If you opened this blog post looking for the perfect answer to setting pricing KPIs… I hate to tell you that the perfect answer is: There is no answer. However, I do have some guidance for you.
Let’s think of pricing initiatives as a diet – or better yet, a diet plan with a diet tracker. Now if you’re like me then you know diets suck. Who likes monitoring their food intake or counting calories, and don’t get me started about the trendy flash diets that hit the market every few years? I remember as a kid, cottage cheese was a diet craze – though be it in small town South Carolina, but I digress.
About 3 years ago I had gotten tired of how I looked and felt health wise so I decided to take action. I dieted, and I did it with the goal of being leaner and more fit. I counted macronutrients using smartphone apps, stayed away from heavy carbs after lunchtime, I monitored my alcohol intake, and really focused on leafy green vegetables. I also did cardio or weights 5-7 times a week. I stepped on the scale every single day when I woke up to keep an eye on my weight but more importantly to drive my behavior for that day. Most importantly, I choose body fat % as my target metric because my goal was to be healthier and leaner. That’s why I ate smaller meals to boost metabolism and stayed away from carbs. I knew my goals and used the right KPIs to help me get there.
I think you can see where I’m going here. I knew my environment, my capacity to exercise, and what actions I needed to take to hit my targeted metric or my KPI. This is the same for pricing. There is no one way to diet or get healthier. You must understand your body type, how it responds to certain foods, your environment and level of discipline. Statista, in a recent study, states that the Health and Wellness Industry has grown to $175 Billion with the latest trend being personalized wellness – because there is no universal rule for success. This is the same for pricing.
You must understand your market, your strategic growth initiatives, your routes to market, your buyer preferences, and cost structure to choose the best KPIs for your business. The first step is understanding your goals. As an analogy – Do you want to get lean, bulk up, or fight disease. There are differing KPIs to track for companies that want to grow top-line revenues and companies that want to improve margins. Companies that are seeking to increase market share will track different KPIs than companies that are looking to block competition. There’s not one-size fits all solution to understanding your pricing situation. You must align to your strategy and your needs to your situation. Tracking KPIs that do not fit your strategic goals can lead to as much as a 9% decline on top-line revenue through price leakage and value perception.
SBI’s Pricing KPIs Tool includes a list of ten common pricing metrics to update your company’s pricing strategy.
Utilize the tool’s calculations of CAC, CLTV, and many others to get your company on the right track.
The First Step in Determining What KPI’s Your Pricing Team Should Track Is Determining Your Strategic Growth Goal Metric
Let’s look at 3 primary goals and I will give you my top two KPIs for each:
- Growing top line revenue
- Improving Margins while Maintaining Value
- Generating New Business through New Logos
The next step after understanding your strategic goal is to choose your metrics. For my fitness journey the metric was Body Fat % and my KPIs were the number of times I hit my macronutrients during the week, the number of times I went to the gym that week, my water consumption, and my daily weight. Those KPIs provided guiderails for me to achieve my goals. So what are they for pricing?
Growing Top Line Revenue Is No Easy Feat
Too often we see companies try to use pricing as the primary lever to do that, and that many not be the answer. A common metric here is growth rate.
To know how your pricing is affecting your revenue growth you must understand your price effectiveness. You can do this by monitoring your Average Selling Price and Win Rates.
Average Selling Price (ASP) is the basis for analysis when growing your top line. The ASP is affected by many things – market volatility, sales effectiveness, discounting structure, and willingness-to-pay. Understanding willingness-to-pay while knowing that it changes over time is the key to being able to set pricing execution practices in place that will maintain the value of your products. You must monitor you ASP monthly so that other factors are not affecting your top line. You must also understand what levers to putt to improve ASP over time – sales enablement, list price increases, price positioning, price setting, and price optimization.
When combined with ASP, win rates can be a powerful tool. If you know where in the market you win, with whom you win, and how well you win you can target your strengths. We want to improve our weaknesses, but in pricing the best way to improve quickly is to target our strengths. If you are a company that provides security software that secures large workloads you are likely to win more with large companies with high data needs that store secure information than other large companies that only store less sensitive customer data. Though a company like Nordstrom’s may fulfill your workload needs it is likely better to focus on a company like Aetna Health Insurance. Their willingness-to-pay is higher, and your overall ASP will benefit.
You Can Discount Your Perception Right out of the Market If You Do Not Protect Your Value
Reduce Value Leakage by reducing price leakage through price execution. A common metric here is profit margin.
Discounting is a necessary evil. Customers expect a discount yet de-value your products when that discount is too high. This gives you a small window to operate. If you discount the farm, you lose your value. If you are too rigid, your competition takes your customer – Catch 22, I understand. The negative from too much discounting far outweighs the positive from a customer acquisition because discounting is a one-way street. There are no U-turns, no 180s, only more discounts. My two favorite discounting KPIs are pocket price and discount to margin/growth ratio.
Pocket Price is an accounting tool defined as list price minus discounts, rebates, promotions, free freight, and similar offers. The contribution margin of a sale transaction can be determined by subtracting the cost of goods sold from the pocket price. For a guy that absolutely hated Accounting in Business School, just writing that last sentence triggered old nightmares before Finals. Now I understand the value of the metric. It feels simplistic, yet it is very powerful. Often, we make changes to the price without considering all the necessary evils that must be considered in pricing – COGS and discounting. The COGS are subtracted from the pocket price so to keep the contribution margins high we must keep the pocket price high as well. In pricing we often do not control costs, so we must “play the hand we’re dealt” and that is maintaining pocket price.
The Discount to Margin Ratio is a great tool for understanding where your products lie in their product lifecycle and how you can extract the most value from that product. Every lifecycle stage is different. New products are often discounted highly to gain market share while aging products are discounted highly to be moved from the shelves. Margin is a tricky metric to follow. It is largely controlled and maintained by your salesforce and comp and quota structure. However, price execution plays a role as well. Structured Discounting and Setting Price Fences are the quickest levers to pull to maintain margins. I just wrote a blog on this very topic. Improving margin starts with understanding and setting what ratios are good for each product depending on the product’s value to your business.
Setting Your List Prices Too High or Too Low Can Have a Real Affect on Your Ability to Attract New Logos
It is not just on marketing. A common metric here is customer lifetime value.
List Price Yield % is a great KPI to understand how your initial price is affecting your new logo conversion. Prospecting customers rely heavily on list prices to determine their level of interest in your products. Do you list prices high to give cushion for negotiations and discounting or are you no haggle? To attract new logos the list price is important. If your Customer Lifetime Value is high then you want to list lower to get new logos in the door because you will benefit from them in the long run. If you are selling singular products with short term usage you want to list so that you are not turning new opportunities away while still upholding the value of your products.
Lead Conversion Rates are often seen as a marketing KPI, and it is, pricing also plays a large role in converting leads. Marketers love to run campaigns or special pricing programs to convert leads. You must understand that lead conversion is one-part art and one-part science. Pricing is the science. Understand the best price point that have converted the best leads and stick closely to that. Much easier said than done, but monitoring this will improve you lead conversion without “giving away the farm” in discounts to get new logos.
The Pricing KPIs Tool includes a list of ten common pricing metrics to update your company’s pricing strategy as well as how to calculate your company’s Committed Monthly Recurring Revenue (CMRR).
You can also check out other ways to further enable your sales team by downloading SBI’s 2020 How to Make Your Number Workbook, exploring our Pricing Strategy insights, or by connecting with an expert.