We have finally made it to the final principle of Customer-Led Growth (CLG) 🎉
You might be wondering why pricing and packaging is the tenth and final CLG Principle… don’t you start with that? The answer is certainly yes. Optimizing your pricing and packaging should be a top priority to build and sustain your customer-led growth engine. However, pricing changes often take a lot of time, research, discussion, leadership approval, etc. And, we recognize some companies might not have the opportunity to act on this principle immediately.
If you can—treat this principle as one of your first orders of business. It’s crucial to align pricing to the value derived from your ideal customer profile (ICP) for long-term net revenue retention (NRR) and gross revenue retention (GRR).
Where do I begin? Let’s talk about the big targets
First up, NRR has really taken over the airwaves in recent years—and we’re grateful for that. To embrace CLG, you must start to balance revenue priorities between new business growth and net revenue retention. However, what about Gross Revenue Retention? We’ve started to see a bigger spotlight (and more scrutiny) on this metric because it does not factor in upsells. As a result, GRR can really double click into your overall customer health and long-term revenue stability.
Let’s break this down.
Net Revenue Retention encompasses all recurring revenue from an account or group of customers. This includes upsells, add-ons, additional users, price increases, etc.—less the total dollar amount churned.
Gross Revenue Retention covers recurring revenue from an account or group of customers, but does not include upsells and other expansion-related income. It strictly measures the annual revenue that is lost from an account or customer base.
Let’s align pricing to value in support of NRR and GRR
Now, we are not going to tell you your exact pricing model for customer retention and growth (i.e. usage-based vs. tiered) because we are not factoring in your actual product, industry, service model, and of course… the customers you serve!
This principle is all about acknowledging that pricing models have been historically focused on improving win-rate or increasing profits without thinking about the impact on customers. We wouldn’t be doing CLG justice if we didn’t try to change that as part of our 10 principles.
The next section is a step-by-step walkthrough of key performance metrics and customer insights to factor into your pricing strategy aligned to long-term customer retention and growth.
Understand how revenue growth is generated (or blocked) along the customer journey
As discussed in Principle 7, embedding the voice of the customer (VOC) across your strategy is critical to shaping your retention and growth strategy. The same goes for pricing. It’s important to balance both quantitative and qualitative data to ensure pricing is truly aligned to the actual value customers receive.
Let’s break this down.
Costs to serve → Are you spending too much time and costs helping customers realize your product/service value?
Sales to CS pass-off time → Do you have this implemented? Is this pass-off timely for a fast start to value?
Time to implement and onboard → Is this optimized for a fast start, without impacting quality? Also, be sure to send post-implementation surveys to collect real feedback on your fast time to value at this stage.
Average customer health by lifecycle → At what point in the journey do customers reach optimal health? Why? How can you extend that along more journey stages? Be sure to segment this data by company size, industry, etc.
Expansion revenue by customer industry/segment → Who are your key expansion customer profiles and why? What leads them to spend more? At what stage does this typically occur? What pains are they experiencing or goals they are trying to achieve?
Expansion processes → Do you have a clear CSQL process to facilitate the flow of leads from CS to Sales to ensure expansion aligns with the customer experience? Are Sales incentivized to manage and close expansion leads sent from CS?
Average at-risk rate → Do you manage a high amount of at-risk customers each month? This can be a critical sign that your pricing is not aligned to value if you’re constantly fighting churn.
Renewal efficiency → What is your renewal rate? How many renewals close before the renewal date? How many accounts downgrade at renewal? With the right pricing strategy, customers should be less hesitant to renew early or on-time and with greater expansion over contraction.
Product value → Use surveys, win/loss and customer interviews to truly understand the value that your product is delivering relative to your pricing and alternatives in the market.
NRR and GRR → Use NRR and GRR as your benchmarks to measure the top-level impact of your pricing decisions.
Know how your offering drives customer impact
As you refine your pricing model to support retention and growth, it’s also critical to understand how your offering actually meets buyer needs. This means going beyond top-level goals like ‘time to value’ as mentioned above. What we’re referring to is a deep, targeted assessment of your key end users and their leadership team to understand how your product supports specific buyer roles, pains and goals every day. To implement this at Catalyst, we use the “Jobs-to-be-done" (JTBD) framework that focuses on understanding the specific job that a customer is trying to accomplish with your product or service.
Using the JTBD framework from a pricing perspective, the basic premise is that customers don't buy products or services based on their features, but rather based on the outcome or benefit they expect to receive from using them. For example, a customer might purchase a lawn mower not because they want a lawn mower, but because they want a well-manicured lawn.
By understanding the customer's underlying job or outcome, you’ll be better equipped to price your product or service based on the value it offers in achieving that job. In addition, it’s important to determine how your products or services can help customers achieve jobs more effectively or efficiently than competing alternatives.
Done right, this exercise requires a lot more than getting leaders into a room for two hours with a whiteboard. We recommend having a cross-functional team own your ongoing JTBD assessment and ensure a quarterly cadence is set up with defined goals to keep this up to date.
The optimal mix of JTBD activities should include:
- Consulting different perspectives across the organization
- Conducting customer and external market interviews (key personas + subject matter experts)
- Analyzing direct customer feedback and customer behavior (ex: usage by persona)
- Hiring external consultants (optional)
- Leveraging your Board member’s experience for consulting
- Finally, once the key customer jobs are defined, assess how competitors accomplish them relative to your business
Overall, regardless of the framework you select, it’s critical to deeply understand the value you offer in relation to the specific function your product serves for end users. This knowledge will not only lead to more effective pricing strategies that support customer advocacy, retention and growth; but it can also be applied to your marketing messaging, sales positioning, success programs, and more.
Where do I go from here?
When the above is factored into pricing, you should be able to take a more holistic approach to ensuring pricing and packaging supports customer retention and growth.
If you’re underperforming in some of the above metrics (long implementations, slow renewals, high churn), ensure your pricing strategy does not add to these frustrations. For example, don’t launch basic add-ons at a premium if you have a big churn problem but want to grow revenue. That will more than likely backfire.
If you have an expansion problem, perhaps you simply need to optimize Sales compensation and facilitate a CSQL process. On the other hand, you might uncover a key moment when customers expand in the journey in relation to their job-to-be-done and identify a new product add-on that can suit their needs at that stage.
When turning to your customers first, often your most actionable growth levers are right there, waiting to be unlocked.
It’s only the beginning of the bottom line
Ultimately, the right pricing model for customer retention and growth will depend on the specific needs and goals of the customers you serve. It's important to always look inwardly to your customers before changing pricing relative to what growth targets you might want to hit.
We’re in a new revenue era of embracing customer retention, expansion, and advocacy as your #1 growth engine. To stay ahead, always keep the customer at the center of your strategy.