Software Pricing:
Getting Back to Growth
By John Hanson, Sarvajna Kazi and Raymond Florio
Software Pricing:
Getting Back to Growth

Software vendors are rapidly running out of room to grow organically.
Figure 1: A host of factors is conspiring to make software vendors’
challenges much more difficult to resolve

Industry ...
Figure 2: Reasons why software vendors change pricing and
licensing policies

Improve relations with
Figure 3: Average satisfaction with pricing and licensing strategy

How to price                                  Software as a service is getting the
Figure 4: Software companies need to think about all their sources
of revenue
                                Example of P...
Figure 5: Price-setting factors

                                              Software Price Waterfall

Price Setting  ...
In our experience, pricing initiatives
that stop at the strategy level are
neither scalable nor sustainable.

4. Use pr...
About Electronics                           has assisted many of the Fortune 100
Upcoming SlideShare
Loading in...5

Software Pricing: Getting Back to Growth


Published on

Published in: Technology, Business
  • Be the first to comment

  • Be the first to like this

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Software Pricing: Getting Back to Growth

  1. 1. Software Pricing: Getting Back to Growth By John Hanson, Sarvajna Kazi and Raymond Florio
  2. 2. Software Pricing: Getting Back to Growth Software vendors are rapidly running out of room to grow organically. Enterprise software players are boxed in by increasingly budget-conscious buyers and by their own entrenched culture of deep discounting. Vendors of packaged software are battling runaway SKU complexity and channel partners’ demands. And both groups are still grappling with the software- as-a-service model—as both threat and opportunity. What’s needed now is a disciplined approach to pricing that combines rules-based process standardization and controls with the flexibility to offer different prices to different customer segments. Somewhere in the world right now, it’s introduced in a way that will make The heart of the problem is that organic very likely that a salesperson is closing a things harder for the vendor. It is growth will never again be what it was multimillion dollar deal for an enterprise being offered in an array of bundles in the software industry’s “go-go” years. software bundle. That’s good—except for different customers, countries Growth through mergers and acquisitions that it’s also very likely that the deal is and channels so there are literally will only exacerbate the problem of tepid being clinched largely on the strength of thousands—perhaps tens of thousands— organic growth. New online software off-list discounts of up to 70 percent. of SKUs for what is really one product. delivery models such as software-as-a- It makes for more price points than the service (SaaS) are adding to the overall The company’s executives really won’t channel can digest—and a more complex complexity. (See sidebar: “How to price know until the end of the next closing channel management problem than is SaaS?”) “Knowledge workers want period what the actual sales price was, good for any software vendor. This will products that work like Google,” noted how deeply any part of the bundle was only get worse in the months ahead, one attendee at Accenture’s 2007 CIO discounted or what other concessions with new releases, new versions and new Council Forum. Overall, capturing value were made to close the sale. They will channel partners. will become even more critical as the certainly not be able to answer critical breadth of products, customers and questions such as “Are we leaving money Both sector scenarios are approaching channels continues to expand. on the table?” or “Are we really in critical points and both are pointing danger of losing this deal on price?” And to potential crisis. Top-line growth Yet, software vendors are proving they may pause for just a moment to has never been harder for software to be their own worst enemies. It is ponder whether it’s worth having a list vendors—or more necessary. Research firm impossible to overstate how much they price at all. Forrester Research projects that software have trained their customers to buy at investments will grow much more slowly the last moment—when products are “on There’s also a good chance that a in 2008.1 Vendors such as Oracle are sale” and the sales rep can be counted on packaged software vendor is launching relying heavily on acquisitions for growth. to over-discount and is likely to include a new product right about now. But And venture capital is no longer flowing the product is almost certainly being strongly toward the software sector. 1 “Forrester Revises 2008 Outlook for US and Global IT Purchases,” Forrester Research press release, Feb 11, 2008,1769,1195,00.html 2
