three or four weeks and not three to six months. OpenView’s companies are game to try anything. They are willing to take risks and use pricing for competitive advantage. This pushes me to be more creative in my approach and proposals. The sky’s the limit!
Ibbaka: What are the emerging best practices?
Kyle: Product-led growth. This means designing products for the end user and not the buyer. Users adopt and engage with the product and this builds a groundswell of champions who take the product to decision makers. Some examples of this are Dropbox, Slack, Atlassian and SendGrid. Our portfolio companies Expensify and Datadog are having great success with this approach. We have found that product-led growth is efficient growth, since it doesn’t require spending huge sums on sales and marketing.
The pricing model has to support the adoption model of landing new users and then expanding accounts as the user experiences value. One also wants to design in network effects and the product/feature gates have to lead users and buyers along the upsell paths. Pricing and packaging are a way to shape adoption and support growth.
This model will transfer outside of SaaS. Best in class customer experience will get users selling your product on your behalf.
The other thing we are seeing is pricing experiments that go beyond the per-user model. The default current model came from people selling on premise software licenses. In the SaaS world the per user pricing model was just the next step.
What we are seeing now is more experimentation with pay-as-you-go and usage-based pricing models. Payment should be connected to when and how people get value. Think about what actions correspond with value, then bill for value delivered.
At the recent Subscribed conference by Zuora, I saw some research from IDC that showed that companies with usage-based pricing are growing faster than those with user-based pricing. To be more precise, companies with a blended model that combined usage-based pricing with some other model are growing faster than companies that just have user-based pricing or just have usage-based pricing.
Ibbaka: What examples of ‘worst practices’ do you see?
Kyle: Sometimes companies can get too innovative and ready to change. They want to test all sorts of different pricing models. This can confuse the salesforce and send mixed signals to the market. Sometimes companies are just testing one thing after another with no plan as to how the hypotheses are connected and how to move from one hypothesis to the next so that learning is building across the different tests. Testing without advance planning creates headaches all around.
The other worst practice I see is people who see low prices as an innovation. They are even willing to price below costs. In B2B having the lowest price is not an innovation. Testing lower prices frequently does not offset the lower revenues delivered or the possible damage to the brand. The unit economics have to work. Low prices make this a lot more difficult.
Ibbaka: What are the root causes of pricing challenges?
Kyle: Lack of segmentation. Companies often get mixed signals from the market. Some people will tell them “this is way too expensive” and others will say ‘this is great value.’ This is generally evidence of a market segmentation problem. Companies need to know what segment to target and they frequently need to package different offers for each segment. One cannot treat everyone in a large market the same way.
The other root cause is a product team that is not in close touch with sales and customers. They can lose touch with customers’ real needs and create things that are cool but have little value.
Ibbaka: Pricing connects with many other functions in the company. What do you see as the most important connections?
Kyle: Pricing is based on segmentation so the pricing people have to work closely with whoever is leading the segmentation work and make sure the segments are meaningful and actionable from a pricing perspective. Pricing is also closely connected to brand positioning. Look at airlines, Southwest and Delta offer basically the same service but very different brands and they have different pricing strategies. Pricing is part of the experience you create for your customer.
Obviously, the product leaders have to understand pricing and make it part of product design.
When it comes to execution sales, inbound marketing and even customer success all need to engage with and understand the pricing.
Many different business functions could own pricing and I have seen many different approaches work. What matters is shared goals and understanding.
A bad product can look great but have no adoption, or adoption with no monetization.
Ibbaka: What messages do you have for start-ups that may eventually go to OpenView for financing?
Kyle: Pricing is part of product-market fit.
Being able to find a target segment where customers get value and are willing to pay for that value is every bit as important as product design. It should be considered along with product design. The CEO needs to be engaged in pricing. At the early stage is when you have the most leeway to do pricing experiments and when you have to find ways to accelerate your learning. Even more important than the price level is understanding the value metric. Do you have the right value metric? Are you able to measure it?
Ibbaka: Say a bit more about how you would define ‘value metric.’
Kyle: The value metric is the unit that defines how a given customer gets charged. There are many different possible value metrics, each dependent on the product and how it creates value. Traffic, API calls, impact on pipeline metrics, there are so many possible value metrics. Early-stage companies should spend time understanding, testing and measuring their value metrics.
Ibbaka: Thank you. Great insights for people committed to innovation at all scales and stages.