Avoiding the Perils of Pricing
By Jim Geisman, MarketShare,
Inc.
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-b acked 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.
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 salesforce
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 salesforce, 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 salesforce. 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 salesforce think your prices are too high,
ad hoc discounting is likely to occur. When your salesforce
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."
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