Software Pricing Strategies: Evaluating, Discounting, & Adjusting
When we surveyed our audience in January 2017, pricing models was near the top of the list of challenges faced by software companies. According to Software Pricing Partners, “Pricing is the most critical decision a software company can make before a product launch. No other variables under management control are more effective at creating revenues and overall business value–or destroying it. Yet how to license, package and charge for software capabilities and services remains the most under-exploited aspect of the software business model.” Software Executive Magazine and ISVinsights.com asked Software Pricing Partner’s co-founder and managing partner Chris Mele to share his insights on several pricing-related topics. He was also the CEO and co-founded of a SaaS company catering to construction companies, and he has spent more than 25 years in the software industry. Mele included links to the Software Pricing Partners blog in his responses for a deeper dive in to the topics.
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Why (or why not) should software companies be concerned about competitors’ pricing?
The issue isn’t whether or not to be concerned, but rather what kind of information is being gathered. It is largely useless to look at competitors’ websites and their pricing pages. These are list prices and give you little insight on how a competitor may actually sell on a net price basis.
Competitive insights are important, but to uncover them requires getting competitors’ customers on the phone and exploring licensing packaging and pricing within the context of what they invested in. This can give you important insights, but overall it is much more critical to focus on the value you provide. Software companies of all sizes seem to put far too much focus on competitors’ pricing.
Further reading: https://softwarepricing.com/blog/how-your-competitors-customers-can-help-guide-your-software-pricing-strategy/
What do software companies do wrong when it comes to discounting? What is the correct approach to discounting?
Most software companies leave far too much flexibility in the hands of sales people when it comes to discounting. There is nothing wrong with structured incentives. But discretionary discounting, beyond scheduled company discounts for example, will always get the software company in trouble. In poker, they refer to leaks in your game: places where your strategy isn’t tight enough and can be exploited in the form of you losing money. For software companies, salespeople’s (including the deal desk’s) flexibility on discretionary discounts is one of the largest leaks in the game of pricing.
If you’ve ever sold software before, then you know that discounts are a fact of life. Structuring incentives into your monetization approach is a critical success factor. If you fail to do this, larger companies and aggregators most likely will avoid doing business with you. Today’s buyers are much more educated. They understand how costs scale in the cloud. They understand gross profit margins for software companies are often in the 80%+ range. If they’re buying a lot of your software, they’re going to expect that your pricing approach addresses this. If your answer is “we don’t discount,” that’s fine. But you have to be okay with the consequences of that decision which is likely very little sales to larger companies.
Further reading: https://softwarepricing.com/blog/the-right-approach-to-software-discounting/
What metrics should software companies use to evaluate pricing?
Any software pricing project that doesn’t help grow revenues and profitability is a complete waste of management’s time. Bottom line: sales people should be able to sell more and do it faster.
How often should software companies evaluate and/or adjust pricing?
Software monetization is a business process. How often should software companies evaluate and adjust their feature set? Every time a new feature is developed, there is a potential of greater value add to the customer, and therefore a potential to increase prices.
When prices are adjusted, how should this be communicated to existing customers?
When prices are adjusted outside of standard, yearly price increases, this shouldn’t affect existing customers. Instead, licensing, packaging, and pricing should come into play to both attract new customers and get older customers to either increase their usage of the software in some way or take down additional capabilities being offered. It would be a terrible mistake to tell a customer that, despite selling them on one value equation a year ago, their pricing has now changed significantly because you have a different perspective on the value you deliver. Their perspective hasn’t changed in this example, and any customer that has their head on straight will simply defect to the competition or some other alternative. Remember, people buy on emotion and rationalize with logic. If customers feel treated unfairly in any way, their emotional response can make them take their business elsewhere even if logically it isn’t the best option for them.
How much do investors care about software pricing?
More than yesterday. And this time next year, exponentially more than today.
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Chris Mele has 25+ years of experience in the software industry, and is the co-founder and managing partner at Software Pricing Partners. He is the former CEO/founder of award-winning SaaS company, is a Software Monetization expert, and is an E&Y Alumnus. Mele holds a BS in Computer Science from Miami University.