Impact Pricing Podcast

#381: How to Approach Increasing Your Prices Caused by Inflation with Steven Forth

Steven Forth is a Partner in Ibbaka, a strategic pricing advisory firm. He was CEO of LeveragePoint Innovations Inc., a SaaS business designed to help companies create and capture value. Steven is what I consider one of the great pricing thinkers in our industry.

In this episode, Steven shares Ibbaka’s approach on raising prices, especially during inflation, as he discusses what’s expected to happen in the pricing world next year, given all the events that’s been around this 2022.

 

Why you have to check out today’s podcast:

  • Find out why you should first segment your customers and treat them differently before you raise your prices
  • Learn how to approach a price increase, especially during inflation
  • Discover what’s possible to happen in the pricing world in 2023, especially with concerns of inflation and recession around

“Learn how to build value models, and connect them to prices.”

Steven Forth

Topics Covered:

01:18 – Steven’s perspective on whether people should be thinking about raising prices now, along with questions to ask before you do so

04:59 – What Mark teaches his clients vs. Ibbaka’s approach in raising prices

09:31 – Discussion around an inaccurate representation of inflation, especially in SaaS 

12:40 – “Pricing is a game that plays out over time, and you always want to make sure you’re thinking three to five moves ahead. If you don’t, you’re going to hurt yourself.”

16:16 – Taking a look at (1) the people you sell to, (2) how recession affects prices, and (3) the finance industry

20:53 – What’s happening right now? What is going to be different in 2023?

26:43 – Steven’s pricing advice

 

Key Takeaways: 

“There may be opportunities to raise prices, but it needs to be surgical, not broad brush. And before one raises prices, one has to ask a series of questions, beginning with what is inflation doing to my customers? And is inflation making my offer more valuable to my customers? Because if it is, then you have a great reason to raise prices. But if my customers are getting in trouble and are becoming more cost conscious because of inflation, then broad brush price increases can backfire.” – Steven Forth

“I think the first thing you do before you raise prices is segment your customers and treat them differently.” – Steven Forth

“Pricing is a game that plays out over time, and you always want to make sure you’re thinking three to five moves ahead. And if you don’t, you’re going to hurt yourself.” – Steven Forth

“When we hear the word inflation, we’re thinking mostly about the CPI. The CPI is not what is most relevant to business. And you have to look at how inflation is impacting your customers and even your customers’ customers in order to make the right pricing.” – Steven Forth

“If you don’t have a data model that you can apply A.I. to, you are going to lose.” – Steven Forth

 

People / Resources Mentioned:

Connect with Steven Forth:

Connect with Mark Stiving:   

 

Full Interview Transcript

(Note: This transcript was created with an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)

Steven Forth

Learn how to build value models, and connect them to prices.

[Intro]

Mark Stiving

Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the close relationship between them. I’m Mark Stiving, and our guest today is Steven Forth. Here are three things you’d want to know about Steven before we start. He’s a partner in Ibbaka; you’re going to correct me later, Steven, I know. We’ll get that right eventually. It’s a strategic pricing advisory firm. He was CEO of Leverage Point, which was a SaaS business designed to help companies create and capture value. And he is what I consider one of the great pricing thinkers in our industry. Welcome, Steven.

Steven Forth

Mark Thank you. I’m glad to be here. And if I have some useful thoughts on pricing, it’s because I spend my time talking to guys like you.

Mark Stiving

Oh, that’s so kind. Okay, say the company name. Just so maybe I’ll remember one day.

Steven Forth

Ibbaka.

Mark Stiving

Ibbaka; got it. Thank you.

So, we’ve had you on a couple different times before. Let’s not go through your history on how you got here. Let’s jump into what we’re going to talk about, and that is 2023. How do we plan? What to expect? And I want to start out with something a little bit controversial because you and I have chatted on LinkedIn and we’ve kind of taken opposite sides on a position, and that is ‘should we raise prices?’ And I’m actually doing a webinar, I’m sorry, an on-site training titled “How to Raise Prices Now” because I think people should be thinking about how to raise prices right now, and you’re not quite on that camp with me. Tell me why.

Steven Forth

Well first, I think we should always be thinking about raising prices. But a lot of people are talking about raising prices now because of general inflation. And I have had numerous conversations with CEOs and investors at major private equity firms; we think that now is an opportunity to raise prices because of inflation. And I think that that broad brush reactive approach to pricing is very, very risky.

