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Software Pricing: Getting Back to Growth

Sep 8, 2008
Software vendors are rapidly running out of room to grow organically. Enterprise software players are boxed in by increasingly budget-conscious buyers and by their own entrenched culture of deep-discounting. Vendors of packaged software are battling runaway SKU complexity and channel partners' demands. And both groups are still grappling with software-as-a-service model - as both threat and opportunity. What is needed now is a disciplined approach to pricing that combines rules-based process standardization and controls with the flexibility to offer different prices to different customer segments.

Top-line growth has never been harder for software vendors--or more necessary. Software investments are growing much more slowly and many vendors are relying on acquisitions for growth. Furthermore, venture capital is no longer flowing into the sector. The heart of the problem is that organic growth will never reach the height of the industry's "go-go years," and capturing value will become more critical as the breadth of products, customers and channels continues to expand.

Yet, software vendors are proving to be their own worst enemies by continuing to encourage their customers to buy at the last moment when products are "on sale" and the sales representative can be counted on to over-discount. They bring very little discipline to discounting.

Recent research by Accenture found substantial opportunities for pricing to drive top-line growth in a post-boom software market. Well-planned price strategy and execution are integral to profitable growth. Recent efforts to expand the use of segmentation have yielded positive results but software providers now need to demonstrate they can take their pricing capabilities up several levels.

To arrive at this higher level, vendors are encountering several areas of difficulty. They struggle with the challenge of the initial price setting and the subsequent price administration and publishing. And, there are the formidable challenges to the mechanics of sales activities - understanding customers' changing requirements in order to sell on value, identifying and planning for conversations with new economic buyers, and much more.

These areas are complicated further by price-point proliferation. On the packaged software side this stems from an increasing number of SKU's receiving different treatment from different vendors. On the enterprise software side, undisciplined deal management results in different customers paying widely varied prices for the same solution.

Software as a service (SaaS) is adding a new element to the pricing challenge. Most providers are still struggling on how to price these products--by user, minute month or some other metric. Furthermore, it is not clear how the user perceives the pricing position and the vendor must determine how to sell these products with out the customer feeling "nickled and dimed" and ultimately becoming resistant to new services and upgrades.

In work with a range of software companies, Accenture has identified several key best practices which companies can begin to develop immediately:

1. Review the core business mode in light of the potential impact of new offerings, term licenses and SaaS components.

2. Standardize pricing approaches (not necessarily pricing strategies) across product lines.

3. Implement "formula" or rules-based pricing to help salespeople construct deals.

4. Use pricing applications to enable best-practice pricing.

5. Focus on organizational improvement.

There can be no question of the urgency to take pricing capabilities to the next level; the costs of doing nothing are prohibitive. What is needed now is a break from traditional approaches and a move from reactive to more rules-based and disciplined pricing. With these fact-based approaches entirely practical today, software providers should be quick to adopt them wholeheartedly to unlock new growth opportunities.
About the Author
Accenture's Electronics & High-tech industry group offers management consulting, technology-strategy and implementation services to all segments of this exceptionally dynamic industry. Read the full article on Software Pricing: Getting Back to Growth . Send an email to Patty Crawford (patricia.l.crawford@accenture.com) if you would like one of our US sales and marketing specialists to meet with you.
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