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PRICING ADVISOR
    The                                                                                                              3535 Roswell Road, Suite 59
                                                                                                                     Marietta, GA 30062
                                                                                                                     770-509-9933
    A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n                                               www.pricingsociety.com



Segment Your Way to Greater Profits
                                                                   power. Raychem made heat-shrinkable           within specific organizations without
    Bruce La Fetra, Senior Marketing                               tubing that was used in commercial, au-       undercutting the high prices paid by ex-
    Consultant for Rubicon Consulting,                             tomotive, industrial and military appli-      isting customers. The most problematic
                                                                   cations. While the company had dozens         scenario is when the same or similar
    examines how software companies                                of chemical formulations, a couple were       applications are used by different user
    often fail to understand how different                         sold into all of these markets, each at a     sets for business-critical and non-criti-
                                                                   different price with a low-to-high range      cal tasks.
    customer groups value their products.                          of about 3X. While the tubing came off
    This leads to firms’ offering both ex-                         the same production line—often the            Business-critical users (Business Profes-
                                                                   same run—each run was only tested to          sionals) are willing to pay top dollar.
    cessive price discounts and too many                           the relevant specification for the intended   They may not be happy about it, but in
    licensing vehicles. La Fetra shows how                         market. Since applications ran the gamut      the absence of close competitors, they
                                                                   from exposure to hydraulic fluid in a M1      have few alternatives. At the same time,
    companies can develop an integrated                            Abrams tank to strain relief in consumer      there may be untapped, broader market
    approach that targets the right pricing                        electronics, the QA certification was im-     opportunities with users who are will-
                                                                   portant. This gave the company total pro-     ing to pay only a fraction of the amounts
    strategy and product offerings to the                          tection against customers buying a lower      paid by Business Professionals. How
    groups he defines as “Business Profes-                         grade product even though some knew it        does the vendor aim high and low at the
                                                                   came off the same production run as “the      same time?
    sionals,” “Aspirants” and “General                             good stuff” that went into military and
    Users.” For more information, you                              space hardware. The varying usages drove  Most sellers respond to this situation by
                                                                   different pricing for the same product.   creating an entry-level or “light” version
    can reach Bruce at: 408-395-3910.                                                                        of their application that they can feature,
                                                                   What’s at Stake                           and functionally differentiate, from the




W
                                                                   Many vendors face a similar               premium version. With only two user
                       hy do software vendors                      problem: they have multiple volume        sets, this solution works well and gener-
                       offer so many buying ve-                    licensing vehicles, but target them       ally is advisable. The situation gets more
                       hicles?                                     indiscriminately at the entire user base  complicated when there is a mid-market
                                                                   with the well-meaning intent of giving    set of price aware users. These purchas-
                   Most companies say they                         customers more buying options. There is ers are eager to use the high-end appli-
want to give customers multiple options,                           nothing unusual                                                     cations, but are
or they do it simply because “everyone                             about these                                                         often unable to
else” does. The actual strategic rationale                         vendors’                                                            justify paying top
for offering a menu of different vehicles                          licensing               Business-critical users                     dollar for occa-
and discounts is poorly understood or                              vehicles; they          (Business Professionals)                    sional use.
forgotten within many vendors; yet it                              are the same            are willing to pay top dollar.
represents the difference between ad-                              ones most                                                           Some vendors call
equate and great pricing. Great pric-                              sellers have:           They may not be happy                       these users “pro-
ing allows a vendor to tailor its offers to                        contractual,            about it, but in the absence                sumers,” but in
various buying groups. This is not illegal                         transactional,                                                      an organizational
discrimination. Rather it merely reflects                          site and                of close competitors, they                  context we refer
sellers’ taking advantage of differences                           concurrent              have few alternatives.                      to them here as
between users in how they value—and                                licensing.                                                          “Aspirants.” Typi-
how much they are willing to pay for—                              Customers like                                                      cally, if the ven-
products. Understanding this (and suc-                             these hydra-                                                        dor sells a suite
cessfully putting it all into practice) is                         headed programs because they give them of applications, this often results in the
fundamental to price optimization. But                             lots of options (…to game the system      Aspirants buying some (but not all) of
if it’s so essential, why don’t more ven-                          and to try to find the cheapest way to    the premium offerings at a price lower
dors do it well?                                                   buy the products).                        than what Business Professionals are
                                                                                                             willing to pay, but far above that which
Raychem Corporation provides a text-                               The dilemma faced by all these ven-       lures General users. This makes Aspi-
book example of price discrimination’s                             dors is how to proliferate for broad use  rants an important growth source, so

