Finding the right price using the value method

Marcel Nieuwpoort

Pricing is the most effective way to maximise profit. It’s fairly easy for Independent Software Vendors (ISVs) that pitch the price for their services at the right level to improve their company performance. This applies both to companies that are currently making the transition to SaaS models and to those born in the cloud.

Software companies often have little influence over their costs, particularly in the short term. Sales volumes are easier to influence, for instance through the segmentation of target groups. However the price of services is something that ISVs have complete control over, which makes it a valuable instrument in the quest to improve company performance.

When determining the right price for a service, it is sometimes tempting for an ISV to make its calculations on the basis of costs, or the revenue that it needs the service to generate. However ISVs could actually make a great leap forwards by approaching the issue from the opposite perspective – the value that the service offers the customer.

For many years Microsoft has been working in partnership with ISVs that seek to pitch their services at the right price, and we regularly talk to pricing experts. In this blog I will share our experiences and explain what we have learned about finding the perfect price for a service.

What value does the product have for the customer?

Finding the right price may be important, but it’s not easy. A pricing model isn’t simply a matter of matching a figure to a solution, calculated on the basis of the costs incurred. ISVs need to stop thinking about the costs for a while and investigate the value that their product offers to the customer.

In first instance companies sell customers the benefits that they actually experience, not the means for achieving those benefits. On paper it’s easy to draw the distinction between ‘features’ and ‘benefits’, but in practice it can be more difficult.

An ISV needs to ask itself how its service affects the productivity of its customers, the insights that its product offers customers, and whether its solution may even have an effect on a customer’s employee satisfaction.

If an ISV’s customers experience sufficient value they will be willing to pay for it, irrespective of the costs incurred by the ISV. So for ISVs it pays to invest in thorough research to discover what products are worth to customers. Based on that research, an ISV can pitch its product at the perfect price.

Pricing for SaaS companies

There is a difference between the old business models for software developers and the new consumption-based models. Old models are arranged in the following order: create, sell, install and provide support. After that, the next sales cycle begins. It’s a relatively simple model.

Pricing for consumption-based models is often more complex. In many cases the software comes in different versions and types, with a variety of add-ons. This makes the overall picture rather fragmented for ISVs, and it becomes harder for them to determine the value that the customer experiences and the price that should be attached to the ecosystem of services.

ISVs that switch to a new SaaS business model are taking an important step. This transition has an impact on their entire operations, on their support model and their distribution channel. It also changes the way in which new customers are found.

There are three Key Consideration Areas when deciding on the right pricing model. The matrix below can help ISVs to reach a structured decision on the right price for their services.

There are even many variations within the ‘price per user per month’ model. The options for finding the right pricing model are almost unlimited:

SaaS models and incremental product improvements

ISVs that switch to a SaaS model gain a greater insight into how their customers like to use their services, and what the more and less popular features are. Using this information, they can for example adjust the layout of a product to make it easier for more people to use.

We have made incremental improvements to our own Microsoft products. One example is the ribbon added to MS Office. We saw that 95% of people used only 5% of the functionality. So we made that 5% of the functionality as accessible as possible to as many people as possible. The lesson is: keep it simple and make sure that your solution fulfils its purpose effectively.

Example: from boxed-solution to SaaS service

Over the past couple of months I’ve been in regular contact with an ISV that wanted to move from charging a one-off payment for a boxed-solution to operating a monthly-payment model. The company already has lots of customers and its sales are good.

We helped the company to approach the issue of finding the right price from the opposite perspective. For companies that have been offering a boxed-solution, it’s tempting to start by looking at their current revenue and dividing it by the number of customers per month, in order to arrive at a monthly price for a SaaS solution. But this is not the best starting point to take.

The move to a new pricing model offers an excellent opportunity to achieve revenue growth or to maximise profits. Our ISV partners can take full advantage of this opportunity.

We helped the company in question look carefully at the value that its service offers customers, separately from the issue of its own costs. In doing so the company reconsidered its initial approach and adapted its plans in order to maximise its profits.

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