Getting Paid Fairly from Software Sales in Integrated Systems
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Webinar March 2013: All too often industrial companies set product prices based on their incremental costs and wind up under-valuing their products. Jim Geisman of Software Pricing Partners shows how systematic pricing and packaging of software can increase revenue and profits.
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Getting Paid Fairly from Software Sales in Integrated Systems
- 1. 233 Needham Street • Suite 300 • Newton, MA 02464 • (508) 647-0330 Jim Geisman Principal & Founder Software Pricing Partners, Inc. Getting Paid Fairly from Software Sales
- 2. © Software Pricing Partners, Inc All Rights Reserved - 2 - Software Pricing Partners Since 1987 Pricing software-based offerings Improving B2B pricing and revenue models The Ends… More revenue from products & services Improve financial performance Increase sales effectiveness The Means… Pricing Model Assessments Pricing Model Development / Improvement Deal Packaging, Pricing & Negotiations
- 3. © Software Pricing Partners, Inc All Rights Reserved - 3 - Technology Trends HW Time •PRICE •ActualValue •PerceivedValue •WillingnesstoPay
- 4. © Software Pricing Partners, Inc All Rights Reserved - 4 - Lower Value Can Lead to Death Spiral Hardware/Bundled Value Price Value Shift
- 5. © Software Pricing Partners, Inc All Rights Reserved - 5 - Lower Value Can Lead to Death Spiral Price Discounts = Lower Price Hardware/Bundled Value
- 6. © Software Pricing Partners, Inc All Rights Reserved - 6 - Lower Value Can Lead to Death Spiral Price Freebies = Maintain Revenue Hardware/Bundled Value
- 7. © Software Pricing Partners, Inc All Rights Reserved - 7 - Application Software Adds Value Embedded Standalone Value-Add
- 8. © Software Pricing Partners, Inc All Rights Reserved - 8 - Technology Trends SW HW Time •PRICE •ActualValue •PerceivedValue •WillingnesstoPay
- 9. © Software Pricing Partners, Inc All Rights Reserved - 9 - Technology Trends SW HW Time •PRICE •ActualValue •PerceivedValue •WillingnesstoPay
- 10. © Software Pricing Partners, Inc All Rights Reserved - 10 - Topics Monetization and Pricing Pricing Framework Getting Paid Fairly Meeting the Challenges Wrap-up
- 11. © Software Pricing Partners, Inc All Rights Reserved - 11 - Software Monetization Hurdles Internal Reliance on hardware sales Manufacturing focus In-house systems and processes External Installed base Existing relationships Customer expectations
- 12. © Software Pricing Partners, Inc All Rights Reserved - 12 - Software-Specific Pricing Issues Licensed not sold No inventory Low / no COGS Complex, highly differentiated Scalable, configurable Many ways to charge for product May be part of a systems sale
- 13. © Software Pricing Partners, Inc All Rights Reserved - 13 - Common Pricing Methods Opinion Size-of-wallet Competition Cost-based Value-driven
- 14. © Software Pricing Partners, Inc All Rights Reserved - 14 - Topics Monetization and Pricing Pricing Framework Getting Paid Fairly Meeting the Challenges Wrap-up
- 15. © Software Pricing Partners, Inc All Rights Reserved - 15 - Metric Bundles Amount Terms Deliverables Incentives Software Pricing Framework
- 16. © Software Pricing Partners, Inc All Rights Reserved - 16 - Software Pricing Framework Metric Packages Amount Terms Incentives Deliverables
- 17. © Software Pricing Partners, Inc All Rights Reserved - 17 - License Model Metric Use more (product) get more (value) Can be “anything” Easy to estimate Easy to control, monitor Encourages use Terms Balance customer and company needs Covers access and usage scenarios Applies to product and services Specifies payment stream and expectations Covers true-ups, product changes Metric Terms
- 18. © Software Pricing Partners, Inc All Rights Reserved - 18 - Transaction Structure Packages Logical grouping of features Obvious differences between editions Simple set of choices Minimize impact on sales channel Easily adapted to internal systems Incentives Standardize on types Encourage specific customer behavior Apply consistently Set clear limits Use judiciously Packages Incentives
- 19. © Software Pricing Partners, Inc All Rights Reserved - 19 - Price Setting Amount Related to value-in-use “Vector in” on base price Make discounts and calculation uniform Start with domestic market Parameterize prices and adjustments Deliverables Standardized grouping(s) and list(s) Easy to understand and use Includes products and services Maps to customer types, sizes Works with most transactions Amount Deliverables
- 20. © Software Pricing Partners, Inc All Rights Reserved - 20 - Topics Monetization and Pricing Pricing Framework Getting Paid Fairly Meeting the Challenges Wrap-up
- 21. © Software Pricing Partners, Inc All Rights Reserved - 21 - Biggest Challenge – Company Mindset Source: Adrian Slywotzky presentation to Professional Pricing Society, May 2012. Demand: Creating What People Love Before They Know They Want It Company-Think Customer-Think
- 22. © Software Pricing Partners, Inc All Rights Reserved - 22 - Company View of “Fair” Objectives Target customers Market Maturity Differentiation Transparency
- 23. © Software Pricing Partners, Inc All Rights Reserved - 23 - Customer View of “Fair” WTPNeed Knowledge Alternatives WTP = Willingness to Pay = maximum amount a party would be willing to pay to receive something
