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SVPMA Workshop:
   Pricing, Business Models, and
       What Are Things Worth
                                             Rich Mironov
                                            CMO, Enthiosys
                                             April 25, 2009
© 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                1
Agenda

•   Introductions
•   Basics of Pricing
•   Case Study #1: Consulting
•   Case Study #2: iPass
•   Exercise #1: Teleportation
•   More About Software Pricing
•   Exercise #2: SaaS
    (Innovation Games Online)


    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    2
Objectives

•   See where pricing fits
•   Work a few exercises
•   Appreciate the scope of issues
•   Laugh a little

• Not a deep dive on financial modeling




    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    3
Agenda

•   Introductions
•   Basics of Pricing
•   Case Study #1: Consulting
•   Case Study #2: iPass
•   Exercise #1: Teleportation
•   More About Software Pricing
•   Exercise #2: SaaS
    (Innovation Games Online)


    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    4
An Unapologetic Product Guy

• CMO at Enthiosys, agile product mgmt consultancy
   – Business models/pricing, roadmaps
   – Innovation Games® and customer needs
   – Agile transformation, interim PM executive
• Repeat offender at software prod mgmt
   – Tandem, Sybase, four start-ups
• “The Art of Product Management”
  and Product Bytes
• Haas executive education faculty


  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  5
Where Does Product Mgmt Fit?


                                                                                   strategy, forecasts,
                                      Budgets, staff,
                                                                                   commitments, roadmaps,
                                                          Executives
                                      targets
                                                                                   competitive intelligence


       market information, priorities,
       requirements, roadmaps, MRDs,
       personas, user stories…                                                             Field input,
                                                         Product                           Market feedback
                                                       Management
                                                                                 Marketing/Sales
                              Development
                                                                                   Customers
                                                        software
                                                                         Segments, messages,
                                                                         benefits/features, pricing,
                                                                         sales support, demos…



 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                                              6
Agenda

•   Introductions
•   Basics of Pricing
•   Case Study #1: Consulting
•   Case Study #2: iPass
•   Exercise #1: Teleportation
•   More About Software Pricing
•   Exercise #2: SaaS
    (Innovation Games Online)


    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    7
“Pricing is almost never
               about the number.
             It’s about the model.”


© 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                8
Context



                      Market
                                                                            Roadmap
                      Needs
             value




                                 pricing
                                                Business
                                                  Plan




 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                      9
Bottoms-Up or Top-Down?

• We‟ll be focused on market pricing (bottoms-up)
   – “What the market will bear”
   – Considering pricing models and specific prices
• Companies also need top-down
   – Justifying R&D investments, projecting revenue
   – “We need higher prices to hit break-even sooner”

• Iterative
   – Intersection of market,
     business model, costs…

  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  10
Where Does Pricing Fit?
• Rarely the headline
• Part of the business model
   – How do we make money? How much?
   – Revenue/profit/shipment forecasts
• Supports core value proposition
   – “Our product/service saves you $$$$…
   – …and we want 15% of the savings.”
• Often an obstacle to buying
   – Too complex
   – Much too high (sticker shock) or too low (desperate)
   – Free (no reason to trade up)

  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  11
Company Models

• Big companies that do serious pricing analysis
   – General Mills, Goldman Sachs,
     United Airlines, Toyota
• Small companies built on a pricing strategy
   – SalesForce.com, NetFlix, ZipCar
• Companies that don‟t handle pricing strategically
   – Nearly everyone else




  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  12
Philosophies and Approaches

• We have the data, resources and commitment to
  do serious pricing analysis
   – Patient and scientific
• The market defines pricing models and prices
   – Small fish, big pond
• We have an explicit pricing strategy
   – But little data
• Our costs and ROI requirements define prices
   – Cost-plus
• We can’t ship until someone picks a price
  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  13
New and Mature Markets

                                             Outside                    Compete
                                            threats, la                 on price
     Mature
                                                te-
     markets
                                              comers



                                             Let 1000
    New markets                              Flowers
                                              Bloom



                                     New pricing                      Dominant
                                       models                          pricing
                                                                       model


 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                   14
Start with Customer View

• Customers buy most products to make money or
  save money
   – How do they describe value?


