At Reward Gateway our value-based pricing strategy grew the business from startup to multi-million-pound market leader in less than ten years. I wrote this article for the Tenzing website where I work as Entrepreneur in Residence.
When Reward Gateway began as a startup in the employee discount market way back in 2006, the sector was on a hiding to nowhere. Our competitors were funded by very small fees from employers, plus advertising income. But their products were so poor they had hardly any users. Advertisers don’t pay much if you don’t have lots of users, so they all had next to no money. No income means no investment in product. Which made product and service worse – and meant that pricing to employers had to match. It was an awful spiral of decline. This unsustainable business model forced us to take a different approach with an offering that was much more expensive but also much, much better.
By differentiating our products and services, we were able to beat the competition, despite being priced as much as eight times higher. I’m here to share the technique I used to help you take a fresh look at your approach to pricing, business growth and profit.
Start by understanding affordability
I once watched a business documentary following Tesco’s board. They spent several years trying to increase the average basket spend. But, no matter what they did, the typical basket price remained the same because customers didn’t have the extra cash.
This taught me that when you’re selling your product or service, the first question to ask is: “Do my buyers have any more money?” In some sectors, the answer will be “no”, making it difficult to put up your prices. But what if the answer is “yes”? And what if your product represents a tiny fraction of your clients’ overall budgets? What if it’s the equivalent to a rounding error on a spreadsheet? In this case, there’s room to increase your prices.
Let’s say you’re a payroll software company, and you charge £60 per employee per year. For a business of 100 employees, that’s £6,000. Assuming an average salary of £30,000, their payroll bill is £3 million. Your £6,000 fee is barely a rounding error on their overall P&L. This indicates there’s room to put your prices up – you just need to give them tangible reasons to pay more. In this instance, increasing your fees to £90 per person means your outgoings would remain the same, but your profit could almost double overnight. So this is a project really worth doing – we were obsessed by it for the whole 12 years I was CEO at RG.
The key question now that we know customers can pay more is “What would convince customers to want to pay more?”
Convincing your customers to pay more
This is something I gave a lot of thought and energy to during my time at Reward Gateway. The first thing to remember about B2B sales is that this is not a faceless, unemotional sale. You’re dealing with a person, making it a human-to-human sale. We were very focused on this at RG, constantly reminding ourselves we were an H2H, not B2B business.
Most of the time, the individual you’re selling to has to get someone else to rubber-stamp their decision. It could be the CFO, the CEO or the whole board. So you’ve got to understand what buying your product feels like for them.
Let’s imagine that your competitors are charging £10,000, and you want to charge £20,000. Buying cheap is easy for your buyer. Buying expensive is a risky choice. So you need to give your potential buyer enough reasons to recommend that their company pays twice the amount.
“You need to line up the reasons to pay more and arm your buyer with the words that will enable them to convince the CFO, CEO or board too. Importantly, the reasons need to be easy to communicate and believable to non-expert audiences. When your buyer is trying to convince the CFO, the CEO or the board, they need tangible differences that will resonate with that audience.”
To do this, you need to align product, marketing and sales and really listen to what your customers want. We did this obsessively at Reward Gateway because we wanted to provide an exceptional product and service for a fair and more expensive price.
After more than a decade of owning Reward Gateway’s pricing strategy, I believe there are four key areas that will help you justify a higher cost.
1 – Brand and reputation
This is the easiest aspect of your business to build, but it also has the smallest impact on pricing. Showcasing who you work with, particularly well-known names, makes your customers feel your business is safe to work with. Appearing safe is good – people want to work with suppliers that look and feel safe. But it’s hard to get people to put an extra value on this because it’s not that hard for competitors to build up a decent list of companies they work with too.
Building brand and reputation definitely helps you close a sale, but it won’t double the price.
2 – Product features
Your product features will fall into two camps: worthy and sellable. Worthy features are the ones that you take a lot of time to perfect so you deliver a smooth product experience for your customers. Sadly, they don’t set the world on fire when it comes to selling your product to a CFO. However, sellable features do.
These are aspects of your product that resonate with your audience. Impactful features that will make their lives easier. For example, CFOs loved the taxable reports our software ran at Reward Gateway because it automated manual in-house tasks. But no one else in the business was interested in that. So we needed to have a long list of product features that would influence everyone in our audience. This comes back to how well you know the audience you’re selling to.
3 – Service features
In most businesses, you’ll have a core product or service plus the service package that wraps around it. People often forget these, but they’re really valuable. Developing and promoting your service features could help you out-manoeuvre your competition. At Reward Gateway, we provided phone support when everyone else offered email. Then we offered video account management calls when our competitors only provided online chat.