  3. 3. Figure 1: A host of factors is conspiring to make software vendors’ challenges much more difficult to resolve Industry Maturity New Business Models (Slower growth, (term, SaaS, Open customer sophistication) Source, etc.) Competition ISV Pricing Strategy New Markets and Capabilities Technology Factors Acquisitions (Multicore, SoA) Source: Accenture lots of “free” software and services such embedded software or other software those with whom the contract must be as support and training to sweeten the that is closely tied to specific hardware signed. Typically, price comes to the fore deal. Vendors bring very little discipline platforms). Many of these challenges again. Tell those professional buyers that to discounting; analyses of transaction may seem familiar to readers.4 But the their business-side leaders have blessed data consistently reveal enormous, mandate now is to move from analyzing the deal—that they think the solution unmanaged variance in deal economics. the problem to taking specific steps to adds value—and the response may well return to profitable growth using the be something like “Great, but my job is to Growth should be all about getting the right kinds of pricing capabilities. make sure it adds even more value.” most valuable price, with price strategy and execution as the software sector’s Roots of the problem Competition isn’t easing up, and key enablers of profitable growth.2 acquisitions continue to reverberate Independent studies confirm a widening There is no single cause behind the around the industry. Consolidation affects gap between what software vendors software sector’s pricing difficulties packaged and enterprise software sectors; offer in terms of licensing and pricing (See Figure 1). For a start, the software both are seeing the axis of competition and what enterprise customers actually industry is maturing and customers are shifting from products to product suites want. Vendors with more flexible and leaning harder on vendors, due to the and integration, adding SKU complexity. advanced pricing and licensing strategies overall slowdown in IT investments. Leaders in both categories are pushing typically experience better relations More and more enterprise customers are rapidly into emerging markets, provoking with their customers as well as greater dedicating purchasing professionals to a new set of challenges—issues such as revenue and faster sales cycles.3 (See the task of evaluating and negotiating new channels, go-to-market partners, sidebar: “The benefits of pricing right.”) with IT vendors. So even when the sale has been made to the business leader 2 “How to build a powerful pricing capability,” Outlook, 2007, Number 1, Accenture This document will dissect the on the basis of ROI and when the 3 “Key Trends in Software Pricing and Licensing: A Survey challenges facing business leaders CIO is happy that the solution can be of Software Industry Executives and Their Enterprise in enterprise software and packaged implemented, integrated and managed, Customers,” ECPweb, Macrovision, SoftSummit, CELUG, and EDA Consortium, November 2007, http://www. (“desktop”) software (we will not discuss it is increasingly necessary to confront Report_2007.pdf 4 “Staying power,” Outlook, 2007, Number 3, Accenture 3
  4. 4. Figure 2: Reasons why software vendors change pricing and licensing policies Improve relations with 37% customers Generate more revenue 29% Accelerated sales cycle 19% Decreased development costs 6% N/A or none of the above 5% Free up R&D resources 4% 0 5 10 15 20 25 30 35 40 % of Software Vendors Sources: SoftSummit et al piracy, localization and competition. And The importance of At the same time, on the enterprise side, enterprise software providers are starting better pricing SAP is adding mid-market offerings and to target small- to mid-sized businesses, pricing structures that are quite different a move that adds enormous complication Accenture’s analysis points to from its traditional large enterprise to existing pricing strategies. substantial opportunities for pricing to licensing model. Providers have also drive top-line growth in a post-boom segmented their markets tightly by New business models are also having software market. Well-planned price region—for instance, most software an impact: SaaS online delivery models strategy and execution are integral to companies vary their desktop software in particular are attracting plenty of profitable growth. The software vendors pricing by geography (North America, attention. Participants at Accenture’s that are proactively reworking their Europe, etc.); by vertical segment such 2007 CIO Council Forum noted that the pricing and licensing policies are doing as “government” or “education” and by growing costs and complexity of legacy so with such business goals in mind (See bundles, which provide users with lower enterprise applications would help Figure 2). costs per product while vendors get facilitate a solid future for subscription- stronger lock-in. based software. Open source is steadily Discrete efforts to date have yielded making inroads and technology good results. Many software providers However, software providers now need developments are moving apace: service- from both camps have made greater to demonstrate that they can take their oriented architecture (SOA) frameworks use of segmentation. For example, pricing capabilities up several notches. are gaining ground, encouraging IT Microsoft has multiple portfolio Third-party research indicates that leaders to rethink their long-held beliefs offerings to allow it to hone in on many vendors are still not listening to about software development. slightly different needs; its new Vista their customers: more than twice as operating software comes in five many vendors as enterprise customers packages—Home Basic, Home Premium, are satisfied with their pricing and Business, Ultimate and Enterprise. licensing strategies (See Figure 3). 4
