Software Services: Pricing and preposition strategies

In the world of IT software business, setting the right pricing schema is extremely one of the most challenging pieces of that business, software product pricing is bit clearer compared to services pricing due to its relative easiness with competition analysis and market maturity, however, here we will be discussing only services pricing as it is a core part of the software service growth

What is a software service?, in fact its a set of different tasks that could be done along the software life cycle, lets define what software services we might have:

  1. Support service: break fixes, errors corrections, bug fixes, knowledge provisioning
  2. Implementation service: setup, tailoring, designing, dispatching, testing
  3. Administration service: maintenance, keep well activities, archiving, daily tasks and requirements of business
  4. Optimization service: performance boosting, utilities improvements, expansion and overall service performance elevation

In the ITIL world, these 4 type of services could be positioned under the following ITIL Service Modules:

Under ITIL Service Design

  • Implementation

Under ITIL Service operations

  • Development

Under ITIL Continuous Service Improvement

  • Support
  • Optimization

In this article I would like to discuss the pricing aspects and methodologies to positioning these 4 main software services types, will try to find answers to some questions like what and when to expect highest gross margin, why having a dynamic pricing strategy is crucial? How to warrant business continuity through right pricing schemes along the life cycle…for that, we will have to define at the beginning different type of market pricing strategies

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Types of Pricing Strategies

Pricing Strategy Definition
Penetration Pricing Here the organization sets a low price to increase sales and market share. Once market share has been captured the firm may well then increase their price.
Skimming Pricing The organization sets an initial high price and then slowly lowers the price to make the product available to a wider market. The objective is to skim profits of the market layer by layer.
Competition Pricing Setting a price in comparison with competitors. Really a firm has three options and these are to price lower, price the same or price higher
Product Line Pricing Pricing different products within the same product range at different price points.
Bundle Pricing The organization bundles a group of products at a reduced price. Common methods are buy one and get one free promotions or BOGOF’s as they are now known. Within the UK some firms are now moving into the realms of buy one get two free can we call this BOGTF i wonder?
Psychological Pricing The seller here will consider the psychology of price and the positioning of price within the market place
Premium Pricing The price set is high to reflect the exclusiveness of the product.
Optional Pricing The organization sells optional extras along with the product to maximize its turnover.
Cost Based Pricing The firms takes into account the cost of production and distribution, they then decide on a mark up which they would like for profit to come to their final pricing decision.
Cost Plus Pricing Here the firm add a percentage to costs as profit margin to come to their final pricing decisions.


Source:
http://www.learnmarketing.net/price.htm

Then, let’s have a look on the software product life cycle that mainly has the following stages:

  • Planning stage
  • Design stage
  • Implementation stage
  • Maintenance stage

 

  • Service Pricing at the Planning stage:

Let’s take it from the planning stage, our interest starts after buying the software product, not before or during the procurement process (which should involve a lot of activities for sure)

Generally, at this stage, within enterprises applications, software service is directly associated with the software licenses pricing, a pricing mix would be very efficient at this stage, as free man technical days, free support period, free design..etc, this takes the worries way from the customers and set them relaxed about the initial costs that are usually high, as already the license cost won’t be low, not only cost is important here, also the time to lunch (or time to market) the service, there are SLAs, customer expectations, business needs that can’t wait long for a software solution to be dispatched for production!

Applying an imitative pricing policy and whittling any extra costs would be very important and most successful strategy here, different pricing methodologies could be made depending on the product competitive position, however, decreasing the initial adoption costs will play a key role in calculating the whole return, as the customer cautiously pays highest attention to the total ROI of the service, even if the customer will pay more money at next stages, always the first starting price (first entry pricing) is one of the key important adoption aspects, so a shorter Internal Rate of Return (IRR) period warrants a higher desire for the whole bundle (software + Service)

  • Service pricing at the Designing and implementation stages:

At that stage the main key important factor won’t be price, it will be time!, thus it is the best chance for the highest margin attainability for implementation services, designing and the implementation phases are the most (or the only)revenue chances for implementation services, service positioning here is very important, the customer within this stage minds meeting the delivery time over than anything else, as this will drive and shape the whole business for long time to come, the right positioning here warrants very good margins, as well, it is a bright chance for ambitious service providers who can apply cutting or penetrating pricing methodologies to persuade customers, however, with  most of the customers I have been working with, it’s very risky for them dealing with new field comers, a decent past record is a minimum requirement, when a customer is trying to test (or risk) most probably it won’t be at this stage, as they will be afraid on the investment being in progress, they still see no value and no revenue, so they won’t risk now!

bath tub curve

I am adding the bathtub curve here to stress on the quality importance as a vital aspect to be taken into consideration during the implementation, by nature (and as demonstrated in the curve) this stage is one of the most erroneous stages within the lifecycle, intensive testing, expert focus, high controllability and concrete project management and progress visibility are all mandatory

  • Service pricing at the Maintenance and CSI stages:

At this stage the customers should have received value from the software product, revenue started to be generated, their clients had started to use and get attached to the utility, thus its perfect time for extra room of revenue (a continuous Service Improvement is not even a stage, it is a consistent practice of different on/off patterns)

I believe this is the best area for all players to intervene, fixing past mistakes, work on new enhancements, integrations, interfacing, performance optimization, all these utilities are very important and the customers are willing to pay as long as a real income is already in place

