Video: The Risk of Waiting to Fix Sub-Optimized Pricing

Transcript of Chris Mele’s talk:

One of the fundamental differences between a software company and, let’s say, a manufacturing operation (where we’re producing something that you can actually touch with your hands rather than see on the screen) is that of the velocity of change and the velocity of product that’s being produced. Software companies produce a lot of product every month that goes by; there might be a new report or a new capability, maybe the potential seed of a new product. Those capabilities need to be monetized.

When we have a manufacturing operation, we can do a lot of that work up front. We can sort of have an event where we think about pricing, and then we have this static object that needs to continually be managed, maybe through inventory, and managed through how we’re going to price on an ongoing basis.

But software companies are very unique. Because next month, the value that you deliver could be very different than the value that you delivered the prior month. And so you, you have to take that into account; you have to know how capabilities will be monetized on an ongoing basis. Most software companies start their journey by making up their pricing. Then they began the process of putting all of their heat and energy towards sales, marketing and product development. And pricing really ends up taking a backseat. And interestingly enough, it rarely comes to the forefront until much later in the company’s history. Usually, when there’s some sort of systemic issue or problem as reported by the sales team, or as reported by the CFO for revenues or for profitability, or something like that.

At the end of the day, what we build can be complex. But what has to be delivered to the sales team has to be very simple. If they cannot describe your pricing approach in two sentences on the phone, live with a prospect, you’re dead in the water.

There’s this misnomer that in the world of software, where “we can sort of make it up later, you know. We don’t really need to worry about having the discipline of pricing, because after we hit that growth spurt, we’re growing like mad, and everything’s wonderful. And we just don’t want to rock the boat.” I think that’s a really dangerous outlook. Because, there is a limited amount of customers in every market. So the earlier that you understand the value that you deliver and the more clearly that you can describe that value, the better.

Once you get past startup stage into emerging and then start to get into your growth stage, you really want to make sure your revenue model and the approach around your monetization strategy is very well thought out with the same discipline that you think about product and the same discipline that you think about sales and marketing. These variables are very different from the other variables that an executive team usually plays with. And they have far reaching possibilities in impacting the overall business model and inflating the revenues of the company.

I think it’s often the idea of you spending so much time in new customer acquisition or selling a new product. If we just look back to the existing customers that we’re onboarding and find a way to monetize them better, we can really push the needle on the revenue model and we can really push the needle on the amount of profitability that we can generate underneath the software business model.

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