Tag Archives: partnering

How to price new enterprise software products

The enterprise software market is almost always a paid one. So how do you price a brand new enterprise innovation?

sw_px-200pxSoftware is one of those “magical” goods in microeconomic terms: it has virtually no Marginal Cost. So how do you get a customer to pay you thousands—or even millions—of dollars to buy something you can reproduce for free?

If you’re looking for a “magic formula” to calculate the price of your software, you can hit the ‘back’ button. You won’t find that here. Instead, if you are looking for a strategy to establish a tangible, defensible price for an intangible innovation, read on…

STEP 1: Price by the value you create

There are many, many software pricing models. However, at the end of the day, you’re going to have to defend your quoted price. This is easiest to do, if you price based on what your customers value. Figure out what units your customers use to measure value, and then pick a price model based on those units. Now you have Value-based Unit Pricing.

STEP 2: Use ROI to establish your “list price”

Enterprise software purchases are investments in “promised value.” However, it will take a lot of work for your customer to “unlock” that value: they have to get budget approval, initiate a program, execute it without over-runs, integrate it into their business operations, etc. To make it worthwhile, your software will have to provide a large return on this upfront cost—at least 40-50%. If your software cannot do this, it will never clear the triple wicket of business sponsor, IT manager and procurement manager.

Look at the market—and more importantly—what it costs your customers to do the very thing you are trying to automate or improve. Calculate the cost per year and subtract enough for a 40% ROI. Now you have your List Price. (Note: if there is already software you want to displace, price your product to make replacement of it something that yields a 40% ROI. Why should anyone take the risk to buy your product if it is not good enough to do this?)

STEP 3: Use co-development to establish your “maximum discount”

When you go to a new customer with a new product and quote a price, they will immediately ask for a discount (especially if you are new to the market). How do you insulate yourself against this? Establish a fixed lower bound for your software that you can legitimately never price below (at least until 1-2 generations pass and everything changes).

The best way to do this is by using co-development partnerships. Co-development partners not only buy and use your product; they provide added time, people, teamwork and insight to make it better. (This is not only good for them, it is also a path you can use to establish market leadership). Co-development should be rewarded with your Maximum Discount.

Once you have done this, whenever a follow-on customer pushes for a larger discount, you can point out that your co-development partner only received your maximum discount because of the work and time they contributed.

STEP 4: Build your price rate cards

You now have all the tools you need: value-based unit pricing, list price and maximum discount for co-development. You are now ready to give your sales and contracts team all those wonderful spreadsheets to calculate the price of your new enterprise software—at least until the next generation of innovation arrives…

A Few Closing Remarks: Two things to NEVER do when pricing your software

Give it away for free to get the deal*. You will inevitably get enticed to give your software away for free to get a major customer. Don’t fall into this trap. Once you have done this you have established your software truly has zero Marginal Value (not just zero Marginal Cost). It is really hard to negotiate UP from zero. Give away add-ons, charge implementation at cost—do anything—but don’t give away enterprise software for free (*unless you are using a Freemium model, of course).

Demand premium pricing. You may be so proud of your latest and greatest software that you will want charge more than “legacy providers” for your innovation. Unfortunately, unless you can demonstrate—at a visceral level—that your software provides value that no one else can, you have destroyed the ROI value proposition of your product.

Article first published as How to price new enterprise software at Oulixeus

Ten essential UX factors to create products your customers will LOVE

easyThis week Apple launched the iPad 2, reminding us that creating a great User Experience (UX) is much more than providing a clean, simple User Interface (UI). Those of us who want to build products that are loved by our customers need to achieve a great UX across areas—not just one:

1. Easy authentication. People have far too many logins and passwords than they can possibly remember. Making them create and manage yet another identity is a hassle that can potentially turn-off over half of your customers. Aim to enable one-click login that re-uses an identity your customers already love (like the Facebook SocialGraph).

2. Clean, simple UI for mainstream users. It is so incredibly easy to fall into the trap of overloading a UI with some many features, making your product non-intuitive the 80% people who constitute your mainstream customers. If you need to provide instructions for basic use, you have made you product too complicated. Strive for simplicity, like Twitter does.

3. Configurable UI for advanced users. Over time, 10-20% of your customers will be your core, “power users.” To keep them happy, you need to provide them the ability to create shortcuts and customizations that let them use your product more effectively. The key is focusing on making their experience more efficient—not more cluttered. Facebook does a good job of this for consumers; Salesforce for business users.

4. Open APIs for partners. Many are afraid to open their product (and data) up to others. In a “Web 2.0 World” this can be a fatal mistake. Build your product to make it easy for others to build create applications on top of your product. This social production taps the creativity and work of others to make your product more useful and valuable to your customers. Look at what this provided Facebook, Twitter, and Salesforce.

5. Easy installation of partner apps. You need to architect your product from Day One to let make it simple for people outside your organization install and integrate applications that work with your product. When you achieve this, your customers see your product as an easy platform to add whatever the need. Contrast how Apple does this vs. RIM and WordPress vs. all other blogging tool to understand this UX firsthand.

6. Device compatibility. If you are building applications for tablets or mobile, endeavor to be platform agnostic. This gives your customers the freedom to chose the device that best fits their need—a great UX—vs. denying them choice. Take a look at the explosion of Android to understand how much people love this.

7. Built-in reporting. (Mostly applicable for business apps). The worst thing you can do to customers is providing them a product without the tools to enable measure and understand what it is doing for them. Build in intuitive reporting from the start. Make it easy for customers to export data for their own use. Be a source of insight—not obfuscation.

8. Non-technical customization. (Another item mostly for business applications). Everyone has unique ways of working. Forcing your customers to conform to ways of working your engineers cooked up in isolation is not a good UX (nor is forcing them to spend obscene amounts of money on customization). Make it easy for non-technical people to adapt your product to how they work. Hint: look again at Saleforce to see how to do this well.

9. Painless upgrade. Technology is an innovative business. If you want to keep your customers, you need to provide them regular improvements and innovation. Making this painful, costly and intrusive will guarantee you loose customers to someone who makes it easy. Making it easy makes you a constant source of improved UX. WordPress does this incredibly well—for individuals and business alike.

10. Transparent pricing. This is one people tend to forget. You can make the easiest-to-use product unappealing if you make the purchase process complicated. Too many software pricing models can make buying software akin to buying a new car. Transparent pricing—based on what your customer value (not your costs)—provides a great experience. Pardot does this really well.

An interesting exercise to try for yourself

Look at the products you provide (and the ones you use). How many of them achieve all ten of these? How many even half? Which of those do you enjoy using the most?