So yes, there may be opportunities to raise prices, but it needs to be surgical, not broad brush. And before one raises prices, one has to ask a series of questions, beginning with what is inflation doing to my customers. And is inflation making my offer more valuable to my customers? Because if it is, then you have a great reason to raise prices. But if my customers are getting in trouble and are becoming more cost-conscious because of inflation, then broad brush price increases can backfire. And I’ll give a concrete example, if I may, Mark, and then I’ll let you talk back at me.

Mark Stiving

Sure. No worries.

Steven Forth

A major technology vendor, one of the biggest, has sent out a letter. I’m not going to say who it was because I was not sent the letter directly; it was shown to me. But it has justified price increases because its costs have gone up. Now, at the same time, its gross margins are above 80%. So, it is saying that its costs, its personnel costs, have gone up around numbers here 10% and its server costs have gone up 4%, so it is going to increase the prices it charges its customers by 12%.

Mark Stiving

That’s good math, you know?

Steven Forth

Well yeah, and your customers are not dumb. And this is a publicly traded company and they have access to some of its financial disclosure; they can do the math as well as you and I can. And the other thing to remember is most of their customers are not making 80% gross margins.

So, we have spent a long time trying to educate people that cost is not what drives price. And now, we have major vendors going out and saying, “Our costs are going up, so we’re going to raise prices for you.” And I think we are sending the wrong message to markets. We are showing that we are not concerned with our customers and we are not connecting price to value in the way that we need to. But I’m going to stop there so you can poke back at me.

Mark Stiving

Oh, I’ve got a hundred things I want to say now.

First off, we all agree costs don’t drive pricing. But I’ve always taken the position that it isn’t our job as pricing people, as companies, to teach our customers that costs don’t drive pricing. Our customers absolutely believe it. And in fact, when you give them an excuse for why you raise prices, the only excuse that works is our costs went up. And so theoretically, we should never use that excuse because it doesn’t make sense; it’s not the reason we raise prices. But I still teach every one of my clients, if you’re going to raise prices, one of the four things you do is you say, “My costs went up.” So let me stop there.

Steven Forth

Yeah, that’s interesting. And I know that many buyers, especially if the buyer is in procurement, that they are susceptible to that argument. But the approach that we’re advocating at Ibbaka is a bit different.

So, we say that the first thing you need to do is segment your customers into four groups. So, one group is getting great value from you and you are getting great value from it. So those are your best customers, right? They’re happy; you’re happy. Doesn’t mean that you sit on your hands there. That is a place where you can raise prices, but you do it as you increase value. So those are those are your best customers and you have to keep them on that trajectory up and to the right.

Then you’ve got a bunch of customers that are getting great value from you and are not generating a lot of value for you. Those customers, you need to go ahead and raise prices. And as long as you connect it to value and value messages, they’re unlikely to leave.

But then you’ve got a bunch of customers where perhaps you’re not delivering value, but you’re charging them a reasonable amount. So just sort of in a reactively raising prices for those people is, I think, a very bad thing to do. First, you have to figure out a way to provide value, and now is a great time to come up with a set of value enhancers, and what those would be would depend on your business.

And then there’s those people in the bottom left that you’re not creating a lot of value for them and they’re not creating a lot of value for you. So, I think what you do with those people is you segment them and you say, okay, this is a group that we could be creating more value for, and you treat them in the same way as you treat the people that you’re trying to increase value for. So, you get them into that upper bucket where you’re creating a lot of value first.

There’s going to be some that you can’t create additional value for. It’s too much effort, it’s too much money; it’s just not going to work. For those people, go ahead and increase prices. If they churn out, you’re happy; well, because they weren’t good customers for you. And some percentage of them are going to accept the price increase and move into that bucket where they’re paying perhaps more than they should. But then you have the much more interesting challenge of increasing value.

So, I think the first thing you do before you raise prices is segment your customers and treat them differently.

Mark Stiving

First off, I love what you just said. And it is extremely consistent with a slide that I often put up when I’m talking about this.

Essentially, what you were describing is I’ve got subscribers, so they’re subscription-type customers who are paying me money and I want to raise my prices on those subscribers today. And what I usually do is I draw a graph that just says, we’ve got some that get a ton of value from us, some that get very little value, and there’s this line that goes between the two, so what do we do with them? And my recommendation pretty consistent with yours is break it into some chunks, right? It could be fifths or quarters; it doesn’t matter. Raise prices on the top quarter; nothing’s going to happen. Raise prices on the next quarter; a couple are going to churn, most won’t, and you’ll make more money. You get to the next section; maybe more churn out than what you are making an additional profit from the price increase, so don’t raise prices on the people in the bottom. Just stop raising prices at that point in time. And I think that’s a very effective way if I’m just going do price increases to my current customers.