• Quantify it for them
   – They won‟t spend the time to analyze this fully
• Assume you can capture a fraction of value
   – B2B: often 5% to 15%
   – Consumers often driven by fashion, not analytics


  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  15
Pricing Your Start-Up

• Why will customers buy?
   – Tell a story in customer‟s own language
• What‟s the natural unit of exchange?
   – How do they derive value? What does the
     competition do?
   – Can you split off a profitable segment?
• How much of customer value
  can you capture?
• Test, trial-close, get your hands dirty


  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  16
Business Model Framework

A framework of interrelated choices that help you
create offerings that provide maximum value.
                                                  Customer Value Analysis
                                                      Identifies Value


                                                                                           Licensing
                                                    Type of Value Exchange
                                                                                   Terms and Conditions of Use
                                                      The way you make
                                                             money
            Pricing
    How much money you make
                                                          Profit Engine
                                                          Causes More
                                                                                          Enforcement
                                                          Money Making
                                                                                       Protection of Rights
                                                             Events


                                                          Customer ROI Model
                                                            Quantifies Return
 © 2009, Enthiosys Inc.   All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                          17                  17
 ® 2009 Enthiosys
Software Value Exchange Models

1.     Time-based access (e.g. unlimited/month)
2.     Transaction (stock trade)
3.     Metered (seats, CPUs, named users)
4.     Hardware (appliances, dongles)
5.     Service (virus updates, support)
6.     Percentage of incremental revenue/savings
7.     Data-driven insights


                                                                                     Charity?
     © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                        18      18
Avoid Creating Pricing Problems

• DON‟T…
  –    Make price the primary issue (usually)
  –    Over-complicate the sale
  –    Require customers to be smart
  –    Change prices too often

• DO…
  –    Support the business model/plan
  –    Reinforce (charge for) key benefits
  –    Pick natural units
  –    Make correct ordering easier

 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                 19
Support the Business Model!

• Pricing drives customer behavior
• What do you want core customers to do?
    No-brainer renewals (small monthly fees)
    Big up-front license (lock up marketplace)
    Lust for upgrades (cool features are extra)
    Freemium model (1% upsold into paid services)
    Install latest version (free updates, increasing service
     fees)




  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  20
How Will People Cheat?

• If I want to rip you off, how could I do it?
   – Licensed software…
   – Per-Seat SaaS…
   – Hardware token…
• Licensing versus enforcement
• Who are the cheaters?
• How much are we willing to spend?
   – Diminishing returns
• Easier to exploit complex pricing models

  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  21
Customer Commitments




No commitment                                                                         Big commitment
High variable costs                                                               Low/no variable costs

Lower volume                                                                            Higher volume
Uncertain usage                                                                      Predictable usage
Optional                                                                    Required (cost of business)
Actively manage costs                                                           Low cost control effort

NEED CONTINUOUS MARKETING                                                           HARD INITIAL SELL


  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                                          22
Everyday Commitments

• Things we commit to…


• Things we buy “by the drink”…


• Why?




  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  23
Agenda

•   Introductions
•   Basics of Pricing
•   Case Study #1: Consulting
•   Case Study #2: iPass
•   Exercise #1: Teleportation
•   More About Software Pricing
•   Exercise #2: SaaS
    (Innovation Games Online)


    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    24
Exercise: Consulting Services

• Your last start-up just closed, so you are
  suddenly a consultant. A prospective client
  needs market analysis, MRD, a pricing model.

• What are your pricing objectives?

• How to structure a project?

• Risks for you? For client?

