Product Pricing and The Socratic Method
from PRODUCT MANAGEMENT CHALLENGES A Newsletter of Tips For Companies that Develop Software
Socrates, the founding father of Greek and Western philosophy and self-styled gadfly who got under the skin of ancient Athenian society, pioneered a way of teaching that he called the Socratic Method. It consisted of asking a series of questions that challenged his students to drill down into the deepest logic of their arguments, and exposed contradictions and irrationality in their assertions.
Questions from Socrates turned your perspective on its head, and drove you to look at the issue at hand in all its complexity and from contradictory perspectives.
Today's issue is not a simple one. It's product pricing, or how to structure and set the price of the software product. Like philosophy, there are many schools of thought, some openly opposed to others, and Product Managers find themselves faced with a dazzling array of choices.
In keeping with the Socratic Method, here's a laundry list of questions designed to upend your thoughts about and approach to pricing. This is by no means an exhaustive list, although you may find that thinking through the answers to some questions can be exhausting.
Take some time to run your product pricing through the question mill below. The answers point to some basic truths about pricing strategies you can use to make your customers sit up and take notice, and leave your competitors scurrying to catch on and catch up.
Many people will hear the price of the product, and voice an opinion about it, ranging from 'dirt cheap' to 'highway robbery'. But who is the individual, job function, or department whose approval results in the purchase of your software? Is it the CFO? Marketing? The executive team? The CEO and nobody else?
Find the person or people who sign the contract, and then set the pricing to appeal to them. Make sure that it wins them over, because nobody else matters. For a CFO, perhaps the price is presented as a calculation based on expected savings, or more daringly, based on actual savings (a variable price that the company pays quarterly as they save money, for example - but with an up front payment to show commitment).
Secondarily, identify the person or people at the customer who do the internal selling to the contract signor. Structure the pricing so that they understand it and can easily explain it in terms that are relevant to the ultimate decision maker.
What's It Worth To You?
Do you really know what it costs to make and maintain your product? Some prices, especially during the dotcom bubble, sounded great, and their only downside was that no company could afford to stay in business at those ridiculously low prices. Or at least no company could afford to remain in business structured and staffed as it was.
What really gets spent in terms of human and dollar resources to maintain the product? Does the pricing formula reflect this, or do you depend on big ticket new sales to keep the company going?
Is your product profitable using your estimates for employee costs, but not using the fully loaded costs from the finance people?
And here's the clincher. Is the product priced to be profitable at list price, but the price breaks actually given by the sales reps result in unacceptable numbers?
One Lump or Two?
Does the price need to be one big payment, or can it be broken down into smaller payments? Can the payments be structured to fall into two different budget years, or to spread the effect on the bottom line over multiple quarters? Could improved cash flow serve as a powerful selling point with your prospects and customers?
How Do They Pay for Other Things?
How does your customer pay for essential purchases for their business? Do they get important supplies on a regular budget plan with quarterly reconciling? Do they generally make big purchases up front?
If your software runs medical equipment, do customers usually lease or buy the equipment? The software could be paid for the same way.
How about software to run a warehouse? How does a customer pay for a new warehouse and then maintain it? Can you make the structure of the software pricing parallel to that?
What is the Budget Process?
What is the typical budget process for your customers? What kind of review and justifications do they require? Is the pricing structured to make that review and justification easy?
Do customers place all expenses related to the software into one budget item, or do they break out expenses into multiple categories? Is your pricing broken out that way also?
If customers include personnel costs in the software budget, can you provide pro-forma costs, or a formula for calculating personnel costs? Wouldn't that make the evaluation process easier for your prospects?
Are your increases in pricing timed to fit well into the budgeting schedules of the customer base? Or are customers hit with increases regardless of whether money has been budgeted for the year, based on a contract renewal date?
Lease or Buy?
What if there were no purchase cost, just a first year cost that was low compared to typical purchase prices, a cost that remains the same each year, bringing in much more than a typical maintenance cost in subsequent years? Would that be easier for your customers to budget for and measure return against? Would it be better for your company?
Could you even have a trade-in cost at the end of the lease that lets a customer move onward and upward to the latest version of the product? Would automatically rolling your customers into the latest version of the software save you more costs in support and maintenance than you spend upgrading the entire customer base?
Would You Like Options With That?
Are there typical options that your customers get with their purchases, either when they purchase your software product or when they purchase other important products?
Would breaking your product up into a base price with separately priced options result in a more digestible and understandable price? Would it encourage customers to buy more options, perhaps not with the initial purchase but in the ensuing years?
Can You Package Uncertainty?
Can you bundle your product into a package that is designed to require no more decision making than necessary for your customer, to centralize the entire end-to-end process of utilizing the software, from resource planning to facilities to hardware to implementation to new user training?
Can you create a package that guides customers into only a handful of recommended combinations of products and services, from a myriad of choices? Are these recommendations based not just on the most common preferences in the customer base, but on greater profitability or cost saving, either for the customer or for your company?
Does Happiness Have a Price?
How much money would it represent to you to restructure your pricing so that customers are delighted with it? Would the increase in reference accounts and customer satisfaction boost your sales revenues and cut your customer care costs?
Just how much would it be worth to use pricing to increase customer satisfaction?
Is It Over Yet?
As you can see, too many questions can be more irritating than anything else. It isn't for nothing that Socrates referred to himself as a gadfly, that stinging insect that makes animals frantic.
But stretching to answer these questions also helps you craft a pricing strategy that your prospects and customers grasp intuitively and consider convenient and natural. And that can only help your product sell better.
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