Keeping up with technology is one way to evolve your offering. But whatever you do, be aware that your competition will catch up. To stay ahead, you need to make sure you’re constantly executing different ideas, seeing what sticks and dropping the rest.
When we launched, we were the only company to offer a telephone helpdesk. Monday to Friday, 9 to 5. When competitors caught up, we had to move it on, so we started doing 8am to 8pm weekdays plus Saturday mornings. When competitors matched that, we went seven days a week. And then finally to 24/7/365. Service innovation is a never-ending task – you have to constantly keep raising the bar to justify your higher prices. And whilst you might think, “Well, no one is going to call us at 3am”, that doesn’t matter – great support hours are a really sellable feature because you don’t need to be a sector expert to imagine the frustration if you can’t get help when you want. And a surprising number of our customers had staff working shifts and overnights, and they loved the fact that we were there for them too.
4 – Contractual features
Sometimes you’ll end up making aspects of your service offering a contractual promise. In our employee comms product, clients could upload graphics and pictures to stories they had written. But they sometimes struggled to find the right graphic or image. So we asked our helpdesk to offer a service doing that with unlimited caps on how much an employer could ask for. In reality, only a handful of people would ask for this to happen, and it was easy for us to do. So we made unlimited image changes a key point of difference in our sales offer and committed to it in our contracts.
Another example of legally committing to our sales messaging was our promise to honour any vouchers we had issued for companies that went bust. It’s these kinds of “unlimited”, “guaranteed” promises that make it easy for your business to stand out when your buyer presents to the board.
This is only possible if you put your prices up
These changes will unlock higher pricing. And higher pricing is the key to being able to deliver these changes. However, when you’re locked into a pricing war, you simply can’t afford these features. But by being more expensive, you build in the capacity to make and honour these value-adding promises. This creates a positive spiral for your customers, your business and your employees.
There’s no need to stop at putting your prices up – think about offering longer-term contracts too. The truth is that it takes time and effort for businesses to procure and implement a new system or product. Most firms won’t re-tender for several years. This gives you the option to offer multi-year contracts to your clients. Contracts you can afford to discount once your pricing is at the right level.
This tactic ensures everyone’s happy. Your client gets a discount on a product or service they always intended to keep for the next three, four or five years. Your business secures guaranteed income and lower customer churn, helping you to maximise profits. Win-win.
Always give an up-front discount
Another aspect of the person-to-person sales approach is realising that everyone loves a bargain. I once made a mistake by refusing to give a buyer a discount. They still bought from us. But this was professionally embarrassing for the buyer and soured the relationship. She told me that she had KPIs and targets on how much discount she had negotiated from suppliers, and she was forced to report us as a big fat zero on her monthly report. By leaving enough headroom in your pricing, you can let your buyer negotiate a decent discount. Sweetening the deal and getting your relationship off to a great start.
Keep thinking about that real person, that human who is buying your service. You want them to say to the board, “I’ve found a fantastic vendor for us, they’re really amazing: They’re expensive, but I’ve negotiated us a great deal.”
Obsess about the buyer experience and your end product
Once you have done the work that enables your business to put its prices up, you need to remain vigilant. This means continually improving your product and service offering to add value to your customers and remain ahead of the competition. Every customer complaint and every suggestion for improvement should be considered and, where possible, acted on. Alongside innovative developments from your team, you’ll drive the product and service excellence that will allow you to keep floating your prices up and boosting profit.
It’s great running a premium-priced business because you’re on a relentless journey to make things better for the client and the user. With money coming in, you’re only limited by your imagination for what you can do to improve the customer experience. The alternative, running a commodity business in a price war, is miserable!
Feel the fear and do it anyway
Putting your prices up takes courage. And I’ll be honest; you will lose some customers along the way. I had one person – “Michelle” at a major tech company that was outraged at our pricing and would tell anyone who would listen that we were “fleecing the market” and “pricing ourselves out of existence”. I knew her well, and we sometimes sit next to each other at awards dinners and industry functions. Not everyone has to believe in what you are doing. We just weren’t the one for her.
Filtering out these people early in sales is crucial. We would always be alert to anyone whose buying reason was, “We just want to tick the box and say we have something like this”. We were not the vendor for “tick the box” clients. When people told us that price was their key deciding factor and they weren’t interested in quality, we knew we needed to pass.
So, be prepared to ignore the people who tell you that you’re charging too much. Once you’ve done the work to differentiate your offering in a way that delivers for your customers, it’s time to have the courage of your convictions. Losing customers might feel painful at first, but their loss makes room for the right customers for your business. Customers who understand the value of your offering and who are willing to pay for it.