pricing in a crisis economy pricing in a crisis economy

MarketShare, Inc.35 Main Street // Suite 8

Wayland, MA 01778Tel: (508) 647-0330

www.softwarepricing.com

© 2008 MarketShare, Inc.

Pricing in a Crisis EconomyPricing in a Crisis EconomyKeep your head…

Stay out of trouble…

Jim Geisman, founder & principal

Webinar Sponsored by

2© 2008 MarketShare, Inc.

Introduction

About About MarketShareMarketSharePricing software and systems since 1987Address client problems

Slow sales cyclesMoney left on tableChaotic / confusing pricingEntry into new markets / segments

Help clients meet objectivesImprove financial performanceStrengthen competitive positionFoundation for future growth

3© 2008 MarketShare, Inc.

Introduction SaaS InnocenceSaaS Innocence

4© 2008 MarketShare, Inc.

Introduction SaaS OpportunitySaaS Opportunity

5© 2008 MarketShare, Inc.

Introduction SaaS OpportunitySaaS OpportunitySquash?

6© 2008 MarketShare, Inc.

Introduction Good News: The Model WorksGood News: The Model Works

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Salesforce.com Subscriber Base and Revenue Build$175 M raised from capital markets

7© 2008 MarketShare, Inc.

Introduction But ItBut It’’s a Balancing Acts a Balancing Act

Slow new customer growth now means less viral growth in future

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Slow viral growth (units and upgrades / options) lowers value of new customer

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8© 2008 MarketShare, Inc.

Introduction So Watch Your Step So Watch Your Step

Uncertainty will last 1-2 years (58%)>2 years (28%)

Impact of downturn neutral to slightly positive On SaaS industry overall (75%)For some vendors (58%)

• But others will feel pain (30%)Spend more on sales, marketing, BD

Find new partnersAdd featuresExpand existing channelRepackage product

No differences?Do what’s right – for your company

9© 2008 MarketShare, Inc.

Introduction

TakeawaysTakeawaysExecute the basics

Attract new customersIncrease viral attractiveness

Don’t weaken yourselfDon’t underprice

Improve pricing executionMake sensible pricing decisions

Don't compete on priceThink before reacting to competition

10© 2008 MarketShare, Inc.

TopicsTopicsDon’t weaken yourself

Deep price cutsToo few packagesGenerous discountsIllogical discount structure

Improve pricing executionMake sensible pricing decisions

Don't compete on priceThink before reacting to competition

11© 2008 MarketShare, Inc.

Don’t Weaken Yourself Deep Price CutsDeep Price Cuts

Additional Volume Required to Maintain Revenues

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400%

0% 25% 50% 75% 100%

Price Cut %

Add

ition

al V

olum

e R

equi

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%

12© 2008 MarketShare, Inc.

Don’t Weaken Yourself Too Few PackagesToo Few Packages

Deliverables

Mon

ey

Get more Pay less

13© 2008 MarketShare, Inc.

Too Few Packages Offer Packaging AlternativesOffer Packaging Alternatives

Get morePay more

Pay less Get less

Deliverables

Mon

ey

Get more Pay less

14© 2008 MarketShare, Inc.

Don’t Weaken Yourself Generous DiscountsGenerous Discounts

# Units11050100250

1000

$ Revenues$2,00010,00025,00030,00050,000

$100,000

$/Unit20001000500300200100

95% discount

15© 2008 MarketShare, Inc.

Troublesome Discounts Illogical Discount StructureIllogical Discount Structure

Tiered Discount Revenues

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Unit Volume

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l Pric

eAverage

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rage

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e pe

r Uni

t

Discontinuous Revenues

16© 2008 MarketShare, Inc.

Discount Schedule Improve Structure & LevelsImprove Structure & Levels

# Units1 - 9

10 - 4950 - 99

100 - 249250 - 999

1000 +

$ Payment-0-

18,00082,000

148,000329,000

1,110,000

+ $/Unit20001600130012001050800

Tax-Table Discount Schedule

17© 2008 MarketShare, Inc.

TopicsTopicsDon’t weaken yourself

Don’t underprice

Improve pricing executionAlign pricing metric with valueUse correct comparablesPackage for valueDon’t confuse customers

Don't compete on priceThink before reacting to competition

18© 2008 MarketShare, Inc.

Improve Pricing Execution Align Metric With Value DriverAlign Metric With Value Driverper loan +++per patient +++per user ++per user ++per user +++per property +++Per user +per student +++per user ++per customer +++per user +++per user +++per patient +++per employee +++per user +per user ++per claim +++per bill +++Per gallon of fuel +++per patient +++per shareholder +++per user +++per employee +++per user +per ad +++per property +++per user +per reservation +++per employee +++per member ++per user +per user +per user +

19© 2008 MarketShare, Inc.

Improve Pricing Execution Align Metric With Value DriverAlign Metric With Value Driverper loan +++per patient +++per user ++per user ++per user +++per property +++Per user +per student +++per user ++per customer +++per user +++per user +++per patient +++per employee +++per user +per user ++per claim +++per bill +++Per gallon of fuel +++per patient +++per shareholder +++per user +++per employee +++per user +per ad +++per property +++per user +per reservation +++per employee +++per member ++per user +per user +per user +

+++++++++++++++++++++++++++++++++++++++++++++++++++++

+++++++++++++++++++++++++++

Vertical marketsAligned with customer’s business

per adper billper claimper customerper employeeper employeeper employeePer gallon of fuelper loanper patientper patientper patientper propertyper propertyper reservationper shareholderper studentper memberper userper userper userper userper userper userper userper userper userper userPer userper userper userper userper user

20© 2008 MarketShare, Inc.

