Make your software pricing model work harder tma 9-10

Make Your Software Pricing Model Work Harder – So You Don’t Have To Don’t Jim Geisman Software Pricing Partners, Inc. 22 September 2010 35 Main Street • Wayland, MA 01778 • (508) 647-0330

Introduction Software Pricing Partners  Unique focus since 1987  Pricing and business models  Software-based offerings  Vendor-side, B2B clients  Practice areas  Value-Driven Pricing  Value-Based Selling  Strategic Discounting  Project results  Enhance value from products & services  Improve financial performance  Increase sales effectiveness © Software Pricing Partners, Inc All Rights Reserved -2-

Many Pricing Models Elements X Full custom 99 cent app Flat rate Deal Pricing Price Details Freemium List Prices Scheduled Discounts Perpetual, subscription Packaging & Licensing Multi-tier packages Value Metric Per-user, per-click CPU power © Software Pricing Partners, Inc All Rights Reserved -4-

Pricing Model Deal Pricing Price Deal Pricing Price Details Details List Prices List Prices Scheduled Discounts Scheduled Discounts Packaging & Licensing Price Packaging & Licensing Structure Value Metric Value Metric © Software Pricing Partners, Inc All Rights Reserved -5-

This Morning  Learn something about pricing models  Appreciate importance of “good” pricing model  Current trends and impact  Some things you can do yourself © Software Pricing Partners, Inc All Rights Reserved -6-

Pricing Models Central to Business Model Attractive Acquire Offering Customers Generate Visibility Margin Price Details Price Finance Structure Satisfy Growth Customers Upsell Expand More User Base Improve product © Software Pricing Partners, Inc All Rights Reserved -8-

Pricing Models Drives Funding Requirements Capital Revenue Spread Cost Invoice Related Invoice Customer Related Customer Size Volume Count Costs Pricing Pricing Model Model Growth Rate Growth Rate © Software Pricing Partners, Inc All Rights Reserved -9-

Pricing Models Common Problems  Hard to develop, change, administer  Often hard to understand… … harder to explain  Interfere with selling  Longer sales cycle  Aggravate discounts  Depress gross margins  Low prices  High discounts © Software Pricing Partners, Inc All Rights Reserved - 10 -

Trends and Impact Web Everywhere  Web is everywhere  More web apps Simple pricing  B2C influencing B2B  Customer expectations Bite-sized packaging  Virtualization increasing Usability influences value  Emerging revenue models Easy to try / buy / use  Commoditization continues © Software Pricing Partners, Inc All Rights Reserved - 13 -

Trends and Impact Virtualization increasing  Web is everywhere  Virtualization increasing  Use is accelerating App tracking harder  Hardware less important  Clouds-in-clouds Hardware-based metrics harder to use  Emerging revenue models Usage data available  Commoditization continues Hosted model more popular © Software Pricing Partners, Inc All Rights Reserved - 14 -

Trends and Impact Revenue Models  Web is everywhere  Virtualization increasing  Emerging revenue models  Perpetual under fire Payment options  Subscription rising  Slow ramp-up Pay for actual use  Commoditization continues Pricing “latency” Lower price points © Software Pricing Partners, Inc All Rights Reserved - 15 -

Trends and Impact Commoditization continues  Web is everywhere  Virtualization increasing  Emerging revenue models  Commoditization continues  Low entry cost Increased competition  Tech availability  Short lifecycles More me-too products Agility is critical Less room for error © Software Pricing Partners, Inc All Rights Reserved - 16 -

Trends and Impact Impact Price-focused Competition Even more features Smaller chunks Product On-demand, as needed More self-service Purchasing Easy to try and scale More OpEx funding Economics, TCO Decision-making Perceived value Web is key Sales Channels less important Less outside sales © Software Pricing Partners, Inc All Rights Reserved - 17 -

Trends and Impact Build Strong Competitive Offering Price-focused Competition Even more features Offering Characteristics  Create “real” + obvious value Smaller chunks Product On-demand, as needed  Charge for value created More self-service  Few, simple packages Purchasing Easy to try and scale More OpEx funding  Tailored configurations Decision-making Economics, TCO  Service (+ services?) Perceived value  Limit use of perpetual licenses Sales Web is key Channels less important  Discounting framework Less outside sales  Price levels in line with value  Policy-driven discounts  Multiple delivery models  Self-service / administration  Payment options © Software Pricing Partners, Inc All Rights Reserved - 18 -

Moving Forward Get Pricing Model to Do More Work Offering Characteristics  Create “real” + obvious value  Charge for value created  Few, simple packages Deal Pricing Price  Tailored configurations Details List Prices  Service (+ services?) Scheduled Discounts  Limit use of perpetual license Packaging & Licensing  Discounting framework Value Metric  Price levels in line with value  Policy-driven discounts  Multiple delivery models  Self-service / administration  Payment options © Software Pricing Partners, Inc All Rights Reserved - 20 -

