Grow your ARR through

value based pricing

September 2021
We help Nordic software
companies scale.

That’s all we do.

Investment focus

Exited Active
Type of companies

§ B2B software
§ Revenues 3+ meur
§ Growing, large potential
§ Supporting work
processes

Investment profile

§ Active minority investor

§ Primary/secondary
§ Founder friendly
Pricing is an important element in growing your annual recurring revenue

ARR (beginning New sales Upsales Price increase Churn ARR

of period) (end of period)
Price changes could be pivotal for a company’s growth journey

Company with 10% profitability margin

increases prices by 20%:

Improved profitability could e.g. be used to…

§ …improve your product
§ …hire more sales people
+200% § …increase marketing efforts

Without price increase With price increase

Revenues EBITDA
Seven steps to grow your ARR through value based pricing

1 Segment your customers

2 Understand value creation for the customer…

3 …and what the value drivers are

4 Analyze switching cost for existing customers

5 Understand the customers’ alternatives

6 Create a value-based price model based on findings

7 Test and adjust your price model (forever!)

1 Segment your customers

Customer group 2
HIGH Big corporates

Customers’
willingness to pay Customer group 1
Small start-ups

LOW

LOW Customer value HIGH

You cannot base your price model on the average customer

2 Understand value creation for the customer

Examples (seen from the customer)

Revenue § Increased utilization of our consultants with 10 percentage points

gain § Increased conversion rate on our leads with 25%

Value for the Cost § Reuse of existing content saved 20 hours of work per month
customer reduction § Automated processes saved us 30 FTEs per year

Emotional § Standardized processes reduced friction between employees

gain § Less time spent on mundane, boring tasks

You need to gain an understanding of value creation in order to calibrate your price point
3 Understand what the value drivers are

Industrial maintenance software provider

Price model not scaling with value Price model scaling with value
Price variable: # of users Price variable: # of maintenance objects

More
automation
leading to fewer
Customer after year 2:
users
Customer’s 500 objects
starting point:
ARR 20 users ARR
Customer’s
Customer after year 2: starting point:
10 users 100 objects

Customer value Customer value

You need to align your price model with value – this will help you grow both new and existing customers
4 Analyze switching cost for existing customers

80 424 Cost per hour Cost Total cost

60
120 20
20 160 120 EUR 19 200 EUR

100
80 32 400 EUR
40
48 40
40 264 50 EUR 13 200 EUR
80 16 8

Research, Export data Import Configure Training Set up Total

evaluate data to new of users integrations
and decide new software
on new software
software

Hours spent on external consultants Hours spent internally

You should understand how hard it is for your customers to switch to an alternative
5 Know the customers’ alternatives

Annualized 5 Implicit price

Switching cost Price/year
year cost potential
A
Continue with
0 EUR 10 000 EUR 10 000 EUR
your product

Current
Competitor
customers’
alternatives B offering same 30 000 EUR 12 000 EUR 18 000 EUR (+ 80%)
Switch to value
alternative
solution Mix of providers
offering same 40 000 EUR 11 000 EUR 19 000 EUR
collective value (+ 90%)

You will get some insight into your pricing power by combining switching cost and price for alternative
6 Create a value-based price model based on findings

Findings from analyses Value-based price model

Value
driver

Users

Tier Tier Tier

1 2 3 Functionality

You should create a value-based model that is in line with the findings from your analyses
7 Test and adjust your price model (forever!)

Adjust the price /

Communicate
price model based
adjusted prices /
on observed
price model
effects
Price
owner

Observe effect

You are never “finished” with pricing – this is a continuous exercise that can add a lot of value
Seven steps to grow your ARR through value based pricing

1 Segment your customers

2 Understand value creation for the customer…

3 …and what the value drivers are

4 Analyze switching cost for existing customers

5 Understand the customers’ alternatives

6 Create a value-based price model based on findings

7 Test and adjust your price model (forever!)