Consistently getting paid fairly for the value your software delivers is not as easy as it sounds. Software companies routinely over-analyze and over-think their strategies and tactics until executive management is paralyzed into inaction. Once all parties involved are sufficiently exhausted from the initiative, changes are often shelved until a later date or next year’s major product release.
When I think about software value, I visualize Cinque Terre, a craggy region of Italy, carved up into vineyard plots, where they produce some of the country’s best-selling wines. Each vineyard has its own way of doing things and produces a distinct (sometimes highly differentiated) product. Some of these wines command premium prices relative to competitors from the region and abroad.
Cinque Terre is a helpful frame of reference when thinking about software value because software markets are also crowded with competitors. Companies need to differentiate their products in the customer’s mind and continue to cultivate that perception of value in the ever-evolving landscape of how organizations use software to produce economic gain.
Trouble in one software company’s “virtual vineyard”
A recent client of ours is a clever and innovative software company. In its virtual vineyard is a platform for software capabilities, services and infrastructure. This platform enables customers to rapidly spin up and scale an open source content delivery platform. Kind of like how the sturdy stems of Cinque Terre grapevines support an abundance of leaves and grapes.
The software company claims that the value it provides is predominantly delivered via this platform. A secondary source of value is tools that enhance the platform. When the company first came out with these tools, they were a nice value sweetener since they went beyond what competitors in the content management space offered. Kind of like a vineyard that plants cocoa trees in-between rows of vines so it can offer a gift box of handmade chocolates with each case of wine.
Salespeople have successfully defended the company’s view of value for years. Everything the company does drives from this conviction about the high value of its software platform. Marketing material, sales decks and other supporting assets make the point again and again.
But there was trouble in the virtual vineyard: A ton of money was being left on the table because customers were being offered incredible discretionary discounts (roughly 15% of their $60M in revenues). The company’s incredible growth trajectory came with a hefty opportunity cost, to the tune of $9M. Even the investors, who live for growth, were worried that so much money was being left on the table.
For over eighteen months, the executive team made many changes to address all sorts of potential problem areas: marketing and lead gen, sales and sales leadership, operations, finance, billing, customer success, support and eventually pricing. They launched a series of initiatives to address all of these areas. Improvements were made, but the overall result was nowhere near what they were aiming for. In other words, they pulled weeds in some areas of their virtual vineyard, but problems remained or popped up in others.
They had worked their collective tails off and still hadn’t solved their key challenge: recapturing a meaningful amount of the $9M in excessive discounting required to maintain their growth rate. And each year they grew, their discounts grew too.
They decided to get some help.
That’s where Software Pricing Partners came in. Our first question was: Why, when they were delivering value that was, from our perception, off the charts, did they have to discount so much?
Digging Deep To Why You Aren’t Getting Paid Fairly
We dug in to find out. All the surveys, NPS and other reports we reviewed substantiated the company’s view that customers loved their platform and tools. But our research team of anthropologists, after some clever qualitative and quantitative research, uncovered something subtle, yet intriguing. A certain group of their users was deploying some of their tools in a unique way. These users had even evolved new processes and organized their teams in creative ways to integrate third-party products that enhanced the effectiveness of our client’s tools.
Armed with this finding, we dug deeper with internal salespeople, who are always invaluable since they talk to prospects and customers all day. They reported back that yes, while customers did love both the platform and the tools, in some cases certain types of tools weren’t being adopted right away.
Both pieces of evidence helped us understand how this company’s prospects and customers were penetrating value defenses. Even their most seasoned salespeople were surrendering, forcing the deal desk to come up with a discretionary discount in almost every skirmish.
Pricing Problems May Not Be Noticeable At First Glance
Here’s what the problem was: Over the years, what customers wanted from software tools was changing. As a result, while most customers saw some of the tools offered by this company as high-value, they perceived others as low-value since they were lacking important capabilities other vendors now offered. Customers argued, and very effectively, that they shouldn’t have to pay full-price if they weren’t going to use all the tools.
So if you think about the problem in Cinque Terre terms, it was like a vineyard owner being forced to substantially discount his wine because customers were complaining that the gift box of chocolates included with each case of wine didn’t have the latest flavors, like chile-coconut-bacon and avocado-ginseng.
Finding A Solution That Benefits The Company And Customers
The solution we recommended realigned the way value is reflected in the company’s pricing strategy. Their new strategy doesn’t charge for low-value tools. These have been stripped from the company’s virtual vineyard, and the revenue they would have generated is now coming from other aspects of the software monetization strategy.
Now salespeople no longer have to defend price based on value that isn’t really there. Revenues are up, sales cycles are faster, growth is outpacing competitors’ and over half of the $9M in discretionary discount dollars has already been recaptured.
To Unlock Your Company’s Potential, Reexamine Your Virtual Vineyard
Maintaining a healthy vineyard sometimes means having to burn down sections, reconfigure the landscape, replant and even cut out or replace some vines.
Remember that, in the minds of your customers, value you claim today does not universally give you a claim on that value tomorrow.
Getting paid fairly for the value you deliver is about understanding value in all of its various and ever-changing forms. That takes looking beyond the data and getting into the minds of your customers. It’s about the clarity of your value message and the courage to do something different despite intense competition crowding in from vineyards on every side.
Anything less is just messing around in the weeds.
But if you dig down to discover what makes your vineyard grow and vigorously cultivate this strength over time, you’ll be the toast of your customers. Your software will produce “many happy returns” (as in strong revenues)—”cento di questi giorni!”
And your virtual vineyard will last a hundred years—“cento anni!”