Software Companies Can Gain Competitive Advantage By Making Their Pricing Value-Based

I help hundreds of technology buyers each year to understand the impact of technology changes on their software contracts, but I also get questions from software providers about how best to price their products. Some are bringing new products to market and want to know how to maximize revenue, while others are struggling with obsolete metrics such as per processor and want to update their pricing for the modern mobile, cloudy world. The answer is usually to find licensing metrics that make their pricing value-based while balancing simplicity and fairness. The more value a customer gets from your product, the more they should be willing to pay for it. If you make your pricing too simple then you won't match value sufficiently closely, which will cause you to price yourself out of some deals and leave money on the table in others. If, OTOH, you try to match value too precisely you risk making your pricing so complicated that buyers will reject it, and you, completely.

For example, suppose you have a product that will help people do their jobs better, so you decide that charging for each user will be a good approximation for value. The potential problem is that not everyone will use your product the same, in terms of depth of functionality and/ or frequency of access. Your single per user price will be unfair to companies with long tails of light, infrequent users, for whom you'll therefore be too expensive. Conversely your pricing will be unfair to you when the customer is mostly power users. To make your pricing fairer you could have different prices for different categories of user, but then you risk being criticized for being too complex.

This balance between fairness and simplicity is even harder if your product delivers value in other ways than being used by humans, such as big data analysis, or process automation. When processing power was expensive you could use that to price your product, on the assumption that if a customer put your software on a big expensive box then they must be getting a lot of value from it and would therefore pay you more too. That assumption is no longer true. Whether your product is XaaS or runs in a customer's virtualized datacenter, you can't count the processors on which it is running, and even if you could that would be a lousy proxy for business value. So you have to find other metrics to use instead, metrics that will better approximate customer value while also being simple and fair. There are two key points to remember as you try to do this:

  • You need to be able to explain your product's business value. In order to make your pricing value-based it does kinda help if you actually understand how your product benefits your customers, and can articulate that in business terms. Many software companies with whom I speak can't do that particularly well., which makes it impossible for them to price correctly. So look at your differentiating capabilities and try to identify how those might translate into your customer's business case for buying your product.
  • Pricing isn't the same as Licensing. Pricing is how you work out what price to propose to a prospect. Licensing is the restrictions you impose when you close the deal that enable you to go back for more money if the customer's circumstances change. They're related, of course, but it is permissible and even desirable to include parameters in price calculations that you simplify out of the eventual license agreement (like the transaction's size, for example, or the strategic importance of the account). 

In order to help software providers - on-premise, XaaS or both - navigate this process, I'm going to be running a workshop on Software Pricing, Licensing Trends, And Best Practices on April 11th, 2013 in our San Francisco office. I'll describe how technology changes have undermined traditional pricing constructs, the various commercial options available to you such as SaaS and PAYG, how do balance simplicity and fairness in your value-based pricing, and how to balance science and art in discounting policy.

Bottom line: if you're a product manager trying to decide how to price your product competitively, or a VP of pricing wanting to bring your company's licensing approach up-to-date, then this workshop is a must-attend event. And the price of this workshop? Rest assured, it is value-based, simple and fair.