Pricing and packaging [Q&A with Toast]

Ever relegated yourself to the role of a window shopper, because you’re not willing to pay what you consider to be an excessive price for a product?

Or on the flip side, have you seen something that’s so cheap, that it’s harmed your buying decision? After all, in the eyes of many consumers, a low price tag is emblematic of a lack of quality.

Ashley Murphy, Toast's Director of Market Insights and Pricing, shared her specialist insights, including her preferred pricing strategy, the role of product marketing in the pricing process, top tips, and much more.

Q: What sort of pricing strategy do you use? And how (and how often) do you go about validating whether or not it's working?

A: “I typically encourage a value-based pricing strategy. This type of strategy is centered around customers’ value drivers and willingness to pay. Competitive dynamics and unit economics are the other two levers I consider to ultimately set price metrics and price levels.

“In terms of validating pricing, there are different tactics depending on how much time/resources you have and the level of rigor you are looking to achieve. For major price changes, I recommend forming pricing based on historical trends and primary research with customers followed by in-market testing (i.e. regional tests with sales or A/B tests on the web). I recommend companies revisit their pricing bi-annually or annually, at a minimum, to stay relevant.”

Q: How big of a role does product marketing play when it comes to pricing at Toast?

A: “Big! I lead a dedicated team within the product marketing organization focused on pricing and packaging.

“Pricing itself is very cross-functional, but my team is responsible for setting our pricing strategy, executing pricing experiments, and continuously evolving our pricing, packaging, and promotion approach. We work closely with core product marketing, product, finance, and sales.

“I’ve seen pricing live on many different teams (or sometimes nowhere/everywhere). I am a proponent of product marketing championing pricing as it will be deeply rooted in customer needs. Typically product marketing has the deepest sense of why you win/lose, competitor dynamics, and insight into the ‘voice of the customer.’

“If you work at a multi-product company, it is especially paramount that you form a dedicated pricing team so that the pricing of individual products are coordinated and work together to hit your goals.”

Q: I'm very new to the world of pricing and am starting a new PMM job in a B2B SaaS org in a few weeks where I know pricing will be a part of my role (how much, I'm not too sure yet). What would be your best advice to a complete newbie?

A: “My #1 piece of advice is to build pricing processes (as opposed to tackling it one-off). Many organizations let pricing be based on gut or just debates between teammates. Establishing formal processes of how/when pricing decisions are made will set you up for long-term success!

“A few ideas that have worked well for me: I recommend creating a new product pricing playbook. Similar to how PMM will traditionally have a product launch playbook/process, you should also establish how pricing analyses and decisions will be made throughout the development process. Many companies wait until GA to make pricing decisions, but you should be considering pricing from the initial inception of a product.

“I also would recommend creating a pricing committee if you work for a mid/large size company. Pricing impacts many departments and therefore many folks will want to weigh in. Creating a formal pricing committee that helps prioritize the pricing roadmap and approve pricing decisions will help drive transparency and help you get things done more efficiently!”

Q: What are some strategies to start converting my B2B computer hardware business model from cost+ to value-added pricing?

Some management and customers are set in this pricing model and we can't seem to get out of this cost+. If anything, I think everyone believes MSRP will increase due to value-added pricing, but some of it may decrease.

A: “Many companies go through this transition. The best way to get buy-in is to prove the business impact through data. I recommend doing in-market testing when shifting to value-based pricing. I typically recommend testing new pricing strategies with prospects to gauge demand and impact on unit economics before changing pricing for existing customers.

“Also, with value-based pricing, it is often beneficial to have a portfolio approach to pricing. If your company has many SKUs/products, the MSRP will likely both increase and decrease. The important thing to test is that as a portfolio, you are increasing your KPIs (revenue, margin, location acquisition).”

Q: What are some trends in pricing transparency on your website? And related —as someone moving to a global/enterprise offering— how might I think about the strategies for this differently from SMB strategies?

A: “In general, I recommend price transparency for lower complexity offerings. Buying habits have certainly shifted over the past few years and consumers (B2C and B2B) prefer to do their research online and I believe expect a certain amount of transparency and autonomy. That said, for enterprise/robust offerings that are often customized based on the customer needs, it is often difficult to display pricing on a website that applies to everyone.

“Using these principles, we publish pricing and offer the ability to buy online for vSMB buyers. For SMB buyers we publish a starting rate, but still encourage prospects to meet with a consultant for a custom quote and price based on their needs. Lastly, for enterprise buyers, we do not publish pricing on our website given the high degree of variability and customization required for that segment.

“In short, price transparency will depend on the buyer and the complexity of their needs!”

Q: I’ve started as a PMM for a company in a niche segment and one of the top focuses is to revamp the existing package pricing. What are a few of the important things that I need to work on to provide a successful pricing model?

A: “The first and most important aspect is to understand what goals you are trying to achieve. Your pricing and packaging strategy will look quite different whether you are trying to maximize customer acquisition vs. top-line revenue vs. margin. Getting a deep understanding of why the company wants to revamp the pricing and what they’ve learned already will help guide you.

“I would also encourage you to use customer value drivers and willingness to pay as critical data points to help inform your recommendation. For major price changes, you’ll want to design custom research using focus groups or an online survey to collect robust insights from both customers AND prospects.

“Lastly, don’t work on this project in a vacuum. You should be collaborating with Sales, Finance, CS, and Operations to form your recommendation.”

Q: Do you have a methodology to measure the impact on customer level loyalty based on changes in pricing?

A: “Weighted net dollar retention is often a go-to metric to understand the value of customer cohorts. This considers both logo churn and revenue growth. I recommend closely tracking weighted net dollar retention by cohorts of customers to identify the impact of price changes.”

Q: In terms of price/value offers for restaurants (think $5 Footlong at Subway), do you have processes for measuring the impact in advance of a chain-wide launch?

A: “For these types of promotions, I recommend in-market testing. You can select ‘look alike’ regions to test these offers before a national launch. Focus groups and online surveys can give you a directional sense of the impact, but nothing beats in-market testing if you have the resources/time.”

Q: What are some hands-on skills pricing analysts should be good at as they start their new role in B2B SaaS?

“First and foremost, data analytics skills will be paramount. Pricing analysts often have to conduct root cause analysis to identify what is driving trends in the data.

"I also recommend becoming familiar with primary research methodologies that are often used in setting pricing strategies. These are often Conjoint, Van Westendorp, and Gabor Granger.

"Also, read up on financial metrics. A pricing analyst must understand how pricing impacts key financial metrics for the company to do its job well. This includes unit economics (LTV/CAC, payback period, weighted net dollar retention, churn metrics, and more!)”

Q: How much does the competitor pricing model play a role in defining the pricing of our product, and while arriving at the pricing, how much does internal cost rank as a factor?

A: “Typically a value-based pricing strategy is rooted in customers’ value drivers and willingness to pay. Competitive dynamics and costs should be considered to form a final recommendation, but the primary guiding light should be the customer insights. Also, when considering competitive dynamics, it is important to think about price/value relationships. Rather than matching price points, you should aim to create product differentiation and charge for that value.”