By the way, I’m 100% in agreement with we’re always creating more value for our customers and trying to find ways to get paid for it.

Steven Forth

Yeah, and I just want to sort of riff on that for a second, Mark. So, you and our listeners here may have heard of this emerging term “SaaS Inflation”. So, SaaS as a business has matured, and as a result, there are companies that specialize in helping with SaaS procurement, and one of them has been talking a lot and publishing a lot about SaaS inflation. And one of the industries they call out is design software, where they point out that prices have gone up, what they would say a phenomenal 60% over the last I forget whether it’s three years or five years; let’s say five years. So, they say that’s an example of SaaS inflation. Well, I’d like to push back on that. Five years ago, if I bought an orange and then I bought another orange today, I’m probably buying the same orange. I don’t think oranges have evolved very much over the last five years. So, an increase in the price of oranges, that’s inflation. But design software is a great example. Five years ago, design software was very immature. Over the last five years, it has developed enormously into something that every company that is designing and delivering value through software must have. So, everyone uses a solution such as Figma. So, its value has increased enormously. If its price did not go up, that would be strange.

So, to refer to that as SaaS inflation, I think, is highly inaccurate. And this is why I would I think it’s really important to connect the price increases to value increases. And this is why I am resisting the temptation to use inflation as an excuse for increasing prices.

Mark Stiving

Okay. So, I want to step back for a second. I think when we talk about subscribers, we’re kind of in agreement with what’s going on. It feels like that to me. If we step out of the world of subscribers and say, I’ve got people deciding whether to buy my product today or not, should I raise prices on those people? And my perception is what inflation has done is it’s driven up probably my competitor’s price. And so, if I’ve got a customer or a potential buyer who’s deciding between my product and my competitor’s product if my competitor raised their price, it gave me an opportunity to raise my price as well. Because it’s that same decision. It’s that which one decision. And as long as we’re relative to them, maybe we’re more expensive or less expensive, but we keep that relative position, then, than inflation has helped us, assuming our competitors raise their price.

Steven Forth

Yeah, but first of all, that’s an assumption that you better test.

Mark Stiving

Absolutely.

Steven Forth

Absolutely. And secondly, the other thing to realize is that inflation for some companies means that there’s less money to spread around.

So, I’m not sure if you saw the recent analysis of Microsoft is struggling to sell software bundles. And Microsoft has made a lot of money over the last few years by bundling things into 365 and claiming a higher price because you’re getting more. And the market has largely accepted that until very recently. But what I am hearing is that Microsoft is finding it harder and harder to sell bundles and people are starting to cherry pick. And they say, “You know what? I don’t need everything in that bundle. And I’m going to force my people to make do with less in order to reduce my prices.” So, I think we need to be very, very strategic here. And my concern is that a lot of both the investors that I’m talking to and the CEOs that I’m talking to have not thought this through.

Pricing is a game that plays out over time, and you always want to make sure you’re thinking three to five moves ahead. And if you don’t, you’re going to hurt yourself.

So, I think one of the questions that people should be asking is, okay, interest rates have gone up and that makes things like operating capital value drivers far more important for many people. But what is going to happen when interest rates come down? We are likely, at least in North America and Europe, to have some level of recession in 2023. But that seems many economists think that that is unavoidable at this point. So, yes, we need to think of how we are going to navigate through the recession, but we also need to be setting ourselves up for how are we going to thrive as the economy emerges from the recession.

My resistance to what’s happening among some people in the market right now is that I find it reactive, and what we really want to be doing is shaping the market over the next 3 to 5 pricing moves that are going to respond to, recession changes and interest rates, emergence from recession, what will the new interest rates be? There are a lot of moving pieces, and let’s make sure we don’t lock ourselves into decisions that we are going to regret and have to unwind.

Mark Stiving

Oh, I’m not sure I believe or agree that we can’t unwind decisions that we’re making today.

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Mark Stiving

Let me go back to the Microsoft example for a second. By the way, even though I tout let’s go raise prices, we have to do it intelligently. I’m not sure I would say scalpel. I would use a thick paintbrush; not a tiny one. But I would certainly be careful about where I raise prices because there are certain examples where I thought you were going to go with the bundling one. And so, I’m going to push back on myself on the bundling one for a second.