4                                                                                                                                           January 008
PRICING ADVISOR
   The                                                                                                                3535 Roswell Road, Suite 59
                                                                                                                      Marietta, GA 30062
                                                                                                                      770-509-9933
   A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n                                                 www.pricingsociety.com

the failure to price optimize is a strategic                      many vehicles and an opportunity exists          the vendor’s advantage. It is a “push”
oversight.                                                        to simplify the set of offerings. Here           vehicle created to generate demand and
                                                                  are typical options and their distinct           should be used to support a prolifera-
In short, charge too much and the ven-                            objectives:                                      tion strategy.
dor is unable to penetrate the Aspirant                           • Contractual Licensing offers volume          • Concurrent Licensing is an attractive,
and General user segments. Charge too                                discounts to the vendor’s best customers.     but often underutilized way to expand
little and the vendor risks seeing its lu-                           Buyers are required to enter into a con-      the vendor’s reach to a large number
crative Business Professionals trade down                            tract committing them to a minimum            of users who are not doing business
to a lower price band. This is a loss of                             purchasing volume during the con-             critical work (i.e. if the license server
real, not potential revenue. Because they                            tracted period. This is a “pull” vehicle,     is occasionally oversubscribed, it’s not
fear undermining their existing business,                            which addresses customers that already        a disaster). Concurrency should be
many sellers fail to act on the Aspirant                             want to buy the vendor’s products.            priced so it is attractive when only low
opportunity.                                                         It contrasts with “push” vehicles (see        availability levels are required. (The
                                                                                                                                   application may not be
In this situation, vendors                                                                                                         immediately accessible
will often pursue a Gold-                                                                                                          at all times.) But at high
Silver-Bronze type prod-                                                                                                           availability levels (imme-
uct assortment. Not only                                                                                                           diate access is required),
does this complicate the                                                                                                           it is more expensive than
development process, but                                                                                                           the corresponding con-
also it muddies the mes-                                                                                                           tractual vehicle. Many
saging and buying pro-                                                                                                             vendors discourage
cesses as well. Customers                                                                                                          concurrent licensing,
feel encouraged to base                                                                                                            seeing it as simply a
their buying decisions on                                                                                                          way for customers to
an analysis of their actual                                                                                                        reduce the number of
use rather than on their                                                                                                           licenses they buy. This
aspirational intent.                                                                                                               reflects a problem with
                                                                                                                                   the underlying pricing,
In a licensing situation,                                                                                                          not with the vehicle it-
the solution is to vary                                                                                                            self. Many vendors use
the vehicles and offers                                                                                                            transactional licensing
by user set, so vendors                                                                                                            to address this need, but
can direct customers to                                                                                                            concurrency offers addi-
the preferred option. Like water that                                 below) which service situations where        tional flexibility and often represents
always flows downhill, corporate buy-                                 the vendor must generate end-user de-        a better choice. It is a “pull” vehicle so
ers are good at finding the cheapest way                              mand before users will buy a product.        vendors should price to value. Con-
to purchase a given product, so it is best                                                                         current licenses are usually offered at
when the seller can get them to self-se-                            A common error for vendors is to pres-         a premium over a similar number of
lect the desired vehicle. Done correctly,                           ent too many offerings with excessive          contractual licenses, but they don’t
the vendor will be able to price optimize                           discounts because they are trying to           have to be.
for each user set without the customer’s                            serve both high- and low-end user seg-
feeling manipulated. It’s the proverbial                            ments. Discounts don’t really encour-        Mapping User Sets to
having one’s cake and eating it too.                                age Business Professionals to buy more       Preferred Vehicles
                                                                    (see below), but they are demanded by        The next section lays out the preferred
Mapping Licensing Vehicles                                          corporate buyers because that is how         licensing vehicle by user set from
to Objectives                                                       software is sold. Sellers should under-      the vendor’s point of view. Product
The first step is to think strategically                            stand the discount levels required for a     selection is used to steer customers to
about the objectives for each offering.                             given industry, and resist the urge to add   the desired licensing vehicle. In our
Licensing vehicles should be driven by                              a costly extra tier or two for a vendor’s    example, all products are available via
strategy, not the other way around. For                             “really good customers.”                     contractual licensing, and all or most
example, without considering products,                            • Site Licensing is designed for large         by concurrent licensing. But only basic
are there different price points or                                 sites with casual usage where the ven-       products can be purchased via a site
buying behaviors the vendor needs to                                dor wants to drive broad proliferation.      license. The view from each user set is
address? If the objectives overlap too                              If the customer is likely to buy via         as follows:
much, then the vendor probably has too                              another vehicle, site licensing is not to    • Business Professionals are interested in

