Subscription Pricing vs. Enterprise Pricing

A question was recently posted in a number of Product Management discussion groups. It read (in part):

…I am working on adding a subscription based pricing model for our product. I have read articles that talk about the “rule of 17″ that suggest a monthly payment should be 1/17th of a perpetual license fee.

I have structured the models so that the “crossover” between the License fee model (including maintenance streams) and the subscription model was sometime in the first half of year 2. I have seen 3 year models as well.

What do you use or what have you seen? Have you offered both model for a time and if so what are the conflicts (if any) that arise?

It can sound very tempting to provide a subscription alternative to your own enterprise software, but you need to think beyond simply price, and think through the evaluation model, the sales model, the expense model (you’re now taking on the cost of hosting/operations), and how you go to market, convert leads etc. I’m assuming here that the subscription pricing is for a hosted or SaaS version of you current on premise software?

The approach to take is to start from first principles, and define the value proposition for the end user or customer.

There is a real tendency if you already have an on premise solution to:

1. ensure you don’t cannibalize the revenue coming in from that solution
2. use the pricing of the existing solution to determine the price of the SaaS version

If you go down either path, the subscription solution is likely to fail.

The first one will always put the existing product ahead of the subscription based product. This is what happened with Siebel on Demand. The existing business had to be protected from encroachment or cannibalization by the on demand business and it hampered the on demand business significantly. Your company will really need to shift it’s thinking to manage this well.

The second is tied to the first, but also ignores a really great opportunity you have to define a true value-based and scalable pricing model that could generate more revenue and have significantly higher customer retention than the current pricing model.

Spend some time with the target customers and understand the value proposition from subscription based pricing, and do some price sensitivity testing with them. This should really help you understand how the pricing can provide value. It may also show that there is no appetite for subscription based pricing, but I’m assuming that is not the situation in your case.

One of the interesting things about subscription pricing is that the money will often come out of OpEx budgets in companies whereas for traditional enterprise pricing, it will come from CapEx budgets. Now a dollar is a dollar, usually, but whose budget it comes out of make s a big difference in how people perceive price.

Additionally the pricing model has to take into account the true value delivered by the software. It is very easy to think of per seat per month or per user per month pricing. It certainly worked for SalesForce.com. But the beauty of subscription pricing is that you are not tied into that model or one model for that matter. But whatever you do, keep it simple! Enterprise pricing is ridiculously over complicated. Use the subscription pricing exercise to address that problem.

Figure out what the key units of value are from a customer perspective and use those for the pricing. There may be multiple models based on user scenario. While you don’t want to force existing customers to move to subscription pricing, you’ll have to figure out a transition pricing model to move them over (and possibly back) if needed.

Think of it this way. If one of your competitors came out with a competitive subscription based offering to your current product, would they simply take your pricing and apply the “rule of 17″? No, they’d figure out a compelling value proposition and pricing model and use that as a weapon against you. Get one up on your competition and do it before they do.

Saeed

P.S. Here’s an article on subscription based pricing that may be helpful.

What’s wrong (or right) with this pricing model?

I bought a small personal laser printer last year. It was on sale at the local electronics chain and cost me all of $79. It is small, less than 1 cubic foot in size, weighs less than 10 lbs, has a 1200×600 dpi print resolution, and is rated at about 22 ppm print speed. This is less than 5% of the price I paid for a far less functional laser printer 15 years ago. Then, I paid over $2000 for a 6ppm, 300×300 dpi printer, that must have weighed 30 pounds.

My little printer came with a toner cartridge that has only now begun to run out, over a year later. I went online to purchase a new toner cartridge. I was surprised (should I have been?) to find that a new toner cartridge cost $99. Now this cartridge will print for about twice as long as the original, but it’s hard for me to get over the fact that the toner cartridge costs more than the printer. How can I purchase a printer and toner for $79, but a replacement toner cartridge costs $99. BTW this is about the same price I paid for toner for my original $2000 laser printer 15 years ago.

