Pricing, especially in the value-based model, must result from a thorough analysis of many aspects of the entire business. There’s no value-based pricing without cost analysis, competition research, etc. While some of those factors are fairly straightforward to measure, the role of a relationship is not one of them.
In some businesses, the way a company approaches relationships and what comes out of it can be a significant value for clients. In others, it barely plays any role.
In this article, we’ll take a deep dive into the topic of business relationships and how much they should influence pricing.
Why does the relationship factor matter in value-based pricing?
The short answer to this question is that everything matters in value-based pricing. In the process of creating pricing according to the value-based approach, you have to analyze each and every element that influences clients’ willingness to pay (WTP). The final goal is to understand the actual value of a product or a service for the client and set the price accordingly to maximize profits. If the relationship plays a role, it should be factored in.
For a more detailed article about value-based pricing, you can go here. Now, let’s move on to the topic at hand.
In what type of business the relationship aspect really matters?
It’s fair to say that a professional and customer-friendly approach is always a good thing to have. However, it doesn’t have as much impact on businesses that rely on self-service in a major way, so that includes most SaaS platforms and a large part of the entire e-commerce industry.
Then, we have many types of businesses on the opposite side of the spectrum, such as software houses, consulting companies, and others that work closely with their clients. The same goes for many manufacturers and industrial companies that work very closely with their clients or vendors. In general, we’re talking about all companies that use account-based marketing to a large extent.
For those companies, relationship matters greatly and should always be considered in building pricing.
What contributes to good relationship building?
There’s no such thing as a model example of how companies should manage their client relationships because it all comes down to what product or service we’re talking about. For services such as consulting or software development, there’s pretty much no ceiling. Direct and efficient communication is vital in those services, so face-to-face meetings in an informal atmosphere are very common. In many cases, even a series of workshop meetings during a workation by the French Riviera can be justified.
For example, most car manufacturers invite prominent dealership owners for fullypaid trips to exciting places when they release new models. The goal is not only to showcase cars but also to show gratitude.
We don't expect anything of this sort for SaaS companies and other businesses that usually don’t form such close relationships with clients. However, it still doesn’t mean they don’t form relationships. They’re just more one-sided.
Good relationship building in more self-service businesses means completely different things. It usually comes down to things like fast and effective customer support, helpful content, webinars, and general availability for the client. Of course, in a perfect world, SaaS clients never need any of those things because they have a perfect understanding of a given service and are satisfied with it.
Relationship factor and the size of a client
In most businesses, some clients require more attention than others. They’re often enterprise-scale clients, they bring more revenue than others, and companies happily prepare individual offers in such cases to solidify relationships and show a can-do attitude.
While there’s nothing wrong with this strategy in general, it may lead to some issues if it’s overused.
The more individual packages you sell, the more trouble you’ll have with further analysis. So, before you offer a tailor-made solution, ensure the client needs it. On top of that, sales specialists sometimes offer special individual treatment to clients that could be perfectly satisfied with the regular plans. Instead, they receive discounts or custom offers, which lowers MRR and increases risk. Having too many custom plans causes chaos not only within the company but may lead to problems outside, including reputation damage.
We talk a bit more about the risks of discounting in the article:
What metrics can help understand the impact of sales processes and relationships on business?
The impact of relationships on business can be elusive and difficult to measure, especially because they usually bring results over a more extended period. However, there are a few metrics that you could look at when analyzing this aspect.
Lifetime value (LTV) is definitely one of them. It’s the average revenue from a customer throughout the entire relationship, so it’s based mainly on the average length of the relationship. The better you keep customers happy, the more LTV you’ll have.
Churn rate is tightly linked to LTV. By improving the relationship aspect, you can learn more about your clients’ needs and respond to them more accurately. That way, you can definitely lower the churn rate.
Another helpful metric is conversion rate. In account-based marketing businesses, it may help understand how good you are at breaking the ice with leads and evaluate your selling process in general. You can also factor in the average time between the first contact and final conversion, which could help you understand how fast and efficient you are and perhaps give you a better perspective on what’s to improve.
The relationship as a selling point
If a relationship matters for a particular type of business, it can play a significant role in the sales process. It very well can be the deciding factor for someone who’s in the process of choosing the right company for a project or a tool for a given purpose.
However, it’s much more important to answer to clients’ needs than to play to your strengths, no matter how good you feel about them. And a good relationship is not always what matters the most for the client.
So, as with everything in value-based pricing, we return to the analysis of all the relevant factors.
And if you need a team to help you with this process, we’re here for you.