January 008                                                                                                                                               5
PRICING ADVISOR
    The                                                                                                                           3535 Roswell Road, Suite 59
                                                                                                                                  Marietta, GA 30062
                                                                                                                                  770-509-9933
    A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n                                                            www.pricingsociety.com

  the professional versions and premium                            Figure 1
  suites. Since these users have no interest
  in using the basic versions, site licensing                                                                             More expensive
                                                                                                    All products,




                                                                                      Loyalist
  is not attractive. Because their usage is                                                                                                     Premium products
                                                                                                                        than Contractual in
  business critical, concurrent licensing                                                            including               high-use
                                                                                                                                                 not available via
  does not meet their requirement for                                                               Master Suite                                   Site License
                                                                                                                          environments
  high availability (access at all times).
  Thus, the contractual licensing program



                                                                    Customer Type
  is the clear choice.                                                                               More expensive      Standard and           Insufficient volume




                                                                                      Aspirant
• Aspirants are primarily interested in                                                             than Concurrency
  the professional products, but buying a
                                                                                                    for moderate use
                                                                                                                           Premium                 to qualify for
  full license for each person or worksta-                                                                                 products                 Site License
                                                                                                      environments
  tion is much too expensive, especially
  so if several applications are desired.                                           General Users
  If forced to buy via contractual li-
  censing at the same premium prices                                                                Too expensive for   Too expensive for       Basic products
  as Business Professionals, customer
  organizations are likely to restrict who
                                                                                                     occasional use      occasional use              only
  can obtain and install the vendor’s
  applications. This is a missed opportu-
  nity for the vendor as it makes adding                                                              Contractual         Concurrent                Site License
  Aspirants to the Business Professional
  set more difficult. High availability,                                                                                Licensing Vehicle
  however, is not needed, so concurrent
  licensing looks attractive as it provides
  economical access to the professional                            no new product variations are needed.                     General Users is reduced. In general,
  versions. Aspirants prefer to use the                            If only a single product offering exists,                 leaders who have less competition at
  professional versions—and the vendor                             a low-end version is needed to isolate                    the high end of the market also risk
  should reinforce this in its messaging.                          the general use market successfully.                      the greatest opportunity cost from in-
  But, just in case, minimums for the site                         Where possible, product and licensing                     action, or from a poorly thought out
  license are set high enough to exclude                           vehicle development should reinforce the                  broad market pricing and licensing
  most of this group.                                              buying segmentation process. This will                    strategy.
• General Users will only buy at scan-                             provide the vendor with more options
  dalously low per-seat prices—com-                                and greater clarity from the buyer’s                      Summary
  pared to Business Professionals.                                 point of view.                                            Software vendors with a loyal base
  However, high minimums and lack of                                                                                         of users can use licensing vehicles to
  access to professional products are not                          Figure 1 provides an overview of the                      address the broader market without
  obstacles in environments where the                              nine buying possibilities available for                   cannibalizing premium priced vehicles.
  vendor is trying to drive broad prolif-                          three user sets and three licensing vehi-                 We’ve shown here how to balance not
  eration. Because basic applications are                          cles. The gray squares describe the disin-                only high-value and low-value users,
  just fine for this user set, these buyers                        centives for each user set / licensing com-               but also how to include a third, mid-
  may be successfully isolated from the                            bination, which help vendors steer buyers                 market, aspirational customer group
  rest of the customer base. The result                            toward the most desirable options—rep-                    in the mix. Since the aspirational
  is a low-cost, per-user site license                             resented by the circles.                                  set represents a large, ripe, and only
  that opens up heretofore unaddressed                                                                                       partially-tapped, growth opportunity, a
  markets without undercutting the                                 This methodology works particularly                       vendor must understand how to direct
  highly lucrative Business Professional                           well when the vendor is a leader in its                   these Aspirants toward the high-end
  market.                                                          field and has a strong base of profes-                    Business Professional set rather than
                                                                   sional users. In this scenario, vendors                   the low-end General users. A properly
The Keys to Success                                                can skew toward optimized pricing since                   designed pricing, licensing and product
The keys to success are: (a) offering an                           Business Professionals will be unlike-                    strategy is able to deliver on the needs of
appropriate range of products to create a                          ly to defect to competitors because of                    each buying group, while also creating
sophisticated assortment across customer                           high prices. For vendors facing a greater                 unique disincentives to steer specific
sets; and (b) targeting access to specific                         competitive threat, the same structure                    customers away from non-optimal
licensing vehicles. If an adequate high-                           holds, but the achievable price premium                   buying vehicles.
to-low range of products are in place,                             for Business Professionals compared to

