091419 software product_pricing_kruemcke_product_camp23
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Updated software product pricing for ProductCamp Austin #23 September 14, 2019
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091419 software product_pricing_kruemcke_product_camp23
- 1. Product pricing considerations Jay Kruemcke jay@kruemcke.com http://Kruemcke.com ProductCamp Austin Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 1
- 3. Prologue • Introduction ⎼Jay Kruemcke jay@kruemcke.com ⎼Product Manager at SUSE ⎼Long career in product management • Why am I giving this presentation? • Assumptions ⎼ Scope is traditional software product (License, Subscription, Cloud) ⎼ Competition exists ⎼ Relatively difficult to change the price once set ⎼ Price is elastic ⎼ Customer value based pricing model ⎼ This discussion has to fit into less than one hour Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 3
- 4. Pricing – An essential Product Manager task • Why? Because its really important ⎼Key determinant of product success or failure ⎼Essential component of the product • What characteristics of “good” pricing ⎼ Facilitates product success ◦ Competitive ◦ Flexible to address different customer needs ◦ Doesn’t leave money on the table or price you out of a desired market ⎼ Simple as possible (but not too simple) ⎼ Reflects the underlying product and business strategy All pricing is a compromise Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 4
- 5. What is Value based pricing? Price Value Elements of Perceived Value • Utility for intended task • Scarcity • Luxury / Status • Quality • Leading edge/early adopter Elements of Perceived Cost • Purchase price • Risk • Change vs Stability • Required investments (capital, people) • Opportunity cost • OpEx vs CapEx Price reflects Perceived Customer Value vs Perceived Cost $ $$$ Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 5
- 6. What is your product market power? Market position ⎼Entry with no competition ⎼Weak with competition ⎼Existing but competitive ⎼Market leader Price elasticity Market maturity Target markets Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 6
- 7. Product Pricing Strategies • Skimming ⎼Grab all you can, then lower to get share • Penetration ⎼Lower price to grab market share • Loss leader ⎼Sell low to encourage other sales • Limit pricing ⎼Protect against competition • Product mix strategy ⎼Total number of products available to customers • Tiered product pricing ⎼Different price points for similar products. Price Value $ $$ $$$ Tiered product pricing Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 7
- 8. Value / Charge Metric • Typical Software Charge Metrics ⎼Processor capacity available ⎼Number of Users ⎼Named user ⎼Usage per interval ⎼Per device ⎼GB of storage used ⎼Per use ⎼Site license ⎼Two part pricing ◦ Fixed portion ◦ Variable portion ⎼Add ons Selecting a charge metric • Existing product / product line metric • De facto industry standard • Provides competitive advantage Charge metric requirements • Has to relate to the customer value • Have to be able to measure • Simple as possible • Customers have to understand • Sales people need to understand • Needs to scale with demand Price = Charge metric * price per unit Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 8
- 9. Licensing Models* • Perpetual license ⎼You can use the product forever (Example: Oracle DB) ⎼Customer uses capital budget (CAPEX) to purchase • Product Subscription ⎼You have maintain a subscription to use the product (Ex. Adobe) • Support Subscription ⎼You purchase support and/or fixes for a set time period (Ex. Linux) ⎼Open-source software fits this model ⎼Perpetual licenses often have a support subscription component • Consumption ⎼You pay based on usage (Ex. AWS) Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 9 General rule – More flexibility for the customer results in higher price *Subject to Terms and Conditions
- 10. How to get started? • Understand your current pricing ⎼Existing product or product line Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 10
- 11. Understand your pricing in relation to your competition Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 11
- 12. Moving forward on pricing • Understand your current pricing ⎼Existing product or product line • Look at your competition or similar offerings ⎼But consider that different pricing can be an advantage • Talk to your sales channels ⎼Identify problems and potential opportunities • Build a pricing model spreadsheet ⎼Project revenue for different volumes ⎼Evaluate against competition • Socialize proposed pricing ⎼Validate with sales channel and other stakeholders Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 12