Market challengers have a very intimidating chance for value selling, introducing competitive pricing here, this could be a starting point for any startups to be trusted and well known for customers

General practice:

Regardless of sales tactics, account situation, partners position…etc, absolute pricings techniques could be summarized in the table below, each service has its best (or highest peak) revenue pattern according to the software lifecycle stage, addressing the situation there minding this pricing schema would be of a great benefit in determining which pricing methodology to use

Planning Stage Design Stage Implementation stage Maintenance and CSI stages
Support service Low cost/ low margin Low cost / Low Margin Low cost / Low MarginORHigher cost / higher margin Higher cost / higher margin
Implementation service No cost / No margin Higher cost / higher margin Higher cost / higher margin NA
Optimization service NA NA NA Higher cost / higher margin
Administration service Average cost / Average margin Average cost / Average margin Average cost / Average margin Low cost/ low margin

pricing graph

 

From this table and the graph above, a hypothetical graphing of revenue across a long periodic stage would resembles a Bessel function’s graph of 2nd stage, where customer spends a high amount of money at the beginning however a swinging amount of cash would be spent among the whole lifetime period, with relatively lower costs (inflation and taxing adjusted)

 

Bessel function
Bessel function

Adequate pricing strategies based on customer types

Finally, in the table below, I have tried to put the best or most suitable pricing strategies that a service provider can have minding the market situation (different service providers and customers types), however, there are many external factors that can affect applying any of those strategies thus requiring different ones, customer retention, economical situation, resources availability, current resources qualities..etc

Service Providers types
Leader Challenger Nicher Follower
Customers Types suspects Competition pricing Bundle pricing Psychological pricing Value pricing Competition pricing Psychological pricing Skimming pricing Competition pricing Bundle pricing
Prospects Competition pricing Bundle pricing Psychological pricing Value pricing Competition pricing Psychological pricing Competition pricing
New customers Competition pricing Bundle pricing Psychological pricing Value pricing Competition pricing Competition pricing Psychological pricing Competition pricing Bundle pricing
Repeat customers Competition pricing Bundle pricing Psychological pricing Value pricing Competition pricing Psychological pricing Competition pricing
Advocates Competition pricing Bundle pricing Psychological pricing Value pricing Competition pricing Psychological pricing Skimming pricing Competition pricing

 

Suspects: You might think of these individuals as the customers who aren’t even aware yet how much they need your product or service. Even before someone becomes a prospect, there are individuals that can be identified to have a need (or are about to have a need if you are talking in terms of life events), but might not be aware of your brand or product. Or, they are aware, but haven’t been in contact yet.

  • Opportunity: Be clear about your value proposition so the right audiences can easily find out about you and understand how your solutions fit into their life.

 

Prospects: The No. 1 target of our acquisition efforts, prospects are known and by this point are typically either in contact with a sales representative of the company or in some other way have reached out to learn more about your brand and products.

Opportunity: Support them. Be there to provide relevant information, answer questions, and facilitate a purchase. It’s not about selling; it’s about helping them buy.

 

New Customers: In my experience, these are the customers who are most praised but then quickly forgotten. The sale was made, but the work is not done. If you think of any good relationship, you know the first few months are often spent getting to know more about each other, finding out what else you like, taking care of each other, finding ways to remind each other of the things that were so attractive in the first place.  It’s no different for these customers. 

Opportunity: Successfully on board new customers during this critical time to reinforce their purchase, find out what other needs exist and extend the engagement.

 

Repeat Customers: They are continuing to purchase your product and maybe by this time they have tried other products. The key here is to understand what’s driving their purchase. These customers may appear to be loyal, but their behavior might be habitual more than anything else, which is good to your bottom line, but could easily change if another brand, product or offer is introduced.

Opportunity: Know your customers, leverage the insight and understanding gained along the way to react when behaviors or needs change and continue to demonstrate the value you bring to their life (be it their job, family, business, lifestyle).

 

Advocates: It’s important to understand how your current advocates arrived at their passionate support for your products so you can go recruit more. These customers have an emotional connection with the brand, trust in the company’s products and employees to support them and will personally recommend you to others. They are also more likely to be in it for the long haul and have a willingness to provide invaluable feedback about your product, good or bad, as long as they see their input being valued in some way.

Opportunity: Make sure you understand who your advocates are. Recognize and reward them so they stick around, and learn from them. Why, in their words, is life better because of your product?

The customer lifecycle is a beautiful thing, helping to identify where engagement with a customer is possible and maximizing opportunities to truly gain trust and delight a customer. Those “customers” are important at every stage, but the goal and strategy are different to identify where trust and advocacy are possible, the key to long-term success.

So the next time someone asks you who your customers are, pause for a moment. Remind yourself that your customer base is comprised of a treasure-trove of individuals at various stages of knowledge and engagement with your company. It’s a great way to redefine old thinking about “customers” and work on the marketing lifecycle to cultivate those who not only buy your product, but who know the value it brings to their lives and who share that sentiment with others. Now, go get ‘em.

Source of the customers types: http://www.targetmarketingmag.com/article/top-5-customer-types-how-market-them/2

Glossary

Pricing strategy is the one of the most difficult areas of software services business, due to its dynamic nature, diverse pricing factors, account situation…etc., however, putting into considerations the aspects discussed above can be a solid foundation for setting a clear way forward methodology for any software business to start, continue and grow.

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