Why Chief Revenue Officers Need To Improve Pricing Capability In SAAS Businesses 💰
A Chief Revenue Officer is a great new and very exciting role to appear in the SAAS business. It’s exactly what B2B businesses need in their pricing teams (but often struggle to achieve) in many respects:
The CRO role is properly positioned at the executive level and reports directly to the CFO or CEO, which is a marvellous step forward.
The CRO is also responsible for integrating and aligning all revenue generation processes in an organisation. It is accountable for marketing, product, sales and even operations. This indicates that SAAS businesses take their growth seriously.
However, we can see a few early warning signs relating to organisational design and pricing capability that may impede the great progress of the CRO role.
In this article, we are discussing why the chief revenue officer needs to improve the pricing capability role in the SAAS business.
At Taylor Wells, we argue that a further opportunity for CROs to refine and improve pricing capability in terms of implementing value-based strategy, team structures and analytics in SAAS businesses.
We strongly believe that it is the role of a chief revenue officer to continue to build capability in SAAS businesses using best-in-class organisational structures, pricing team expertise and strategies.
Why A Chief Revenue Officer Need To Improve Their Pricing Capability Role
What is a Chief Revenue Officer?
The chief revenue officer plays a critical role in a company’s future, overseeing new business sales, and implementing client base sales, marketing, and relationship policies. Bringing on a new CRO represents a commitment to business growth. Each company, like any other, will require a CRO to carry out their responsibilities well to drive consistent and profitable revenue growth for the business without negating customer experience in any way.
Finding the balance between generating revenue and improving buyer experiences is challenging. Especially as many SAAS companies have a start-up organisation design and structure and mid-level pricing maturity (as discussed later in the article).
What is the major role and responsibilities of a Chief Revenue Officer?
Operations, sales, business strategy, marketing, pricing, and revenue management are all handled by the CRO. Their primary goal is to sell products and services to generate the maximum revenue to the most appropriate customer.
Thus, they must develop innovative marketing, business, pricing and revenue model ways to boost the performance across many business metrics. Again, this is a tall order – and without the right set-up, capabilities and resources are impossible.
Starting from the top, here are a few gaps we believe SAAS firms could address to build more pricing capability for more revenue and more margin:
1. Price rise communications are focused on driving the firm’s profitability rather than generating customer value.
Generally, favouring fixed prices, SAAS firms are now sending more price-rise communications to customers than ever before. Often these emails don’t explain or justify the price rise or rationale for the price increase. Rather, like most price rise communications, customers are told how much the increase will be; the amount, time and date of the imminent and often substantial price increase. The customer is left in no uncertain terms that the price rise is coming whether they perceive this increase is fair or warranted or not.
Usually, the price increase is a blanket price rise percentage across all plans. If it is a variable price increase, customers are often driven to website pages with lengthy, legal terms and conditions; a pretty lazy way to communicate a price rise; placing all the work and accountability for the price rise onto the customer.
Very few SAAS firms explain or reiterate the value of their plans and services to customers. The whole price rise process is clinical; aimed to protect or boost the firm’s profitability rather than generate value for the customer.
We think this is a mistake (and potentially a missed marketing opportunity). Research shows that customers do not like to pay price increases when a plan was free or cheap. Moreover, customers resent being locked into a system only to pay significantly higher prices.
As an example, consider Disney’s recent price increase.
Members of Disney+ will have to choose between two options in the coming months if they want to keep their subscription. Pay the same monthly fee as before, but now with advertisements. Subscribers could pay more to watch without advertisements. This is a risky price move in the subscription market and potentially one which will lead to a profit decline over time. Why?
Most subscribers don’t like advertisements. Ads are very annoying and disruptive to the viewing experience. Are customers really willing to pay more for advertisements that they did not sign up for? Almost certainly not. Who logically would be happy to move to a less preferable option after signing up for something far superior only to find out they have to pay the same price for a worse experience?
Making the messaging more customer-centric is a good way to reduce risks. For each price increase, provide a value story. Telling a compelling story about the rationale for the price increase based on what customers really value (not what they dislike most about the service).
