Pricing in a Crisis Economy Pricing in a Crisis Economy
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Pricing in a Crisis Economy Pricing in a Crisis Economy Presentation Transcript

  • 1. Webinar Sponsored by Pricing in a Crisis Economy Keep your head… Stay out of trouble… Jim Geisman, founder & principal MarketShare, Inc. 35 Main Street // Suite 8 Wayland, MA 01778 Tel: (508) 647-0330 www.softwarepricing.com © 2008 MarketShare, Inc.
  • 2. Introduction About MarketShare Pricing software and systems since 1987 Address client problems Slow sales cycles Money left on table Chaotic / confusing pricing Entry into new markets / segments Help clients meet objectives Improve financial performance Strengthen competitive position Foundation for future growth © 2008 MarketShare, Inc. 2
  • 3. Introduction SaaS Innocence © 2008 MarketShare, Inc. 3
  • 4. Introduction SaaS Opportunity © 2008 MarketShare, Inc. 4
  • 5. Introduction Squash? SaaS Opportunity © 2008 MarketShare, Inc. 5
  • 6. Introduction Good News: The Model Works Salesforce.com Subscriber Base and Revenue Build $175 M raised from capital markets $90 450 $80 400 $70 350 $60 300 Subscribers (000s) Revenue ($ M) $50 250 $40 200 $30 150 $20 100 $10 50 $- 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Number of Quarters (Since Q1 FY 2004 ) © 2008 MarketShare, Inc. 6
  • 7. Introduction But It’s a Balancing Act Revenues $50.0 $40.0 R v n e ($ ) ee u M Revenues $30.0 $20.0 $10.0 $50.0 $0.0 1 2 3 4 5 $40.0 Number of Years Revenue ($M) $30.0 Slow new customer growth now $20.0 means less viral growth in future Revenues $10.0 $50.0 $0.0 $40.0 R v n e ($ ) eeu M 1 2 3 4 5 $30.0 $20.0 Number of Years $10.0 $0.0 1 2 3 4 5 Number of Years Existing Customers Upgrade Growth Unit Growth New Customers Slow viral growth (units and upgrades / options) lowers value of new customer © 2008 MarketShare, Inc. 7
  • 8. Introduction So Watch Your Step Uncertainty will last 1-2 years (58%) >2 years (28%) Impact of downturn neutral to slightly positive On SaaS industry overall (75%) For some vendors (58%) • But others will feel pain (30%) Spend more on sales, marketing, BD Find new partners Add features Expand existing channel Repackage product No differences? Do what’s right – for your company © 2008 MarketShare, Inc. 8
  • 9. Introduction Takeaways Execute the basics Attract new customers Increase viral attractiveness Don’t weaken yourself Don’t underprice Improve pricing execution Make sensible pricing decisions Don't compete on price Think before reacting to competition © 2008 MarketShare, Inc. 9
  • 10. Topics Don’t weaken yourself Deep price cuts Too few packages Generous discounts Illogical discount structure Improve pricing execution Make sensible pricing decisions Don't compete on price Think before reacting to competition © 2008 MarketShare, Inc. 10
  • 11. Don’t Weaken Yourself Deep Price Cuts Additional Volume Required to Maintain Revenues 400% Additional Volume Required % 350% 300% 250% 200% 150% 100% 50% 0% 0% 25% 50% 75% 100% Price Cut % © 2008 MarketShare, Inc. 11
  • 12. Don’t Weaken Yourself Too Few Packages Money Get more Pay less Deliverables © 2008 MarketShare, Inc. 12
  • 13. Too Few Packages Offer Packaging Alternatives Get more Money Pay more Get more Pay less Pay less Get less Deliverables © 2008 MarketShare, Inc. 13
  • 14. Don’t Weaken Yourself Generous Discounts # Units $/Unit $ Revenues 1 2000 $2,000 10 1000 10,000 50 500 25,000 100 300 30,000 250 200 50,000 1000 100 $100,000 95% discount © 2008 MarketShare, Inc. 14
  • 15. Troublesome Discounts Illogical Discount Structure Tiered Discount Schedule $2,500 Average Price per Unit $2,000 Discontinuous $1,500 Revenues $1,000 Tiered Discount Revenues $500 $250,000 $- 0 100 200 300 400 500 $200,000 Unit Volume Total Price $150,000 Average $100,000 Price $50,000 $- 0 250 500 750 1000 1250 1500 Unit Volume © 2008 MarketShare, Inc. 15
