Software pricing strategist Jim Geisman shares three reasons why software companies often miss the mark when it comes to the delicate relationship between packaging, price, and cost.
For more than 20 years, I’ve seen many emerging and established software companies tackle the issue of product pricing and packaging in a very similar way.
First, they start with a set of financial goals. Next, they determine what exactly they plan to develop. After that, they determine what they think will be the right price point. And, finally, they make a wild guess of what level of sales volume they can drive in based on the market size.
A few keystrokes later, poof, they’ve produced a very broad (and probably inaccurate) revenue forecast that is often shown to board members or investors. Unfortunately, there are three reasons why this is not a very smart approach.
3 Reasons You’re Probably Doing Software Pricing and Packaging Wrong
1) You really don’t know how much functionality you’ll be delivering when you ship or go live.
The level of functionality that goes out the door represents the value your product will deliver. The value delivered affects the price you can charge. Your revenue forecast will be flawed because of potentially incorrect assumptions about functionality, timing, value delivered and, ultimately, the price.
2) You may be delivering too much functionality.
Even if the product is on schedule, there is a tendency among software entrepreneurs to add functionality to cover all the use cases. This can lead to feature bloat and a product that may not actually meet your customers’ primary needs.
The part of the revenue forecast related to customer uptake will be wrong because customers may not want all the value you end up delivering. Which leads to my final point…
3) Customers may resist paying for functionality they don’t want or need.
Suppose the project is on schedule and the functionality is broken up into a series of “editions”. Each edition or your first product may not fit the needs of the different customers you want to serve. When too much functionality gets jammed into an edition or a product, there is a tendency to solve the problem with a low price. Once again, one of the key assumptions — the price — can be way off due to improper packaging.
3 Steps to Getting it Right
There is a better way to forecast revenues but it means understanding and balancing the relationship between packaging and pricing. In order to do this, entrepreneurs need to develop a deeper understanding of the different types of buyers. It is only then you have a shot at balancing functionality, price point, and value for each of those versions.
Here are three tips that should help you better manage the forecasting process:
1) Engage customers in a discussion about how your product changes their business.
During the development process, engage customers in a discussion about the value you intend to deliver. Make sure you understand how different customer segment needs differ so you can deliver the right amount of functionality in a product or the editions you will offer. Find out what the level of economic impact is you can deliver.
2) Get packaging right before setting the price.
Once you understand the value delivered you can break the product into bite-sized chunks or pare down the list of features. In the case of multiple editions, make sure the functionality of each edition provides obvious and suitable incremental value so you can use price estimates that are more likely to fit when you go to market.
3) Don’t overwhelm your customers with too many choices.
Whether you offer customers the choice among editions or a single product with optional add-ons, make the decision-making process simple. Offer products and options in the context of usage scenarios — e.g., “small groups,” “companies with 5-10,000 customers,” etc.. Make sure price levels are in line with the incremental value of added functionality, especially when offering multiple editions.
Still Not Sold?
If you don’t care that much about the forecasts you use to fund or run your business, here are two other distinct benefits you can enjoy when you strike the right balance between pricing and packaging.
- First, you will acquire customers more rapidly because they will be able to quickly and easily identify which version of your product or options best aligns with their needs.
- Second, you are likely to see higher customer retention rates and more upsell opportunities because customers are able to easily see — and justify — the value proposition of stepping up to the next product level.
Additional Software Pricing and Packaging Resources
In this webinar recording, Jim Geisman offers a breakdown of software pricing models, how product value is created, and how to get paid for the value delivered in your applications. Watch the video.
If you’re offering freemiums in hopes of increasing customer acquisition, you might want to reconsider your pricing strategy. Learn how raising prices can actually result in more profitable customers and higher retention rates. Read more.
Photo by: David Goehring