Software Pricing is not a new topic. There's a ton of literature out there that covers either theoretical understanding of sophisticated price elasticity and demand curves or bite-sized "practical" blogs with names such as the "5 basic models" or "7 pricing strategies". These provide some insight but, in reality, exist to serve as lead-generation vehicles to persuade the reader to further engage in the consulting services of the company that has authored the article.
A practical end-to-end guide to creating and operationalizing software packaging and pricing has been lacking. This book aims to fill that void.
Pricing is so important that it impacts decisions right from company strategy and product positioning down to day-to-day sales operations. But due to its perceived complexity, both product managers and product marketers tend to avoid integrating it into their regular launch processes, often resulting in last-minute ad-hoc pricing decisions. Often at fast-growing startups, an inefficient pricing model eventually leads to a breaking point where a total, painful pricing overhaul has to be done.
Getting consultants to do this work isn't guaranteed to work either and is often too expensive. Just the other day, I saw the following opinion echoed within a Product Marketing community that I am a member of. A product marketing leader at a top-tier valley startup posted, "My past company used [well known consulting company] and paid a few hundred thousand dollars and the pricing recommendations they gave killed our ACV, and I had to revamp pricing and rip and replace their recommendation."
In this book, my goal is to arm you, the Founder/PM/PMM/Revenue Leader, with the tools to make the right set of pricing decisions that will best align your company strategy, product positioning and the needs of your market. These decisions are often not just about the price point itself but the preceding elements of packaging, pricing metrics and pricing structures.
The book seeks to keep away from complex analysis for the most part while still gunning for completeness of the exercise. The hope is to cut through the noise and distill a practical and actionable approach on how to effectively and correctly position, package, and price a software product and/or product portfolio.
I worked at Medallia for close to five years from 2011 to 2016 in a phase where the company went from bootstrapped to one of Sequoia's then biggest investments in enterprise SaaS, where revenue grew from around 20M to 120M. I saw the company expand out of hospitality as its core industry segment into financial services, retail, and other industries in this high growth environment. I also saw how a very professional enterprise sales team raised ASPs (Average Selling Prices) by a significant degree.
The price of our software could vary manifold between industries, from a few hundred thousand dollars to multi-million-dollar deals. The business school concept of price discrimination becomes very clear when a financial services company pays 3-4x more than a retail company for roughly the same feature-set.
Additionally, with a better value-driven sales process, Medallia's post-VC money enterprise sales team did much better overall than the pre-VC money team. Every step in the sales process tied back to customer value, changing the conversation from a software 'tool' to a strategic change in the prospect company's direction.
And while even Medallia wasn't perfect in how it went about pricing, it was clear how much impact a value-based pricing model, with the appropriate communication of value, could have on revenue and valuation.
We see exponential growth in Software as a Service (SaaS) companies. Globally, Gartner predicts that by 2021 cloud revenues will total $278 Billion. That is a staggering amount of money.
In terms of market share, SaaS is expected to represent 45% of the total enterprise software market by 2023. SaaS companies are also drawing in major funding in technology today, with notable players occupying seven of the top 10 verticals by venture capital deal activity and three of the top 10 by investments.
As this growth happens, what will separate the winners from the losers is not just the product. The world is littered with excellently engineered products that could not find product-market fit and withered away. At the same time, there are plenty of examples of growing companies that truly have patch-work products that just seem to work well enough, but with the right GTM approaches and a well-aligned price for their chosen buyer, they have managed to find space for themselves.
I hope that the insights from this book can help the next "little startup that could." (Cultural reference to the children's classic called "The Little Engine That Could")
If you are selling Software, the chances are that you have a lot more room to maneuver than you think.
The beauty of Software is that it is generally not a commodity (more the case with b2b than b2c Software), which means the price isn't your buyer's most important consideration.
This also means that increasing your buyer's perception of the value will enable you to raise prices. A well-positioned, packaged and priced product will help you do just that.
Additionally, a mismatch between value delivered and monetized revenue occurs naturally as a startup grows. High-growth software companies tend to obsess initially (when starting out) over new logo acquisition (as they should), which inherently incents them to not risk pricing too high. As they grow, their brand's strength also grows, and so does their pricing power. This is why companies tend to undergo an overhaul of pricing at each significant growth stage so that they can monetize their added value to the market.
This book is for you if you have the onus of drafting or fixing pricing for your company.
This book is also for you if you are the lone ranger Product Manager/Marketer who wants to design pricing for a specific product that you are responsible for.
Finally, this book is also for Execs and/or Founders who have considered hiring an external consultant or expert to do this for their companies.
This book is not for you if:
You are looking for a high, e.g., 95%+, precision pricing in the market. This level of accuracy is usually needed when you have a functional pricing and packaging model that can provide incremental optimization. This tends to be the case with established companies that are selling standardized SKUs at scale and tends to be a need at the pre-IPO or post-IPO life cycle where every $ of incremental revenue means a significant impact on the company's valuation. This also tends to be the case with pricing and optimization for fixed inventory products like airline tickets, hotel bookings, and car rentals.
At a very rudimentary level creating pricing and packaging requires you to make decisions on four key aspects:
This book will help you get to those four key decisions and guide you on how to operationalize the pricing within your organization.
Here are some key focus areas that this book seeks to untangle and explain:
Beyond these topics, I aim to offer a wider perspective of how these steps and decisions vary for companies in different stages of growth. I've tried to do this by offering insights from my own experience and the experience of real pricing gurus who have worked on initiatives for companies such as Oracle, Gainsight, Citrix, Mixpanel Rubrik, Verint, as well as from the established pricing consultancy Simon Kucher Partners.
I am not a pricing expert with decades of pricing experience. I am a marketer who learned the nuts and bolts of software pricing and packaging by reading, experimenting and talking to other pricing experts. Based on a logical sequence of steps, I increased product ASPs for pricing and packaging at my firm while increasing my sales team's satisfaction with the new pricing model.
I am writing the book that I wanted to read before I commenced on my own pricing journey. The hope is that you can easily understand and easily apply the sequence of steps offered in this book to design your own pricing and packaging without feeling the need to bring in external consultants or feel like this is rocket science. It's not.
