Key Takeaways
1. Pricing is a Design Job, Not an Excel Job
I had a key insight that resonated: pricing is more a “design” job than an “Excel” job.
Beyond Spreadsheets. Pricing isn't just about crunching numbers in a spreadsheet; it's a strategic design process. It requires understanding customer psychology, market dynamics, and the value your product delivers. Relying solely on cost-plus pricing or competitor benchmarking misses the nuances of creating a pricing model that resonates with your target audience.
Design Thinking. Approaching pricing as a design challenge involves empathy, experimentation, and iteration. It's about understanding your customers' needs, pain points, and willingness to pay, and then crafting a pricing structure that aligns with their perception of value. This may involve creating different pricing tiers, bundling features, or offering customized solutions.
Strategic Advantage. Effective pricing can be a significant competitive advantage. It can help you attract new customers, increase revenue, and improve profitability. By focusing on design, you can create a pricing model that is both sustainable and scalable, allowing you to adapt to changing market conditions and customer needs.
2. Price Your Customer, Not Your Product
Instead of trying to price your product, you should price your customer.
Customer-Centric Approach. The fundamental shift in thinking is to move away from pricing based on the cost of your product and instead focus on the value it provides to different customer segments. This means understanding their specific needs, willingness to pay, and the jobs they are trying to accomplish with your solution.
Value Differentiation. Recognizing that not all customers are the same is crucial. Some customers may be willing to pay a premium for certain features or services, while others may be more price-sensitive. By segmenting your customer base and tailoring your pricing accordingly, you can maximize revenue and capture a larger share of the market.
Pricing Structure. This approach emphasizes creating a pricing structure that allows you to discriminate between different customers. This structure includes product packaging and pricing metrics. The goal is to build a pricing structure that will properly price all these customers.
3. Scale Economics Drive Sustainable Profitability
“Strategy” is “the plan you have to gain competitive advantage, defined as a sustainable way to keep profits above the cost of capital.”
Superior Profit Formula. To outperform competitors, a superior profit model is needed, focusing on lower customer acquisition costs (CAC), higher product value, or lower delivery costs. This requires understanding and leveraging different types of scale: economies of scale, network effects, and distribution effects.
CLTV/CAC Ratio. The core yardstick of profitability is the Customer Lifetime Value (CLTV) to Customer Acquisition Cost (CAC) ratio. This metric captures the balance between the cost of acquiring a customer and the total lifetime gross profits generated by that customer. A higher CLTV/CAC ratio indicates a more profitable and sustainable business model.
Scale Combinations. Combining different types of scale can create a powerful competitive advantage. For example, a product with network effects and viral marketing can achieve both high product value and low CAC. Understanding the dynamics of scale in your market is essential for building a sustainable and profitable business.
4. The CUPID Model: Users as Customers, Product, or Distribution
The key question the CUPID model forces you to answer is “What is the value path from user to customer?”
Understanding the Value Path. The CUPID model provides a framework for designing a product ecosystem around the three types of scale: Customers, Users, Product, Iteration, and Distribution. It forces you to consider how your users contribute to your business, whether as paying customers, as part of the product itself, or as a distribution channel.
Users as Customers. This is the most straightforward scenario, where users directly pay for the value they receive from your product. The focus is on strengthening the relationship with these customers and continuously increasing the value of your offering.
Users as Product or Distribution. In some cases, users may not be direct customers but contribute to the value of the product or help distribute it to other users. For example, a social media platform may sell user data to advertisers, or a free version of a software may drive adoption of the paid version. Understanding these dynamics is crucial for designing a sustainable business model.
5. Product Model: Fencing and Laddering
Fencing: the separation of your customers into overall different categories (e.g., train passengers vs. freight transportation).
Two-Level Approach. The product model involves two levels: the product ecosystem and packaging. The ecosystem considers how different products support each other to build more value, while packaging focuses on specific use cases and value propositions.
Fencing. Fencing involves separating customers into distinct categories to better deliver and extract value. This allows for specialized product and pricing models tailored to each segment. Effective fences are discreet, stable, fair, obvious, and valuable.
Laddering. Laddering involves structuring the product to guide customers' purchase, usage, and expansion over time. This creates a product ladder that encourages customers to upgrade to more expensive tiers as their needs evolve. The "Jobs to Be Done" theory helps identify the core problems that each package should solve.