  • 16. Discount Schedule Improve Structure & Levels Tax-Table Discount Schedule # Units $ Payment + $/Unit 1-9 -0- 2000 10 - 49 18,000 1600 50 - 99 82,000 1300 100 - 249 148,000 1200 250 - 999 329,000 1050 1000 + 1,110,000 800 © 2008 MarketShare, Inc. 16
  • 17. Topics Don’t weaken yourself Don’t underprice Improve pricing execution Align pricing metric with value Use correct comparables Package for value Don’t confuse customers Don't compete on price Think before reacting to competition © 2008 MarketShare, Inc. 17
  • 18. Improve Pricing Execution Align Metric With Value Driver per loan +++ per patient +++ per user ++ per user ++ per user +++ per property +++ Per user + per student +++ per user ++ per customer +++ per user +++ per user +++ per patient +++ per employee +++ per user + per user ++ per claim +++ per bill +++ Per gallon of fuel +++ per patient +++ per shareholder +++ per user +++ per employee +++ per user + per ad +++ per property +++ per user + per reservation +++ per employee +++ per member ++ per user + per user + per user + © 2008 MarketShare, Inc. 18
  • 19. Improve Pricing Execution Align Metric With Value Driver per loan +++ per ad +++ per patient +++ per bill +++ per user ++ per claim +++ per user ++ per customer +++ per user +++ per employee +++ per property +++ per employee +++ Per user per student + +++ per employee Per gallon of fuel +++ +++ Vertical markets per user ++ per loan +++ per customer +++ per patient +++ Aligned with per user +++ per patient +++ per user per patient +++ +++ per patient per property +++ +++ customer’s business per employee +++ per property +++ per user + per reservation +++ per user ++ per shareholder +++ per claim +++ per student +++ per bill +++ per member ++ Per gallon of fuel +++ per user +++ per patient +++ per user +++ per shareholder +++ per user +++ per user +++ per user +++ per employee +++ per user ++ per user + per user ++ per ad +++ per user ++ per property +++ per user ++ per user + per user + per reservation +++ per user + per employee +++ Per user + per member ++ per user + per user + per user + per user + per user + per user + per user + © 2008 MarketShare, Inc. 19
  • 20. Improve Pricing Execution Align Metric With Value Driver per loan +++ per ad +++ per patient +++ per bill +++ per user ++ per claim +++ per user ++ per customer +++ per user +++ per employee +++ per property +++ per employee +++ Per user per student + +++ per employee Per gallon of fuel +++ +++ Vertical markets per user ++ per loan +++ per customer +++ per patient +++ Aligned with per user +++ per patient +++ per user per patient +++ +++ per patient per property +++ +++ customer’s business per employee +++ per property +++ per user + per reservation +++ per user ++ per shareholder +++ per claim +++ per student +++ per bill +++ per member ++ Per gallon of fuel +++ per user +++ per patient +++ per user +++ per shareholder +++ per user +++ per user +++ per user +++ per employee +++ per user ++ per user + per user per user ++ ++ Horizontal and vertical per ad +++ per property per user +++ + per user per user ++ + markets per reservation per employee +++ +++ per user Per user + + Sometimes aligned per member ++ per user + per user + per user + per user + per user + per user + per user + © 2008 MarketShare, Inc. 20
  • 21. Value-Aligned Pricing Metric An Example Per-Connection Pricing + Type of Connector © 2008 MarketShare, Inc. 21
  • 22. Value-Aligned Pricing Metric Selection Guidelines Aligned with customer’s business Path to revenue Financial-enhancing usage Revenue-generating users Scales with value delivered Can be estimated for budgeting Accuracy less important Should be “wired” into application License servers, keys Transaction counters © 2008 MarketShare, Inc. 22
