How to Choose a Pricing Metric
We keep debating our price. Are we even arguing about the right thing?
Lenny's Newsletter · Patrick Campbell
Published Updated
Early on, the exact price matters much less than two decisions underneath it. What you charge for, and who you are charging. Patrick Campbell's advice is to choose a unit that grows with the value the customer gets, test it with customers, build quantified segments in a spreadsheet, and then experiment with some part of pricing every quarter.
Most founders argue about the wrong number
Pricing tends to get set once and then left alone. It is uncomfortable to revisit, and the effects take a long time to show, so it drifts for years.
When founders do revisit it, the argument is usually about the number. Should it be $500 or $505. Patrick Campbell, the founder of ProfitWell, writing a guest post in Lenny's Newsletter, argues that early on the exact number matters much less than that argument suggests. What matters first is the range you sit in, a $10 product, a $100 product, or a $1,000 product. After that, two decisions carry most of the weight. What you charge for, and who you are charging.
Price is an exchange rate
Campbell starts from a simple idea. Your product creates value, and your price is the exchange rate on that value.
That means pricing is not only the number on the page. The segment you sell to, the features you put in each package, and how you describe the product all change what a buyer will pay. A change to any of them is a pricing change, whether or not the number moves.
Decide what you charge for first
The first decision is the unit you charge by. Per user, per transaction, per unit of volume, per result. Campbell calls it the value metric, and he says that if you get it right you will do reasonably well even when other pricing choices are wrong.
The reason is the demand curve. A single flat fee charges a small customer and a large customer the same. The small one may find it too expensive, and the large one pays far less than the product is worth to them. Three tiers help a little. A unit that grows with the customer lets a small customer start small and pay more as they get more value, and pay less, rather than leave, when they use less.
Campbell reports that companies pricing on a value metric typically grow at about double the rate, with about half the churn, of companies charging a flat fee or separating tiers only by features.
Find the measure your customer will agree to
The ideal unit is the value itself. Money saved, revenue gained, time recovered. ProfitWell could charge its churn recovery customers on the revenue it recovered, because it could measure that and customers agreed with the measurement.
Most products cannot measure value that directly, so they choose a proxy. Campbell's method is to list five to ten candidate units, then ask customers and prospects which they prefer. One or two usually stand out. Keep the ones where larger customers naturally use more and smaller customers use less, and where the unit encourages people to keep using the product.
His examples reach well beyond software. Rolls-Royce charges airlines per mile for its engines and owns the maintenance. Husqvarna charges for time with its lawn care equipment rather than selling the machines. The unit follows the value, whatever the product is.
Why seats are usually the wrong measure
Charging per user is the default for software, and Campbell calls it a relic of the era when usage could not be measured. His test is whether each user gets a separate experience. If one person can log in as a colleague and do all of their own work, users are not the value. HubSpot charges its marketing customers by contacts rather than users, so adding people costs nothing and the work they do grows the bill.
Know who you are pricing for
The second decision is the segment. Campbell's point is that most personas are too vague to price from. He asks for a spreadsheet. The customer profiles you target run across the top, split by size, role, or both. Down the side go the features each values most and least, willingness to pay, lifetime value, and acquisition cost.
Fill it in even where you are guessing, then test the guess that matters most for your next decision. His own lesson came from ProfitWell's analytics product. Research showed customers would not pay much for charts, so the company made that product free and used it to bring in customers.
Then experiment, every quarter
With the unit and the segments set, the rest is research and testing. Campbell's order is the price range, the positioning, and the packaging first. Then add-ons, the exact number, local currency pricing, discounts, and contract terms.
He adds a few findings from ProfitWell's data. Discounts above 20 percent tend to bring higher churn. Pricing in the buyer's own currency lifts revenue per customer. Case studies raise willingness to pay.
The habit he recommends is to test something about monetization every quarter. Not the price every quarter, but something. Start with the unit you charge by. It is the decision the others rest on.