2. Many SAAS companies don’t update their prices, keeping their prices fixed for a long period.
Fixed pricing basically indicates that there’s very limited to no ongoing price review and optimisation process taking place in the SAAS business. Fixed prices also suggest a ‘set and forget attitude to pricing is prevalent in the business. A set-and-forget attitude to pricing makes a variable price rise strategy almost impossible; including price optimisation to capture ongoing $ value impossible. This is a massive and often missed revenue opportunity for SAAS businesses.
From a customer’s perspective, however, fixed pricing shows that price points are not market relevant. This is because suboptimal prices signal poor positioning in the market and limited to no customer value discovery. Within a short time (weeks if not days) a SAAS business can find itself charging customers too much for plans or underselling their plans and missing out on their entitlement to my not optimising price points.
Ongoing price review and price optimisation are essential to keeping prices fair, sharp and relevant to customers and markets. It is also a much more effective and safe method than the typical price rise approach (described above) to generate profit for a SAAS firm.
3. Website messaging is very product-focused.
It’s very common to find website pages describing how great the product is and how cool and smart the business leaders are. Not much is written on why plans are valuable to customers or why leaders of the business have developed and positioned these plans to serve customer needs or solve specific problems.
Features and benefits marketing is ok if you’ve got continuous product innovation. But, constantly inventing new features and benefits is not always possible. And, brand power often depends on more than just branding. This means CROs need to get good at developing promotions that speak to customers and building websites that make buying really easy and convenient. Let’s take Apple as an example.
Apple is betting that its customers’ perception of value is tied to the brand rather than product innovation.
The famous high-end mobile phone company is experimenting with how it communicates value to its current and potential customers. This year, Apple is pursuing a “no price increase” strategy while everyone else raises theirs. The company is obviously using price stability to keep customers hooked on its latest and most expensive iPhone models while managing costs by not introducing new features to the majority of its lineup.
The new features in this year’s iPhone lineup are concentrated primarily in the top-tier models. Is this something that will work?
This strategy will most likely divide customers in half. People will buy Apple for the premium factor, while others will prefer different brands. It’s a risky strategy, especially if the intrinsic value of Apple to customers actually ties to product innovation rather than the brand, as Apple appears to be leveraging.
4. SAAS websites are not always easy to buy from.
Price pages can be overly complex or too simple. Often you end up having to email the customer services support desk because the exchange of value is unclear or even the product/service is confusing.
5. Price relativities between plans are often too narrow or way too broad.
Sometimes there isn’t that nice logical transition that users expect from one plan to the next. This indicates that the business doesn’t know who their customer is (positioning & segmentation), what they value (product mix), and what they are willing to pay for the offer (pricing).
To price SAAS plans properly, the business needs dedicated pricing expertise to consciously evaluate core elements of the business strategy to optimise prices based on value. Not having clear and logical progressions in price points, indicates problems with the fundamental price structure and metrics.
6. Price tiers often have incorrect applications to plans and there are either too few or too many plans for customers to consider at the point of purchase.
We have seen even the big SAAS businesses using 6 or more pricing tiers to differentiate plans. Too few or too many plans lead to fewer online purchases. The number and structure of plans are important. Research shows that customers find it confusing and/or don’t know how to buy or find deciphering the value of the plans more difficult when the product positioning and segmentation strategy are set up incorrectly.
7. Freemium plans show a lack of understanding of perceived and actual value’.
To educate people about value, many SAAS use Freemium. Freemium was designed to attract customers by offering a test-and-see experience. However, I think it’s flawed because it places value discovery in the hands of the customer. Many customers don’t really know the value of the plan without any guidance. Expecting customers to know after exploring the basic plan in the range doesn’t mean they’ll get the value of the plan. In fact, it’s highly unlikely.
Freemium shouts out: “Find out why we are valuable yourself – we can’t be bothered to explain.” This devalues the plan and the business offer. An understanding of value shouldn’t be left to a customer to find out. It should be the centrepiece of your pricing, marketing and product strategy. Not an after-thought or something you give away for free. You end up giving all your value for free, but not getting the pay that is rightly yours.
8. AB testing prices are not a proxy for customer willingness to pay.
AB testing isn’t the way to understand what your customers value about you. The chances of having enough traffic to objectively decide on willingness to pay are very low. Even if you do have enough traffic coming to your site, your reference on willingness to pay is based on the prices you have published on your website in the past.