Improve Pricing Execution Align Metric With Value DriverAlign Metric With Value Driverper loan +++per patient +++per user ++per user ++per user +++per property +++Per user +per student +++per user ++per customer +++per user +++per user +++per patient +++per employee +++per user +per user ++per claim +++per bill +++Per gallon of fuel +++per patient +++per shareholder +++per user +++per employee +++per user +per ad +++per property +++per user +per reservation +++per employee +++per member ++per user +per user +per user +

Horizontal and vertical marketsSometimes aligned

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+++++++++++++++++++++++++++

Vertical marketsAligned with customer’s business

per adper billper claimper customerper employeeper employeeper employeePer gallon of fuelper loanper patientper patientper patientper propertyper propertyper reservationper shareholderper studentper memberper userper userper userper userper userper userper userper userper userper userPer userper userper userper userper user

21© 2008 MarketShare, Inc.

Value-Aligned Pricing Metric An ExampleAn Example

Per-Connection Pricing + Type of Connector

22© 2008 MarketShare, Inc.

Value-Aligned Pricing Metric Selection GuidelinesSelection Guidelines

Aligned with customer’s businessPath to revenueFinancial-enhancing usageRevenue-generating users

Scales with value deliveredCan be estimated for budgeting

Accuracy less importantShould be “wired” into application

License servers, keysTransaction counters

23© 2008 MarketShare, Inc.

Improve Pricing Execution Use Correct ComparablesUse Correct Comparables

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e Pa

ymen

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K)

Perpetual Software Fee

Perp + M&S Fee

24© 2008 MarketShare, Inc.

Improve Pricing Execution Use Correct ComparablesUse Correct Comparables

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ts ($

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Perpetual Software Fee

Perp + M&S Fee

SaaS Breakeven

25© 2008 MarketShare, Inc.

Improve Pricing Execution Use Correct ComparablesUse Correct Comparables

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SaaS Software PLUS Hosting

Breakeven

Perpetual Software Fee

Perp + M&S Fee

SaaS Software-OnlyBreakeven

26© 2008 MarketShare, Inc.

Improve Pricing Execution Package for ValuePackage for Value

Take Away

How little needed to beat price?

Build Up

How much needed to justify price?

27© 2008 MarketShare, Inc.

Improve Pricing Execution DonDon’’t Confuse Customerst Confuse Customers

28© 2008 MarketShare, Inc.

TopicsTopicsDon’t weaken yourself

Don’t underprice

Improve pricing executionMake sensible pricing decisions

Don't compete on priceFind your nicheBe flexibleDon’t get trampled

29© 2008 MarketShare, Inc.

New Product Elements Find Your NicheFind Your Niche

Security

Integration

Flexibility

Low upfront costPay as you useMonthly paymentWeb-delivered application No / low need for internal IT

SaaS Benefits

SaaS Drawbacks

No IT budgetCustomer Types to Target

Price sensitive

Rapid deployment

Legacy apps

Risk averse

Need custom solution

Uncertain usageCashflow sensitive

Customer Types to Avoid

30© 2008 MarketShare, Inc.

Don’t Compete on Price Be Flexible with PaymentsBe Flexible with Payments

Up-front vs Ongoing Cume Payments

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Ongoing Payment

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DCF of Upfront + 5 ongoing payments @10% Discount Rate

Pay less upfront

31© 2008 MarketShare, Inc.

Don’t Compete on Price Be Flexible with PaymentsBe Flexible with Payments

Up-front vs Ongoing Cume Payments

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0 5 10 15 20 25 30

Ongoing Payment

Up-

fron

t Pay

men

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DCF of Upfront + 5 ongoing payments @10% Discount Rate

Pay less upfront

32© 2008 MarketShare, Inc.

Don’t Compete on Price Be Flexible with PaymentsBe Flexible with Payments

Up-front vs Ongoing Cume Payments

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DCF of Upfront + 5 ongoing payments @10% Discount Rate

Pay less upfront

Pay moreoverall

33© 2008 MarketShare, Inc.

Don’t Compete on Price Avoid Being TrampledAvoid Being Trampled

34© 2008 MarketShare, Inc.

Avoid Being Trampled NetSuiteNetSuite Financials*Financials*

Revenues Up 44% ($40 vs $28M)

Gross marginDown 4 points (66% vs 70%)

• 6% declineSales & Marketing

Up $6M (40% growth)Still 50% of revenues

Operating CashflowMore negative (-$6M vs. -$1.8M)

* Q3 2008 vs Q3 2007

35© 2008 MarketShare, Inc.

WrapWrap--UpUpExecute the basics

Attract new customersIncrease viral attractiveness

Don’t weaken yourselfDon’t underprice

Improve pricing executionMake sensible pricing decisions

Don't compete on priceThink before reacting to competition

36© 2008 MarketShare, Inc.

WrapWrap--UpUp Final ThoughtsFinal Thoughts

Align price with value

Use packaging to add value

Link payment timing to value delivery

Test prices, packages, offerings

Watch billings and cashflow

37© 2008 MarketShare, Inc.

WrapWrap--UpUp Are Things Really This Bad?Are Things Really This Bad?

SaaS IndexSW Index

38© 2008 MarketShare, Inc.

WrapWrap--UpUp Maybe Not!Maybe Not!

http://tinyurl.com/no-decline

39© 2008 MarketShare, Inc.

Thanks!Thanks!

Jim Geisman

jimg@softwarepricing.com

508 – 647 – 0330