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Is Your Current Software Pricing Approach a Barrier to Adopting New Pricing Models?

By June 7, 2011Article

When pricing software licenses, there is always the classic tradeoff of generating more revenue and market share versus managing the cost of sales and deployment.
On one the hand, you can offer multiple price points for the software by grouping different functions into products, or, by offering many new software license models. This gives you the precision to attack different market segments or types of users based upon specific value and need. The downside of this approach is that it may be more complex to figure out exactly what combination of product and software license model fits your customer(s)’ needs. You will typically see such pricing approaches for large enterprise software that is scalable to address a wide variety of customer needs, such as an ERP or CRM package.
On the other hand, there is the approach of offering fewer price points and simpler pricing. With this approach, there is less pricing precision, but it is typically easier for the channel and customers to figure out what to buy. On the surface, this is clearly a less sophisticated approach. This type of software license pricing model is often used in desktop productivity software such as Microsoft Word.
Selecting a software pricing approach can be a complex exercise, as many factors need to be considered.
However, one of the many factors I like to emphasize is the deployment model behind your product – this means the number of copies of software licenses you sell, and, the corresponding channel model.

  • If you are selling deployment that offers a single instance of your software typically with a direct sales model, then using multiple price points is a good way to drive the revenue model. A direct sales force is more capable of explaining the value, and the pricing model allows revenue scale based upon the organization’s size, need, and growth.
    SAP’s ERP software is priced on such a model.

  • At the other extreme, if you are selling tens, hundreds and thousands of copies and use a channel, then it may make sense to make the software products and license models much simpler. This makes it easier for customers to understand what to buy, and, for the channel partners (who often sell products from multiple vendors). In this case, revenue is based upon volume and sales velocity. This is why Microsoft Word doesn’t offer too many variants of pricing, such as offering different prices for the spell checker, interfaces to Excel, etc.

Such a model probably already makes sense to companies in one or two of the categories. But, it can be a good lesson if you are in the business of offering more sophisticated software with complex pricing models, and then trying to go “down-market” with high volume deployments.
The institutional culture behind pricing and selling a more complex model often creates a mindset and a barrier to changing the underlying pricing model to accommodate market needs. Complex models usually include sophisticated sales tools, direct customer interaction, finance and entitlement systems that require knowledge of the customer configuration in order to perform any expansion sale, and often the presence of a services engineer to install the software. Trying to price software for different market needs becomes difficult because no one thinks that way, and no systems are set to support that type of business model. This can lead to a failure of “down market” initiatives. That’s why it’s difficult for large enterprise software companies to move into more high-volume markets.
Clearly, this becomes more than a software license pricing issue … systems and processes are involved, but simply understanding that a new, simpler software licensing and pricing model is required as a first step is paramount to making the transition. Change requires change.
Cris Wendt is the Principal Strategy Consultant at Flexera Software.
This blog is reposted with permission.

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