If you’re a sports fan, you are probably familiar with “Moneyball”, the story of baseball’s small-market Oakland A’s successfully deploying a team of data analysts to build a roster of lightly regarded players and guide in-game strategies. Their achievements against deep-pocketed, big-market teams—which included the then-longest winning streak in league history—inspired baseball’s incredible transformation from traditional game strategy dictated by intuition, to one now heavily influenced by data.
A similar transformation is underway in today’s software industry, specifically regarding software pricing, where companies are using a heretofore untapped reservoir of data to overhaul and manage their pricing strategies and pricing models. The results have been equally impressive, with early returns pointing toward accelerated deal flow, higher margins, easier scalability and more predictable performance.
The software industry is moving toward sophisticated software pricing strategies
Surprisingly, SaaS companies—even those with rigorous development processes—often establish their pricing in a relatively unsophisticated manner. Their model is frequently patterned after competitors and on loose assumptions of the value their solution provides. Even more frequently, ongoing management of their pricing model is limited to a ‘deal desk’ that oversees negotiations, and an occasional repackaging of their offerings as new product features are added.
But an influx of data scientists and the advent of exciting new business intelligence tools are changing that scene. Together, they are making it possible for SaaS companies to understand exactly how and to whom their software is being sold and identify the factors that create deal friction, revenue gaps and margin erosion.
Above all, data enables the software company to anchor its pricing strategies in Reality. Without the data to support it, pricing decisions can only come from narrative, assumptions and anecdotes—a much more precarious and risky foundation.
Take for example the value of data regarding software discounting. It is quite common for software executives to underestimate the variety and amounts of discounts that flow through their company’s book of business. They believe they know what is happening, until a scatter chart plotting every deal by discounts and other attributes (e.g., size, contract length, timing of sale, etc.) tells them a very different story.
Three roles data serves in software pricing
Data serves three roles in software pricing, each of which is critical to an effective software pricing strategy:
- It will uncover things you didn’t expect.
- It will confirm things you did expect.
- It will raise questions that cause you to dig deeper and learn more.
What kind of data is needed for a competitive pricing strategy?
Certain types of data are essential to pricing strategy development. At Software Pricing Partners, we start with data on list prices; transactions—including which SKUs were purchased by which customers; discounts—including structured and discretionary; surcharges; lost deals and customer churn. The objective is to focus on data that uncovers real company and customer behaviors which can lead directly to pricing model improvements.
Compiling this data has been a challenge. While the necessary data does exist at most software or SaaS companies, few have true data warehouses with data harmonized in a consistent structure across all parts of their organization. More typically, the data is held in silos, such as CRM, CPQ, accounting and customer service systems, and terminology in one system is different from terminology in another.
But with today’s resources, compiling data should no longer be an obstacle, and SaaS companies hoping to improve their pricing model must make it a priority. The risks of making decisions about pricing strategies without data are simply too high.
Armed with the right data, pricing strategists can identify critical issues and valuable opportunities—e.g., where revenue leaks are coming from, where there are obstacles getting in the way of deep deployment, how pricing inconsistencies are elongating sales cycles and creating market fairness issues. A systematic approach to gathering and viewing data through a pricing lens makes it possible to build pricing strategies that work in the real world.
Pricing data is constantly changing
We can’t discuss the importance of data to your pricing success without also recognizing its dynamic nature. Good data is not a snapshot of past history. It lives within your customers and your organization and as it changes, so too must your pricing model.
This is where business intelligence technology is becoming so critical to software pricing success. Fed by live transaction and usage data, the technology monitors the impact of a pricing model in real-time. The proprietary system Software Pricing Partners created enables our analysts to measure the impact of the pricing model and isolate optimization opportunities. It gives us the insight to answer important questions, like which customer segments have growth potential, what elements of the software offering are gaining or losing traction or how well Sales are adhering to the model. With the right data, you can have competitive pricing strategies ready for implementation.
The value of building software pricing models on data
While the sophisticated use of data to build and manage pricing models has been evident in large software enterprises for years, it is now clear that companies of all sizes are following suit. Not only is this driven by the availability of data experts and new technology, but also by its impact on all-important company valuations. Joel Lanik of the private equity firm Frontier Partners, which invests solely in software companies, explains this perfectly:
“Software companies that apply real data analytics to their pricing model give investors a higher level of confidence in their business practices. It is an indicator of a much more mature business.”
Joel Lanik – Frontier Partners
My advice? Get ready to play smarter. ”Moneyball” has come to the software industry. Even your investors are getting in on the game.