Now, I’m used to this scheme with ink-jet cartridges — it’s the old razor blade model. The idea is that you’re not buying a shaver, but in fact, a subscription of sorts, to blades. It’s a recurring revenue model and seems to work for razors. In the context of shaving, it is the blade that has the value — consider the 5 bladed, Fusion razor as an example. If I want a close shave, I focus on the blade. The handle has little value except to enable the blade to do it’s job, but if I like the blade, I will buy and use more.

But in the printer world, it doesn’t apply that easily. At least it did apply 15 years ago, but doesn’t apply today. Why not? If we look at the printer as the handle, and the ink/toner as the blade (recurring revenue stream), it is the handle (printer) that has the real value. The toner/ink only enables the printer to do it’s job.
Also, the “handles” get better and better every year. My little laser printer from last year has been replaced by a better model that is faster and has a couple of additional features as compared to mine and costs about… you guessed it…$79.

But even more important, there are many other printers on the market that I can choose from. Aside from basic laser printers such as the one I purchased, there are colour printers, printer/scanner/copier combos, networkable printers, etc. etc.

The cost of these printers is, in my opinion, incredibly cheap, far below what I believe it costs to make them. I saw an Epson color ink-jet printer/scanner/copier on sale for $29 recently. Think about that. What other technology can I get for $29? Not much. A router. 2GB of RAM. Some flash memory. A video game. A full single colour ink jet cartridge!

So what did I do given this dynamic? Instead of buying a new toner cartridge for $99, I decided to spend $10 dollars more and bought this baby. It prints at 2400×600 dpi, scans, copies, OCRs text and much more. And yes, it comes with a toner cartridge.

So, here’s the question. How viable is this pricing model? Granted, I’m a light user of printers at home. And if I run through 1 or even 2 printer cartridges a year, I’m going to benefit every year from better printers at cheaper prices. I fully expect that a year or two from now, I will be able to get fully networkable, colour laser printer for about what I paid for my monochrome printer this year. How is this sustainable? Or am I in the minority of users who don’t print very much and thus can benefit from such low prices?

Thoughts?

Saeed

iPhone vs. iPod Touch

A few months ago, to much fanfare and (possibly well deserved) hype, Apple released the iPhone.

People oohed and ahhed.

And a small number (1, 2, 3) OK…lots of people bought them.

Then Apple did something really interesting. Within a few months of the iPhone release, they dropped the price of the iPhone, by 33% (from $599 -> $399), and almost simultaneously released the iPod Touch.

The price drop really annoyed existing iPhone owners, and the new iPod Touch once again made people ooh and ahh.

The iPod Touch, is essentially an iPhone, without the phone, camera and a number of other features. The Touch is only 15 grams (1/2 ounce) lighter and 3 mm thinner than an iPhone. They have the same sized screen and function almost identically.

Why is this at all interesting?

First, people paid a premium price for the iPhone even though it was clearly quite expensive, AND it had a poor cell phone carrier plan. With the price drop, a customer revolt ensued, but Apple seems to have handled it well with a $100 Apple credit for any of the original iPhone purchasers.

Second, that the difference in price between an 8GB iPhone and an 8GB iPod Touch is only $100. $399 for the phone. $299 for the Touch. Makes you wonder. Is the phone portion such a commodity or are Apple’s margins really good on the Touch?

Third, and most important IMHO, Apple now has two different products that fundamentally share the same technology. And while this can be viewed as line extension (iPod, iPod nano, iPod shuffle etc.), in many ways this is really a big step forward for the iPod. It now becomes a mobile, wireless device, and not simply a portable music/video player. And the rumours are that the multi-touch pointing technology is next headed for the laptop.

So from a Product Management perspective, what can be learned?

