Software pricing and packaging expert Josh Bloom shares eight top tips for improving the odds that innovative software products succeed.
In my previous article , I shared with you the five most common mistakes companies make when pricing and packaging their software products. Today I’m going to tell you how to avoid them, drawing on the best practices of key players in the industry, and based on my deeply held belief that pricing and packaging are the two most powerful growth levers for businesses of any size. Pricing and packaging touch every part of the organization, from product teams to marketing, sales, finance, and operations. That’s why in today's digital and consumer-driven economy, the most successful software companies innovate not only their products, but also their overall packaging and pricing strategy. From a solid go-to-market plan, to a more objective view of the market landscape, here are eight lessons you can learn from best-in-class companies that use pricing and packaging to monetize the buyer journey over time:
- Have the willingness to pay conversation, early and often. Pricing isn’t just about putting a price tag on a product. There needs to be a pre-revenue discussion to ensure the right products are built for a differentiated use case. If you know how much someone is willing to pay, you know whether to kill a product early, or accelerate a product through greater investment if it is set be a game changer. Having an idea of what the product could look like12 months down the road also helps to create evergreen packages that don’t need to be constantly updated. It’s never too early to think about pricing and willingness to pay. Otherwise how will you know your product can sustain a business model?
- Know your true target segments: To send the right message and command prices based on segment-specific behavior, you need to be extremely precise regarding the segments you target, along with their needs, behavior, and willingness to pay. Otherwise, you will almost always underprice, as there will be pockets of the market where you are providing a tremendous amount of value but not capturing that upside. Plus, from experience, incumbents are most concerned about new players with a sharp segment-specific focus – it’s exactly these companies that have the strength to disrupt and dominate the whole market. Companies targeting every segment on earth without the necessary resources tend to be less successful.
- Understand the economic value you deliver: Price is really just the extraction of the value you create – the single most important question to ask is how your product changes a customer’s business workflows, or even their lives. If you know the ROI and can build monetization around that, you’ve created a perfect value exchange. Moreover, ROI research is not just siloed to the pricing domain. It can be the building blocks for initial sales conversations and marketing material, helping to build a value story, which is especially important in negotiated product environments. ROI measurement isn’t necessarily meant to define an exact price level, but can create an umbrella under which you can monetize.
- Find the metric that’s right for your customers/market: A decade ago, about 50% of the monetization models in the software space were user-based. Now, there’s a trend toward more innovative value metrics. Firms are getting more creative beyond the monthly fee thanks to cloud platforms that track usage over time, as well as a growing acceptance from purchasing departments that payment is tied to value. The next challenge is predictability: companies want assurance that their bill won’t explode. This can be tackled through different pricing structures, such as purely pay-as-you-go licensing models, pre-commitment models, volume discounts, and other elements that provide certainty to purchasers.
- Make pricing part of the normal release schedule: Companies do a lot of planning around quarterly, annual releases, major release versions etc. Why not think about pricing and packaging in the same way, and align it with the release strategy? Sometimes that means holding features or treating them as pilots for a handful of customers until they become a prominent part of the packaging structure.
- Take a data-driven approach to monetization: Even early stage companies with extremely limited resources should still conduct some basic, data-based pricing research. The first step should be to roll up sleeves on the competitive landscape, running not just feature-by-feature comparisons, but also analyses on the different models successful companies use to monetize. Even if there’s consistency in the market, there may be customer frustration, stagnation, or a feeling of over complexity. Pricing could be a competitive weapon to disrupt incumbents with something more appealing or radically different.
- Own pricing! Especially in the early days, pricing should be a C-level topic. Simon-Kucher research even shows that strong CEO involvement leads to 35% greater likelihood of a product launch being successful. That’s why it’s incredibly important that the CEO owns the original pricing decision, handing over some of the reins to professionals as the company builds a marketing toolkit over time. A pricing committee led by the executive team is best practice.
- Prioritize how you charge over how much you charge: Whatever size your company, the concept of settling on the right pricing metric – that fundamental unit of value and value exchange between you and your customers – is more important than picking a specific price point. Find a metric that organically grows over the customer lifetime to drive a land and expand strategy.