Why Pricing Models Often Miss the Boat

SPP Monetization Model

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These days, it seems like most software companies are focused on their pricing model because they are unhappy with their pricing in some way. In come the pricing experts and out comes yet another pricing model that will work for a time, until it’s out of date again.

What is going on why is it that pricing models just don’t last?

Stop Focusing on the Pricing Model

Software companies are a changing landscape of capabilities. What you provide customers today can rapidly change tomorrow as you develop more products and services. But your pricing represented a moment in time, say last year, and now here you sit with more capabilities trying unsuccessfully to jam them into an already out-of-date pricing model. Customers are complaining and your salespeople are telling you that it’s increasingly difficult to land the larger deals.

So what do you do? If you’re like most software companies, you open up the company checkbook and invite the guys you brought in last year to fix the mess you’re in. But then, if you do that, you’ll be in the same pickle this time next year.

And that’s because your pricing model is one-third of the puzzle you are trying to solve. Ever try to complete a puzzle with your grandmother with two-thirds of the pieces missing? It’s nice spending time with her of course, it’s just that you’ll never complete the puzzle together.

Start Focusing on Monetization Models

Pricing models fall short in implementation because they represent an incomplete solution.
A pricing model is one small part of monetizing all the products and services you offer to all the types of customers you serve. It turns out there are two other models you need: the License Model and the Offering Model. Without these, you’ll be messing around on website pricing pages until you’re blue in the face.

Pricing Model vs. Monetization Models

Monetization models are more advances than Pricing Models. It’s looking at the whole picture, instead of just one part. Below are just some of the many differences between a pricing model and a monetization model.

PRICING MODEL
MONETIZATION MODEL

Narrow focus, typically on one application of a product line and its associated pricing tiers.
Broad focus ensuring monetizing fits all of a software company products and services.

Tendency to get caught up in mechanics and administration.
Price setting is seen as just one part of a Monetization Model.

Short term focus on pricing the here and now, fighting fires – often driven by a pressing deadline.
Looks to monetizing the product road-map including future products and services as well as related products and services (including partners).

Majority of time spent finding things to charge for and then determining “the number”.
Heavy focus on balancing simplicity vs. precision for ease of use and understanding across customers, sales and marketing.

Lacks an orderly process to explore offering structures and packages. Tendency is to start with product specs.
Uses a structured process for deep exploration of product and service bundling to more fully address customer segments and needs.

Primary dialogue is around pricing tiers and website pricing pages.
Price levels and discounts are only developed after it is clear what is adding value and how value is added.

“Big deal” focus is typically focuses on amounts paid and rarely takes into account other value trade-offs.
Addresses big deal scalability with discount schedules, volume roll-outs and other creative ways to attract game-changing clients.
  • A Pricing Model has a narrow focus, typically on one application of a product line and its associated pricing tiers. a Monetization Model has a broad focus ensuring monetizing fits all of a software company products and services.
  • With a Pricing Model, you have a tendency to get caught up in mechanics and administration. With a Monetization Model, price setting is seen as just one small part of the puzzle.
  • Pricing Models typically have a short term focus on pricing the here and now. A Monetization Model encourages you to monetize the product road-map including future products and services as well as related products and services (including partners).
  • Pricing Models encourage you to spend the majority of your time finding things to charge for and then determining “the number”. A Monetization Model encourages a heavy focus on balancing simplicity vs. precision for ease of use and understanding across customers, sales and marketing.
  • Pricing Models lack an orderly process to explore offering structures and packages, encouraging you to start with product specs. A Monetization Model uses a structured process for deep exploration of product and service bundling to more fully address customer segments and needs.
  • Pricing Model’s primary dialogue is around pricing tiers and website pricing pages. In a Monetization Model, price levels and discounts are only developed after it is clear what is adding value and how value is added.
  • Pricing Models “Big deal” focus is typically focuses on amounts paid and rarely takes into account other value trade-offs. A Monetization Model addresses big deal scalability with discount schedules, volume roll-outs and other creative ways to attract game-changing clients.

What To Look For

Throughout our site you’ll read both the term pricing model and Monetization Model. Whenever we refer to pricing model, we’re referring to a very small piece of the puzzle — the one-third part of the whole that everybody wants to focus on: setting prices. This also includes the over-focus on website pricing pages.

When we talk about a Monetization Model, we’re talking about the integration of three models:

  1. License Model: what you charge for, the rights to use, the payments and the terms and conditions.
  2. Offering Model: The features and packages you offer as well as the services you or your partners provide.
  3. Pricing Model: The amounts paid and the incentives offered to each customer segment.

To get a complete picture of how to fully monetize your intellectual property, you ultimately need a more mature way of thinking about pricing within your organization. Understanding a Monetization Methodology gives you a way to think through the issues you encounter and rapidly identify the source of the problem. Often times the issue has little to do with your prices.

Knowing how to reconfigure your License Model and your Offering Model will help you drive more revenue with a lot less friction in your sales team. On your next pricing model gig, make sure you get a team that fully understands all three parts of how to fully (and correctly) monetize your IP.

How do you know if you get it right? That’s easy: once your new Monetization Model is implemented you should see significant strides forward in revenue generation. If it’s just more of the same, well, it’s probably because all you did was move around one-third of your puzzle pieces.

Do you really have a pricing problem – or is it possible the issue is is a bit deeper? Let us know in the comments!

About the Author

Chris Mele

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Chris is a software monetization and pricing expert and former CEO of an award-winning SaaS company. When not working with fast growing software companies as co-owner of Software Pricing Partners, he's working on his first book to help founders create more powerful businesses & personal lives. An avid scuba diver, Chris should probably move closer to the beach.

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