  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  25
Possible Objectives

• Work at any price
   – Food on the table
• Loss leader
   – Underprice first assignment, get follow-on work
   – Good reference for other clients
• Become indispensable
   – Push for a full-time position later
• Gain pricing experience
   – What will the market bear? OK to lose assignment


  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  26
Some Consulting Pricing Models

•   Per hour, no limits
•   Per project
•   Per hour with project ceiling
•   Fixed price for initial sizing (“pay me to estimate”)
•   Milestones (progress payments)
•   Equity (pre-IPO stock)
•   Customer sets value at end
•   Shared savings (portion of ROI)
•   Free (experience, reference, try & buy)

    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    27
Risks in Consulting Models

                                                       Client’s Risk              Consultant’s Risk

                                                 Unlimited cost,
 Straight Hourly                                                                        None
                                               quality, completion

 Fixed project price                                                               Unlimited effort,
                                                Timely completion
 (pay on completion)                                                               defining “done”
                                                  Partial work not
 Fixed price
                                                  valuable, how to                 Upfront analysis
 milestones
                                                   inspect work?
 Equity, portion of                                                               No immediate cash
                                                 May overpay later
 ROI                                                                                    value




  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                                       28
Case study: iPass

• Founded 1996: new market, new application
   – Falling asleep in Tokyo hotel
• Early clearinghouse for Internet “roaming”
   – How do I dial into the „net when far from home?
• Target: corporate travelers, “road warriors”
• By 2004, covered 170 countries
   – 20,000 dial-up numbers, 5000 hot spots…


• IPO July ‟03, $1B market cap

  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  29
iPass Transaction Model
                        ISP, PTT,                                                     Customer Site
                         hotspot

                                                                 Internet




                                                   iPass Global Transaction Centers




                                                       iPass Settlement System
 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                                      30
Evolution of iPass Pricing Model

1. Cost-plus pricing (mark up each POP 40%)
   – Buy-side prices are visible
2. Flattened by country (then continent)
   – Simpler
   – Customers indifferent to suppliers
3. Overlay Home/Roam model
   – Charge less at “home” but more to “roam”
   – Lots of “home” substitutes but few “roam” alternatives




  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  31
Network Effect: Strategic Leverage

• Early: low volumes, high supplier
  prices, difficult purchasing
   – Grow user base, add more networks…


• Mid-cycle: can substitute suppliers, improve
  quality, simplify end user experience
   – Companies want biggest network
   – Networks want most roaming users


• Maturing: dominant player
   – All major dial-up networks (BT, FT, DT, AT&T…)
   – All major hotspots (T-Mobile…)
   – Who wants to join the second-largest ATM network?

  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  32
Selling Value-Added Data

• iPass was monitoring quality data
     – For each dial-up attempt: POP, result, initial speed
•   Aggregated and resold this to…
•   Customers
•   Prospects
•   Network operators

• Hybrid model


    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    33
Agenda

•   Introductions
•   Basics of Pricing
•   Case Study #1: Consulting
•   Case Study #2: iPass
•   Exercise #1: Teleportation
•   More About Software Pricing
•   Exercise #2: SaaS
    (Innovation Games Online)


    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    34
Workshop Exercise: Teleportation

• Founders: Stanford physicists with local VC
• Software plus expensive custom hardware
• Some arbitrary product limitations
   –    Inanimate objects only (no people)
   –    Under 40 pounds, under 18” diameter
   –    2000 mile limit, arrival +/- 3 inches
   –    High power requirement (15 kW)
   –    15 second recharge time
   –    Non-military, non-government


  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  35
Not Yet a Product or Service…

•   No target application or audience
•   No go-to-market strategy
•   No pricing model (how we will make money)
•   No infrastructure/operations/support plan
•   No marketing or sales staff

• Lots of blue sky discussions



    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    36
Team Exercise: 20 minutes

• Break into groups of 4-6
• Pick a target application
   –    Tell a specific user story
   –    How does customer define value?
   –    Competing offerings?
   –    Adoption challenges, infrastructure needs?
   –    Build a value proposition
   –    Justify a list price (quantity one)?
   –    Dimensions of discounting/bundling/tiers?


