Updated: Apr 9, 2020
Imagine a scenario where 15,000 days effort is required to develop a new product release, innovation, or feature set; and as little as a few hours is dedicated to determining the pricing and offer design strategy. Unfortunately, for many software firms, this is the reality. Guesswork around willingness-to-pay, pricing based on cost-plus, or an over-reliance on legacy deal outcomes becomes the norm for pricing decisions resulting in sub-optimal, sometimes catastrophic, pricing strategies.
Those companies that do focus heavily on applying value-based pricing management practices deliver significantly better revenue, market share, and profitability compared to their competitive peers. Adobe (NASDAQ: ADBE), for example, is a company that increased their market value by 8x after migrating from legacy perpetual license models to well-structured cloud subscriptions starting in 2012.
Enter the need for a B2B Software Pricing Framework.
Figure 1: The B2B Software Pricing Framework (TM)
This framework is used as a guiding tool in the Pricing and Software Product Manager's toolkit for building, planning, and executing pricing & offer design strategies. Its a continuous cycle of improvement that follows pricing strategies from conception, through the sales negotiation process, through to results measurement, and eventual re-adjustment (value perception changes over time, and so too should your software pricing strategy). Ultimately, the most successful pricing strategies are closely linked to the software "value story" with a strong understanding around product positioning across each market and customer segment.
The Software Pricing Framework (Figure 1) addresses processes in three main parts: Offer Design, Enablement, and Execution.
Offer Design. From strategy, to value analysis, to price structure development (packaging, metrics, tiers), to financial analysis and price stress testing – the offer design phase ensures product and pricing teams bring in the right inputs and analysis to drive the most favorable value-based segmented pricing and offer structures. A stress-tested commercial price list is the final output of this phase that ensures both Sales and Product teams are armed with the right pricing tools that drive market success.
Enablement. Whether its internal Sales teams, channel partners, customer success representatives, and even technical support staff - enablement is a critical activity for understanding how one’s software is packaged, priced, and linked to the ”value story”. New pricing strategies and business models are accompanied with “all on board” organizational alignment programs and effective communications that bring transparency to new pricing structures, deliver new monetization opportunities, and alignment with respect to new guidelines and policies.
Execution. Applying an effective bid-evaluation process, assigning pricing negotiation policies, and applying pricing approval matrices avoids a “race to bottom” price approach when submitting best-and-final-offer (BAFO) in bids. As well, consistently monitoring win/loss outcomes, key performance indicators (KPIs), and insights from post-bid award reports are critical to act as an Early Warning System for on-going re-adjustment to pricing and offer structures.
The Pricing Ecosystem (PECO). At the centre of the framework is what is termed PECO; this includes all other people, processes, and systems within an organization that are impacted by changes to pricing strategies, structures, compliance, and policies. Cross-functional teams impacted by pricing can include Accounting, Legal, Sales Operations, Contracting, Reporting, IT, and Customer Service (to name a few).
The importance of viewing pricing “as a process” cannot be understated. And not only is it a process, but it is also an approach that requires a continuous cycle of improvement: client and segment value perceptions change over time, new strategies emerge, and market innovation will continue to change – especially in the fast-paced era of digital transformation.
Scott Miller is the founder of Miller Advisors (www.miller-advisors.com), a pricing, monetization, and offer design consulting firm with a specialty in B2B software. He is also a speaker and instructor on best pricing practices with the Professional Pricing Society (PPS), International Software Product Management Association (ISPMA), and Carnegie Mellon University bringing over 15 years of experience from a variety of consulting and global corporate pricing roles.