Pricing as a topic is very close to my heart and hence it did not take me a lot of thinking before I selected this topic for my second post. The reason why I am a big fan of pricing is because I believe that pricing is definitely the single biggest reason why a prospect will not buy your product or service, and it is one of the biggest reasons why (s)he would. Now don’t get me wrong, of course the product features, reliability, brand etc. are equally important in the buying process but these are assessed good or bad only in the context of pricing.
The monetary consideration a buyer foregoes in exchange of a software product or service is the single biggest risk a customer takes against the service being offered. This is the risk of non deliverance on the expected benefits against the outlay. The more the price, the more the outlay and hence more the impact of the risk. Although the chance of risk is controlled by the merit of the product/service the extent of impact is certainly controlled by price.
The way you price is the single biggest barrier for your prospect to enter into a contract with you.
Now, I am in no way suggesting that to reduce the barrier “the per unit price” has to be discounted, definitely no. But to reduce the barrier, the price (customer’s risk) has to be positively co-related with the results your products/service promises to deliver. A few organizations do speak about value based pricing which will try and establish this correlation but the instances of this are too few to suggest if the trend has caught on. In most cases it is a way to gain a prospects attention akin to other catchy(?) words like “New”, “Improved”, “Better” and so on.
Traditionally pricing of software has been very defensive, by defensive I mean correlating pricing with either the costs of delivering the goods or competitive prices. That much coveted correlation with the benefits realized by customers remains elusive. The closest that software pricing has got to this is by linking pricing with “extent of usage” by customers – licensing software products by number of users, per processor etc are examples of this approach. Software as a Service (SaaS) further promises to refine this but then again it’s a promise.
One of the challenges of creating a price/value correlation is that while my cost and price are tangible, value is subjective, it’s interpreted and hence there is no universal scale on which value can be measured. This challenge is a very difficult challenge and is one reason why most software providers have kept some distance from it.
This was an introductory post and in my next posts I intend to further explore this topic and write about the various ways in which software product vendors and software service vendors have priced their goods. I would follow these posts with a post on “value based pricing” and its application in the context of IT service provides. I will also be curious to know if you have any suggestions on any other topic around pricing, do let me know.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment