Laurie Harvey
Laurie is a business-driven product management executive with over 15 years of experience in multinational companies and startups.
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Smart software pricing strategies can make or break success. Pricing impacts design decisions and should be reviewed with the long term in mind.
Stay competitive and agile with pricing to keep ahead of the competition. A well-designed pricing architecture will simplify contract negotiations and new product introductions.
Smart software pricing strategies can make or break success. Pricing impacts design decisions and should be reviewed with the long term in mind.
Stay competitive and agile with pricing to keep ahead of the competition. A well-designed pricing architecture will simplify contract negotiations and new product introductions.
Laurie is a business-driven product management executive with over 15 years of experience in multinational companies and startups.
This article looks at designing a software pricing strategy that maps to the product architecture, and, of course, to the market opportunity. Ownership of the responsibility for pricing may differ dramatically in a company. In some cases, sales, deal desk, or marketing may own pricing, in others, product management may own it. Regardless of where the core responsibilities lie, the product must be able to provision, track and report against the selling meters considered in a pricing structure.
Designing an effective pricing strategy and business model is one of the most important jobs in a go-to-market plan. It is not an exact science, but a process of constant negotiation, market validation, operational validation, industry competitiveness, and customer acceptance.
The goal in any pricing model is to entice customers to purchase with minimum controversy. Be clear on the logistics relating to measuring usage in order to have a viable and sustainable model.
Licensing software implies permission for someone to use your software–either as an individual or as an application that would be tied to the equipment on which it is installed. Product Managers define the terms of usage. The legal team will help define the legal rights that will be tied to the end user license agreement (EULA) and any channel/partner agreements. In this model, pricing is often accompanied by setup or installation (or provisioning) fee and a maintenance fee.
The upside of software licensing pricing models is that revenues are received up front–a one-time boost to the bottom line. The downside is the risk of not having a strong relationship with clients. To get new revenues from the same client often involves a longer sales cycle. For the client, often licensed software is a significant cost, and their preference may be to pay monthly or to be able to manage their cash flow more effectively.
Software-as-a-Service (Saas) or cloud models imply that a subscriber will “rent” the service–so the EULA would be replaced with an end user services agreement (or similar terminology) that defines access permissions and terms of use associated with using the service. It is important to define the method on which the systems will count and charge for services.
Subscription services should be measured as a value of usage metering over time. Various models may be used for a services agreement, including:
Spend time with the finance team with respect to the appropriate revenue recognition elements. Keep in mind that when considering revenues, also consider the sales compensation models. Success in any sales environment will mean that the sales team must be adequately and appropriately compensated to keep them selling.
Often, when we think of services, we think of support services–but there are many services that can form part of the product offerings.
Getting to the right price is one of the hardest challenges for the product manager. We will be looking at various elements that must be considered, in order to get to a viable price for your business.
There are two basic initial approaches to making the right decisions. Cost-based pricing can be used as a benchmark to validate the LOWEST price that you can consider. Value-based pricing can drive the best return for a product investment.
Every company measures gross margins — the costs of delivering the product/service. Pricing must be established to meet or exceed the gross margins goals, based on a business plan with expected revenues. Ideally, this should NOT be a method of determining the pricing that is presented to the market.
Take the time to determine value-based pricing, especially in a SaaS opportunity. In a value-based pricing model, apply quantitative estimates to the differentiable value of the offering against the current customer situation. Does it save them money? Does it make them money? Does it reduce risk or liability? Does it provide value? How much over what period?
There are multiple approaches to coming to a number, but as a starting point–do the market research. Find out what are the numbers that others are using. Determine if they are getting discounts, and if so, what is the foundation for the discounting? Make sure to explore what associated services are being charged for, and for what rates. Do the homework as a valuable tool in developing the confidence to defend pricing proposals.
The price(s) that are discovered from your market research will be the number on which to create viable ROI models. This is NOT the price on the price list.
With a sense of the amount that the market would be willing to pay, step forward through the business needs to come up with the manufacturer standard retail price (MSRP). The MSRP is the value that would go on any commercial price list.
Although the company may have a direct-to-customer pricing model today - be sure to consider the “what-if’s” that can change the business models at any point in time. Design for the long term.
Consider the models of:
Find out what standard compensation models are for channels and partners. Incorporate these into the pricing up front, so that when they come along the company won’t find itself at the bottom of the gross margin battle.
Be assured that the model will need volume discounts. Find out the largest potential customer, and calculate the meter associated with their volume and add 50%. That is the biggest discount level to start with. For simplicity (and SKU management), limit the discount levels to only 5 or 6 levels.
Look at the market. Determine where the customers are on the volume scale if the meter relates to volumes of usage. For example, in selling to a telecommunications service provider in a specific geography–and the largest service provider had 50M subscribers; (with subscriber-based price) calculate the largest discount level for 75M (50 x 1.5 = 75M). If more than 25% of the market are equally large, a discount table might look something like this:
It really depends on evaluating the target market. If this customer was an anomaly–then look at the overall customer base and determine where most of the customers will fit. For a customer base of smaller customers, it’s still important to address the larger customers, but consider that the demand for discounting will come from the smaller customers.
Design a scale to meet the requirements of the specific market. This will require a lot of discussions with the sales teams who work with these customers on a regular basis. Try to keep the levels simple. Expect a challenge with pressure to have low tier rates for everybody’s smallest customers. Find the sweet spot (the customer size that the sales teams should focus on) and identify the discounting appropriate for that market segment.
Before putting numbers into the price plan, consider the software architecture. For SaaS services, consider the model below. It represents a structure that puts data at the core — this may be the one thing that the company does not market. Apps represent the actual SaaS services that are being marketed–but there are potentially the platform access (APIs), and the microservices or data feeds that become additional revenue sources.
Price accordingly. If the desire is to leverage the core data and microservices to create more and more services, then structure most of the revenues to the platform.
Do not overlook the overall solution architecture. As a SaaS provider in a B2B scenario, consider the inputs and outputs in your pricing structure.
For example, a pricing breakdown for the pricing analysis might load the revenues towards the platform and data feeds, leaving only 20% of the revenues associated with the UI–the app:
With an organized pricing model, the addition of new Cloud Services (SaaS apps) can be priced in line with other SaaS Services. Likewise, by having the breakdown ready, it is easier to consider more creative pricing when it comes to APIs and microservices. This model supports the demand that may come from customers to “…just give me the data and I will incorporate into my own UI.”
Be assured that as the product family grows, sales, solutions engineers and customers will all want to compare new service pricing with the old. Having a structure for pricing will simplify the position and recommendations.
Before you finalize your pricing go back and look at your gross margins. Predict what the impact of growth will be in your operating costs (especially with a SaaS model), and ensure that you are within the corporate financial goals.
Approach the pricing strategy with a mindset that represents professionalism in creating logical, reusable pricing that will survive the test of time. Be prepared to adopt new pricing, new pricing meters. The ability to adjust pricing quickly will give the company a strategic advantage over competitors.
Design the software accordingly to capture and report against logical meters that suit the current and potential service offerings.
When pricing software products, structure an approach that is simple to explain. Identify logical meters for the pricing strategy that can be measured and audited. Design the platform for reporting and auditing and expect pricing meters to change. Get it right and the deal desk will be able to work most sales opportunities without having to come back and negotiate pricing for each exception.
A pricing model for software describes the fees, metering, and discounting associated with a product or service.
A pricing strategy provides a linkage between the rights of use by customers, with the costs and fees in delivering the product and service to the customer. A solid strategy requires a data-driven analysis of the go-to-market strategy combined with an architectural understanding of the products and services.
Software as a Service (SaaS) has become the most popular software model used by major vendors such as Microsoft with Office 365 or SalesForce among many others. SaaS subscriptions are typically monthly or annual fees, automatically renewed.
Licensing software implies permission for someone to use your software–either as an individual or as an application that would be tied to the equipment on which it is installed.
Meters are the count of how the right to use the software is described. Is it time–minutes, days, weeks, months, years? Is it the volume of transactions or clicks? Is it storage volume? Speed? API calls? Picking the right meter is a strategic decision that must be reflected in the software architecture.
Located in Port St. Lucie, FL, United States
Member since October 26, 2018
Laurie is a business-driven product management executive with over 15 years of experience in multinational companies and startups.
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