Pricing a new enterprise software product, or reevaluating the price of an existing product, has always presented an interesting set of challenges for marketers. When you add in the intricacies of Software-as-a-Service (SaaS) deployments, open source alternatives in more product categories, and the greater buyer transparency in today’s Web 2.0 world, the potential for pricing confusion has reached an unprecedented level for buyers and sellers alike.
Over the last two years, I have worked with clients across a number of market spaces to create and refine pricing models. Some of the issues I have dealt with have been quite mundane; others have involved creating new product categories. Across these engagements, five common threads have emerged. 1. Always keep the perspective of the “whole product”.
Enterprise buyers don’t buy products for their own sake; they buy them to solve business problems. The simplest “whole product” model might take into account software licenses or SaaS subscriptions, implementation costs, and training. However, other considerations might include organizational redesign, change management, and even evangelism about how to apply a new process to the business. Depending on the nature of your product, the customer may need all of these elements in place in order to realize value from its investment.
The price of your product serves multiple purposes. Most importantly, it must cover your marginal costs and generate profits. Also, it sends signals to the marketplace about the overall investment in your product. As a result, a low price may not actually be the best option for a product where the customer is going to need a lot of internal commitment and vendor “hand-holding” in order to be successful. A price point that is too high shrinks the addressable market and broadens the range of potential substitutes. 2. Focus on the drivers of value – from the customer’s perspective.
You know how your product generates value. You may even have metrics, for example:
It improves productivity of end users by 10%
It reduces rogue spending by 50%?
Be sure to consider how value relates to usage. For example, does value increase with the number of users in the network, or is it relatively constant? Are there components of the product that will have different values for different organizations? If so, you might want to package them separately.
Aligning pricing with how your sponsor will justify his or her investment in your solution and how usage will grow over time lets you capture the most value. And adding a mix of “cost-plus” options with limited business value can slow the sale. 3. Do your competitive homework.
It almost goes without saying, but the smoothest pricing projects I have worked on were ones were we worked with multiple competitive data points from the beginning. 4. Keep a wide range of substitutes in mind.
Particularly with new product categories, you might need to think creatively about substitutes. At the broadest level, what are the alternative ways through which the customer can solve the business problem and how much do they cost?
5. Always remember that sales people need to be able to explain your pricing, and customers need to grok it.
Even if they capture customer value perfectly, the “elegant” pricing models that take 20 minutes to explain rarely succeed. Sales people can’t or won’t stand behind them.