1. Always keep innovating.The iPhone may be as great as all the hype, maybe not, but it truly is different in many ways when compared to other high end mobile phones. But note that in all the hype about the iPhone, was there any mention that this was Apple’s second kick at the telecom can? Anyone remember the ROKR? OK, it was a Motorola phone, but Apple was certainly involved in it’s development. Can anyone say boooring?
2. Communicate those innovations in intelligent and articulate ways to your market/customers in advance of the launch. By giving people 3 months notice of the launch of the iPhone, Apple ensured that word would spread and demand would grow. Many software companies wait until the ship date to communicate to the market and customers. This is a guaranteed way to delay revenue.
3. Leverage your technology investments and deliver multiple solutions to different market segments.It’s always great to create a completely new product with new technology and new functionality. But, what’s even better is to get multiple returns on a single technology investment by being able to repackage, reposition, and resell different slices of the same technology to address problems for different users and use cases. If you are in the BUSINESS of technology, and not simply the technology business, this is something you really need to focus on.

Saeed

What’s the deal with tradeshow demos? (abridged and full versions)

In a blog posting, Steve Johnson of Pragmatic Marketing asks “Why Demo at Trade Shows?” Good question.

Abridged version

Why demo?

Steve writes:

Do we think that the product will sell itself? … Instead I fear that we’re showing too much too soon in the sales cycle and turning off our potential buyers.

I have to ask the question: Steve, what evidence is there that trade show demos turn OFF potential buyers?

Steve, you bought an iPhone right? Steve Jobs demo’d it at an Apple Conference a few months before they went on sale. What was the sales cycle that ensued that convinced you (and 100,000+ others) to get it as soon as it was available? I’m pretty sure it sold itself.

Full version

Why demo?

Why even attend trade shows at all for that matter? All those airline tickets and hotel rooms, not to mention trade show booth rentals, cost serious $$$. And then there are all those people who just come to your booth to get the nifty pen or other cool swag you have on hand.

What a bother!

But let’s get back to to the original post. Steve writes:

Back in its heyday, Comdex estimated that they threw away two tons of product literature every day. If they don’t keep the collateral, will they remember the demo?

Steve, a bit of logical fallacy here don’t you think? Sure, people throw away literature at trade shows. That doesn’t mean they throw away ALL of their literature, and it doesn’t at all imply they suffer from memory loss.

At it’s peak, Comdex attracted about 200,000 attendees. A bit of math (the numbers work out quite conveniently), and we see that (2 tons) 4000 lbs / 200,000 people = .02 lbs per person of wasted literature each day.

That’s about 9 grams per person. Not really a lot when you think about it. So, if people aren’t actually throwing that much away, maybe they are remembering the demo?

Later Steve writes:

Do we think that the product will sell itself? … Instead I fear that we’re showing too much too soon in the sales cycle and turning off our potential buyers.

I have to ask the question: Steve, what evidence is there that trade show demos turn OFF potential buyers?

Steve, you bought an iPhone right? Steve Jobs demo’d it at an Apple Conference a few months before they went on sale. What was the sales cycle that ensued that convinced you to buy it? I’m pretty sure it sold itself. Or at the very least, the Steve Jobs reality distortion field helped convince you to buy it.

BTW, if the product can’t sell itself, whose fault is that? Sure not all technology products are right for trade show demos, but that doesn’t mean none of them are. I had a wonderful experience a while back demoing a software product at a show. Could have sold lots of licenses on the floor if it were possible.

Many people attend technology trade shows explicitly for the opportunity to see a live demo of a product and speak directly to savvy personnel from the company that makes the product.

Ever watch a late night infomercial? They are nothing but extended demos of the products — kitchen devices, exercise machines, you name it. And boy do they sell product. One of most popular products sold by infomercial is the Showtime Rotisserie, pictured here. It is claimed that over 7 million units have been sold, generating revenues of over $1,000,000,000 dollars.

Steve continues:

Do the sales people demand it? Demo-selling is the laziest kind of selling. It says, “I don’t want to know you or learn your business. I just want to get you to buy as quickly as possible.”

I have to respectfully disagree here. First of all, as mentioned earlier, many people go to shows with the expressed intent to see the product and get a demo. Demo-selling is only lazy IF the vendor explicitly doesn’t want to listen to the prospect. In fact, if that is the case, it is not only lazy, but incredibly foolish as well. And yes, some companies do behave that way, but many companies don’t.

