Wednesday, April 22, 2009

Pricing thoughts

One of the most complex areas of the product mix is pricing.  Get it right and revenue is maximized, while poor pricing has the opposite effect.  

There are a huge number of factors to consider when pricing products, such as product elasticity, competition, product costs, regional pricing, target markets, and competition.  I'm not going to delve into the mechanics of pricing, and recommend that readers pick up a copy of the pricing bible - "The Strategy and Tactics of Pricing" by Nagle & Hogan.  Instead, here are some lessons I've picked up along the way:

1. Customers compare prices to competition and alternatives to get a measure of the value.  When setting the price for Netoria products, we were targeting Novell Netware administrators who typically paid $60-$70 per Netware user.  As our products were utilities (like Norton's) we adopted a pricing strategy of 25% of the Netware license - $15 per user.  This had a number of benefits:
  • Our strategy was to gain seats within the NetWare installed base - from memory there was over 50 million Netware seats in use, giving us a huge potential market.
  • Our customers could purchase the products without a complex ROI calculation.  We were aspirin, solving a pain point, and could be quickly purchased and deployed.
  • Administrators could purchase within their expenditure level, leading to a faster sales cycle.
  • Deals could be quite large as we moved into the enterprise, but there was never any push back on price.
2. Non-profits and education always expect a discount.  Don't fight it, and give them 20% off list.

3. Higher overall prices typically mean longer sales cycle, with much more sales support.  There is nothing wrong with high prices, but you often need to help the customer justify the purchase up to their management.  One of the best ROI tools I have ever seen is provided by VMware, and is a service hosted by Alinean.

4. Be very careful of regular discounting, especially at end of quarter.  You can inadvertently train your customer and channel to wait for the discounts. Dennis Rose (VP of Asia Pacific at Citrix) was the first person who showed me the pitfalls here - too much discounting, and customers would just wait until the next promotion.  Instead of price discounts, try adding in extra value, like support or consulting.

5. Don't be afraid to experiment. During my seven years at Citrix we regularly raised prices, and each time the business tracked upwards.  One of the most impressive pricing experiments I have seen is Valve with their excellent Steam game distribution service. Steam is huge in the gaming community, as valve has opened it to their competitors and distributes hundreds of games.  Games have a very predictable sales decay (like most entertainment products), but by providing a combination of updates and discount sales, they are able to keep sales high - take a look at the chart below:

For another example of innovative pricing, check out the upcoming Battlefield Heroes game from Electronic Arts, where the game is completely free, but real money is used to purchase upgrades. the message here is clear - track pricing innovations in other industries, and consider lessons applicable to your products.

6. It's always better to start with a higher price and move downwards.  If you work out a price range that your customers accept, start at the higher end of the range.  Sales can always discount by creating a price exception.  Tracking the number of pricing exceptions gives an indication of whether the price is too high (but not too low).  One company I worked for had pricing exceptions at 70% of deals in a particular region - clear indication that the price was too high, and sales had to work extra hard to negotiate a lower price. Typically you want pricing exceptions to be 5% or less.

7.  Create higher value bundles as the primary lead - sales can always drop back with a la carte pricing.  We did this at Netoria by bundling all our 4 products into a suite, Citrix does it (starting with the MetaFrame bundles, progressing to the Access Suite, the Platinum products and now Citrix Delivery Center), and Microsoft is the master with the Office suite amongst others.

8 Finally, create an annuity stream - if enterprise customers are using your solution they typically expect to pay annual fees for maintenance, support, and updates.  Make sure you maximize this revenue by having sales (inside sales) ensure that customers are up to date. Of courses services are the ultimate here, creating recurring revenue every month (Salesforce.com anyone?).

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