                                                                                                                                                        January 008

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Segment Your Way To Greater Profits

  • 1. PRICING ADVISOR The 3535 Roswell Road, Suite 59 Marietta, GA 30062 770-509-9933 A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com Segment Your Way to Greater Profits power. Raychem made heat-shrinkable within specific organizations without Bruce La Fetra, Senior Marketing tubing that was used in commercial, au- undercutting the high prices paid by ex- Consultant for Rubicon Consulting, tomotive, industrial and military appli- isting customers. The most problematic cations. While the company had dozens scenario is when the same or similar examines how software companies of chemical formulations, a couple were applications are used by different user often fail to understand how different sold into all of these markets, each at a sets for business-critical and non-criti- different price with a low-to-high range cal tasks. customer groups value their products. of about 3X. While the tubing came off This leads to firms’ offering both ex- the same production line—often the Business-critical users (Business Profes- same run—each run was only tested to sionals) are willing to pay top dollar. cessive price discounts and too many the relevant specification for the intended They may not be happy about it, but in licensing vehicles. La Fetra shows how market. Since applications ran the gamut the absence of close competitors, they from exposure to hydraulic fluid in a M1 have few alternatives. At the same time, companies can develop an integrated Abrams tank to strain relief in consumer there may be untapped, broader market approach that targets the right pricing electronics, the QA certification was im- opportunities with users who are will- portant. This gave the company total pro- ing to pay only a fraction of the amounts strategy and product offerings to the tection against customers buying a lower paid by Business Professionals. How groups he defines as “Business Profes- grade product even though some knew it does the vendor aim high and low at the came off the same production run as “the same time? sionals,” “Aspirants” and “General good stuff” that went into military and Users.” For more information, you space hardware. The varying usages drove Most sellers respond to this situation by different pricing for the same product. creating an entry-level or “light” version can reach Bruce at: 408-395-3910. of their application that they can feature, What’s at Stake and functionally differentiate, from the W Many vendors face a similar premium version. With only two user hy do software vendors problem: they have multiple volume sets, this solution works well and gener- offer so many buying ve- licensing vehicles, but target them ally is advisable. The situation gets more hicles? indiscriminately at the entire user base complicated when there is a mid-market with the well-meaning intent of giving set of price aware users. These purchas- Most companies say they customers more buying options. There is ers are eager to use the high-end appli- want to give customers multiple options, nothing unusual cations, but are or they do it simply because “everyone about these often unable to else” does. The actual strategic rationale vendors’ justify paying top for offering a menu of different vehicles licensing Business-critical users dollar for occa- and discounts is poorly understood or vehicles; they (Business Professionals) sional use. forgotten within many vendors; yet it are the same are willing to pay top dollar. represents the difference between ad- ones most Some vendors call equate and great pricing. Great pric- sellers have: They may not be happy these users “pro- ing allows a vendor to tailor its offers to contractual, about it, but in the absence sumers,” but in various buying groups. This is not illegal transactional, an organizational discrimination. Rather it merely reflects site and of close competitors, they context we refer sellers’ taking advantage of differences concurrent have few alternatives. to them here as between users in how they value—and licensing. “Aspirants.” Typi- how much they are willing to pay for— Customers like cally, if the ven- products. Understanding this (and suc- these hydra- dor sells a suite cessfully putting it all into practice) is headed programs because they give them of applications, this often results in the fundamental to price optimization. But lots of options (…to game the system Aspirants buying some (but not all) of if it’s so essential, why don’t more ven- and to try to find the cheapest way to the premium offerings at a price lower dors do it well? buy the products). than what Business Professionals are willing to pay, but far above that which Raychem Corporation provides a text- The dilemma faced by all these ven- lures General users. This makes Aspi- book example of price discrimination’s dors is how to proliferate for broad use rants an important growth source, so 4 January 008
