Avoiding the Perils of Pricing

We’ve all seen the scenario: Team of developers finishing new product to make upcoming tradeshow. Marketing people are arguing with graphics artists and booth designers. Sales people are pre-announcing the new product to customers. Excitement.

Product almost finshed. Tradeshow almost here. "Pricing!" the chorus, screams. "We haven’t set prices". Senior executives delegate pricing to lower level person saying, "Do It!. Pandemonium.

Product marketing manager with no time (or experience) "does it". Pricing looks a lot like the competition except with lower prices and more generous terms… Sales force generates modest sales results at immodest discount level. Price list revised in 3 months… Venture-backed company valuation suffers…Despair.

It takes skill and experience to set prices. Properly set, prices can help companies sell more product, at lower discounts and make the numbers. In this brief article I'd like to share ten tips that can help you develop your pricing and discounting policies. Here they are.

• learn your customer's business
• focus on (and sell) value
• what customers spend to reap benefits
• have an internal logic
• know financial impact of pricing
• watch deals you do with customers
• avoid ad hoc discounting
• get something in return for discounts
• clearly define your product
• count the deliverables

1. The most important factor in setting price is to learn your customer's business. Make sure your product/service offering creates value for your customers. Customers value products that make or save money, save time or make them feel good/avoid pain. Understand how your products create value. More features doesn't necessarily mean more value.

2. Always focus on (and sell) value. Your sales force or selling proposition must focus on the value your software creates. All of your company’s materials -- whether they appear in the hands of your sales force, in print, or on-screen at your website -- must reflect the value you deliver to your customers. Reinforce your product's value proposition to maintain your prices.

3. Look at how much your customers must spend to reap the benefit of your product or service offerings. Implementation costs reduce the benefits you deliver and introduce risk. If you are willing to bear more of the implementation costs, make sure your customers will pay you to do so.

4. Pricing should have an internal logic and make sense to your customers and sales force The easiest way to do this is to make sure your product architecture can be packaged in a way that maps into perceived benefits. Customers that pay more, should get more.

5. Run the numbers to see the financial impact of your pricing and discounting on your business -- before publishing your new price list. Run different pricing scenarios, Make sure your pricing strategy fits your company's objectives. There is nothing right or wrong with a penetration (low price) or skimming (high price) strategy. If you are well funded, you can pursue an unprofitable, low price strategy for market penetration a lot longer than a company that is bootstrapping.

6. Look at the deals you do with customers. When you give volume or other discounts to certain types of customers, make sure they deserve what you give them. Work the numbers from the bottom up as well as from the top down.

7. If customers or the sales force think your prices are too high, ad hoc discounting is likely to occur. When your sales force plays "Let's Make a Deal" make sure the discounts are reasonable. Judge the reasonable-ness by comparing the amount of money you gave up with the value you get from the customer in terms of promotional value, product feedback, future sales, etc.

8. Don’t be afraid to ask for something in return. Never give discounts without getting something (monetary or non-monetary) in return. Higher volume commitments, larger up-front purchases, endorsements, etc. are all good reasons for giving up discounts. Make sure the discounts given are commensurate with the value your company receives. Discounts are remembered; the reasons they were given are not.

9. "Good" pricing won’t help you make money if you haven’t clearly defined your product. Despite how obvious this is, many companies do not define the scope of their product or service. If you do not do this, you cannot tell when you have fulfilled your end of a commitment. This is especially true for services because the cost of services is so expensive.

10. When licensing software, count the deliverables in a way that make sense to your customer. Match what you count (licenses, users, servers, etc.) with the customer’s business practices and processes. If you serve similar markets, usage patterns may be similar which means you can count licenses with a single licensing scheme.

This article is adapted from "101 Tips for Software Vendors: How to Price, License and Negotiate Software Deals."