You built a new feature. What should it cost?

No pressure, but the success or failure of launching new software capabilities can determine the financial health of your company. After months of investment in development, testing, and marketing, the potential payoff from landing new logos and expanding current client subscriptions is what you need to demonstrate growth to your current (and future) investors. Like everything else in life, packaging and pricing decisions are about making tradeoffs: in this case between the priorities of Product, Sales, Client, and Finance personas.

What do these personas care about? With apologies to Tolstoy, each unhappy team is unhappy in its own way, but it’s safe to believe the following motivations are true:

  • Sales wants to get paid
  • Clients want it for free
  • Product wants adoption
  • Finance wants accretive growth

Of course we could add complexity to these incentives, and you will likely face some of these complexities (and others) in your business. Does top line growth or profitability matter more to your investors in the pursuit of Rule of 40 growth? Does new logo acquisition or current client expansion matter more to your industry analysts? Does your Sales comp plan pay the same commission rate on expansion sales as new sales (i.e., is the cost of sales equivalent)? Is your product team incented on feature adoption, or build quality? Is the new feature a strong positive differentiator vs competitors, or ‘table stakes?’ And more. For now, let’s keep a simplified view and compare a few practical options to launch your new feature.

Bundle it in

In this scenario, include the new feature at no additional charge with an existing product or edition without changing the list price. Current clients already using the edition that contains the new feature will ‘just get it’ when they receive the new release. Sales will get paid when new clients purchase this edition, or when existing clients upgrade from a lower-tier edition. Finance will likely yawn unless the new feature generates significant market share growth.

This option is best suited for situations when the feature is ‘table stakes’ and restores parity to competitors’ equivalent offerings, or when adding the feature to a top-tier edition increases the perceived value and drives upsell among the existing client base. If your competitive intelligence has shown low win rates and poor perceived value of an existing edition, and your test clients showed relatively low willingness to pay for the new feature on a standalone basis, this option might be your best choice.

Raise the price

When the new feature is highly differentiating and sample buyers demonstrate a high willingness to pay, set a higher price for bundles/editions that include it. Current clients will likely be ‘grandfathered in’ to start using the new feature before a higher price kicks in at renewal. Client Success and Product Marketing teams will use this preview period to gather feedback and testimonials to validate the expected value of the new feature. These proof points will help to diffuse any resistance to the increased price from new buyers. Both Sales and Finance teams will be thrilled by the higher transaction value, assuming that win rate and deal cycle length (key variables in the Sales Velocity Equation) don’t drop concurrently.

Give them the option

A middle-ground option makes the new feature a paid add-on to existing products or bundles. This configuration can get Sales teams excited to sell something new to existing customers who are mid-term in their contract (and retire some quota in the process). Be careful that the new feature, with a value prop of its own, doesn’t get “thrown in” at a discount to close deals — undermining the Product Marketing team’s ability to validate the market’s willingness to pay, trashing the Finance team’s margin forecasts, or artificially depressing the Product team’s adoption trends (if the feature is ignored by buyers who were indifferent to it in the first place). A paid add-on will require a new “SKU” in your catalog and add complexity to provisioning/shipment and run-books for your Ops teams. If your organization has immature Product Launch processes, make sure to give these teams 4-8 weeks notice so they can review, modify, and test their procedures to support the new feature as a paid add-on.

But wait, there’s more

Launch planning can feel like a tug-of-war between numerous groups with competing priorities and often misaligned incentives. While it’s impossible to predict how your clients, prospects, and competitors will react to your launch, the concepts above might help you make a more informed decision on how to package and price the new feature.

For more information about packaging, pricing, and product launch, try these resources:

I spend most of my days thinking about packaging, pricing, monetization, and the lead-to-cash cycle for a B2B SaaS business. I’m open to questions, feedback, challenges, and new ideas from people in the same situation – please leave a comment or contact me directly.

This post first appeared at leadertainment.com. Image credit: schoolspecialty.com

What do investors want, and how can you satisfy them?

In this context, by “investors” I mean professional managers of (mostly) other people’s money, that move millions at a time — not retail savers like most of us with thousands in a retirement account.

Investors want predictable returns that match the risk-weighted expectations for the portfolios they manage.

Every type of investor has a certain risk profile and horizon over which want to achieve returns. And that rate of return will always be compared against some benchmark, hurdle rate, or previous high water mark.

Risk-weighted expected returns are negative here.

Here are some investor type examples, listed in order of decreasing tolerance for volatility:

  • Angel investors want to “give back” to early entrepreneurs by providing their money, advice, and time with minimal expectations of financial return
  • Venture Capitalists will tolerate writing off 9 investments to get one with a 10x exit
  • Private equity partners want 8% IRR in a 6 year horizon
  • Retirement plan administrators want “5 real:” that is, 5% annualized growth after adjusting for inflation and foreign currency exchange

In equity investments, return on capital comes from share price appreciation and dividends. Recently share buybacks have become a hot topic, as an alternative means of returning excess earnings to investors (instead of dividends), but let’s leave that aside for now (instead, read what Matt Levine has written about it). The new theory views public markets as a way to return capital to early stage private investors — again, out of scope for this post.

From this point, let’s narrow the scenario: you are a leader at a publicly traded company. With stock that trades on the public markets, you need to know what kind of returns your investors want. Index funds, representing a large share but not the  majority of equity investors, want the index, which is an aggregate of the prices of the individual stocks in the index, to rise at some multiple of inflation. Some investors speculate on companies being acquired at a premium. Any “long” investor wants prices to grow over time. For a given P/E ratio, earnings growth gets you price growth. Higher earnings growth, sustained over enough reporting periods to establish a new expectation, can command a higher P/E ratio and therefore a greater rate of return on the same annual earnings growth rate.

Drilling down another level, the best way to achieve earnings growth is through revenue growth at constant margins. I say “the best” because revenue has no practical upper limit for a single company, while cutting costs to grow earnings will eventually run out of costs to cut. Revenue growth at constant margins isn’t easy — it’s the stuff careers are made of, or broken by.

I’m fortunate that my entire career has been devoted helping companies achieve more profitable growth, either as a consultant or manager, in both “old tech” and “new tech” industries. I am constantly learning from my direct experiences and case studies of other businesses. Some industries, like energy, healthcare, and FMCG, require significant capital investment across complex global supply chains. Timing these investments within business cycles, maximizing returns of a capital projects portfolio, and pursuing operational excellence are essential in saturated markets with low levels of consumer loyalty and commoditized offerings.

The tech industry contains a different set of growth challenges with different economics: achieving product/market fit then scaling up investment in sales, marketing, support, and infrastructure. Growing markets, loyal (or fickle) consumers, fierce competition for talent and regulatory uncertainty provide endless alternative scenarios for management teams to evaluate when making decisions.

So, when determining what strategy to execute, what projects and initiatives to fund, and generally where to focus your scarce leadership attention, first understand what your investors want based on their expectations for risk-adjusted returns.

Here are some additional resources that you might find useful:

Image credit: Tristan Surtel [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)%5D, from Wikimedia Commons