  5. 5. Figure 3: Average satisfaction with pricing and licensing strategy 59% Software Vendor 55% 57% 31% Enterprise 27% 28% 0 10 20 30 40 50 60 % Satisfied 2007 2006 2005 Sources: SoftSummit et al Specifically, Accenture believes that activities—understanding customers’ overhead and encourages gray-market vendors have to start thinking and acting changing requirements in order to sell activity. Channel partners struggle to in terms of a broad set of on-demand on value, identifying and planning for figure out which price is applicable services rather than just segmenting their conversations with new economic buyers, for which SKU in which situation. customers ever more finely. Also needed: and much more. And customers continually see pricing enhanced price-setting capabilities that inconsistencies among offerings. allow software providers to better manage In packaged software, the fundamental complexities and cope with the SKU issue is SKU proliferation. Vendors treat At the same time, price setting and explosion that the move to segmentation every SKU and offering differently from analysis are more difficult to execute. has created. a pricing standpoint, leading to far too Spreadsheet tools and ad hoc analyses many price points. Large software vendors can’t keep up with the soaring volume Challenges to stronger today are facing millions, if not tens of of prices and customer/channel partner pricing capability millions, of price points with only a small demands. For the same reason, it is percentage of them being used in actual increasingly difficult for sales reps or There are three main areas where transactions. One of the first knock-on channel partners to get timely, accurate software vendors are struggling with effects of creating unique price points for pricing information when preparing pricing. First, product managers and each item is that it takes longer to bring bids. It’s no wonder that managers and marketing managers are hard-pressed an offering to market. It’s more difficult to sales reps have little time to focus on to make smart decisions about price change prices quickly. It also makes pricing understanding customer needs. setting. Then there is the soaring activities harder to manage; too much difficulty of price administration and time is spent on pricing administration, The story is not dissimilar in enterprise publishing—how to capture, code and publication, communication and approval. software. There, the core problem communicate pricing decisions to internal is undisciplined deal management, sales teams and to the channel—and The problems with price-point where different customers end up in ways that are comprehensible to proliferation don’t stop there. It paying widely varied prices for the customers too. And there are formidable exacerbates errors in order entry and same solution, either due to the sales challenges to the mechanics of sales order management, inflates maintenance relationship or to legacy behaviors such 5
  6. 6. How to price Software as a service is getting the attention of IT leaders. According to It’s important to note that SaaS is more than just an “online” version of existing Gartner, it will make up a quarter of the software. Along with its new delivery SaaS? $220 billion-a-year software industry model, SaaS introduces fundamental by 2011. One attendee at Accenture’s changes in core features, packaging, 2007 CIO Forum was bullish on the integration and associated services. As SaaS model because of the cost and a result, SaaS pricing needs to follow complexity of upgrades needed for the practices associated with the launch enterprise applications. “It’s almost more of completely new products rather than reinstall than upgrade,” he said. just slight modifications of existing pricing schemes. The problem is that SaaS pricing is still very much in its infancy. Most providers One potential solution involves pricing don’t yet know whether to price by user, the solution, not just the software, to minute, month or some other metric. a single standard. Providers already SLAs, help desk policies and upgrade have access to the tools and techniques schedules can vary widely. And it is needed for “solution-based” pricing. For not clear how business users perceive example, sophisticated market research the pricing position. Already, many techniques can test different price customers are starting to feel “nickel- points and standards to see how buyers and-dimed”—which will stiffen their perceive the value of different add-ons. resistance to any additional fees for services and upgrades. as waiting until the end of the quarter A few examples from Accenture’s client and there is no workflow process to to make purchases. Software vendors work illustrate the range of challenges that help confirm that sales reps stick to often don’t know when they are over- software companies are wrestling with— discounting guidelines. To lower costs, discounting, or when they are losing and the opportunities they can expect: improve response times and increase sales by keeping prices too high. customer satisfaction, the company A software provider with a broad suite is requiring a combination of systems Purchasing of enterprise software is of enterprise applications is trying to improvement and change management to increasingly driven by the CIO’s budget, transform itself for growth by shifting drive more disciplined sales force behavior. not by the user’s needs or value potential. from all-direct sales to making greater Meanwhile, salespeople continue to use of channels and from