Posted By Tench Forbes
Abstract: The following post contains Questions and Answers on the subject Workshop compiled and edited by Petra Lehman, Vibhoosh Guta, and Tench Forbes
Posted March 22, 2013
As part of our Practitioners Workshop Series, Jim Geisman, Founder and Principal of Software Pricing Partners, presented how to make pricing decisions that are likely to "stick”. Specifically, the event focused on strategies and tactics for obtaining higher revenues and profitability from software products, "must know” pricing fundamentals, and how to avoid pricing "traps”. Below, we review some of the questions that came from the audience and others about this topic:
1. Any thoughts on how to quantify value derived from a software product -any best practices, etc?
First, I would caution you not to look for best practices in the software industry – look for common practices that seem to work. With respect to quantifying value, it all starts by understanding your customers' businesses.
Each customer will likely derive different value from the same product because they value different features differently. Therefore you need to understand how many significant economic drivers there are. After that, attach numbers to these drivers that most of your customers would agree are "reasonable". Doing so allows you to see how much of that value you are trying to extract with your price levels. This quantification is also very useful for value props.
2. Many companies offer discounted pricing to a point where list prices in some industries are basically rendered useless. What is your opinion on this?
I think the toughest markets are ones where competitors are fools or acting foolishly. Make sure that you avoid competing on price as much as you can. There are certainly some markets that are extremely sensitive to price, but the tech markets are not that way. (Even in commodity markets, there's room for differentiation in terms of service, delivery, customer relationships, etc.). If you are competing in a market where list prices are meaningless and discounting is rampant, it is even more important for you to hone your value proposition and narrow your target audience.
3. How many discount tiers are too many?
Setting the number of discount tiers is like everything else in pricing – a balancing act. You want to make sure that there aren't so many tiers the sale is slowed down but there are enough tiers, so customers feel the discounts they are receiving are appropriate. My own opinion is a "reasonable number of tiers" would be 4-5 plus a final one that says "Call for Quote".
4. Any ideas on how to set different prices for different geographic regions in this global environment?
Many times companies set prices in different regions on a case-by-case basis which can lead to chaos. We advocate the use of relative pricing: Get the price as right as you can for a product or region and then peg the other product or regional prices to a percentage of the one you got as right as you could.
5. Some people want to trial the software/service first. Any thoughts on how to package and price the trial versions vs. the production versions?
I'm a big believer in letting people use a product so they can make a purchase decision. I'm not a big believer in freemium, although it has limited applicability. You must offer a trial if you have a complex product. Sometimes the trial will involve the customer paying money for the initial pilot program.
If you have a simple product, I would suggest a time-limited trial like 30, 60 or 90 days – long enough for the prospect to see if the product can do the job. If you are going to offer free product and hope for the user will become a customer by paying you money, make sure the free product doesn't cannibalize the market for your paid products. Some of the cloud storage providers are so generous with their free product (storage) that many people never pay money. Overall, I believe the industry is shifting towards free trials instead of free product.
6. I am thinking of trying an SaaS model for my software offering. Any thoughts on how to price it or what should I keep in mind while pricing it?
It may be heresy, but a SaaS-delivered product is nothing more than software licensed on a subscription basis with the additional value of remote hosting. Therefore, the most important part of setting prices for your SaaS software is the standalone software-only price. Once you do that, you add a surcharge or premium for the remote hosting which adds significant value.
Unfortunately, a lot of people in the SaaS space do a poor job of pricing or they are assuming customer retention will continue for a very long time (more than two or three years). Given that some sass markets are extremely price competitive, you may have to be prepared to charge lower prices and therefore spend or raise more money than you might otherwise.
In summary, the Workshop provided actionable advice with real world illustrations about software pricing. The lively question and answer sessions illustrate the interest of the attendees. Additionally, a lot of the pricing advice is applicable to other kinds of products, and shows the value of these kinds of workshops for the Product Management Community. The BPMA very much appreciates Jim's contribution, and thanks all the attendees for their active participation.