Imagine customers who are struggling to purchase, you know, just to get by in life. They live paycheck to paycheck or you can imagine it’s a business that’s not profitable and they struggle just to be able to get the funding to pay for certain things. Inflation happens; it actually shifts their purchasing behavior. Some things they will buy less of, some things they’ll shift and buy lower quality, less expensive things. And so there really is this pressure on us to say, look, we can’t just go raise prices on everything and everybody. We need to take a really good look at who are we selling to. Do we tend to sell to people who are struggling or do we tend to sell to people who are very comfortable?

Steven Forth

Yeah. And I think that’s part of the critical point here. Inflation, when we hear inflation, we’re really talking about the consumer price index. But inflation is very different in different parts of the economy. So, I think the other thing you need to do is to take a look at your customers and see, are they raising their prices? Customers that are raising their own prices are psychologically more likely to accept a price increase. And then the other thing to look at is–

Mark Stiving

Just pause for a second. I just want my listeners– I’d never heard that or thought of that before, and that was truly brilliant. So, take just a moment and think about if you’re looking at your customers and if they’re raising their prices, they’re probably more likely to accept your price increase. Okay. Sorry, Steven, for interrupting. What’s the next one?

Steven Forth

Yeah. So, the other thing is to realize that there are some industries that are countercyclical. So, if the economy goes into a recession, they actually do just fine.

So, let’s say you’re selling into health care. Health care is not going to be all that impacted by a recession. As you know, Mark, I had major surgery this summer. I didn’t care how much that surgery cost. I would have paid any amount of money to have it done. And I don’t care if there was a recession or not. Now, I know I’m a fairly well-off guy; I can afford to. But health care tends not to be impacted by the recession.

Mark Stiving

And on health care, we have third-party payers. So, someone else is paying it a lot of the time. And so yeah, absolutely.

Steven Forth

Yeah. But I was actually worried about whether I’d be able to have the surgery done in Canada. I’m Canadian and I was worried about wait times and the impact of the pandemic. So, I was willing to go and pay a premium price to have it done in the United States if necessary. It meant I’d have to stay in Minnesota for six months, which I was not quite so keen on. But fortunately, I got the operation scheduled and it was very successful, was done in Vancouver. But anyway; but I digress.

Another thing look at here is, you know, the finance industry. So traditionally, many finance companies made a lot of money off spread between interest rates. When interest rates got really low, as they have been for quite a while, the spread business was put under a lot of pressure and banks started charging lots of service fees, as you probably noticed. Now that interest rates have gone back up, financial institutions and other people that have a spread business have an opportunity to make a lot more money. Now, are they going to decrease or get rid of fees? I don’t think so. But they’re going to be making a lot more money on spread. So, if you’re selling into the finance sector, these increases of interest rates mean that you have new opportunities to sell and new solutions that you can develop.

So, I think the point here is that when we hear the word inflation, we’re thinking about mostly about the CPI. The CPI is not what is most relevant to business. And you have to look at how inflation is impacting your customers and even your customers’ customers in order to make the right pricing

Mark Stiving

Excellent. Steven, can I change topics for just a second? Because I’m really curious about what you think. What is going to be different in 2023?

Steven Forth

Wow, that is a great question. And of course, if I knew that, I would probably retire and become the next Bill Gates. I think there’s a number of things that are happening, though. And again, I work mostly in B2B SaaS, so that colors my perspectives.

So, one is it is much more difficult for companies to raise money right now than it was six months ago. So that means that they are changing their behaviors and we are increasingly seeing investors and leadership teams saying, I’m not as concerned with recurring revenue as I was a year ago. I am very concerned with net dollar retention. So how do I price to ensure net dollar retention? And that’s a different question than how do I price to maximize top-line recurring revenue growth. And I expect that we saw that emerge in 2022 and I think it’s going to really put a lot of pressure on pricing experts in 2023 to be able to answer that question.

Mark Stiving

I want to see if I understand what you just said. You just said that you think investors would rather win more deals at lower prices—

Steven Forth

No.

Mark Stiving

–as long as we have an expansion plan to get current customers to pay us more next year than they did this year.

Steven Forth

No. So next, all the retention is driven by a number of different things, right? One is churn. So, if churn goes up, net dollar retention goes down. Another is upsells and cross-sells. So, if you can sell more into your current customers, you have better net dollar retention. And investors are really looking for net dollar retention in 105% and higher area.

