Software Executive Magazine

December 2017

Software Executive magazine helps software executives grow their businesses by showcasing the business best practices of our readers, executives from established and innovative software companies.

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If you've ever sold software, you know that discounts are a fact of life. Structuring incentives into your mone- tization approach is a critical success factor. If you fail to do this, larger companies and aggregators most likely will avoid doing business with you. Today's buyers are much more educated. They understand how costs scale in the cloud. They understand gross profit margins for software companies are often in the 80+ percent range. If they're buying a lot of your software, they're going to expect that your pricing approach addresses this. If your answer is "We don't discount," that's fine. But you have to be OK with the consequence of that decision, which is likely very few sales to larger companies. EVALUATING & ADJUSTING PRICING Any software pricing project that doesn't help grow revenue and profitability is a complete waste of man- agement's time. Bottom line: Salespeople should be able to sell more and do so faster. How often should software companies evaluate and adjust their feature set? Every time a new feature is developed, there is a potential of greater value-add to the customer and therefore a po- tential to increase prices. When prices are adjusted outside of standard, year- ly price increases, this shouldn't affect existing cus- tomers. Instead, licensing, packaging, and pricing should come into play to attract new customers and get older customers to either increase their usage of the software or buy additional capabilities being of- fered. It would be a terrible mistake to tell a custom- er that, despite selling them on one value equation a year ago, their pricing has now changed significantly because you have a different perspective on the val- ue you deliver. Their perspective hasn't changed in this example, and any customer who has their head on straight will simply defect to the competition or some alternative. Remember, people buy on emotion and rationalize with logic. If customers feel treated unfairly in any way, their emotional response can make them take their business elsewhere, even if it logically isn't the best option for them. When it comes to pricing, if you're a startup, don't overthink it. If you're a growth software company, you're probably already late to the game if this is the first time you're reading about this. If you're an enter- prise software company, there's no time like now to be- gin cleaning up the mess! S disappointed. It is absolutely critical that startups spend their time as quickly as possible with paying customers. A buyer participating in an unpaid beta is not a customer. PRICING MISTAKES: ENTERPRISE SOFTWARE COMPANIES One of the biggest mistakes for mature software com- panies is having too much pricing complexity. Engi- neering rules the roost and has overly complicated how to license, package, and charge for its software. This is further complicated with old acquisitions of on-prem- ises software companies and more recent acquisitions of cloud software companies. The result is often a glob- al sales team in which there is so much friction in the sales process that not only are the salespeople con- fused, but their customers and prospects are confused, too. And we know confused buyers never buy. In addition, there are usually large, systemic issues with market fairness: Two customers bought the same thing and paid two different prices. Once customers un- cover that they were charged differently for the same set of products and services (which inevitably they do), the software company's brand can take an enormous trust hit, especially in today's world of social media where there really are no secrets. PRICING MISTAKES: GROWTH-STAGE SOFTWARE COMPANIES Growth-stage software companies can burn through large numbers of customers without adequately cap- turing the value they deliver. No market has an endless number of customers. It is crucial that growth-stage companies get paid full value for their software during this stage. Otherwise, they run the risk of having tons of customers and uncovering too late that they left too much money on the table. This can be the difference between having an option of going public or not. If you fail to capture the value you deliver along the way, you really kneecap the enterprise value you can achieve in the long run. DISCOUNTING MISTAKES Most software companies leave far too much flexibility in the hands of salespeople when it comes to discount- ing. There is nothing wrong with structured incentives. But discretionary discounting, beyond scheduled com- pany discounts, for example, will always get the soft- ware company in trouble. In poker, they refer to leaks in your game: places where your strategy isn't tight enough and can be exploited in the form of your losing money. For software companies, salespeople's (includ- ing the deal desk's) flexibility on discretionary dis- counts is one of the largest leaks in the game of pricing. C H R I S M E L E has 25+ years of experience in the software industry and is the co-founder and managing partner of Software Pricing Partners. He is the former CEO/founder of an award- winning SaaS company, is a software monetization expert, and is an E&Y alumnus. Mele holds a BS in Computer Science from Miami University. 37 SOFTWAREEXECUTIVEMAG.COM DECEMBER 2017

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