6. Complexity is a Virtue in Pricing
The rule of thumb is that the larger the ACV, the more complexity you need.
Beyond Simplicity. While simplicity is often touted as a key principle in pricing, complexity can be a virtue when it comes to price discrimination. The larger the Annual Contract Value (ACV), the more complexity is needed to capture the full value of your product and cater to different customer segments.
Nine Building Blocks. The complexity toolbox includes nine building blocks: setup fees, ad-hoc one-offs, exit fees, flat base fees, flat add-on fees, flat non-optional fees, metric-based license fees, consumption-based metrics, and credit-based metrics. By strategically combining these elements, you can create a pricing model that is both flexible and profitable.
Strategic Tool. Complexity is a tool to price discriminate between different customers. The goal is to create a pricing structure that is easy to sell, not necessarily simple. This involves balancing the need for clarity with the ability to capture value from different customer segments.
7. Wallet Structuring: Make Everyone Pay
The rationale is simple: make everyone pay.
Understanding the Buying Committee. Enterprise software is often bought by a committee, with each member representing a different department or function. Each of these stakeholders has their own budget and priorities, and they all have the power to block the sale.
Targeting Budgets. Wallet structuring involves aligning your pricing structure with your customer's budget structure, ensuring that each stakeholder contributes to the overall cost. This can involve charging different departments for specific features or services that align with their responsibilities.
Cost-Plus and Value Pricing. Wallet structuring allows you to combine cost-plus and value pricing strategies. You can charge your primary buyer for the value they receive from your product, while also charging other departments for the costs associated with their use of the system. This approach can increase revenue and improve customer alignment.
8. The Behavioral Pricing Matrix: Relative Price Points
Prices are not high or low on an absolute basis—only in relation to something else.
Anchoring Effect. Prices are not evaluated in isolation but in relation to other reference points. The "anchoring effect" demonstrates how initial information can significantly influence willingness to pay. Understanding these psychological factors is crucial for setting effective price points.
Behavioral Pricing Matrix. The matrix maps out four basic price-anchoring scenarios based on information asymmetry and competitive pressure: cost-based, niche-based, perceived value, and fair value pricing. Each quadrant requires a different approach to pricing and communication.
Customer Sophistication. Customer sophistication is a key factor in determining the appropriate pricing strategy. Sophisticated customers are more informed and price-sensitive, while less sophisticated customers may be more influenced by perceived value. Tailoring your pricing to the level of sophistication of your target audience is essential for success.
9. Discounts Are a Profit Tool, Not a Sign of Weakness
Discounts are a powerful tool, and for that reason, they can be powerfully misused.
Strategic Tool. Discounts should be viewed as a strategic tool for maximizing profit, not as a sign of weakness or a way to compensate for poor sales skills. When used correctly, discounts can help you attract new customers, increase sales volume, and improve customer retention.
Structural vs. Sales Discounts. Structural discounts are predetermined and transparent, designed to incentivize higher volume purchases. Sales discounts are discretionary and used to close individual deals. Both types of discounts should be carefully managed and controlled.
Prioritizing Discounts. When offering sales discounts, prioritize time-limited discounts, better terms and conditions, and upselling with a permanent discount. Permanent discounts on preferred products should be a last resort. The goal is to minimize the impact on long-term revenue while still closing the sale.
10. Raise Prices Regularly to Reflect Value
You should probably raise your prices at least annually, if not quarterly.
Dynamic Pricing. SaaS products are constantly evolving, with new features and improvements being added regularly. To reflect this increasing value, prices should be raised regularly, at least annually if not quarterly. This ensures that you are capturing the full value of your product and maximizing revenue.
Contract Framework. Your contract should allow you to change prices, discounts, products, and operational terms without renegotiating the contract. This provides the flexibility to adapt to changing market conditions and customer needs. A dynamic SaaS contract framework is essential for long-term success.
Avoiding Hydra and Monolith Pitfalls. To avoid becoming a hydra (with too many add-ons) or a monolith (with under-monetized features), focus on maintaining packaging integrity and reassessing price points often. This involves creating new offerings for distinct new jobs and adding functionality to existing offerings to improve their value.
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FAQ
1. What is "The Pricing Roadmap" by Ulrik Lehrskov-Schmidt about?
- B2B SaaS Pricing Design: The book is a comprehensive guide to designing pricing models for B2B SaaS companies, focusing on creating structures that customers will love and that maximize business value.