  • 2. PRICING ADVISOR The 3535 Roswell Road, Suite 59 Marietta, GA 30062 770-509-9933 A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com the failure to price optimize is a strategic many vehicles and an opportunity exists the vendor’s advantage. It is a “push” oversight. to simplify the set of offerings. Here vehicle created to generate demand and are typical options and their distinct should be used to support a prolifera- In short, charge too much and the ven- objectives: tion strategy. dor is unable to penetrate the Aspirant • Contractual Licensing offers volume • Concurrent Licensing is an attractive, and General user segments. Charge too discounts to the vendor’s best customers. but often underutilized way to expand little and the vendor risks seeing its lu- Buyers are required to enter into a con- the vendor’s reach to a large number crative Business Professionals trade down tract committing them to a minimum of users who are not doing business to a lower price band. This is a loss of purchasing volume during the con- critical work (i.e. if the license server real, not potential revenue. Because they tracted period. This is a “pull” vehicle, is occasionally oversubscribed, it’s not fear undermining their existing business, which addresses customers that already a disaster). Concurrency should be many sellers fail to act on the Aspirant want to buy the vendor’s products. priced so it is attractive when only low opportunity. It contrasts with “push” vehicles (see availability levels are required. (The application may not be In this situation, vendors immediately accessible will often pursue a Gold- at all times.) But at high Silver-Bronze type prod- availability levels (imme- uct assortment. Not only diate access is required), does this complicate the it is more expensive than development process, but the corresponding con- also it muddies the mes- tractual vehicle. Many saging and buying pro- vendors discourage cesses as well. Customers concurrent licensing, feel encouraged to base seeing it as simply a their buying decisions on way for customers to an analysis of their actual reduce the number of use rather than on their licenses they buy. This aspirational intent. reflects a problem with the underlying pricing, In a licensing situation, not with the vehicle it- the solution is to vary self. Many vendors use the vehicles and offers transactional licensing by user set, so vendors to address this need, but can direct customers to concurrency offers addi- the preferred option. Like water that below) which service situations where tional flexibility and often represents always flows downhill, corporate buy- the vendor must generate end-user de- a better choice. It is a “pull” vehicle so ers are good at finding the cheapest way mand before users will buy a product. vendors should price to value. Con- to purchase a given product, so it is best current licenses are usually offered at when the seller can get them to self-se- A common error for vendors is to pres- a premium over a similar number of lect the desired vehicle. Done correctly, ent too many offerings with excessive contractual licenses, but they don’t the vendor will be able to price optimize discounts because they are trying to have to be. for each user set without the customer’s serve both high- and low-end user seg- feeling manipulated. It’s the proverbial ments. Discounts don’t really encour- Mapping User Sets to having one’s cake and eating it too. age Business Professionals to buy more Preferred Vehicles (see below), but they are demanded by The next section lays out the preferred Mapping Licensing Vehicles corporate buyers because that is how licensing vehicle by user set from to Objectives software is sold. Sellers should under- the vendor’s point of view. Product The first step is to think strategically stand the discount levels required for a selection is used to steer customers to about the objectives for each offering. given industry, and resist the urge to add the desired licensing vehicle. In our Licensing vehicles should be driven by a costly extra tier or two for a vendor’s example, all products are available via strategy, not the other way around. For “really good customers.” contractual licensing, and all or most example, without considering products, • Site Licensing is designed for large by concurrent licensing. But only basic are there different price points or sites with casual usage where the ven- products can be purchased via a site buying behaviors the vendor needs to dor wants to drive broad proliferation. license. The view from each user set is address? If the objectives overlap too If the customer is likely to buy via as follows: much, then the vendor probably has too another vehicle, site licensing is not to • Business Professionals are interested in January 008 5