If they have not been set correctly, how will you learn about your customer’s willingness to pay? Also, customer willingness to pay now tells you nothing about their willingness to pay in the future. Willingness to pay depends on how good your marketing is. If you are only selling features and benefits, customer willingness to pay is going to be much lower than if you are marketing proven customer value drivers.
9. Too many discounts and promotions are very tactical and cap current and future revenue generation strategy.
We see discounts and promos across most SAAS businesses as a means to drive more traffic to the site or capture quick sales to some set deadline. We think this is a mistake. SAAS is different from B2B or even retail. Customers see so many offers and promotions on the internet. They know the time-specific offers will return pretty soon. They are not under the influence of cut-off dates anymore.
In effect, all excessive discounting does is cap your current and future revenue potential. To drive profitable revenue generation, you’ll need to consider and invest in growing ‘customer lifetime value’ – making your existing customers happy as well as driving the new customer to offers based on value not price.
Discussion on the Role of Chief Revenue Officer
As the principal role of a Chief Revenue Officer (CRO) is to drive revenue generation in a SAAS business, their remit is inevitably very big. In fact, the remit of a chief revenue officer is huge. They look after all revenue-related functions, including marketing, sales, customer support, pricing, and revenue management.
For example, the CRO is a part and goes through evaluation on several criteria. Some Key activities and performance metrics include:
Product creation: Identifying new markets and matching with the right products or at least defining what the right products should be
Pricing strategy: Determining the optimal pricing for each product based on the needs of a customer segment
Pricing execution: Developing price setting tools and processes for different markets and segments
Sales performance: Developing sales strategies and tactics for different customer segments with a focus on generating the most revenue possible
Advertising and promotion effectiveness: Allocating marketing spend on marketing and advertising activities and monitoring effectiveness across channels based on revenue targets and ROI
Distribution effectiveness: Evaluating all channels to market to determine which is most profitable
Customer Support: Evaluating the effectiveness of customer support services and optimising to manage margin and customer satisfaction
In short, the primary role and responsibility of the Chief Revenue Officer in most SAAS are a mile wide.
They are accountable for operations, sales, corporate development, marketing, pricing, and revenue management – with some shared tasks and overlaps with other executives.
Since these functions extend across multiple teams in most companies, a CRO has to be set up correctly in the business to ensure multiple workstreams are finished and/or don’t go off course.
The right organisational structures and frameworks across products, sales, operations, marketing and finance are critical to achieving the shared outcomes expected from a CRO. They are also vital for a SAAS business to embed and distribute best practices and knowledge.
Often the CRO reports to the CFO or CEO. This is a marked difference from pricing which often reports to middle managers in sales or finance. However, due to the magnitude of the role, it would appear almost impossible for 1 CRO to accomplish all KPIs set for them. Optimal team structures, talent strategies and workflows are necessary to ensure the CRO is set up to achieve key performance and pricing metrics.
Implications of the Role of Chief Revenue Officer
SAAS businesses (even successful ones) often act like new start-ups desperate for revenue and customers. Often, website pricing and marketing suggest SAAS still leads with product innovation above all else to capture share. They also appear to be hell-bent on selling innovation in the belief that feature and benefits selling generates more new leads and business. A bit more reflection, planning and nurturing of what you have may be a good idea to protect profit now and in the future.
In fact, during this time of mass inflation where customers are dropping subscriptions to save money, it is important to close capability gaps quickly. So much time, effort and resources are put into SAAS advertising and marketing to find and acquire new customers quickly. The investment must be spent on improving existing customers’ experiences.
To take SAAS to the next level, nurture the existing customer base. Refine pricing strategies. Adopt new methods and approaches. It is possible to drive acquisition, retention and growing share of the wallet if CRO roles and SAAS businesses are set up properly.
Pricing is a crucial part of growth and customer acquisition strategy. It has the highest impact on growth above all other things. Good pricing drives retention and improves acquisition. Hence, need to spend more time on getting pricing right.
Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks.
After 6 months, the team can capture at least 1.0-2.25% more margin using better price management processes. After 9-12 months, businesses often generate between 3-7% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.
For a comprehensive view on integrating a high-performing pricing team in your company,
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
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