Mark Stiving

So, the other two for net dollar retention are I can do price increases, and if I’m pricing based on a pricing metric of usage, I can get increased usage. So, any of those will generate more revenue next year than we got this year. But if I’m being compensated on revenue growth of current customers, which is essentially what net dollar retention is, that means I would rather win more customers at lower prices so that I can then expand them into the future and I can have a much higher net dollar retention number than sacrificing my recurring revenue number.

Steven Forth

Possibly, but in order for that to be true, you have to be able to show that you can actually grow those customers in the future. And investors have become increasingly skeptical about claims. So, to come back to your question so we could go down into the weeds here.

Mark Stiving

Yeah, got it.

Steven Forth

But one thing is that people are going to be focusing more on net dollar retention. And if you’re a pricing expert or if you’re responsible for pricing, you should have an answer for this question. How are you going to use pricing to improve net dollar retention?

Second thing I think we’re going to see is the growth models get connected and become more hybrid. At Ibbaka, we have a model of six different growth models, and how you price for each of those growth models. There has been a lot of buzz, of course, over the last two years, say, about product-led growth. But if you look at the reality, about 70% of companies are sales-led growth. The vast majority of businesses today rely on sales-led growth. So, two things are going to happen.

And the other thing to realize is product-led growth companies, as they scale, almost always layer in sales-led growth. So, I think we’re going to see a couple of things happen. One is there’s going to be investors are going to continue to ask people, what’s your product-led growth strategy? And many companies are going to try to adopt a product-led growth strategy because their investors are asking about it without thinking it through. But the other interesting thing that can happen is that even if you’re a sales-led growth company, you have customers, and those customers can feed into your net dollar retention by driving increased value. So, there’s a whole strategy here that happens between product-led growth, sales-led growth, lowering sales-led growth on top of product-led growth, and internalizing product-led growth and sales-led growth companies.

A little bit complex. Sorry, but this is one of the sort of critical things I think we’re going to have to answer in 2023. It’s how do we develop pricing strategies and pricing models that will support the interaction and the interplay between PLG and sales-led growth? Sorry, that was a bit complex.

Mark Stiving

No, I think that’s it’s fascinating. And one of the hardest questions that I have is how do you compensate salespeople when you’re trying to drive a product-led growth strategy?

Steven Forth  

Yeah.

Mark Stiving

It just gets really hard.

Steven Forth

Yeah, it’s a super interesting and important question. And the connection between pricing and sales compensation is something that we should talk about in another time because there are important connections there.

Mark Stiving

Nice. Steven, we could talk for hours if we just let this go, so we’re going to have to wrap it up. But let me end with the final question. What’s the one piece of processing advice today that you would give our listeners that you think could have a big impact on their business?

Steven Forth

Learn how to build value models and connect them to prices. One of the reasons for that is that AI is infiltrating so much more of our business, and I think, Mark, we should talk about that in the near future. But for AI’s to work, you need to have good data models. AI’s act on data models. And what is the data model for value? What is the data model for price? Because if we don’t have good data models for those two things. We’re not going to be able to take full advantage of artificial intelligence and actually flip that and say if you don’t have a data model that you can apply A.I. to, you are going to lose.

Mark Stiving

Hmm. We’re going to have to talk about that someday because I think most people don’t know what value is. And so how we’re going to get a data model to gather that data is going to be really interesting.

Steven Forth

Yeah, but the people that are able to do that and can layer AI into that are going to be in an incredibly powerful position.

Mark Stiving

Nice. Steven, thank you so much for your time today. If anybody wants to contact you, how can they do that?

Steven Forth

That’s two ways. One is I’m easy to find on LinkedIn. So, Steven with a v, F-o-r-t-h. Reach out to me and I’ll be happy to connect to you. And by email, steven@ibbaka.com. And I’m an open connector.

Mark Stiving

Alright. Thank you, Steven, and thank you listeners for listening. If you enjoyed this, would you please leave us a rating and a review? The easiest way is to go to ratethispodcast.com/impactpricing. And finally, if you have any questions or comments about this podcast or pricing in general, feel free to email me at mark@impactpricing.com. Now, go make an impact.

Mark Stiving

Don’t forget to attend our workshop, “How to Fearlessly Raise Prices Now”. Go to impactpricing.com/rpn.

 

Tags: Accelerate Your Subscription Business, ask a pricing expert, pricing metrics, pricing strategy

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