Product pricing is more of an art than a science especially in enterprise software. The most prevalent strategies are Competitive Pricing and Value-Based Pricing, together with a variety of different packaging options and other factors that enable product owners to arrive at the different price points.
When developing a new enterprise software product into an existing category, it is common practice to research how competitive products package and price. For well-defined product categories, with expected feature sets, this can frequently be the model chosen.
For example if you consider cloud storage providers, a competitive pricing strategy would be to price consistently with the market leaders. Pricing consistently with the competition does not mean setting identical pricing. It does mean that you would price your product in a way that allows for easy features and billing options comparison. Then depending on your strategy, you may choose to match, to undercut their pricing to penetrate, or set a premium to encourage a higher value perception with the competition.
Competitive pricing research is easy to do for many products, but not all enterprise products categories. Especially in commoditized categories, it is now common practice to publish transparent pricing details for most options. However, these prices are often given for a limited number of tiers and will require a prospective customer to call for large enterprise pricing. Thus, where pricing information is not readily available through market research, competitive pricing is not a very practical option for your product.
For the vast majority of those in enterprise software, the ideal pricing strategy is value-based pricing. In short, the aim is to understand the value the product brings to the customer, then price according to that (actual or perceived) value. For example, selling on the basis of cost savings, increased revenue, or reduced risk is the primary way that most enterprise software is sold today. The challenge is to accurately define the monetary value to the customer that the product offers. Once you define the value, then you determine how much of that value prospective customers are willing to give up in search of a solution. Not all customers will value or pay for the benefit equally.
Packaging Option and Value Drivers
On top of Competitive Pricing and Value-Based Pricing, product owners use other variables to effectively differentiate the value they offer to the customer. Unlike physical goods, where the product is fixed when shipped, in software products there are variables in how the products get used. These variables drive both the competitive benchmarks and value derived by the customer through the usage f the product.
Thus, it’s essential to identify the attributes / factors that drive value to the customer. When done well, pricing can scale effectively with the value derived from product usage. Such variability in the pricing model typically entails a lower barrier to initial use with an upside in revenue creation as the customer expands usage of the product over time /volume /number, etc. In most SaaS products, we can see value being driven by the number of users. Pricing is on a per user basis within some tiered price points, which allows for discounts at higher tiers.
However, there exist many other value driving attributes / factors that should be considered in combination with user volume. The key is to identify the attributes that are most aligned with value creation for the customer. Few examples of complimentary attribute/ factors that are used are:
- Storage Capacity for Cloud Storage providers
- Number of Partners for a Supply Chain Management solution
- Number of Employees for an HR solution
- The volume of Transactions for a Payment solution
- Number of Devices for an Enterprise security solution
- Number of Projects for a Project Management solution
Not every attribute / factor in your product adds equal value to all customers. Rather than making all customers pay for and receive all product features, you can package them differently into product offerings that provide additional levers to fine-tune pricing models. These product offering packages are ways to differentiate your product from the competition.
Apart from splitting product features into different offerings, the opposite packaging option may also be exercised. So if you offer a multiple of related products, it is possible to bundle them together at different price points.
In practice, enterprise software companies leverage two primary pricing strategies Competitive Pricing and Value-Based Pricing. In reality these two are frequently used in combination, however, in most enterprise software product categories Value-Based Pricing is the preferred strategy today as it most aligns the product with the perceived value the customer receives and works to ensure optimal price points for the product owner.
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Christos Lytras – Managing Partner