This Q&A refers to the Pricing Webinar we held at August 2nd. The questions are answered by Jim Geisman, Jim is an acknowledged expert in B2B software pricing. Jim is the Founder and a Principal at Software Pricing Partners and has been helping software companies deal with their pricing challenges for more than 20 years. You can listen to the recording here: www.servoy.com/webinars.
Q: What if extending the new pricing model to your customer base is less profitable – how do you convert your legacy clients to the new price structure without losing revenue?
A: I hope the new pricing plan has some financial benefit – otherwise, why would you do this? It seems counterproductive. If your new pricing plan has a positive impact on sales or reducing costs (significantly) I would start my roll-out with new customers. You can deal with your installed base later but many times it is better to leave your installed base alone – grandfather them in.
Q: Would you recommend offering a single price for everything or would you split up software, support, license and hosting etc.? Do splitting up prices like this confuse the customers in your opinion?
A: In most cases it’s probably better not to split out these prices but it is a good idea to tell customers what is included. Subscription pricing typically includes maintenance and support as does SaaS-delivered apps (which also include hosting). In some cases you may want to reduce the overall price of a product by offering maintenance, support or even hosting as an option. Start with an “all-in” price, though.
Q: What do you mean by “Make sure the customer owns the numbers”?
A: If you are using some sort of value calculator, you need to use numbers that represent a reasonable starting point. When you share these numbers with a customer, let the customer modify them. In that way the customer will have a vested interest in them i.e. “owning the numbers”.
Q: How do you secure revenue in cloud model, where the customer is really buying on use-basis?
A: The question has to do with predictability-more than anything else. If you are charging on a per use and usage is unpredictable, your revenues will be too. You can adjust your price levels and cost structure so your worst-case usage will not drive a loss. However, it might be better to convert to a model similar to that of a phone card: Let the customer buy a bulk number of transactions. At least you will have money in advance and can control how much you spend instead of being driven by actual use.
Q: What productivity is expected in a cloud model yr on yr?
A: I’m unlcear of what productivity you are referring to. That said, some “productivity effects” come from spreading fixed costs across more units/customers or being able to buy in bulk to get better discounts. In addition there is the effects of experience: the more experience you are in doing a task, the more efficient you will become over time.
Q: What are your thoughts on the possibility that customers might react in this manner…””The price is too low, the app can’t possibly be of any use to our company!!!”” In other words, “How low do you go?””
A: This is very important. Pricing, as I hope you now understand from the webinar, requires a great deal of judgment to balance revenue, costs and market demand. It is possible to set prices so low that a prospect may suspect an application as being deficient in some major way. This goes back to the saying “If something looks too good to be true, it probably is”. Many time people will price their products below a market leader. Most prospects understand a difference of 20-25%. I suspect when you go much lower, people may view your product as “junk”.
Q: When you change your pricing in an effort to arrive at a better pricing structure, what do you do with your existing customers? Do you pass the changes “”plus or minus”” through to them?
A: Implementing a price change for use with current customers is very tricky. That is why transition plans need to be worked out in detail and in advance. To start with, you ought to think about segmenting your existing customers into ones that are more versus less important. You may be able to treat most of your existing customers in a standard way like putting everyone on the new price list and letting them pay whichever is less: Their current prices or the new price. That will free up time so you can handle important customers on a case-by-case basis. Sometimes you may want to leave things as they are.
Q: What is the best approach, process, or methodology for evaluating what price metric is most effective? Is it simply asking customers what they think?
A: You can certainly ask customers what they think and, in this case, their answers will be more accurate than their answers to questions about price levels. I’m not sure there is a good way to judge whether a metric is effective but I would test to make sure the metric you choose scales with the value delivered. . For example, the same number of users of a financial management application can manage portfolios of much different size or complexity. Therefore, it may be better to charge for assets under management (if you are tracking this) than per user.
Q: What does the CAGR of 264% on your freemium revenue modeler refer to?
A: The 264% CAGR referred to the compound annual growth rate in customers.
Q: Do you see a different view for the public administrations?
A: Setting prices for sales to state, local or federal governments is very difficult for two reasons: 1). Purchases are often made by some sort of tender or bidding process which reduces the differences between products and makes them more of a commodity and 2). The actual user may be separated from the purchasing process so it is difficult to make a value argument to justify your price levels, packaging, or other terms.
Q: If I get no push back on price. Is it too low?
A: I would say so. Not all direct sales can be closed. My sense is, in a direct sales situation, you should probably lose 5-10% of the total potential sales transactions. If you are selling via the web, and you don’t get messages telling you your prices are too high, then you may want to consider raising the price (to new customers) until you hear a few complaints or until the number of sales decline.
Q: Do you have any specific tips for pricing sustainability and carbon footprint management Saas Software? (I am managing this product from India)
A: Pricing software based on sustainability or carbon footprint is probably very difficult unless you really understand the economics – which I believe is very hard anyhow. I suspect one reason why it is hard to present an economic argument about these issues is the benefit accrues to society as a whole not a specific company. However, you may be able to make an economic argument that is based on the good publicity will generate goodwill and therefore increase revenues.
Q: What are some steps to price “value” to a customer, especially with a new offering that may not have a clear direct competitor?
A: Demonstrating value is a combination of how you write or speak about an offering as well as how you present the economic case. Setting prices for products that people haven’t seen before is best done by choosing the right comparables. It is very important that you choose the comparable and not leave it up to the prospect. If you let the prospect choose the comparable, the prospect my choose an inappropriate, low-priced comparable.
Q: How do you price to recover your development costs, without over burdening your initial customers unfairly?
A: Recovering your development costs depends on the quantity of units you expect to sell and, to a lesser extent the time frame. The greater the share of the costs you place on your early customers, the more they will bear the burden.
Q: How do we move from one-time fee to subscription without taking a big cash flow hit?
A: One way to avoid a big cashflow hit in aggregate is to phase in subscription pricing over a period of time. However, the structure of customer payments for an application is independent of whether or not the application is hosted remotely or not. You may want to consider using the up-front payment model for the license and a single price for maintenance, support and hosting – assuming you are delivering the application remotely. (If you are changing from and up-front plus annual M&S to a “all-in” subscription for an on–premise application, handle this as you would a change in pricing model.)