How to Beat the Discount Heat (Continued)
Copyright (c) 2003, SoftwareCEO Inc. Reprinted with permission
Granted, AGI is in a specialized market — the company's primary
product is called Satellite Tool Kit (STK), which it sells to aerospace
and defense customers who want to analyze and visualize space-related
components — anything that moves around the earth. A typical
sale is $50,000, though the entry level is $10,000.
"We don't have a lot of competition, but we're not gouging
customers because of that," Linsalata says. "Space has
become a vital commodity, time is money, and we have a commercial
product that can do the job now in a market that traditionally reinvents
the wheel year after year. The urgency of getting software in place
to do the job seems to be understood much better lately."
And, Linsalata is counting on AGI's value proposition to stay strong:
He's projecting 30% sales growth this year, up from last year's
$28.5 million. Founded in 1989, AGI now has 150 employees.
Discount avoidance rule #3: Zero in on the issues
that matter to your prospect.
"If it's a techie, you don't need to talk price," Geisman
says. "On the other hand, you will have situations where you
have to quote a price, but leave yourself some wiggle room.
"In the early stages of a deal, a prospect will often say
they're looking for a range, not a fixed price. What you need to
do is draw yourself a box where the horizontal dimension is functionality
or deliverables, and vertical is price.
Once you've ascertained that your product is in the ballpark in
terms of functionality, then you can begin to talk price. But it's
important to establish functionality first, because people will
use price to adjust for product deficiency: You don't have feature
X, so you volunteer to give it them for half price.
"If you're weak in a particular area, package that as an option.
'I can give it to you for less — we'll take out feature X.'
They end up getting feature Y and Z at a much lower price, and they're
happy."
Discount avoidance rule #4: Make sure that your
price list makes sense.
The litmus test here is whether your price list makes sense to
someone outside your company. Sure, you understand it, you wrote
it; but does it reflect the reality of your product's use in the
field?
"With a good price list, you can show it to them and they'll
understand it," Geisman says. "The tier breaks map into
what the customer is likely to do, the discounts don't rise too
sharply for too little volume, and the discounts are reasonable.
"For example, if someone spends a million dollars, you don't
give them 10% off — people that spend a lot of money expect
to get concessions."
AGI didn't increase prices across the board; some went up, and
some were "rearranged," Linsalata says. "In general
the core modules have not gone up in five or six years. What has
gone up is the network token.
"You can get a floating version of our software, and there's
a premium on that. because it provides tremendous flexibility and
value. In the last three years it's gone up from 25% to 50% of the
initial price. For example, you can get a node-locked version for
$10,000, or a floating version for $15,000."
The moral: AGI figured out how customers were using its software
and what mattered, then priced accordingly. To manage the floating
versions, AGI uses Macrovision's FLEXlm. "It allows anyone
to use our software, but only one person at a time," Linsalata
says. "You can empower multiple people to use the software
without getting another chair."
The moral revisited: Focus on value delivered today, not past pricing.
Many AGI customers see the floating version as an incredible value;
if they pay just 50% over the single-seat price, they can provide
access to an unlimited number of users. The fact that the price
of that privilege has gone up is essentially irrelevant.
Despite the successes, Linsalata says AGI isn't finished tweaking.
"We're always trying to do better," he says. "We
want to look at multiple unit discounts, and to evaluate dollar
volume versus quantity discount schedule. We want to know how we
should evaluate very large deals.
"We're a very vertical product; a government agency may come
to us and say, 'We want to standardize on STK, but your price sheet
stops at 10 units, and we need to outfit 1,000 people.' We need
to create a volume discount curve, and we still need to do further
analysis to come up with the right curve."
Discount avoidance rule #5: Build the configuration
before you talk price.
"Let's understand what your needs are" is your opening
gambit, Geisman says. Then, drill into detail: How many people are
going to be using it? Where are they located? What servers are they
running off of? And so on.
This inductive process lets you build a system to the customer's
specification. You can then refer to your price sheet and say, "Here's
our list prices, and here's what your price will be based on what
you've told me."
Then, when the customer comes back and says that's too much, your
response, Geisman says, is clean and simple: "I guess I misunderstood;
what do you want me to take out?"
Customer: "I don't want you to take anything out."
Next
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The original article appeared on June 24, 2003 on SoftwareCEO.com.
To view it, click here.
Contents above Copyright (c) 2003, SoftwareCEO Inc. Reprinted
by permission. Other unauthorized reproduction prohibited.
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