  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  37
Teleportation Presentation




 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                 38
Agenda

•   Introductions
•   Basics of Pricing
•   Case Study #1: Consulting
•   Case Study #2: iPass
•   Exercise #1: Teleportation
•   More About Software Pricing
•   Exercise #2: SaaS
    (Innovation Games Online)


    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    39
Software Models: The Real Fun

• No natural cost-plus approach
• SaaS is how it‟s delivered, not how it‟s priced

Possibilities:
• One-time license
• Recurring/rental
• Bundled with hardware
• Per transaction
• Prepaid usage…

  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  40
Recurring vs. One-Time License

• Not (really) about how you deliver it
• One-Time Licensing
   –    Perpetual or long-term license plus support
   –    Pre-empt competition
   –    Some upgrade fees on major releases
   –    “Selling the future”
• Good because…

• Bad because…

  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  41
Recurring vs. One-Time License

• Not (really) about how you deliver it
• Recurring / SaaS
   –    Monthly or annual fees
   –    No separate support or upgrades
   –    Upsell packages of capabilities
   –    Theoretically easy to cancel
• Good because…

• Bad because…

  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  42
Mixed Models

• Most software solutions use multiple models
   – Tiered capabilities (entry, standard, expert) per user
     per month
   – Different units for bigger customers
   – Software support levels (work hours, 7*24)
   – Separately priced “connectors”
   – Additional price for data import or conversion




  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  43
Agenda

•   Introductions
•   Basics of Pricing
•   Case Study #1: Consulting
•   Case Study #2: iPass
•   Exercise #1: Teleportation
•   More About Software Pricing
•   Exercise #2: SaaS
    (Innovation Games Online)


    © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                    44
Exercise: SaaS Pricing

• Innovation Games® Online
   – Extension of Luke Hohmann‟s
     Innovation Games ®
   – Originally conceived as face-to-face
     collaborative market research tools
• Target audiences
   – Product managers/marketers
   – In-house market researchers, paid consultants
   – Companies (divisions) that do frequent customer
     collaboration/needs-finding
   – Not-for-profit groups, open source projects
  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  45
Buy A Feature



• An Innovation Game® where customers/prospects collaborate with a
  vendor to prioritize a backlog
    – Vendor gets information about the features customers want first, and
      reasons for their preferences
    – Product manager quot;pricesquot; a list of potential features. Customers are
      given quot;moneyquot; and asked to collaborate with group to decide which
      features will be quot;purchased.quot;
    – The group has only enough money for a subset of features. They
      negotiate for the most important items, while explaining their decisions.



   © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                   46
Buy A Feature Online - Backlog




 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                 47
Buy A Feature Online - Underway




 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                 48
Buy A Feature Online - Results




 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                 49
Break into teams…

• Describe a persona and use case

• How will customer value this service?
   – Competitive options
• Natural unit of value exchange?
• “Quantity one” price?
• Levels, tiers or bundles?

• Present your recommendations

  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  50
Take-Aways

• Market pricing starts with audience‟s pain
• Pricing model aligned with pain
   – Units make sense
   – Savings >> price
   – KISS
• Must support business model
• Complex pricing plans impede sales process
• Invest in research if you can
   – Competition, interviews, historical databases


  © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                  51
SVPMA Workshop:
   Pricing, Business Models, and
       What Are Things Worth
                                             Rich Mironov
                                            CMO, Enthiosys
                                             April 25, 2009
© 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                                                                                52

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Pricing, Business Models, and What Things are Worth