  • 23. Improve Pricing Execution Use Correct Comparables $45.0 $40.0 $35.0 Perpetual Perp + M&S Fee Software Fee Cume Payments ($K) $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $- 0 4 8 12 16 20 # Quarters © 2008 MarketShare, Inc. 23
  • 24. Improve Pricing Execution Use Correct Comparables $45.0 $40.0 $35.0 Perpetual Perp + M&S Fee Software Fee Cume Payments ($K) $30.0 $25.0 $20.0 $15.0 SaaS Breakeven $10.0 $5.0 $- 0 4 8 12 16 20 # Quarters © 2008 MarketShare, Inc. 24
  • 25. Improve Pricing Execution Use Correct Comparables $45.0 $40.0 $35.0 Perpetual Perp + M&S Fee Software Fee Cume Payments ($K) $30.0 $25.0 $20.0 $15.0 SaaS Software-Only Breakeven SaaS Software $10.0 PLUS Hosting Breakeven $5.0 $- 0 4 8 12 16 20 # Quarters © 2008 MarketShare, Inc. 25
  • 26. Improve Pricing Execution Package for Value Take Away Build Up How little needed to How much needed to beat price? justify price? © 2008 MarketShare, Inc. 26
  • 27. Improve Pricing Execution Don’t Confuse Customers © 2008 MarketShare, Inc. 27
  • 28. Topics Don’t weaken yourself Don’t underprice Improve pricing execution Make sensible pricing decisions Don't compete on price Find your niche Be flexible Don’t get trampled © 2008 MarketShare, Inc. 28
  • 29. New Product Elements Find Your Niche SaaS Benefits Customer Types to Target No / low need for internal IT No IT budget Web-delivered application Rapid deployment Monthly payment Cashflow sensitive Pay as you use Uncertain usage Low upfront cost Price sensitive SaaS Drawbacks Customer Types to Avoid Flexibility Need custom solution Integration Legacy apps Security Risk averse © 2008 MarketShare, Inc. 29
  • 30. Don’t Compete on Price Be Flexible with Payments Up-front vs Ongoing Cume Payments DCF of Upfront + 5 ongoing payments @10% Discount Rate 120 100 Pay less upfront 80 Up-front Payment 60 40 20 0 0 5 10 15 20 25 30 Ongoing Payment © 2008 MarketShare, Inc. 30
  • 31. Don’t Compete on Price Be Flexible with Payments Up-front vs Ongoing Cume Payments DCF of Upfront + 5 ongoing payments @10% Discount Rate 120 100 Pay less upfront 80 Up-front Payment 60 40 20 0 0 5 10 15 20 25 30 Ongoing Payment © 2008 MarketShare, Inc. 31
  • 32. Don’t Compete on Price Be Flexible with Payments Up-front vs Ongoing Cume Payments DCF of Upfront + 5 ongoing payments @10% Discount Rate 120 150 100 140 Pay less Pay more upfront overall 80 130 Up-front Payment Cume Payments 60 120 40 110 20 100 0 90 0 5 10 15 20 25 30 Ongoing Payment © 2008 MarketShare, Inc. 32
  • 33. Don’t Compete on Price Avoid Being Trampled © 2008 MarketShare, Inc. 33
  • 34. Avoid Being Trampled NetSuite Financials* Revenues Up 44% ($40 vs $28M) Gross margin Down 4 points (66% vs 70%) • 6% decline Sales & Marketing Up $6M (40% growth) Still 50% of revenues Operating Cashflow More negative (-$6M vs. -$1.8M) * Q3 2008 vs Q3 2007 © 2008 MarketShare, Inc. 34
  • 35. Wrap-Up Execute the basics Attract new customers Increase viral attractiveness Don’t weaken yourself Don’t underprice Improve pricing execution Make sensible pricing decisions Don't compete on price Think before reacting to competition © 2008 MarketShare, Inc. 35
  • 36. Wrap-Up Final Thoughts Align price with value Use packaging to add value Link payment timing to value delivery Test prices, packages, offerings Watch billings and cashflow © 2008 MarketShare, Inc. 36
  • 37. Wrap-Up Are Things Really This Bad? SW Index SaaS Index © 2008 MarketShare, Inc. 37
  • 38. Wrap-Up Maybe Not! http://tinyurl.com/no-decline © 2008 MarketShare, Inc. 38
  • 39. Thanks! Jim Geisman jimg@softwarepricing.com 508 – 647 – 0330 © 2008 MarketShare, Inc. 39