Archive for the Pricing of Technology Products Category

Software vendors, tear down this wall !

Posted in Enterprise Software Sales, Pricing of Technology Products, Sales - Basics on January 16, 2011 by Shankar Saikia

Historians say that Ronald Reagan’s 1987 “Mr. Gorbachev, tear down this wall” speech at Brandenburg Gate catalyzed the end of the cold war. Similarly, innovations such as web 2.0, social media, analytics and smartphones have enabled companies to change enterprise software sales and perhaps sales of other products as well.

Traditionally, a salesperson was needed for the following purposes:

– provide product information
– demonstrate product capabilities
– price offerings
– negotiate agreements

Technologies such as the internet, web 2.o and social media have changed the dynamics of software sales. Today customers can research product information using tools such as search and social media. In addition customers can “try-before-buy” by signing up for free trial accounts. Several companies list their pricing on the internet. Vendors that facilitate transparency increase their credibility and reputation.

The benefits to prospects are many, such as:

– increased transparency (e.g., finding information about a vendor by researching tweets, LinkedIn updates etc.)

– pricing clarity (e.g., learn how product is priced by studying online listing of prices)

– increased product knowledge (e.g., online trials, online resources)

Vendors also benefit:

– reduce cost of sales (e.g., instead of salesreps answering questions, have the prospect get answers from multiple online resources)

– improve credibility (e.g., increased transparency leads in increased trust)

With all the innovation in technologies, it is surprising that vendors have not leveraged these technologies to improve the sales process. If customers have started to embrace web 2.0 social media, smartphones etc., shouldn’t you as well ?

NEW PRODUCT PRICING: Is the MARKET right?

Posted in Enterprise Software Sales, Entrepreneurship, Pricing of Technology Products, Pricing Theory on August 12, 2009 by Shankar Saikia

A key challenge that an entrepreneur, especially in the case of new and innovative products, often faces is “how do I price my product or service?” I faced this situation at two early stage companies that I worked for and at one startup where I was the cofounder.

Conventional pricing theory, which Robert Phillips explains very well in his book Pricing and Revenue Optimization, says that there are three (3) methods for setting prices:

  1. Cost-based: add a markup to the cost of production.
  2. Market-based: charge the price where supply equals demand – the final price is arrived at after the customer compares competitors’ prices
  3. Value-based: relate price to the benefit gained by the customer –  negotiate a price that is proportional to the value that the customer gains by using the product

While one can make a case for each method of pricing, my experience has proven the following related points regarding new product pricing:

– a customer will pay a price that is similar to what it pays for something that it (i.e., the customer) perceives as a substitute

– a customer will pay what it feels is the market price that in turn is constrained by a budget. For example, back in 1999  when I worked for one of the early software-as-a-service (SAAS) companies, one of our prospective customers had a $10K per month budget for application software – the price that we eventually negotiated did not exceed the $10K  per month budgetary limit.

In my 20+ years in the enterprise applications business I have noticed that, while vendors like to rave about “value-based” pricing, customers end up negotiating a market-based price. I do feel that the value-message is the right one – it’s just that customers often, and rightly, feel that it is impossible to link value to specific products. Therefore, the market-based pricing method is what actually works in the real world.

Pricing is a hot topic in several industries. Most of us are aware of yield-management in the airline industry where different classes of customers (e.g., leisure travellers that book early versus businesspeople that buy at the last minute) pay different prices. In the software industry several companies, especially those with SAAS offerings, offer “freemium” products – you can use a free version upto a certain number of users etc. In the world of web 2.0, social media and online gaming, there are challenges such as what to charge for virtual goods, how to monetize offerings (e.g., Twitter) etc.

There is a lot of debate about pricing in the world of enterprise software as well as consumer software. Recently Techcrunch published a great writeup on free pricing in enterprise software. Bill Gurley from Benchmark Capital has a nice writeup on pricing-related opinions of several notables including Malcolm Gladwell (author of Outliers, Blink (my favorite book) and Tipping Point). My perspective is that nothing of value is ever free. In the enterprise software industry, newer technologies such as cloud computing and web 2.0 collaboration are enabling vendors to provide freemium offerings – the vendor benefits by lowering the cost of pre-sales  (instead of viewing demonstrations, why not try the software for free!) as well as by getting faster product feedback (therefore lowering the cost of product management/development etc.). In my own experience as an entrepreneur I started using free versions of software until I had to upgrade because of increased users – I paid because I saw value.

Pricing is a complex topic with nuances such as price differentiation, dynamic pricing (i.e., the price changes with supply and demand) and monetization strategies (e.g, Twitter). Despite the complexities, I have seen that conventional economic principles of supply and demand still influence prices. My simple rule of pricing is to set a price that is close to that of similar products and then run it by your customer – the customer will most probably compare your price to those offered by the competition, and eventually pay what the customer feels is the right price – which is essentially the market-based price!

What do you think?

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