The Director of PwC, Amit Dhir, gave a very insightful presentation about how to approach pricing in the shifting world of Software at our Freemium Meetup this February. He spoke about the significant shift in the software industry’s approach to software licensing.
Freemium: Customers either see value or not – Amit Dhir
Comparing to Amit Dhir, small minority of vendors remain committed to the traditional business model based on permanent licensing of software as a product. A small but growing number of companies, mainly start-ups, focus exclusively on emerging models, including subscription SaaS with cloud deployment, pay-as-you-go based on actual usage, and Freemium with or without premium versions. The remaining companies are combining both approaches into hybrid business models.
The evolving world of Software
XaaS Services represented 11.2% of the $237.3B of the software industry revenues in 2011 for the 100 largest companies. Amit sees nine technology macro trends fueling growth, innovation and complexity across these software firms and they are affecting licensing, pricing and delivery models.
Buy as they like, Deploy as they like, Pay as they like!
Consumers want flexibility, predictability and interoperability with software. They want the ability to purchase software they really need and easily install it on all their devices…and they want convenient ways to pay for the software. These three factors bring the most complexity into the selling of software, especially for traditional software sellers who now must mix their old offerings with new models in creative ways.
“Buy as you like” software can be bought as subscription SaaS or in a traditional way with a rental license and possibly with financing. In a private cloud, or a public cloud, or on mobile devices consumers have the ability to deploy software in ways to fit their needs. With a flat fee or pay-per-user or by pay-per-view, customers now have choices.
Four pillars to determine pricing:
- Bounds—these are determined by customers’ perceptions of value, the price cannot be higher than the value given to it by potential buyers.
- Competition—everyone has competition. There are alternate solutions out there and the product needs to be competitively priced.
- Strategy— market goals can be to quickly gain market share or to position the company with a value platform for selling future services.
- Financial—this includes when and how a company plans to make money and the steps to get there.
Hybrids like Kachingle will be needed! – Amit Dhir
Many consumer and enterprise companies are embracing hybrid business models where both traditional and emerging software solutions are implemented.
Process Organization Technology Data & Analytics
Software pricing is a product of a company’s long-range goals, business model and the competition. Pricing excellence is the ongoing process of optimizing the price of goods and services to maximize profits. There are four elements in PwC’s pricing framework focusing on what drives pricing maturity and the impact financial results have throughout the pricing lifecycle.
- Pricing strategy – pricing goals, portfolio analysis, overall strategy, segment-specific strategy
- Price formulation – overall pricing and policies, segment-specific pricing and policies, pricing data and rules
- Transaction management – opportunities and requests, prioritization and allocation, quotations and deal management, policy enforcement
- Performance management – sales force and partner enablement, pricing performance measurement and management, compliance
PwC’s “Price Waterfall”
The visual tool, the “Price Waterfall” diagram, helps businesses reduce leakages by identifying costs. Businesses can follow a targeted sales price as it cascades down the sales channel from List Price to Buy Price to Invoice to Discount to Profit Margin.
Limit leakage using the Price Waterfall
- Identify the right pricing levels in business models, find a solid pricing strategy, have good operational factors and access routes to market.
- Using the identified levels to determine what are optimal list prices, regional list prices, and good volume discounts and establish pricing floors.
- Define policies for pricing levels, including who has the authority to exceeded set boundaries.
- Develop implementation plans with greater visibility into pricing adjustments where companies can analyze data about customer and market segmentation, product design and discounting effectiveness to improve their efficiency and profitability.
Maximize economic benefits with good pricing
One of PwC’s Price Optimization and Management projects typically results in pricing improvements ranging from the changing of a vendor’s pricing model to the establishment of new pricing floors and discounting policies.
Pricing adjustments for increasing profits
- Adopt new pricing models for each customer segment reflecting customer value-drivers and costs-to-serve expenses
- Adjust prices to reflect market conditions (i.e., competitor pricing and customer willingness to pay)
- Establish pricing floors and eliminate pricing outliers
- Exit unprofitable customers
- Address pricing cannibalization by establishing price separation in good, better and best product lines
- Identify to customers up-sell opportunities
- Take out/reduce unnecessary discounts and promotions
- Charge for or eliminate cost-to-serve elements (e.g., freight, samples)
- Eliminate any unnecessary credits and rebates
Want to learn more about the Freemium Business Model for your business?
If you are in the Bay Area, join our monthly Freemium SF Bay Area Meetup for a chance to hear world-class speakers and make networking connections! If you can’t make it, you can always catch the summary, video and presentations.