- Shift from Product to Customer: It argues that pricing should be about "pricing your customer" rather than just your product, using tools like product packaging and pricing models to achieve price discrimination.
- Strategic, Not Just Tactical: The book positions pricing as a strategic design process, not just a financial or Excel-driven exercise, and provides a step-by-step framework for building effective pricing architectures.
- Practical Frameworks and Examples: Lehrskov-Schmidt uses real-world SaaS examples, historical analogies (like trains), and actionable frameworks (like CUPID and the Behavioural Pricing Matrix) to illustrate his points.
2. Why should I read "The Pricing Roadmap" by Ulrik Lehrskov-Schmidt?
- Solve Pricing Confusion: The book addresses the common confusion and paralysis SaaS founders and executives face when setting prices, offering clarity and actionable steps.
- Unlock Growth and Profit: It shows how the right pricing structure can dramatically improve customer acquisition, retention, and profitability, often more than product or sales improvements alone.
- Avoid Common Pitfalls: Lehrskov-Schmidt highlights and helps readers avoid frequent SaaS pricing mistakes, such as oversimplification, under-monetization, and misaligned discounting.
- Applicable to All Stages: Whether you’re a startup or a scaling SaaS business, the frameworks and advice are relevant and adaptable to different company sizes and market positions.
3. What are the key takeaways from "The Pricing Roadmap" by Ulrik Lehrskov-Schmidt?
- Price the Customer, Not the Product: The most important insight is to focus on pricing different customers according to their willingness to pay, using packaging and pricing models as tools.
- Structure Over Price Point: The value is in the pricing structure (fencing, packaging, metrics), not just the specific price points you set.
- Scale Drives Strategy: Understanding and designing for scale—cost, product, and distribution—is essential for sustainable SaaS profitability.
- Iterative Validation: Pricing should be validated through customer interviews, surveys, and real market testing, always listening to the "quality of the no."
- Dynamic, Not Static: Pricing and contracts should be dynamic, allowing for regular updates as your product and market evolve.
4. How does "The Pricing Roadmap" define and use the concept of "pricing your customer" in B2B SaaS?
- Move Beyond Cost-Plus: Instead of setting prices based on costs or arbitrary markups, the book advocates for understanding what different customers are willing to pay.
- Use Fencing and Packaging: Segment customers into distinct groups (fences) and create tailored packages (ladders) that match their specific jobs to be done and value perceptions.
- Price Discrimination as a Tool: By differentiating offerings (like first, second, and third class on trains), you can capture more value from customers with higher willingness to pay.
- Metrics and Structure: Select pricing metrics and structures that align with customer value, fairness, and operational viability, ensuring each customer pays appropriately.
5. What is the CUPID model in "The Pricing Roadmap" and how does it help SaaS companies design for scale?
- CUPID Framework: CUPID stands for Customers, Users, Product, Iteration, and Distribution—a model for mapping how value flows from users to paying customers.
- Three User Roles: Users can be customers (paying), the product (aggregated and sold to others), or distributors (helping acquire more customers).
- Design for Scale: The model helps SaaS companies identify and leverage cost, product, and distribution scaling opportunities, such as network effects and viral loops.
- Strategic Product Ecosystem: CUPID guides companies to build product ecosystems that maximize CLTV/CAC ratios and create sustainable competitive advantages.
6. How does "The Pricing Roadmap" approach product packaging and the "jobs to be done" theory for SaaS?
- Jobs to Be Done Focus: Each product package should solve a specific job that customers are actively seeking to accomplish, not just offer a bundle of features.
- Packaging Drives Pricing: By aligning packages with clear jobs, pricing becomes easier to justify and sell, and customers can immediately see the value.
- Laddering and Fencing: Use ladders (tiers) to promote upselling and expansion, and fences to separate fundamentally different customer groups for tailored offerings.
- Storytelling in Packaging: The product ladder should tell a compelling story that encourages customers to ascend, making expansion sales more natural.
7. What are the nine building blocks of SaaS pricing architecture according to "The Pricing Roadmap"?
- Three Main Categories: The nine blocks are grouped into transactional nonrecurring fees, flat recurring fees, and metric-based recurring fees.
