Pricing Pressure

Sources of Pricing Pressure

Published: June 13, 2014 | Updated: February 1, 2022

If you haven’t heard of Sandhill.com or the Sandhill Group, you have now. Sandhill.com is a site dedicated to providing insights and business strategies for the software, cloud, mobile and Big Data ecosystem. They have conducted all sorts of interesting research projects and studies.

In Sandhill’s latest study of trends in the software industry, pricing is once again a key issue. Publisher M.R. Rangaswami discusses the five sources of pricing pressure for software companies.

The Quick Summary

The five major points of pressure are:

  1. Trying to win the “value” sale
  2. Pricing for the “right” type of customer
  3. Maintaining agility
  4. Selling a “solution”
  5. Enables apples-to-apples comparison for true-ups.

For more detail on each point, head on over and read the article.

Some Thoughts on Selling Value

Selling value has always been a sticky wicket, as they say in Europe. And that’s because it really depends on who you’re trying to sell value to and how they see it.

Selling value to smaller companies can be challenging — especially when a founder or CEO is involved. They want to make sure they are not missing an opportunity that will help their company grow. But they are also risk-averse and “spending averse”.

They will spend lots of time in detailed discussions and demos involving many hours with your sales team as they grapple with risk. Once they are over that, they will deal with how much money they’ll have to spend. Even if you’ve made the strongest case for how your offering is essential for their company’s success, you will still meet extreme price resistance.

As companies get larger, and therefore deals become larger, things begin to change. Although more people may be involved in the decision and risk is still an issue, selling the value of addressing a pressing problem becomes easier. Buyers in large companies typically understand how to deploy capital and may even have budgets already set aside to solve particular problems the firm is facing.

Align Your Offering Model With Value

Selling value has a lot to do with how your Offering Model is constructed. An Offering Model for smaller companies typically includes standard bundles of software and services configured alone or together. Offering Models for larger companies may go beyond.

If your smaller company prospect can’t (or won’t) give you the amount of money you want, there is no reason to give them everything they want. Before, you start negotiating price, negotiate what you are going to give at a lower price. A well thought out Offering Model where the bang-for-the-buck (a.k.a. “value”) tracks with your price level lets you offer good value by giving a smaller bang for the fewer “bucks” the prospect is willing to spend.

Larger deals with large prospects may need even more flexibility in the Offering Model so you can put unique offerings together for them. In addition to the products and services of the standard Offering Model, larger companies may want different licensing arrangements (e.g. “All You Can Eat”), different services (e.g. on-site support for 30 days) or even custom versions of your solution geared towards them.

When you begin to package your offering in this way, it enables you to offer many different types of value. Putting together customer-specific deals allow you to charge a premium. A unique offering makes apples-to-apples competitive comparisons very difficult. It also makes customer-to-customer comparisons hard.

When Your Price Is the Only One That Counts

By the way, I know everyone with a SaaS offering wants to maintain a single code base and keep maintenance costs under control. But ask yourself this: under what circumstances would you say “yes” if a customer wants your multi-tenant product installed behind their firewall? Of course you may need access to their servers to keep the code base intact if they want your standard product, but you can charge them a premium for the value you are providing. In this example, the value you are providing is the added sense of control the customer gets by operating your software on their own infrastructure.

But what if a customer wants to break your business model by customizing your product? Your gut reaction may be “No Way” and your technical folks may even get upset stomachs. But don’t just say No. Come up with a dollar amount you would accept. That’s the premium you would charge for changing your business model and the value they get from a customized solution that only you can offer.

Besides, you never know. A price that may be astronomically high to you might be a good value to a large player in your market space. And isn’t that one of the beauties of a growing Saas firm? Your fortunes can literally change overnight.

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About The Author

Chris Mele

Chris Mele

Chris is Managing Partner for Software Pricing Partners, where he and his team have launched some of the software industry’s most transformative monetization strategies. As a former software company founder and leader, Chris focuses on the impact effective licensing, packaging and pricing strategies can make on the most essential software company metrics: revenue, profit and valuation. Under his leadership, Software Pricing Partners has become an influential voice for growth-oriented software companies both large and small.

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