negotiating Another large enterprise software discount late-quarter deals to make a single “umbrella” master agreement organization has never had good price their quotas. Deals are won at lower covering all products to implementing analytic capabilities for understanding its prices than necessary, and some may not more transactional, solution-specific deal economics. To increase its margins, even be worth it. Yet while very small pricing. Its efforts to transform along both the company is working with Accenture to transactions may be discounted very dimensions simultaneously are requiring identify and understand systematic over- steeply, large and important deals can significant changes in pricing architecture, discounting practices by solution, industry, be lost due to the lack of a satisfactory business processes, sales strategy and region and customer class. A key objective discount, with high-revenue customers CRM/pricing systems infrastructure. is to identify and leverage those products sometimes receiving smaller discounts and accounts where the company really than very low-revenue customers. Part of A similar company with an even broader has differentiated pricing power. that problem is that sales managers and portfolio of enterprise applications is executives do not have clear, accurate striving to boost its profit margins by A large software company with a broad guidelines for negotiations. And in improving the quote preparation process. set of packaged products is struggling enterprise software applications, loose Its current capabilities are limited: with the scalability of its pricing and fragmented pricing processes can the interface of the quoting system is systems. Pricing involves extensive make it tough to manage pricing. awkward, response times are slow, the reliance on manual tasks and it typically price and discount guidelines it provides takes several months to set new product to the sales force are often out of date, 6
  7. 7. Figure 4: Software companies need to think about all their sources of revenue Example of Pricing Components Revenue Initial Services Variable Modules Horizontal Fixed Modules Ongoing Services Premium Version Platinum—25% p.a. Gold—20% p.a. Standard Version Silver—15% p.a. Entry Version Maintenance Fee Year 0 Year 1 Year 2 Year 3 Year 4 Perpetual Fee Recurring Fee Source: Accenture pricing. As a result, the company loses 1. Review the core business model in transactional processes to clearly reveal out on many promotion opportunities. It light of the potential impact of new each discrete pricing and discounting is implementing new pricing systems to offerings, term licenses and SaaS action that leads either to the final or streamline and automate price setting components pocket price. Leading-edge companies and administration processes. have standardized their price-setting Companies need to think about all frameworks and variables across product A large software company is running the sources of revenue—not just the groups and business units (See Figure into challenges with scaling up and initial licensing sale but the associated 5). The standardization helps with managing the job of publishing its prices sales of optional components, services, scalability and development of insights to its thousands of channel partners. online offerings and ongoing service into when and how much to charge and The company already has millions of components (See Figure 4). In some to discount. price points, and is expecting many more cases, management may need to with the arrival of new SaaS offerings. completely rethink the company’s 3. Implement “formula” or rules-based It is not practical to continue with its packaging, bundling and pricing schemes. pricing to help salespeople construct traditional approaches of publishing long deals price lists every month. The company is 2. Standardize pricing approaches (not investigating rule-based, dynamic price necessarily pricing strategies) across For a long time, industrial companies publication capabilities. product lines have set pricing rules, supported by analytic and business process automation Action stations Today, some leading software firms tools, to structure their varied deals. can speak to only their list prices Software companies should do the same Some solutions are emerging. and the discounts associated with now that they are finding themselves Accenture’s work with a range of particular deals. But those that have with many more SKUs than before. software companies reveals several key mastered pricing practices organize best practices which companies can their price setting, licensing and begin to develop immediately: 7