- Transactional Nonrecurring Fees: Setup fees, ad-hoc one-offs, and exit fees—charged at onboarding, during, or at the end of the customer relationship.
- Flat Recurring Fees: Flat base fees (core subscription), flat add-on fees (optional extras), and flat non-optional fees (e.g., compliance charges).
- Metric-Based Fees: License-based (e.g., per user), consumption/usage-based (e.g., API calls), and credit-based (prepaid usage)—these are the core of SaaS monetization.
8. How does "The Pricing Roadmap" recommend selecting and evaluating pricing metrics for SaaS?
- Four Key Criteria: Metrics should be operationally viable, aligned with customer value and demand, perceived as fair (expectation to pay), and have high metric density (uniform value per unit).
- Value Chain Position: The best metrics are close to the customer’s value output, but must also be something customers expect to pay for.
- Metric Density Matters: Avoid metrics where most units have little or no value (low density), as this leads to discounting and poor monetization.
- Iterative Testing: Use internal scoring, customer feedback, and market validation to refine and select the best metrics for your pricing model.
9. What is "wallet structuring" in "The Pricing Roadmap" and how does it improve enterprise SaaS pricing?
- Committee Buying Reality: Enterprise software is bought by a group (the "wallet"), each with their own budget and priorities.
- Map Pricing to Budgets: Structure your pricing so that each stakeholder pays for the aspects of your solution they care about and expect to pay for (e.g., compliance, IT, training).
- Cost-Plus and Value Pricing: Combine value-based pricing for the primary buyer with cost-plus elements for auxiliary stakeholders, improving alignment and reducing negotiation friction.
- Maximize Co-Pay: By tapping multiple budgets, you can increase ACV, defend margins, and make your solution more attractive across the organization.
10. How does "The Pricing Roadmap" advise SaaS companies to set and validate price points?
- Relative, Not Absolute: Prices are always evaluated relative to something else—competition, customer sophistication, or perceived value—not in isolation.
- Behavioural Pricing Matrix: Use this framework to understand whether your market is cost-based, niche-based, perceived value, or fair value, and set prices accordingly.
- Validation Methods: Combine internal expert judgment, price experimentation (with discounts), customer interviews/surveys, and statistical prediction models to find optimal price points.
- Listen to the "Quality of the No": Focus on feedback from lost sales to identify whether issues are with demand, structure, or price, and iterate accordingly.
11. What is the recommended approach to discounts and raising prices in "The Pricing Roadmap"?
- Discounts as Tools: Use structural discounts (predefined, volume-based) to manage large deals, and sales discounts (case-by-case) as communication tools, not as default negotiation levers.
- Prioritize Discount Types: Favor time-limited and terms-based discounts over permanent ones, and always require something in return (quid pro quo).
- Raising Prices Regularly: SaaS products should have dynamic pricing that is reviewed and increased at least annually, if not quarterly, to reflect added value.
- Contract Frameworks: Use dynamic contracts that allow for price and product changes without renegotiation, and manage customer cohorts to handle price updates smoothly.
12. What are the most important quotes from "The Pricing Roadmap" by Ulrik Lehrskov-Schmidt and what do they mean?
- "Don’t price your product. Price your customer." – The core philosophy: focus on customer segmentation and willingness to pay, not just product features or costs.
- "The money is not in the price point. It’s in the price structure." – Emphasizes that how you structure pricing (tiers, metrics, fences) matters more than the specific numbers.
- "Strategy is your plan to get and keep a competitive advantage." – Pricing is a strategic lever, not just a tactical one, and should align with your business’s path to sustainable profits.
- "Customers want you to have good pricing." – Customers appreciate fair, transparent, and logical pricing models that make sense for their needs and budgets.
- "If you and your team are debating $119 vs. $149, you’ve already lost." – Focusing on minor price tweaks misses the bigger opportunity: designing a structure that captures value across your customer base.
Review Summary
The Pricing Roadmap receives high praise from readers, with an average rating of 4.55/5. Reviewers commend its comprehensive coverage of B2B SaaS pricing, practical frameworks, and real-world examples. Many find it informative, insightful, and well-structured, appreciating its depth and applicability. Product managers and pricing professionals particularly value its actionable strategies and clear explanations. Some readers note its usefulness as a reference guide, while a few mention certain chapters being more engaging than others. Overall, it's widely recommended for anyone involved in or interested in SaaS pricing.
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