By Jim Geisman, Software Pricing Partners

In partnership with Logi Analytics

THE ART OFPRICING SOFTWARE FEATURES

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INTRODUCTIONThe purpose of this ebook is to provide software executives with a framework to help them make faster packaging decisions and accurately predict revenue before launching new products and features.

Introduction

Why Should I Read This?How do you estimate how much revenue you will get from a feature you are just thinking about? Estimating revenue means estimating demand and price. Before you can estimate either, you need to decide on packaging. Is the feature significant enough to be a new product or a new edition that extends an existing product line? Should the feature be bundled into an existing product or be offered as an add-on or option? These decisions affect the demand…which affects the price…which affects revenue.

No wonder the time to market can be delayed. Revenue, price, demand, and packaging are all inter-related. This is where a disciplined approach can overcome the challenge of estimating the revenue impact of a new feature, whether you’re building it from scratch or utilizing a third party technology.

Meet the Challenge: Use a Disciplined Approach to PricingEstimating revenue can be a complex exercise, but it is relatively straightforward if you use a disciplined approach to pricing, like the Monetization Model Framework discussed later on in this ebook. The framework allows you to deal with the interplay between price level, packaging, demand, and associated costs in a more orderly manner so all the pieces fit together. You’ll also find that this kind of approach takes less time and provides better results than traditional decibel-based pricing methods, which often lead to inconsistencies between the Monetization Model, pricing strategy, and overall business objectives.

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THE NATURE OF PRICINGWhen people talk about pricing, they are usually focused on how much the customer pays. While the amount paid is important, pricing in a more general sense depends on two critical factors: the target market and how the customer interprets value. Once you clearly identify your target market, you can then define target customers and use cases. Once you do that, then you can determine the value-in-use and your customers’ perceptions of value. This is where the rubber of pricing meets the road of sales and marketing.

In addition to the actual economic value created, there are other aspects that influence perceived value as illustrated to the right. Price level should relate to the overall value the customer perceives when they purchase your product. However, it is important to note that the price level is just the tip of the iceberg when it comes to software pricing.

Price Level

Packaging

Delivery

Services

Payment Timing

Quality

Price Metric Discounts

Customer Type

TechnologyPrior Orders

Product Access

Once you define a sales target, you’ll need to determine your customer’s willingness to pay. The common perception of willingness to pay – that price outweighs any other consideration – is incorrect.

Price

Etc.

Perception

The Nature of Pricing

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Nearly every customer survey asking why customers buy the products they do, shows price as the third or fourth most important factor. For example, the 2014 State of Embedded Analytics Report from Logi Analytics asked software executives at ISVs and SaaS companies to rank their buying considerations with regard to embedded analytics (see figure to the right). The top three considerations had to do with the value delivered to customers. Pricing and Speed of Implementation were tied for fourth.

In addition, several years ago we surveyed members of the Boston Product Management Association about the factors that typically influenced their purchasing decisions (see figure to the left). Value, once again, trumps price. Ironically, when Product Managers are customers, value is more important than price, but when they think about their customers, they believe price is the most important factor, leading them to set prices that are too low.

The Nature of Pricing

Speed of implementation

Pricing

Licensing

Architecturealignment

Functionality75%

61%

54%

49%

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Survey of Product ManagersInfluencers Buying Decision

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Embedded Analytics Buying Considerations

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