Welcome to week 2 of Crescendo Insights, where we try to provide a bite sized piece of monetization wisdom to help you on your pricing journey. First up, some news:

Introducing Patrick Despres-Gallagher!

You will see Patrick around more as he is joining Crescendo as an Advisor, and we will be collaborating to support companies. He brings a unique background as a technology investor, an early product leader at Loom—where he helped scale the company from under $1 million to $35 million in revenue in two years—and as the former co-founder and CEO of Stage, a software pricing and billing automation startup. An expert in product monetization and revenue operations, Patrick understands the tough monetization trade-offs founders and executives face due to their impact on customers, products, and sales organizations. He has advised venture and PE-backed companies such as HeyGen, Triple Whale, Ernest, Ampersand, and Invarion, among others. Patrick is currently the Founder/CEO of Rhythm Holdings, a technology-driven holding company working to bring technology and data to traditional operating businesses. We are excited to team up!

Now on to this week’s pricing topic:

Your price level doesn’t matter

Price level - not to be confused with other parts of pricing, like metric and structure - is the actual dollar amount that your product costs, e.g. should you charge $15 or $20 for your “Mac n’ Cheese of the month box”?¹

It’s not that level doesn’t matter at all, it’s that price level pales in comparison to the other pricing levers’ power. With price level, you’re playing with price elasticity; with packaging and metric, you’re playing with price differentiation.

How important is price differentiation? Optimizing your price level can get you an additional 5% - 10% revenue, depending on how “off” you are. Let’s put some math behind that…

Imagine you have a nice linear demand curve² (seen below, brought to you by my beautiful Excel skills). What’s the optimal price?

If you remember high school calculus, I can tell you it is exactly $50. At $50, exactly 50 people buy your product, and you make $2,500 in revenue.

What if you’re too high or too low by $10? How much revenue is at stake?

Not much - actually just 4%. You move from the optimal $2,500 to $2,400 if your price is off by a whopping 20%. 4% can still be pretty impactful in a low margin environment, but that’s a topic for another newsletter.³

Yes, that’s true, but this pattern is even more pronounced in exponential distributions, like the one below. Here, the optimal price is $37, but a swing between $30 and $50 barely moves your revenue from its $750 optimum.

Enter Price Differentiation

What if we fixed our problem with packaging instead of price level? Using the exponential example, I introduced 3 plans, creatively named “bronze”, “silver”, and “gold”, for $2, $26, and $69 respectively⁴ . Assuming everyone buys the most expensive plan that they can afford (or they churn), your revenue goes from $750 to $1,158, a 54% increase!

In the graph below, you can see each package and who purchases it. The area of each colored bar represents the revenue you earn.

The key takeaway: Optimizing your price level - 5% change in revenue. Optimizing your price differentiation - 50% change in revenue.

How to do this stuff on your own

1. Figure out the willingness to pay for each of your customers. That ALONE is very difficult and is 90% of the work that Crescendo does.

2. Create packages that uniquely appeal to customer willingness to pay.

3. Do the math to optimize the price points of each package. For what it’s worth, that’s the easy part.

If you want to see the Excel that underpins this analysis, reply to this email.

How to get in touch

Crescendo works with medium sized software business to help optimize their pricing, packaging, and promotion strategies. If you’d like to book a quick consult, reach out at [email protected] or schedule time directly via our Calendly.

This is a new newsletter. Please let us know how we can create content that is helpful and enjoyable. Reach out via email or simply reply.

1  Honestly, that sounds awesome.

2  Yes, I know price and quantity are reversed, but honestly demand curves should look that way.

3  Did you smash that subscribe button yet??

4  How did I get those price points? A fancy technique called optimization modeling that we will cover another time.