Conga’s Director of Business Transformation discusses pricing best practices with Randy Littleson
Best business practices are an ever-evolving discussion, with subscription-based business models garnering much attention today. Conga’s Chief Marketing Officer, Randy Littleson, recently sat down with our Director of Business Transformation, Derrick Herbst, to discuss pricing practices and the changing way companies provide their services.
The subscription-based business model has expanded past the software field. Unsurprisingly, many organizations are moving from one-time purchase models to subscription-based business models. We see this with companies like Netflix, Adobe, Sirius XM, service companies such as car washes, healthcare, and many others—across industries. Shifting to a subscription-based business model involves unique factors, such as changes to the processes surrounding your purchase model. Transitions require time and capacity, among other substantial changes and benefits that should be considered.
3 considerations when transitioning business models
When considering switching to a subscription-based business model, Derrick recommends keeping three considerations top of mind: financial, volume, and knowledge. Evaluating how companies can benefit from the switch in these areas is the first step when determining the best path forward. These benefits can be applied to both the business and the consumer side of the service relationship.
Business benefits of a subscription-based business model
One of the most significant changes to consider is the shift in receiving revenue from lump sums to a recurring revenue model. By doing this, the revenue levels out and makes the sales-customer relationship more consistent. Derrick further elaborates, “Instead of having to say we got to close three deals this quarter (you might have closed ten deals), you also had 50 other customers that were paying your entire quarter on a subscription.” The flow of revenue changes to a steady stream, which could impact how business is conducted financially.
With a switch to a subscription-based business, sales volume becomes much more predictable revenue. Derrick also asserts that this makes customers purchase a little more and upgrade more often than they might have otherwise. This drives upsells over time. For example, he says, "If you tell somebody they have to pay $100 a year for something, or they can just pay $10 a month, a lot of people would actually pay $10 a month. That's $120 bucks. They would think that was a better deal, so to speak because it's not as big of a lump sum upfront."
The last and most valuable consideration is your knowledge of your customers when switching to a subscription-based service model. You can learn what customers want and need as individual organizations. In these models, you can see how they consume and use the product or service. This enables you to tailor your offering to what the customer wants, which in turn helps improve renewal rates. Offering terms more aligned with their wishes and desires benefits both sides of the partnership.
Changes to the service-customer relationship
Switching to a subscription-based business model also changes the dynamic of the relationships you build with your customers. With this model, customers have the opportunity to leave sooner than they would in a one-time purchase model. If you don’t maintain a good relationship with consistency, this could negatively impact your renewals.
Subscription-based models help maintain service throughout the entire partnership, rather than checking in at the end of a multiple-year-long contract. Organizations now must win their customers daily and maintain those key relationships—because the customer has to choose the product daily.
Customer benefits of a subscription-based business model
Just as this model becomes recurring revenue for your organization, it also becomes a predictable cost for the customer. In his conversation with Littleson, Derrick says this model also gives the customer more flexibility. Adding services or turning on product enhancements becomes much easier for the customer in terms of cost if the service is subscription-based. Derrick also says, "Because they're [a service-based business they’re] able to see what customers value and what they want. Oftentimes the services are a little bit more tailored to the customers. So, there's a benefit to both sides."
Pricing strategies to combat rising costs
Next in their discussion, Derrick and Littleson go over essential market factors and ways to strategize as you consider changing business models. Based on an early 2000's study by McKinsey of 1,200 global companies, they looked at the impact of volume and price on the bottom line. They found that a 1% increase in your variable costs led to a 7% impact on your bottom line. A 1% increase in realized price was about an 11% increase on the bottom line. With this correlation, it's clear that you have to adjust prices to recoup some of your costs.
However, many are naturally resistant to raising prices, but the answer to this issue is not to increase volume. While obtaining volume from the competition is never easy, even if this was accomplished, the impact of increasing volume by 1% was a 3.7% increase to the bottom line. Derrick explains further, "If you give up 1% of the price and you lose 11%, you'd have to pick up about 3% of volume to offset the cost. It's not a viable long-term strategy. Especially when your competitors are going to do all they can to protect their turf."
He recommends avoiding the strategy of going to market with a blanket price increase. Instead, Derrick suggests going to market with a price increase strategy that isn't tied explicitly to covering higher costs. Doing so could negatively affect your customer relationships when the costs begin to decrease, garnering pushback from your customers to lower said prices.
He suggests going to your customers and acknowledging the business's increased costs. Be open about what you've done already to address the increased costs in your organization while highlighting the value you bring to the customer in the agreed upon price. "A lot of times you're providing services and advantages to the customer that they take for granted and they don't realize are there," Derrick says. From there, you can work with your customers to find ways to reduce your costs while still serving them.
Tactically implementing price increases with the customer in mind
The first place to look when you need to raise your prices is your contracts. Derrick points out, "Some contracts do not allow for a price increase. So that's a problem. Some contracts allow a certain amount of increase or a certain frequency of increases. So, it's very important to have good visibility into your contractual landscape, to understand where you have the opportunity to raise prices and if so, by how much."
Adding these elements to your contracts can be done at any stage of your go-forward plan. Derrick also urges companies to look for opportunities already built into contracts that allow raising prices when needed to cover business costs. However, he reiterates again not to raise prices in a blanket spread. Instead, go granular—look at a customer's willingness to pay more, the strategic vs. non-strategic customers, and where you have high-value products with low margins.
Raising prices is a necessity in business as companies fight to succeed. Prepare your organization for these price increases by arming your salespeople with the necessary information. They need rational justifications to take to customers when discussing price hikes to maintain those important relationships.
While there are clear benefits to shifting, making the switch from one-time purchasing to a subscription-based business model for your organization is not a decision to take lightly. Ensuring your organization is in the best place before going forward is essential to making a smooth transition.
To learn more and get first-hand insights, watch the full video with Derrick Herbst and CMO, Randy Littleson as they discuss pricing best practices.
This blog post is an abbreviated version of the video that's been condensed and edited for readability.