  • 1. SVPMA Workshop: Pricing, Business Models, and What Are Things Worth Rich Mironov CMO, Enthiosys April 25, 2009 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 1
  • 2. Agenda • Introductions • Basics of Pricing • Case Study #1: Consulting • Case Study #2: iPass • Exercise #1: Teleportation • More About Software Pricing • Exercise #2: SaaS (Innovation Games Online) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 2
  • 3. Objectives • See where pricing fits • Work a few exercises • Appreciate the scope of issues • Laugh a little • Not a deep dive on financial modeling © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 3
  • 4. Agenda • Introductions • Basics of Pricing • Case Study #1: Consulting • Case Study #2: iPass • Exercise #1: Teleportation • More About Software Pricing • Exercise #2: SaaS (Innovation Games Online) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 4
  • 5. An Unapologetic Product Guy • CMO at Enthiosys, agile product mgmt consultancy – Business models/pricing, roadmaps – Innovation Games® and customer needs – Agile transformation, interim PM executive • Repeat offender at software prod mgmt – Tandem, Sybase, four start-ups • “The Art of Product Management” and Product Bytes • Haas executive education faculty © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 5
  • 6. Where Does Product Mgmt Fit? strategy, forecasts, Budgets, staff, commitments, roadmaps, Executives targets competitive intelligence market information, priorities, requirements, roadmaps, MRDs, personas, user stories… Field input, Product Market feedback Management Marketing/Sales Development Customers software Segments, messages, benefits/features, pricing, sales support, demos… © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 6
  • 7. Agenda • Introductions • Basics of Pricing • Case Study #1: Consulting • Case Study #2: iPass • Exercise #1: Teleportation • More About Software Pricing • Exercise #2: SaaS (Innovation Games Online) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 7
  • 8. “Pricing is almost never about the number. It’s about the model.” © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 8
  • 9. Context Market Roadmap Needs value pricing Business Plan © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 9
  • 10. Bottoms-Up or Top-Down? • We‟ll be focused on market pricing (bottoms-up) – “What the market will bear” – Considering pricing models and specific prices • Companies also need top-down – Justifying R&D investments, projecting revenue – “We need higher prices to hit break-even sooner” • Iterative – Intersection of market, business model, costs… © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 10
  • 11. Where Does Pricing Fit? • Rarely the headline • Part of the business model – How do we make money? How much? – Revenue/profit/shipment forecasts • Supports core value proposition – “Our product/service saves you $$$$… – …and we want 15% of the savings.” • Often an obstacle to buying – Too complex – Much too high (sticker shock) or too low (desperate) – Free (no reason to trade up) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 11
  • 12. Company Models • Big companies that do serious pricing analysis – General Mills, Goldman Sachs, United Airlines, Toyota • Small companies built on a pricing strategy – SalesForce.com, NetFlix, ZipCar • Companies that don‟t handle pricing strategically – Nearly everyone else © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 12
  • 13. Philosophies and Approaches • We have the data, resources and commitment to do serious pricing analysis – Patient and scientific • The market defines pricing models and prices – Small fish, big pond • We have an explicit pricing strategy – But little data • Our costs and ROI requirements define prices – Cost-plus • We can’t ship until someone picks a price © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 13
  • 14. New and Mature Markets Outside Compete threats, la on price Mature te- markets comers Let 1000 New markets Flowers Bloom New pricing Dominant models pricing model © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 14
  • 15. Start with Customer View • Customers buy most products to make money or save money – How do they describe value? • Quantify it for them – They won‟t spend the time to analyze this fully • Assume you can capture a fraction of value – B2B: often 5% to 15% – Consumers often driven by fashion, not analytics © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 15
  • 16. Pricing Your Start-Up • Why will customers buy? – Tell a story in customer‟s own language • What‟s the natural unit of exchange? – How do they derive value? What does the competition do? – Can you split off a profitable segment? • How much of customer value can you capture? • Test, trial-close, get your hands dirty © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 16
  • 17. Business Model Framework A framework of interrelated choices that help you create offerings that provide maximum value. Customer Value Analysis Identifies Value Licensing Type of Value Exchange Terms and Conditions of Use The way you make money Pricing How much money you make Profit Engine Causes More Enforcement Money Making Protection of Rights Events Customer ROI Model Quantifies Return © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 17 17 ® 2009 Enthiosys