Get Pricing Model Right Starts With the Basics  Understand customer business  Where is value created  Value impact  Clarify use cases  Tasks  Usage  Scaling  Trial / Pilot  Diffusion  Find the “sweet spot”  Primary metric  Customer fit © Software Pricing Partners, Inc All Rights Reserved - 21 -

Moving Forward Build Solid Foundation Details Deal Pricing Price Details List Prices Scheduled Discounts Scheduled Discounts Packaging & Licensing Packaging Licensing Value Metric Structure © Software Pricing Partners, Inc All Rights Reserved - 22 -

Build Solid Foundation Align Metric With Business per loan +++ per user +++ per patient +++ per user +++ per user ++ per user +++ per user ++ per user +++ per user +++ per user ++ per property +++ per user ++ Per user per student + +++ per user per user ++ ++  Horizontal and vertical markets per user ++ per user per user + +  Sometimes aligned per customer +++ per user +++ Per user + per user +++ per user + per patient +++ per user + per employee +++ per user + per user + per user + per user ++ per ad +++ per claim +++ per bill +++ per bill +++ per claim +++ Per gallon of fuel +++ per customer +++ per patient +++ per employee +++ per shareholder +++ per employee +++ per user +++ per employee +++ per employee per user +++ + Per gallon of fuel per loan +++ +++  Vertical markets per ad per property +++ +++ per patient per patient +++ +++  Aligned w/ customer’s business per user + per patient +++ per reservation +++ per property +++ per employee +++ per property +++ per member ++ per reservation +++ per user + per shareholder +++ per user + per student +++ per user + per member ++ © Software Pricing Partners, Inc All Rights Reserved - 23 -

Build Solid Foundation Packaging and Licensing  Package and value steps  Anchor packages  Relative value  Entry level, upsell and options  Try / buy / use logic  Standard vs. custom configurations  Hosting location  Expectations  Services  Services © Software Pricing Partners, Inc All Rights Reserved - 24 -

Build Solid Foundation Licensing  Unlimited term  Perpetual  One-time payment  Limited term  Subscription length  Billing cycle • Recurring payments  Product changes  Updates  Upgrades © Software Pricing Partners, Inc All Rights Reserved - 27 -

Build Solid Foundation Scheduled Discounts  Introductory  Accelerate new product uptake  Time-limited  Purchase sooner  Contract length  Longer commitment  Bundle  Increase transaction value  Volume-based  Increase unit or dollar volume  Upgrade  Trade-up, upsell  Segment focused  Industry, customer type © Software Pricing Partners, Inc All Rights Reserved - 30 -

Build Solid Foundation Freemium Is a Scheduled Discount Perhaps, the most important aspect is how Evernote uses its payment model… Evernote, which has just secured $10-million (R73-million) in financing, is a great example of this. It's free for 40 megabytes per month (or about 20000 text notes); or $5 I've never had to upgrade to the (R37) a month or $45 (R330) a year. premium given my usage (and the small ad is hardly intrusive), but I gladly would… Such aggressive offerings have forced Microsoft to look at similar rent-to-use models that are themselves part of a broader online trend, called software-as-a-service. Evernote has been nominated this year for two notable online awards: Mashable's Open Web Awards and TechCrunch's Crunchies. It's my app of the year. © Software Pricing Partners, Inc All Rights Reserved - 31 -

Moving Forward Tend to the Details Details Deal Pricing Price Details List Prices Scheduled Discounts Packaging & Licensing Value Metric Structure © Software Pricing Partners, Inc All Rights Reserved - 32 -

Tend to the Details Perception Is Reality  Customer perceptions are malleable  Good value not enough  Personal and project risk  Psychology at work  Anchoring  Value of “FREE”  Loss aversion © Software Pricing Partners, Inc All Rights Reserved - 39 -

Summary Pricing Model Impact Order Size Price Customer Levels Growth & Steps Rate Functionality Viral Unit Bundles Growth Rate Commitment Upgrade Length Rate Retention Driven By Pricing Model Rate © Software Pricing Partners, Inc All Rights Reserved - 41 -

Summary Start Now  Take customer perspective  More than price levels  Find and eliminate sales friction  Use systematic approach  Run the numbers  Execution is (always) key  Roll out changes gradually  Takes time and experience © Software Pricing Partners, Inc All Rights Reserved - 43 -

Thanks! Jim Geisman 508-647-0330 jimg@softwarepricing.com Software / SaaS Pricing Workshops San Jose 10/14 (after SoftSummit) Boston 11/11 (after SaaS University) http://bit.ly/SW-SaaS-Pricing-Workshop © Software Pricing Partners, Inc All Rights Reserved - 45 -

Make your software pricing model work harder tma 9-10

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