As Business Insider recently reported 91% of US CEOs anticipate there will be recession in the next 12 months, according to a KPMG survey. With great predictability recessions drive behavioral changes, and making the right changes determines long-term success.
I won’t mince words: the aggressive growth strategies driven by the unique business conditions created by the pandemic, have left many companies in a battle for their survival in 2023. The top-line revenue is drying up, purchasing cycles are becoming longer, and the primary strategy many companies are turning to is bottom line cuts.
Despite that, I’m bullish on how usage-based billing can augment the challenges companies are facing today. Read on for my predictions for this year.
Prediction #1: Buying dries up, but consumption-based platforms still make the cut
From my conversations with other CEOs, investors and analysts, leaders are looking for systems, processes and technologies that can support necessary strategy shifts, drive business growth, and increase operational flexibility. Yet, at the same time they are cautious about purchasing new technology because 1) the pandemic forced an overwhelming array of new tech deployments and 2) budgets have tightened considerably. What does this mean?
Every potential investment will be highly scrutinized, and only those solutions with proven efficacy and impact will make the cut. CEOs will look for solutions that can not only address the needs of today, but that also have the flexibility to address the needs of the future. Making the shift from subscription to usage-based can impact both the bottom and the top line, which will make consumption-based platforms a priority for spend in 2023.
Prediction #2: Companies will follow a different revenue management playbook
Savvy CFOs will learn from past mistakes and avoid making short-term pricing decisions to manage revenue. Students of effective pricing strategies now recognize that high performing companies follow a disciplined set of behaviors when times get tough, as the urge to deeply cut costs has a negative association to long-term profitability.
In the past many (to most) companies reduced the prices of their products and services, which nearly always results in damaged brand reputation because it causes buyers to assume: 1) pricing was too high to start with 2) something was inherently wrong with the product or service 3) the company was struggling to compete within its market.
Instead, in the next 12-18 months as companies revisit their pricing strategies, they won’t be slashing prices. Instead, these winning companies will lean into the most profitable parts of the business, limit scope creep, and look creative and innovative ways to realize more revenue.
Prediction #3: Complexity becomes a business advantage
We tend to think of “complexity” as a negative, generally assuming that simplicity in all things is universally better. But with something like one-size-fits-all subscription billing there is waste on both sides; companies leave money on the table and customers pay too much (or too little) for their goods and services.
As our CMO Geoff Galat pointed out in THIS post, typical B2B companies only revisit pricing and billing once a year, or once every six months at best. They rely on standard agreements that don’t appropriately reflect the complexity of the business, or the specialized needs of their customers. This isn’t a matter of choice. While it’s a vast improvement over managed service pricing, simple subscription billing simply isn’t built to handle the kind of complexity necessary to keep up with a constantly changing business environment.
As such, in 2023 billing and pricing “complexity” will no longer be a negative, but instead be recognized for its ability to enable a company to consider many variables, scenarios and outcomes and then price their goods and services with near perfect precision. Building complex pricing models will reduce costs, improve margins and reduce revenue leakage.
By creating in-the-moment pricing models, companies can eke out every bit of revenue possible from current and prospective customers, all while delivering an overall better customer experience.
Prediction #4: Complex pricing gets bonus points for driving NRR.
For companies looking to show strength to investors, shareholders and other stakeholders net revenue retention (NRR) has become the metric to watch. No matter how amazing your product, your leadership team, or your hockey-stick shaped growth plans, NRR is the metric you’re likely to be judged on.
SaaS companies are already losing customers, which is impacting their NRR. No matter how many new customers they pull in true growth is impossible without customer retention. And, who knows how long this cycle will last.
The “good type” of complexity correlates to a better NRR. For instance, by segmenting your customers into cohorts based on factors such as focus, size and market, you can increase product adoption and improve customer retention. Feeling seen, heard and valued isn’t just for B2C companies, it matters to B2B companies too.
Considering the health of your customer relationships isn’t just about making sure support times are short. It is about considering recent buying behaviors, product usage and engagement trends as well as service utilization, as well as analyzing historical patterns and trends. And, then, giving them the right amount of product, service, support – all with specific pricing for their needs. They pay for what they use, nothing more – nothing less.
Tailor made pricing positively impacts NRR – we have seen it happen again and again.
What do you think about our predictions? Would love to hear your thoughts!