  • 18. Software Value Exchange Models 1. Time-based access (e.g. unlimited/month) 2. Transaction (stock trade) 3. Metered (seats, CPUs, named users) 4. Hardware (appliances, dongles) 5. Service (virus updates, support) 6. Percentage of incremental revenue/savings 7. Data-driven insights Charity? © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 18 18
  • 19. Avoid Creating Pricing Problems • DON‟T… – Make price the primary issue (usually) – Over-complicate the sale – Require customers to be smart – Change prices too often • DO… – Support the business model/plan – Reinforce (charge for) key benefits – Pick natural units – Make correct ordering easier © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 19
  • 20. Support the Business Model! • Pricing drives customer behavior • What do you want core customers to do?  No-brainer renewals (small monthly fees)  Big up-front license (lock up marketplace)  Lust for upgrades (cool features are extra)  Freemium model (1% upsold into paid services)  Install latest version (free updates, increasing service fees) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 20
  • 21. How Will People Cheat? • If I want to rip you off, how could I do it? – Licensed software… – Per-Seat SaaS… – Hardware token… • Licensing versus enforcement • Who are the cheaters? • How much are we willing to spend? – Diminishing returns • Easier to exploit complex pricing models © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 21
  • 22. Customer Commitments No commitment Big commitment High variable costs Low/no variable costs Lower volume Higher volume Uncertain usage Predictable usage Optional Required (cost of business) Actively manage costs Low cost control effort NEED CONTINUOUS MARKETING HARD INITIAL SELL © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 22
  • 23. Everyday Commitments • Things we commit to… • Things we buy “by the drink”… • Why? © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 23
  • 24. Agenda • Introductions • Basics of Pricing • Case Study #1: Consulting • Case Study #2: iPass • Exercise #1: Teleportation • More About Software Pricing • Exercise #2: SaaS (Innovation Games Online) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 24
  • 25. Exercise: Consulting Services • Your last start-up just closed, so you are suddenly a consultant. A prospective client needs market analysis, MRD, a pricing model. • What are your pricing objectives? • How to structure a project? • Risks for you? For client? © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 25
  • 26. Possible Objectives • Work at any price – Food on the table • Loss leader – Underprice first assignment, get follow-on work – Good reference for other clients • Become indispensable – Push for a full-time position later • Gain pricing experience – What will the market bear? OK to lose assignment © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 26
  • 27. Some Consulting Pricing Models • Per hour, no limits • Per project • Per hour with project ceiling • Fixed price for initial sizing (“pay me to estimate”) • Milestones (progress payments) • Equity (pre-IPO stock) • Customer sets value at end • Shared savings (portion of ROI) • Free (experience, reference, try & buy) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 27
  • 28. Risks in Consulting Models Client’s Risk Consultant’s Risk Unlimited cost, Straight Hourly None quality, completion Fixed project price Unlimited effort, Timely completion (pay on completion) defining “done” Partial work not Fixed price valuable, how to Upfront analysis milestones inspect work? Equity, portion of No immediate cash May overpay later ROI value © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 28
  • 29. Case study: iPass • Founded 1996: new market, new application – Falling asleep in Tokyo hotel • Early clearinghouse for Internet “roaming” – How do I dial into the „net when far from home? • Target: corporate travelers, “road warriors” • By 2004, covered 170 countries – 20,000 dial-up numbers, 5000 hot spots… • IPO July ‟03, $1B market cap © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 29
  • 30. iPass Transaction Model ISP, PTT, Customer Site hotspot Internet iPass Global Transaction Centers iPass Settlement System © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 30
  • 31. Evolution of iPass Pricing Model 1. Cost-plus pricing (mark up each POP 40%) – Buy-side prices are visible 2. Flattened by country (then continent) – Simpler – Customers indifferent to suppliers 3. Overlay Home/Roam model – Charge less at “home” but more to “roam” – Lots of “home” substitutes but few “roam” alternatives © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 31
  • 32. Network Effect: Strategic Leverage • Early: low volumes, high supplier prices, difficult purchasing – Grow user base, add more networks… • Mid-cycle: can substitute suppliers, improve quality, simplify end user experience – Companies want biggest network – Networks want most roaming users • Maturing: dominant player – All major dial-up networks (BT, FT, DT, AT&T…) – All major hotspots (T-Mobile…) – Who wants to join the second-largest ATM network? © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 32
  • 33. Selling Value-Added Data • iPass was monitoring quality data – For each dial-up attempt: POP, result, initial speed • Aggregated and resold this to… • Customers • Prospects • Network operators • Hybrid model © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 33