  • 3. PRICING ADVISOR The 3535 Roswell Road, Suite 59 Marietta, GA 30062 770-509-9933 A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com the professional versions and premium Figure 1 suites. Since these users have no interest in using the basic versions, site licensing More expensive All products, Loyalist is not attractive. Because their usage is Premium products than Contractual in business critical, concurrent licensing including high-use not available via does not meet their requirement for Master Suite Site License environments high availability (access at all times). Thus, the contractual licensing program Customer Type is the clear choice. More expensive Standard and Insufficient volume Aspirant • Aspirants are primarily interested in than Concurrency the professional products, but buying a for moderate use Premium to qualify for full license for each person or worksta- products Site License environments tion is much too expensive, especially so if several applications are desired. General Users If forced to buy via contractual li- censing at the same premium prices Too expensive for Too expensive for Basic products as Business Professionals, customer organizations are likely to restrict who occasional use occasional use only can obtain and install the vendor’s applications. This is a missed opportu- nity for the vendor as it makes adding Contractual Concurrent Site License Aspirants to the Business Professional set more difficult. High availability, Licensing Vehicle however, is not needed, so concurrent licensing looks attractive as it provides economical access to the professional no new product variations are needed. General Users is reduced. In general, versions. Aspirants prefer to use the If only a single product offering exists, leaders who have less competition at professional versions—and the vendor a low-end version is needed to isolate the high end of the market also risk should reinforce this in its messaging. the general use market successfully. the greatest opportunity cost from in- But, just in case, minimums for the site Where possible, product and licensing action, or from a poorly thought out license are set high enough to exclude vehicle development should reinforce the broad market pricing and licensing most of this group. buying segmentation process. This will strategy. • General Users will only buy at scan- provide the vendor with more options dalously low per-seat prices—com- and greater clarity from the buyer’s Summary pared to Business Professionals. point of view. Software vendors with a loyal base However, high minimums and lack of of users can use licensing vehicles to access to professional products are not Figure 1 provides an overview of the address the broader market without obstacles in environments where the nine buying possibilities available for cannibalizing premium priced vehicles. vendor is trying to drive broad prolif- three user sets and three licensing vehi- We’ve shown here how to balance not eration. Because basic applications are cles. The gray squares describe the disin- only high-value and low-value users, just fine for this user set, these buyers centives for each user set / licensing com- but also how to include a third, mid- may be successfully isolated from the bination, which help vendors steer buyers market, aspirational customer group rest of the customer base. The result toward the most desirable options—rep- in the mix. Since the aspirational is a low-cost, per-user site license resented by the circles. set represents a large, ripe, and only that opens up heretofore unaddressed partially-tapped, growth opportunity, a markets without undercutting the This methodology works particularly vendor must understand how to direct highly lucrative Business Professional well when the vendor is a leader in its these Aspirants toward the high-end market. field and has a strong base of profes- Business Professional set rather than sional users. In this scenario, vendors the low-end General users. A properly The Keys to Success can skew toward optimized pricing since designed pricing, licensing and product The keys to success are: (a) offering an Business Professionals will be unlike- strategy is able to deliver on the needs of appropriate range of products to create a ly to defect to competitors because of each buying group, while also creating sophisticated assortment across customer high prices. For vendors facing a greater unique disincentives to steer specific sets; and (b) targeting access to specific competitive threat, the same structure customers away from non-optimal licensing vehicles. If an adequate high- holds, but the achievable price premium buying vehicles. to-low range of products are in place, for Business Professionals compared to January 008