- 24. © Software Pricing Partners, Inc All Rights Reserved - 24 - Fair Depends on What’s “It” Worth Hard Dollar Impact of Better / Faster / Cheaper Time to Value Solution Price Current solutions Faster Cheaper Better
- 25. © Software Pricing Partners, Inc All Rights Reserved - 25 - “Worth” Depends on Value-Add Base (Common) Features Market / Base Price
- 26. © Software Pricing Partners, Inc All Rights Reserved - 26 - “Worth” Depends on Value-Add Software Value-Add Incremental Value Add Base (Common) Features How Much Is THIS Added Value Worth? Market / Base Price
- 27. © Software Pricing Partners, Inc All Rights Reserved - 27 - Build Offerings From Pricing Framework Packages Incentives
- 28. © Software Pricing Partners, Inc All Rights Reserved - 28 - Topics Monetization and Pricing Pricing Framework Getting Paid Fairly Meeting the Challenges Wrap-up
- 29. © Software Pricing Partners, Inc All Rights Reserved - 29 - WTA Need Knowledge Alternatives Mindset Affects Revenue Generation WTPNeed Knowledge Alternatives WTA = Willingness to Accept = minimum amount a party would be willing to receive to give up something
- 30. © Software Pricing Partners, Inc All Rights Reserved - 30 - Customer Mindset Software doesn’t cost you anything I don’t need all this We’ve never paid for software before What will happen to budgets, staffing, etc.
- 31. © Software Pricing Partners, Inc All Rights Reserved - 31 - Sales Channel Mindset Free software drives hardware sale Deal is more complicated More time spent on in-house negotiations Financial impact
- 32. © Software Pricing Partners, Inc All Rights Reserved - 32 - Topics Monetization and Pricing Pricing Framework Getting Paid Fairly Meeting the Challenges Wrap-up
- 33. © Software Pricing Partners, Inc All Rights Reserved - 33 - Software Pricing Framework License Model Metric scales with value-in-use Terms balances payments with access, usage rights Transaction Structure Bundles meet usage scenarios Incentives have clear purpose Price Setting Amount paid depends on volume Deliverables are easy-to-understand Metric Bundles Amount Terms Incentives Deliverables
- 34. © Software Pricing Partners, Inc All Rights Reserved - 34 - Using a Pricing Model Can Help Metric Bundles Amount Terms Incentives Deliverables Software Pricing Issues Customer Mindset Sales Channel MindsetMonetization Hurdles
- 35. © Software Pricing Partners, Inc All Rights Reserved - 35 - Using a Pricing Model Can Help Increase Sales ThroughputEasy to Do Business With Treat Customers FairlyCustomer Focus Software Pricing Issues Customer Mindset Sales Channel MindsetMonetization Hurdles Bundles Incentives
- 36. © Software Pricing Partners, Inc All Rights Reserved - 36 - Thanks! Jim Geisman jimg@softwarepricing.com Software Pricing Partners, Inc. 508-647-0330
Editor's Notes
- Hardware value is decreasing so are prices
- What happens when value of products declines?
- Discounting is done to lower price so it is in line with value
- Sometimes freebies are added to sweeten the pot and maintain revenuesNet result is need to ship more product to maintain sales or profitability
- SW has been evolving and often has independent value
- Can offset decline in HW value w/ SW – added rev source, offset decline in HW value
- If SW can offset decline in HW value don’t tie SW to a HW boat anchor
- Death spiral avoided by monetizing new product elements (SW) but monetizing anything means dealing with pricing.
- Reasons it is hard to monetize SW
- Common pricing methods don’t apply well to SW because pricing frameworks were made for other “stuff”
- People use these methods to do pricing. Some work better than others and are more preferable
- Pricing framework developed especially for monetizing SW IP can be very helpful
- Elements of the first layer
- Elements of the second layer
- Elements of the third layer
- Using this framework can help construct offerings that customers will find attractive. This increase chances of getting paid fairly
- This is the biggest challenge to SW (or any product) monetization
- Company mindset affects view of fair is not same as customer’s view
- The customer’s view of fair is different and depends on … Not only knowledge of what they are trying to do but what your product can do for them
- Customer needs to understand what the It is and what the it is worth in economic terms
- Every product has a minimum set of features to be in the game. This determines the Base price.
- How you differentiate your product (with SW) is what customer is looking for – and they don’t care about your costs
- All sorts of challenges facing SW monetization – Mindsets of customer, company
- How much you an monetize your SW depends on your company’s WTA (describe what the 3 arrows mean from a company perspective)
- Need to deal with this mindset – and the elements of the pricing framework will help you do that (explain)
- Applying the framework will also help address some of the channel concerns. Any change affects financials so be sure to address this – especially in advance of a sale
- Review the framework… It was built for SW and fits well with SW sold standalone or with hardware and services
- We’ve talked about a bunch of stuff (mention examples)
- Using this model with care can address these issue, hurdles, mindsets and can do good things for your business