Pricing Grader

Pricing as a Competitive Weapon

Getting the Deal at the Maximum Price

"How much do we want to charge for our software?" is one of the most spirited of all internal conversations.  Should we price by named user, concurrent users, company size, module or by a combination of those options, depending on the length of the contract term?

Pricing isn’t just controversial; it can be a competitive weapon, helping to distinguish a company from its competitors.  Large companies, such as Salesforce, have a structure that enables some latitude for discounting, but which maintains a fairly tight grip on deal-by-deal pricing tactics.  Smaller companies often try to win by using deep discounts in the absence of establishing pricing value and power.
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I’ve never quite understood sales reps spending an entire sales cycle working to establish unique business value differentiating their product from competition, only to toss all that effort by the wayside merely to close a deal by the end of the quarter.   Negotiating on price is one thing, but totally capitulating just to drive business by a date is something else entirely.
By discovering what compelling event is driving the timing of the deal, the sales rep receives the benefit of selling when the customer needs the product, rather than when the software provider wants to sell it.  Customers have gotten so accustomed to "end of the quarter discounting" that they use the software companies' timing needs against them in order to secure a lower price.
Regardless, what are the benefits of each pricing method?  Which approaches are in the customer’s best interests?  Which approach is best for us?  How influenced should we be regarding the pricing approach employed by our competitors?  Certainly, today’s SaaS companies are mostly charging on a named user basis, as it is easy to explain to customers and easy to internally administer.  Contractually outlawing “login sharing” helps to enforce a “one user, one login” model.
Concurrent user pricing should be discouraged; it is difficult to enforce (particularly if offline users are part of the mix) and does not encourage the customer to maximize the number of people using the product.  In fact, it drives the opposite behavior.  Even so, determining what happens when the customer crosses the concurrent user limit can be a nuisance for all concerned.
Meanwhile, “enterprise” pricing is a terrific approach for very large deployments when the customer doesn’t want the administrative overhead associated with counting user types.  This “unlimited” user approach limits the expansion possibilities (outside of new products) and thus, needs to be seriously evaluated before offering.
Ultimately, the most effective way to price SaaS offerings is a named user model, based on user types by persona coupled with discounts based on volume of users and length of contract term.  This method allows for having a base module price with separately priced add-on modules so as to accommodate the various needs of individual user constituencies.  With this approach, all users are not priced equally, but start at the same unit price.  Then, depending on specific capability needs, users can have incremental functionality priced for them.  For example, an executive might want various dashboarding capabilities that an end user might not need.  With this approach, each user pays only for the requisite functionality for his/her role in the organization.
An alternative is to bundle various a la carte options into broader user types.  For example, if there are five different user types/modules in addition to the base module, pricing the bundle at a lower cost than the sum of all the incremental modules incents the customer to more broadly deploy the software, without worrying about which user needs which user type.  Either way, the customer gets to choose which is in their best interests — a la carte pricing or bundled pricing.
Layered on top of this pricing element is contract term.  Commonly in the SaaS world, longer contractual commitments warrant additional price discount consideration.  Longer contract terms benefit both parties; from the customer's perspective, the software unit price won't be raised during the term of the agreement, providing longer term cost predictability, and from the vendor's perspective, the longer term provides a more committed customer that doesn't have to be "resold" every year.  Shorter agreements, by contrast, provide greater flexibility for the customer, allowing for user reductions at the end of each term, but are likely to have unit price increases more frequently.
Leveraging these various pricing levers (user volume, role based modules, contract length) provides a framework whereby everyone benefits, based on the individual needs of the customer and the vendor.  Software providers often encourage one approach over another to drive a desired result, while customers can leverage this approach to secure the most "form fit" price possible.
Determining the price for the base module is key, as it is price that will most likely be compared by the customer versus competition (as presumably, the incremental modules are unique capabilities offered by the software vendor and warrant additional charges).  In the end, this pricing approach will likely maximize the value of each deal for the software provider (likely at least 20% more than they are currently receiving if they don't user this approach).  The customer, meanwhile, gets the option of hedging with a shorter, but more expensive agreement, or securing a longer agreement with more favorable pricing. 
Ultimately, a win for all parties . . .

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Dave Levitt

Dave Levitt brings a wealth of experience with more than 40 years in the enterprise software space. Having served as Sr. Vice President, Worldwide Sales, at LiquidFrameworks, Dave played a crucial role in scaling their "quote to cash" platform, leading to its acquisition first by Luminate and then by ServiceMax. His strategic prowess was further proven as he created and spearheaded the Energy Business Unit at Salesforce, growing it from inception to $100 million in total contract value. His extensive background also includes sales roles at SAP, Siebel Systems, Oracle | Datalogix, and as a board member for several tech innovators.