  • 34. Agenda • Introductions • Basics of Pricing • Case Study #1: Consulting • Case Study #2: iPass • Exercise #1: Teleportation • More About Software Pricing • Exercise #2: SaaS (Innovation Games Online) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 34
  • 35. Workshop Exercise: Teleportation • Founders: Stanford physicists with local VC • Software plus expensive custom hardware • Some arbitrary product limitations – Inanimate objects only (no people) – Under 40 pounds, under 18” diameter – 2000 mile limit, arrival +/- 3 inches – High power requirement (15 kW) – 15 second recharge time – Non-military, non-government © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 35
  • 36. Not Yet a Product or Service… • No target application or audience • No go-to-market strategy • No pricing model (how we will make money) • No infrastructure/operations/support plan • No marketing or sales staff • Lots of blue sky discussions © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 36
  • 37. Team Exercise: 20 minutes • Break into groups of 4-6 • Pick a target application – Tell a specific user story – How does customer define value? – Competing offerings? – Adoption challenges, infrastructure needs? – Build a value proposition – Justify a list price (quantity one)? – Dimensions of discounting/bundling/tiers? © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 37
  • 38. Teleportation Presentation © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 38
  • 39. Agenda • Introductions • Basics of Pricing • Case Study #1: Consulting • Case Study #2: iPass • Exercise #1: Teleportation • More About Software Pricing • Exercise #2: SaaS (Innovation Games Online) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 39
  • 40. Software Models: The Real Fun • No natural cost-plus approach • SaaS is how it‟s delivered, not how it‟s priced Possibilities: • One-time license • Recurring/rental • Bundled with hardware • Per transaction • Prepaid usage… © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 40
  • 41. Recurring vs. One-Time License • Not (really) about how you deliver it • One-Time Licensing – Perpetual or long-term license plus support – Pre-empt competition – Some upgrade fees on major releases – “Selling the future” • Good because… • Bad because… © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 41
  • 42. Recurring vs. One-Time License • Not (really) about how you deliver it • Recurring / SaaS – Monthly or annual fees – No separate support or upgrades – Upsell packages of capabilities – Theoretically easy to cancel • Good because… • Bad because… © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 42
  • 43. Mixed Models • Most software solutions use multiple models – Tiered capabilities (entry, standard, expert) per user per month – Different units for bigger customers – Software support levels (work hours, 7*24) – Separately priced “connectors” – Additional price for data import or conversion © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 43
  • 44. Agenda • Introductions • Basics of Pricing • Case Study #1: Consulting • Case Study #2: iPass • Exercise #1: Teleportation • More About Software Pricing • Exercise #2: SaaS (Innovation Games Online) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 44
  • 45. Exercise: SaaS Pricing • Innovation Games® Online – Extension of Luke Hohmann‟s Innovation Games ® – Originally conceived as face-to-face collaborative market research tools • Target audiences – Product managers/marketers – In-house market researchers, paid consultants – Companies (divisions) that do frequent customer collaboration/needs-finding – Not-for-profit groups, open source projects © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 45
  • 46. Buy A Feature • An Innovation Game® where customers/prospects collaborate with a vendor to prioritize a backlog – Vendor gets information about the features customers want first, and reasons for their preferences – Product manager quot;pricesquot; a list of potential features. Customers are given quot;moneyquot; and asked to collaborate with group to decide which features will be quot;purchased.quot; – The group has only enough money for a subset of features. They negotiate for the most important items, while explaining their decisions. © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 46
  • 47. Buy A Feature Online - Backlog © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 47
  • 48. Buy A Feature Online - Underway © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 48
  • 49. Buy A Feature Online - Results © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 49
  • 50. Break into teams… • Describe a persona and use case • How will customer value this service? – Competitive options • Natural unit of value exchange? • “Quantity one” price? • Levels, tiers or bundles? • Present your recommendations © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 50
  • 51. Take-Aways • Market pricing starts with audience‟s pain • Pricing model aligned with pain – Units make sense – Savings >> price – KISS • Must support business model • Complex pricing plans impede sales process • Invest in research if you can – Competition, interviews, historical databases © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 51
  • 52. SVPMA Workshop: Pricing, Business Models, and What Are Things Worth Rich Mironov CMO, Enthiosys April 25, 2009 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 52