- 13. Pricing Adjustments • Promotional pricing ⎼ Useful to drive early adoption • Volume discount • Channel discount ⎼Encourage reselling ⎼Market Development Fund rebates based on sales • Segmentation ⎼Different price for different customers (E.g. Geographic pricing) • Customer appreciation discount • Bundle pricing • Discount for multiple years Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 13
- 14. Terms and Conditions / Terms of Use – Protection for the vendor • A legal agreement between the provider and the customer that governs the use of the product and the responsibilities of both parties ⎼ Allowable use ⎼ Redistribution / resale ⎼ Ownership of the product ⎼ Limitation of liability ⎼ Disclaimer of warranties ⎼ Termination ⎼ Customer responsibilities ⎼ Vendor responsibilities ⎼ Prohibited actions ⎼ Charge metrics ⎼ … Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 14
- 15. On-Demand Cloud Pricing – One approach Scenario: Customer wants to use an application hosted by a Cloud Service Provider (CSP) Inputs to calculating price: ⎼ Standard annual price for the product (if purchased normally) ⎼ Adjustments for CPU capacity available (in vCPUs) ⎼ Minimal cloud billing interval (minute, hour, month) ⎼ Adjustment for Multi-tenant vs Single tenant Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 15 Cloud Pricing Example Non-Cloud Price per Year $100,000 Hours in a year 8,760 Single Tenant Cost Multi-Tenant Cost Annual price / Hours in a year (Base price per Hour) $ 11.42 VM size Hourly cost Equivelent Annual Cost VM size Hourly cost Equivelent Annual Cost 1-2 vCPU adjustment factor 0.55 1-2 vCPU $ 6.25 $ 54,750 1-2 vCPU $ 5.19 $ 45,443 3-4 vCPU adjustment factor 1.10 3-4 vCPU $ 12.50 $ 109,500 3-4 vCPU $ 10.38 $ 90,885 5+ vCPU adjustment factor 1.31 5+ vCPU $ 15.00 $ 131,400 5+ vCPU $ 12.45 $ 109,062 Multi-tenant adjustment factor 0.83 Hourly price calculation: Base price per hour X vCPU adjustment X Multi-tenant adjustment
- 16. SaaS pricing models Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 16 Thanks to - https://www.inturact.com/blog/the-top-10-saas-pricing-strategies Approach Comments Example Per User Very common. Charge for each additional users. Downside is fewer users get to use your product hurting future growth. Probably not the best choice Salesforce Tiered User Similar to per user but the number of users increase in tiers of multiple users such as 1-10, 11-50, 51-200 Confluence Per Storage Cost increases as more storage is used. Usually grouped into tiers. Often with free tier. Advantage: gets customers hooked on free, then easy upgrade to paid. Dropbox Feature based Increased features with higher priced options. Trick is to select the right features PandaDoc Pay as you go Costs go up as usage increases. Downside for customer is predicting costs. AWS Roll your own Start with a base price and select individual features at a higher cost. Intercom Freemium Free offering with upgraded features for higher cost. PM challenge is to provide enough features in free tier to hook customers and pick the features customers would upgrade for LinkedIn Flat rate / Subscription Free for base. Flat rate price for all additional features. Easier than Feature based Buffer Free, Ad supported Free to use. Cost to remove advertising. Wix Per active user Free for small number of users. Tiers for more users with refund if not used Slack
- 17. Guidelines • Don’t set price too low ⎼Easier to discount with promotions than to increase price later • Don’t set price too high either ⎼Setting price too high can discourage consideration • Customer flexibility comes at a higher price ⎼Flexibility such as Cloud comes at a higher overall price • Tiered offerings are usually a good approach ⎼New capability comes as a higher cost. Easier to scale offerings • Understand competition pricing but don’t just mimic the competition ⎼Pricing model can provide a competitive strategy All pricing is a compromise! Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 17
- 18. Last words • Pricing is one of the key tools Product Managers have – don’t be afraid to use it • The pricing model should align with the customers perception of value • Tiered pricing is often a good approach • Be sure to get buy in from the sales channels before making changes • Promotions and adjustments can be used to vary the price as a short term tactic Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 18
- 19. In Kind Advocate Sponsors SUPPORTERS Thanks for keeping ProductCamp Austin FREE!
- 20. Thanks! Jay Kruemcke jay@Kruemcke.com http://kruemcke.com @phastflyer Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 20