Pricing for sales growth: overcoming prospects’ fears of innovation
It happens all the time: you get an idea for a B2B product or service, and get great feedback. So, you raise some finances and build out the launch MVP (Minimum Viable Product). And you receive great feedback! You put it on the market, get lots of interest…but just a few sales. What’s going on?
FUD is what’s going on: Fear, Uncertainty, and Doubt. In this case, not the FUD spread by competitors, but rather the natural FUD that people feel when faced with making a change to something unknown. Will it work? Will users adopt the new approach? How costly and hard will it be to implement? Will the product development as the startup promises? Will the startup even be around to support us for as long as we keep using their product? So many risks!
This video is taken from Sanlam Investment YouTube Channel.
Tversky and Kahneman won the Nobel Prize in 2002 for Prospect theory, demonstrating that individuals are irrationally risk-averse when it comes to assessing gains and losses. A loss is assessed as twice as bad as a same-sized gain. Put another way, we assess losses as 2-3 times the impact of the same gain. This short cartoon explains it really well.
So when customers assess the potential benefits your solution could bring them, they overweight the risks as compared to the benefits. What to do? Reduce buyers’ actual and perceived risks. Let’s explore both.
Reducing buyers risks
The overall risk for a buyer is that they won’t get the value out of the solution they are expecting. We break this down into DATE Risk (yes I know…we like our acronyms too much!):
Deployment – the risk that the deployment will cost more or take longer than planned.
Adoption – lower/slower than expected user adoption reduces the value delivered.
Technology – buyers struggle to assess technology risks (especially for non-experts) that the solution just won’t technically work.
External – uncontrollable risks that could influence the value received: market changes that reduce or eliminate the need for the solution.
So the first step: put yourself in the prospect’s shoes, and make sure you understand not only the real and the perceived value, but also the risks to realize that value for the buyers. Talk to prospects and customers to validate your thinking. Then, design your pricing to minimize customer risks, using price carriers to manage customer risk and risk-sharing. Consider:
Work to minimize the risk to value (value received or cost to deploy) for the customer. Reducing implementation investment is often a great place to start.
Fix deployment costs if they are significant. When possible spread the customer’s cost over a subscription period.
Make initial subscriptions flexible – minimize the initial commitment they need to make. Freemium offers are great if you can use them to demonstrate the value, and this leads to an actual subscription.
Pay-per-Use (PPU) can minimize customer risk if usage is unpredictable or seasonal…but be aware that customers usually like to budget for costs, so PPU makes sense when your product is tied to their revenues (PPU tied to costs can increase customer risks if they are concerned with overuse that can blow the budget).
Warranties or guarantees can be very helpful. But try to avoid cash-back schemes (revenue recognition becomes a nightmare), and they won’t overcome very high risks.
Consider value-based outcome pricing. In practice it’s rarely used, since it’s really hard to agree on KPIs and align incentives. But when it can be done, it’s very powerful.
Reducing buyers perceived risks
In addition to reducing actual risks, pricing can significantly reduce perceived risks. The work of another Nobel Prize winner, Richard Thaler, points to part of the answer: Nudge Theory. This theory explains that positive reinforcement and indirect suggestions can influence individual and group decision-making, and nudges and other behavioral techniques can minimize buyer’s perceived risks. Below are some of our favorite tactics:
Encourage the buyer to reference your solution’s value/price to references that work well from your perspective. Top-of-the-list is usually the buyer’s value potential. In cases where you have a strong quantitative story, value calculators tell the story best (more on this in a couple of months). But other references can also work, such as expensive competitors or related high-price purchases.
Use customer case studies and references to minimize perceived risk.
We mentioned warranties before. Some warranties can give a perception of risk reduction at quite low cost (and vice versa of course). Wherever there is a risk-awareness asymmetry (you understand the risk better than the customer) and judge it lower than they do, warranties make sense.
If a Freemium or free trial offer doesn’t work (e.g. too much seller cost), offer a paid pilot. Pilots should be designed so that the customer experiences the value. Pricing pilots is very different from full pricing – more on this next month.
In summary, smart price models can go a long way to minimizing prospects' actual and perceived risks, shortening sales cycles and driving faster growth.
What actions are you going to take? Get in touch to have one of our experts discuss your situation.