Why Pricing Is Hard to Do

Practice Makes Perfect

Most software companies know how to exploit technology successfully. The response to customer problems is typically more technology leading to more features. Since product development is an ongoing process, companies get a lot of practice doing it. Practice makes perfect when it comes to technology.

But when it comes to pricing, most companies get much less practice. Pricing is often an event, a project milestone, something you complete and then forget. Pricing is the root-canal of software marketing.

Vendors change their price lists every year or so, mostly in response to competition. Items on the price list change with a major new release or when new items get added -- again several times a year. Every 18 to 24 months, price structures (tiers, discounts, licensing options) get revised.

Very few people (and certainly no one group) get a great deal of exposure to pricing. The exposure people get to competitor's pricing and internal pressures often leads to inappropriate pricing or licensing terms. In fact, we have found many companies tend to charge too little for their products -- often by more than 100%.

Follow-the Leader Pricing Is No longer Effective

As the industry has moved toward higher value-adding enterprise applications, vendors face more complicated pricing and licensing decisions. Most vendors must make very complicated pricing decisions with a limited experience base and with poorly developed internal pricing processes in place.

Sure, your company can play follow the leader. Unfortunately, the leader often doesn't know what they are doing either. In some cases, the leaders may be following you.

And, worse yet, the leader may be able to afford to do what they are doing because they are bigger and have greater resources at their disposal. Remember, your competitor is following their business plan and (hopefully) yours is different.

Enterprise Pricing Leads To Complications

Pricing the typical enterprise product is not easy. Vendors trying to price their software must work the details of a complicated set of interactions:

1. Price levels: What is the proper price to charge for the licensed software item?
2. Price structure: How should a new price schedule be tied to patterns of use within customers' operating environments?
3. Product configuration: How can an application be configured so different parts and functions can be licensed?
4. Terms and conditions: Is the legal framework in place for protecting ourselves while meeting special requests from customers?
5. User base segmentation: Which customers need dedicated versus shared access to applications?
6. Transition issues: How do we present and promote the changes to customers, sales reps, and others?
7. Protecting revenues: What impact will a shift to a new licensing and pricing method have on revenues?

Conclusions

We're sorry we can't tell you pricing is easy or that pricing enterprise products is really easy. It isn't.

What we can tell you is companies get into trouble when they do not align their prices with customer requirements. We can also tell you it is always much easier to improve the pricing process and much, much harder to correct poor pricing decisions.

Pricing is another area where companies won't take time to do it correctly in the first place but have time to do it over.

Save time and money: Do pricing right the first time around.