Tag Archives: SaaS

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

Apple’s iCloud: The New Multi-presence Cloud

Article first published as Apple’s iCloud: The New Multi-Presence Cloud on Technorati.

The iCloud is a new kind of cloud where copies of data co-exist in MANY places. This is a “game-changer.”

 

Just over one hour ago, Steve Jobs came on stage at Apple’s WWDC and introduced the iCloud. This is not just a case where Apple is jumping on the “cloud bandwagon.” It is the introduction of an entirely different type of cloud, the multi-presence cloud, to the mainstream market.

Apple’s iCloud is quite different from the clouds we usually see. Instead, of hosting your data “in the cloud” (usually a bunch of remote, virtualized servers and storage) and requiring you to access it there, iCloud allows you to download your data to multiple devices. You can access your data (most likely first music, but later videos and documents) remotely (from Apple’s servers) or locally (on your Mac, PC, iPad or iPhone)—whichever is more convenient.

This difference is not a fine point. It opens a whole new set of opportunities.

You are not “tethered” to the cloud

One of the weaknesses of the traditional cloud (and remotely-accessed services in general) is that you have to be connected to the Internet. As long as you have a connection to the Internet, you can access all your information. However, if you are in place without Internet access (e.g., on an airplane, travelling to a faraway place, at your Aunt Matilda’s), you are “off the grid,” with no access to your data.

The iCloud model overcomes this. Your Mac, iPad, iPod, etc. is a mobile “piece of the cloud” that you can carry wherever you go. You have both access to your data and the software to process it—letting you autonomously listen to music, watch videos, or read documents anywhere.

Bandwidth (i.e., time) is irrelevant

Another weakness of the traditional cloud is that your access to your data is only as fast as the slowest link between you and the cloud provider’s nearest server. Traditionally, most people have said this is not a problem as broadband is “everywhere.” However, this is not true in many situations. When the hosting company’s servers are busy, you slow to a crawl. When walking and driving around you routinely leave 3G coverage areas. When downloading large media files the Internet is always slow.

The iCloud model overcomes this as well. Most of the content you will access (e.g., your music library) will be instantaneously accessible (either on your PC or on your home network). Bandwidth is not a worry (nor are 3G connections, firewalls, etc.)

Access is now nearly ubiquitous

One of the primary strengths of the traditional cloud is that you have near-universal access to your data. It does not matter if you are on a different computer, in a different office, on a different network: you can access you data from any device, anywhere (as long as you have an internet connection). Unlike clouds, iTunes did not allow this (i.e., the PC was the hub). You had to transfer your files from device to device, a tedious process.

The iCloud model ends this limitation. You no longer have to transfer data from device to device. Any device that can connect (for a period of time, not permanently) to the Internet can download your authorised data (from the new hub, the cloud).

This IS the future of cloud computing

What Apple has pulled off is not a trivial accomplishment: universal access with centralized management. It requires the complex synchronization of data and authorization to access it across numerous independent, distributed devices. It requires software that can access this data both while it is connected to the cloud and when it is off-line. All of this has to work seamlessly—and without need of customer support.

Even with these challenges, this is the future of cloud computing. The world has benefited greatly from the economies of scale and network externalities provided by the Internet. However, life does not run on a tether. We need both the benefits of both cloud-based, large-scale efficiency and the freedom of offline operation. This will become even more important as the growth in the volume of data we use far outstrips the growth in bandwidth available.

It will be interesting to see how many other cloud providers follow Apple’s iCloud model over the next 18-36 months.