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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  • 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
  • Getting Paid Fairly from Software Sales in Integrated Systems

    1. 1. 233 Needham Street • Suite 300 • Newton, MA 02464 • (508) 647-0330Jim GeismanPrincipal & FounderSoftware Pricing Partners, Inc.Getting Paid Fairlyfrom Software Sales
    2. 2. © Software Pricing Partners, IncAll 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. 3. © Software Pricing Partners, IncAll Rights Reserved- 3 -Technology TrendsHWTime•PRICE•ActualValue•PerceivedValue•WillingnesstoPay
    4. 4. © Software Pricing Partners, IncAll Rights Reserved- 4 -Lower Value Can Lead to Death SpiralHardware/Bundled ValuePriceValue Shift
    5. 5. © Software Pricing Partners, IncAll Rights Reserved- 5 -Lower Value Can Lead to Death SpiralPriceDiscounts = Lower PriceHardware/Bundled Value
    6. 6. © Software Pricing Partners, IncAll Rights Reserved- 6 -Lower Value Can Lead to Death SpiralPriceFreebies = Maintain RevenueHardware/Bundled Value
    7. 7. © Software Pricing Partners, IncAll Rights Reserved- 7 -Application Software Adds ValueEmbedded StandaloneValue-Add
    8. 8. © Software Pricing Partners, IncAll Rights Reserved- 8 -Technology TrendsSWHWTime•PRICE•ActualValue•PerceivedValue•WillingnesstoPay
    9. 9. © Software Pricing Partners, IncAll Rights Reserved- 9 -Technology TrendsSWHWTime•PRICE•ActualValue•PerceivedValue•WillingnesstoPay
    10. 10. © Software Pricing Partners, IncAll Rights Reserved- 10 -Topics Monetization and Pricing Pricing Framework Getting Paid Fairly Meeting the Challenges Wrap-up
    11. 11. © Software Pricing Partners, IncAll 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. 12. © Software Pricing Partners, IncAll 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. 13. © Software Pricing Partners, IncAll Rights Reserved- 13 -Common Pricing Methods Opinion Size-of-wallet Competition Cost-based Value-driven
    14. 14. © Software Pricing Partners, IncAll Rights Reserved- 14 -Topics Monetization and Pricing Pricing Framework Getting Paid Fairly Meeting the Challenges Wrap-up
    15. 15. © Software Pricing Partners, IncAll Rights Reserved- 15 -MetricBundlesAmountTermsDeliverablesIncentivesSoftware Pricing Framework
    16. 16. © Software Pricing Partners, IncAll Rights Reserved- 16 -Software Pricing FrameworkMetricPackagesAmountTermsIncentivesDeliverables
    17. 17. © Software Pricing Partners, IncAll 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 changesMetric Terms
    18. 18. © Software Pricing Partners, IncAll 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 judiciouslyPackages Incentives
    19. 19. © Software Pricing Partners, IncAll 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 transactionsAmount Deliverables
    20. 20. © Software Pricing Partners, IncAll Rights Reserved- 20 -Topics Monetization and Pricing Pricing Framework Getting Paid Fairly Meeting the Challenges Wrap-up
    21. 21. © Software Pricing Partners, IncAll Rights Reserved- 21 -Biggest Challenge – Company MindsetSource: Adrian Slywotzky presentation to Professional Pricing Society, May 2012.Demand: Creating What People Love Before They Know They Want ItCompany-Think Customer-Think
    22. 22. © Software Pricing Partners, IncAll Rights Reserved- 22 -Company View of “Fair” Objectives Target customers Market Maturity Differentiation Transparency
    23. 23. © Software Pricing Partners, IncAll Rights Reserved- 23 -Customer View of “Fair”WTPNeedKnowledgeAlternativesWTP = Willingness to Pay = maximum amount a party would be willing to pay to receive something
    24. 24. © Software Pricing Partners, IncAll Rights Reserved- 24 -Fair Depends on What’s “It” WorthHard Dollar Impact of Better / Faster / CheaperTime to ValueSolutionPriceCurrentsolutionsFasterCheaperBetter
    25. 25. © Software Pricing Partners, IncAll Rights Reserved- 25 -“Worth” Depends on Value-AddBase(Common)FeaturesMarket / BasePrice
    26. 26. © Software Pricing Partners, IncAll Rights Reserved- 26 -“Worth” Depends on Value-AddSoftwareValue-AddIncrementalValue AddBase(Common)FeaturesHow Much IsTHIS AddedValue Worth?Market / BasePrice
    27. 27. © Software Pricing Partners, IncAll Rights Reserved- 27 -Build Offerings From Pricing FrameworkPackagesIncentives
    28. 28. © Software Pricing Partners, IncAll Rights Reserved- 28 -Topics Monetization and Pricing Pricing Framework Getting Paid Fairly Meeting the Challenges Wrap-up
    29. 29. © Software Pricing Partners, IncAll Rights Reserved- 29 -WTA NeedKnowledgeAlternativesMindset Affects Revenue GenerationWTPNeedKnowledgeAlternativesWTA = Willingness to Accept = minimum amount a party would be willing to receive to give up something
    30. 30. © Software Pricing Partners, IncAll 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. 31. © Software Pricing Partners, IncAll 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. 32. © Software Pricing Partners, IncAll Rights Reserved- 32 -Topics Monetization and Pricing Pricing Framework Getting Paid Fairly Meeting the Challenges Wrap-up
    33. 33. © Software Pricing Partners, IncAll 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-understandMetricBundlesAmountTermsIncentivesDeliverables
    34. 34. © Software Pricing Partners, IncAll Rights Reserved- 34 -Using a Pricing Model Can HelpMetricBundlesAmountTermsIncentivesDeliverablesSoftware Pricing Issues Customer MindsetSales Channel MindsetMonetization Hurdles
    35. 35. © Software Pricing Partners, IncAll Rights Reserved- 35 -Using a Pricing Model Can HelpIncrease Sales ThroughputEasy to Do Business WithTreat Customers FairlyCustomer FocusSoftware Pricing Issues Customer MindsetSales Channel MindsetMonetization HurdlesBundlesIncentives
    36. 36. © Software Pricing Partners, IncAll Rights Reserved- 36 -Thanks!Jim Geismanjimg@softwarepricing.comSoftware Pricing Partners, Inc.508-647-0330

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