  8. 8. Figure 5: Price-setting factors Software Price Waterfall Price Setting Licensing Standard Off Invoice Direct Production Reconciled with (single copy) Schemes Channel Costs Items and Service Costs Conventional P&L Platform Version Volume Segment Segment Customer Deal Discount Channel Margin Rebates Credit Other Channel Costs Royalties Other Direct Costs Overhead Base List Target End Channel Pocket Margin CD Price Price User Prices Price Price Price Price Source: Accenture The benefits of Systematically reducing discounting among existing customers Greater efficiency of pricing processes pricing right • Improved sales force productivity— • Less variance in deal setting—very clear guidelines for negotiations small transactions, if not worth it, get streamline the process and free up time Software companies that are highly flushed out while very important deals for more valuable activities focused on building their pricing are appropriately priced capabilities are realizing significant • Improved time to market benefits in the form of sustainable • More consistent pricing throughout revenue and margin growth by: the quarter, thanks to better sales force • Reduction in administration control and transaction errors Better pricing of net-new business • Less costly and less manual quote-to- fulfillment processes • Better responsiveness to individual customer deals Greater scalability • Increasing average transaction • Greater visibility, integration and price at the segment level automation for pricing capabilities • Accurate quoting and disciplined • New pricing systems are easily scalable sales behavior to accommodate new SKUs and models 8
  9. 9. In our experience, pricing initiatives that stop at the strategy level are neither scalable nor sustainable. 4. Use pricing applications to enable central point with total ownership. To grow prohibitive. If they do not change course on best-practice pricing top-line revenue organically, software firms pricing soon, they will find profits sinking, will need to address core issues of pricing opportunity costs soaring and lower returns In the last few years, several technology governance and accountability. For large from the acquisitions on which they solutions have emerged that provide companies, a central “pricing group” can already rely on for growth. critical analytic insights to support coordinate several pricing activities and segmented price setting by improving help implement leading pricing practices. What’s needed now is a break with understanding of the provider’s pricing traditional approaches to pricing. It is time power. These solutions also help In our experience, pricing initiatives that for less gut reactions and more facts—time standardize and control pricing activity. stop at the strategy level are neither to develop and apply superior pricing Price management solution companies— scalable nor sustainable; a true pricing capabilities using “scientific” approaches for example, Vendavo, PROS, Zilliant, transformation has to incorporate an that marry rules-based pricing, pricing and Vistaar—are rapidly implementing implementation plan if it is to have any discipline and standardization with more capabilities in their solutions to make them chance of succeeding. A pricing makeover effective customer segmentation and a suitable for software/high-tech markets. will take time, investment and commitment better understanding of how to put scale Enterprise software companies SAP and at all levels to elevate these new pricing to work. Oracle have shown keen interest in pricing capabilities; there will assuredly be pain, and are actively strengthening their roadblocks and missteps—none of which Those fact-based approaches are entirely offerings in this area through partnerships, can be an excuse for doing nothing. practical today. The software providers that acquisitions and internal development. are quickest to adopt them wholeheartedly Wrap-up will be the first to unlock new growth 5. Focus on organizational improvement opportunities and to build the capabilities As things stand now, both enterprise necessary for facilitating sustainable Pricing is a deeply cross-functional software providers and vendors of packaged business platforms. And the vendors business process, with partial ownership in applications are headed for significant that continue to act as if today’s pricing product management, product marketing, problems. There can be no question of the policies will be effective ad infinitum? finance and sales—and therefore, no urgency to take pricing capabilities to the Their CEOs can expect sharper questions next level; the costs of doing nothing are from shareholders before too long. 9
  10. 10. About Electronics has assisted many of the Fortune 100 electronics and high-tech companies and & High Tech 40 of the 51 electronics and high-tech companies in the Global Fortune 500. We Accenture’s Electronics & High tech have provided timely, innovative insights industry group offers management and services that help our clients become consulting, technology-strategy and faster-growing, more profitable and implementation services to all segments more efficient businesses geared toward of this exceptionally dynamic industry. achieving high performance. Our industry group consists of six primary segments: Consumer Technology, Semiconductor, Communications Technology, Enterprise Technology, Network & Software Business, and Aerospace/Defense. To companies in each of these areas, we provide an array of services and skills, including design and implementation of enterprise resource management, customer relationship management and supply chain management systems; business process outsourcing; software development and testing; new product innovation and management; post-merger systems and business integration. Accenture Copyright © 2008 Accenture All rights reserved. About Accenture Accenture is a global management Accenture, its logo, and consulting, technology services and High Performance Delivered outsourcing company. Combining are trademarks of Accenture. unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With 178,000 people in 49 countries, the company generated net revenues of US$19.70 billion for the fiscal year ended Aug. 31, 2007. Its home page is