How subscription businesses can navigate the critical but risky business of pricing transformation

By John Phillips, General Manager at Zuora

For many businesses, increasing scale can lead to an increase in pricing. But for subscription-based businesses, changes in pricing are often about more than just increases. There comes a point where a subscription company’s existing pricing system no longer reflects its strategic direction, and changes will need to be made to enforce a course correction.

Whether it’s based purely on usage, on a recurring flat fee, or somewhere in between, a company’s pricing strategy is just one input in a complex matrix of factors that affect its revenue. A change in the price of just one feature can have a ripple effect across an entire portfolio, causing headaches for financial teams. It’s vital, therefore, to find a way to safely navigate the choppy waters of pricing transformation.

Taking action

A scaling subscription business will typically iterate on pricing every six months. But making those iterations can be challenging, especially for finance teams caught between the rapid innovation of a company’s product team, and the fight for IT to implement the necessary changes. It’s little surprise that subscription pricing strategies can be neglected by many companies.

It’s important not to overlook them, though, particularly when the billing system that got the company off the ground to begin with requires ever more effort to ensure it fits in with the overall business strategy.

The first step is to identify what’s not currently working. Signals such as excessive discounts across the sales team, a need to constantly run promotions, and static price rates that haven’t increased in years are all red flags. As well as indicating areas that require action, they can also help a business identify the goal of its pricing refresh.

A business might not be able to acquire new customers, for example, so it might need to change its pricing to increase customer acquisition in a particular segment. Perhaps its upsell path is broken, requiring a change of pricing to increase the Average Revenue per Account (ARPA) by creating more upsells or cross-sells. Or its pricing might be static and hasn’t kept up with market trends, in which case the business might need to consider simplifying its pricing strategy, to encourage its customer to more easily use new features.

Whatever the outcome, analysis of these problem areas can help form a clear picture of what the business is looking to achieve.

Fight the fear

Following this analysis, many companies can find themselves in a state of paralysis. They have a great deal of new information and, as a result, a better sense of the direction in which they should be moving, but they might be reluctant to take the next step for fear of something going wrong.

But, while it pays to exercise caution with existing customers, there’s no reason businesses shouldn’t apply new pricing to new customers. They should set a timeline for when the new subscription pricing will be made available to those new customers, and work backwards from there.

That said, a pilot of any new pricing structure should be carried out with both new and existing customers, allowing the company to test it, iterate, and repeat until they’re satisfied. Tests should be carried out to find the right pricing point and rolled out to all new customers after the ‘launch’ date. At the same time, the company should identify existing customers they know will benefit from the new pricing strategy and test it on them.

Practices should be put in place to ensure the new pricing strategy is adopted and maintained. Smaller catalogues, for instance, are often a good thing. Indeed, the fastest-growing companies will often have the lowest number of products when adjusted for company revenue. Research shows that companies with more than five products per millions of dollars of revenue grow at a significantly slower pace (12%) than those with less than one (31%). It’s important, therefore, to keep it simple.

Active management of product catalogues matters too. By maintaining its catalogue on a relatively frequent basis – twice a year, say, rather than every two years – a company can avoid large pricing clean-up operations in the future.

A risky necessity

Pricing transformation is necessary for any subscription-based business looking to scale. But it can be fraught with risks. Get it wrong, and it can have an impact on internal operations and customer relations.

By ensuring any transformation is carried out carefully, for the right reasons, and with the right customers, it’s possible for businesses to minimise those risks and scale successfully, enjoying increased revenue and delivering a consistent customer experience.