Tech companies are under the gun to improve profit margins and cashflow.
One mechanism for this is through packaging & pricing, the most intellectually challenging (and for me, fun!) piece of the PMM’s role.
This post will walk through
- 2 errors: Narayen & sufficiency errors
- 2 wins: Repackaging for Role & Integrative benefit
Let’s start with the errors.
A Narayen error is an error in which a company optimizes in one part of their business, but causes a much larger dis-improvement elsewhere.
The eponymous example of this is Adobe – who
- sells design and PDF tools to individuals for hundreds of dollars, and
- sells Adobe Experience Cloud to large businesses for $100K-$1 million
Adobe’s Narayen error is its choice to deploy an extractive trials/auto-subscribe process for the individual customer, which risks creating an individual perception of Adobe as untrustworthy, where that individual is on the buying team for the much larger Adobe Experience Cloud opportunities.
The Narayen error costs Adobe millions of dollars in order to make thousands of dollars.
PMM TO DO: when you’re looking at a way to increase revenue in one piece of your business, do a ‘whole picture’ analysis of consequences for the rest of the business.
Sufficiency errors occur when you’re considering raising the price of your base product by packaging formerly add-on/up-sell products into the base product – thus forcing all customers to pay for them.
If the add-on being repackaged into the base product as ‘required’ is
- valuable to almost all customers
- sufficient/competitive with alternatives in the market
then this can be a good strategy. No error.
The sufficiency error happens if the add-on you are bundling is not competitive and/or not valuable to most customers.
In this case, while the re-packaging leads to higher ASP, it increases customer churn – and can lead to reduced margins/NRR/cashflow.
PMM TO DO: assess an add-on’s sufficiency and value to the broader customer base before repackaging it into a now-higher-priced base product.
Now let’s talk about the wins.
Repackaging for Role
Product marketers who are hunting to improve margins should look at each of the existing capabilities they sell to one persona, and explore whether any of them are valuable to a different persona, who is not being sold to today.
For example, a software company that sells its product primarily to finance for visibility and control of software spend sees that one feature of that – monitoring employee software usage – meets a keenly felt, un-met need for the IT, security, and compliance departments.
In this example, the company can package that sub-feature of their existing product as a new product, and sell it to two new roles for additional revenue, without significant R&D cost.
PMM TO DO: when you’re hunting for margin, look at each of the capabilities you have, and do customer research to identify roles beyond your current buyer who would find value.
In the science of negotiation, the less successful approach is called ‘distributive bargaining,’ in which one party has to lose for the other to win. Picture a pie of a certain size. For you to get more pie, I have to get less.
The more successful negotiation approach is called ‘integrative bargaining,’ in which both parties articulate everything that matters to them to uncover changes in which each party improves its situation in the ways it cares about most. Picture a pie, but now we re-formulate the agreement so you get more cherries but I get more crust. Mmmmmm, crust.
An Integrative Benefit approach to packaging & pricing means going out and talking to your decision makers, users, IT, procurement, and finance/accounts payable teams at your customers. Ask them what they’d like to be different about the relationship, and what would make doing business with you easier and fit their goals better.
For example, one client of mine found that their customers’ finance folks hated multi-year contracts their procurement people had negotiated, because of how the multi-year obligations showed up in their accounting. My client found that customers would pay a higher price in exchange for annual out-clauses. My client’s finance team evaluated and accepted trading higher cashflow and margins now, for lower unbilled future revenue. They renegotiated their contracts along these lines and improved cashflow and margins. Their customers were happier, and they were happier.
PMM TO DO: When looking at how you package, expand your view to consider everything about the customer relationship:
- Billing (frequency, method, terms)
- How costs / revenue are accounted for on both sides
- Support levels
- Refund and cancellation policies
- Access to specific teams
The list goes on, but these are a few hunting grounds to start with.
Happy (stormy) Spring from the front porch in Moss Beach,