Pricing deployment risks range from wasting your time to crashing your business model
The truth is, despite the popularity of software demand elasticity analyses, nobody knows their demand curve—how buyers will actually behave if you raise your prices by X or reduce them by Y. And there’s a whole lot that can go wrong when you deploy new pricing strategies.
This is the first in a multi-part series on the risks of changing software pricing. In this series, I’ll look at some of the specific risks that can capsize your efforts:
- Risk of false assumptions (e.g., What if higher net revenue doesn’t end up offsetting lower demand?)
- Risk of seemingly innocuous details causing negative impacts (e.g., Have you created a definition or threshold somewhere that is going to bubble up into unforeseen problems?)
- Risk in transitioning legacy customers (e.g., Are you going about it in a way that increases revenue or gives away value?)
- Risk of inciting salesforce sabotage or rebellion (e.g., Are your salespeople on board and able to fluently talk buyers through new pricing rationale, options and recalibrated value?)
Five fundamentals of software pricing risk
We’ll cover that list of risks and more in upcoming blogs. But for this kick-off to the series, I want to start with what I regard as the five fundamentals of software pricing risk:
1. Until you can predict where your net prices will land you’re just wasting your time (or worse).
There are systematic, consistent, proven ways to make more reliable assumptions, increase predictability of buyer behavior and minimize price change risk. That’s where every software company wants to go. But today’s reality is that many companies aren’t providing their salesforces with a rational, clear, effective pricing structure. Consequently, different sales groups often resort to “writing their own playbooks.”
In this kind of environment, pricing can become uncontrolled, highly variable and even chaotic. What you do to change your pricing doesn’t matter because nothing will ever improve. The executive team has lost all pricing power. You’ve also created a buyer’s market (savvy buyers, aware of your discount span, will push to no end). Even your best salespeople will forever be at a disadvantage.
2. Chaos is a risky place from which to deploy pricing changes.
Executive teams have no clear visibility into what’s happening on the ground. Their only read of the demand curve is through their sales teams (who, in aggregate, are not the best readers of all the dynamics at play). Also, salespeople who aren’t on board with a new pricing strategy can nullify it through discretionary discounting.
I’ve seen discounts as high as 99.99%. That was a case where company leaders believed their software’s value scaled linearly (quantity x list price). Since they had provided no framework for volume discounting, their salespeople had to quote ridiculous prices, like $120M on a deal that—after deep discretionary discounting—ended up closing at $120K.
Salespeople sometimes push back against new pricing with comments like “Customers will never pay that!” or “The new pricing model isn’t working.” They may also lead the buyer down a path that undercuts the new strategy. I heard one salesperson advise a prospect to consider an on-prem version of the software since “the cloud wasn’t ready.” In fact, the cloud version was ready—the executive team’s mission was to move customers to it—but the sales commission structure for cloud sales was not.
Another problem with chaotic pricing environments, especially if the company is growing: Executives may not be aware of inefficiencies that become glaringly obvious when change is introduced. For example, discounts may be on the rise, but you can’t see it. That could be because you have too many SKUs with too many complicated variations, or maybe your bundled SKUs and other packaging have evolved in ways that muddy discounting.
Multi-tiered discount schedules that make sense independently can result in weird mathematical effects when combined. Maybe you depend too much on averages and KPIs that obscure important nuances in customer behavior and trends. And watch out if you’re relying on undocumented tribal pricing knowledge—the riskiest place to be. All of these conditions can create unexpected complications and challenges when you’re trying to change pricing.
Raising prices in a chaotic pricing environment can lead to unforeseen problems with operations, sales teams and customers.
Fix the chaos first, so you can see what’s really happening on the ground and eliminate operational efficiencies, before you change your pricing.
3. The more you change, the deeper your risk.
If you want to just mess with your price points a little, then your risk is probably just that you waste your time. In a chaotic environment, list price increases will be absorbed by discretionary discounting, resulting in net prices on par with the net prices you had before the increase. But if you want to make a bigger price swing—careful.
I know of an executive who wanted to increase prices by 30%, and another who wanted to decrease them by the same amount. Both were making decisions based primarily on competitor pricing, which is a very risky way to do it. Their assumptions (in one case, that higher net revenue would make up for lower demand; in the other, that higher demand would make up for lower net revenue) were not backed up by adequate data or modeling.
If you want to change more than the price, you take on more risk. For example, many companies refresh packaging along with pricing. But limited executive visibility into what’s happening on the ground leads to mistakes in identifying the “ideal customer” and segmenting buyer populations. Or maybe they make unwarranted assumptions, skewed by outliers within the customer base. Such blunders can result in ineffective packaging and GTM strategies, raising deployment risk.
And what if you want to change your entire monetization strategy (licensing, packaging and pricing, including discounting framework)? Many companies do, as a thorough revamp often delivers the greatest rewards. But if you initiate this scale of change from chaos, the risks to your operations and business model can be quite substantial. Without full visibility, you may pick a licensing metric that is extremely difficult to estimate, turns out to be a nightmare of complexity to manage, or just never delivers the expected results. And when you change your metric, you change the “blueprint” of probable objections your salesforce is likely to encounter—so they need to be on board and fluent in countering those objections and helping buyers traverse the “then” and “now” of monetization.
4. Fixing the chaos is a prerequisite for successful pricing change.
The first step in minimizing price change risk is to leave chaos behind by adopting more strategic, systematic, data-driven software pricing methods. A fundamental piece of this is reining in discretionary discounting with rational list prices and an array of structured incentives that reward customers for buying more.
There’s more to it, but my point here is that once you have these systems and best practices in place, the executive team regains visibility and control. They have a reliable foundation for designing and deploying change—from price tweaks to full monetization strategies.
Not only that, but salespeople gain more flexibility and can reach new-found levels of success. It’s common for top-performing reps to make 200%+ of plan their first year after emerging from chaos.
5. Understanding willingness to pay is a process, not a project.
Once you have that foundation, you’ll be able to not only change pricing with less risk but begin a series of controlled experiments to better understand and push the boundaries of your buyers’ willingness to pay. This is an empirical, reliable way to do demand elasticity analysis, firmly rooted in how customers actually behave (not just what they say). And here is where pricing change can really pay off, because it happens subtly, systematically and incrementally.
This approach helps you keep your prices aligned with customers’ perceptions of the value they derive from your software. It provides a firm foundation for transitioning legacy customers to the new pricing over time. It’s also how you harmonize pricing with the rate of new value creation from your roadmap.
Stay tuned for more details on risk based pricing
To find out more about reducing your risk when making software pricing changes, check out our next article in this series: The impacts of grandfather pricing and the top five best practices for transitioning existing customers to new pricing. Or contact me at firstname.lastname@example.org.