The great thing about trade shows is that in exchange for a short (not necessarily canned) demo of the product, I get to have face to face conversations with potential buyers. What’s my response to someone who comes to the booth and says:

“Hi, can I get a demo of your product?“

I say,

“Yes, absolutely. But first can you tell me a bit about yourself and what you are looking to do with a product like ours?“

If the person bites and responds to the question, then I have them. I can ask them a few more qualifying questions and if they fit the profile I’m looking for, I can get into a demo with them and continue the conversation, asking questions, probing for information etc. If they don’t fit the profile I can still give them the demo I promised, but I can decide how deep or not to take it. In the end, I get what I want, and they get want they want. Seems reasonable to me.

Later Steve writes:

Why do we demo at trade shows? Because everyone is doing it? My mother used to ask, “If everyone jumped off a cliff, would you?”

My mother used to say the same thing, but never in the context of tradeshows.

Just because everyone is doing it, it doesn’t mean it’s stupid.

I have a friend who was vacationing in Thailand a couple of years ago. He was sitting down to have breakfast with his wife and son. As they were eating breakfast on the restaurant patio, they started noticing people running up the road. As they watched, the number of people running up the road continued to increase. Many of the people were yelling in Thai as they ran by. My friend didn’t understand Thai. But, he figured that if so many people were running up the road, he and his family should do it as well. They abandoned their breakfast and ran along with the throngs of other people, not knowing why everyone was running.

The date was December 26, 2004. The people were all running up the road away from the beach and the massive tsunami that was bearing down on them. We don’t always have all the data to make well reasoned decisions on what to do, but many times, by observing crowds, we may get insight that delivers significant benefit.

There certainly are ways to have bad demos and to promote and sell products poorly. Some companies do it far too regularly, by focusing on their own features and functionality and not understanding the customer’s frame of reference. But that has nothing to do with a trade show. Alan blogged about this in one of his posts.

Steve concludes:

At your next event, try just asking people who come by the booth a few simple qualifying questions about their problem and its urgency to them. If they answer in the affirmative, scan their badge or take their card and invite them to enjoy the show. Meanwhile send a set of materials to them through the mail or better yet, have a sales person contact them the week after the show. Nobody retains information from a trade show–everyone is yelling to be heard. Perhaps you could be a little quieter and much more effective. Let’s use the demo where it belongs, much later in the sales cycle.

Steve, that’s an interesting idea. We have a big product launch coming up in September. We’re announcing the product at a big trade show at the Moscone Center in San Francisco. Now, I’m wondering, what would be the reaction of someone who took time off work, came down to the Moscone Center (maybe they are local, maybe they flew in for the show), and came to our booth and after a short interchange, I scanned their badge and sent them off to the next company of interest.

Hate to say it, but I doubt the impression would be a good one. What ROI are they getting from me, having spent time and money to come to my booth? A handshake, a short conversation and a “we’ll have a sales rep contact you next week“?

I’ll think about your idea. But to be honest, when I have the opportunity to have a high touch, high value direct conversation with a good prospect, I’m going to take it.

Saeed

Should I get me some of that?

Came across this special deal on an electronics retailer’s web site today. Until they explicitly pointed out the incredible savings I was getting if I purchased the CPU and motherboard together, I thought $79.97 was a pretty good price. With the exception of the green arrow (I put it there), this is an actual screen clip from the retailer’s web site. [click to enlarge]

Pointing out that I was saving only $.01 cost them the transaction. Given ecommerce is well over 10 years old, does it make sense that ecommerce sites are still this stupid? Wouldn’t someone managing the site create a requirement that says something like:

If the savings of our bundles are <5% of the combined price of the individual components, do not show actual component prices or the savings.

I like the retailer. They have a reasonably good website, but I’ll have to keep my eyes out for more of these “great deals”.

Saeed

How to be a GREAT Product Manager (part 5)

Be an integrator, translator and communicator. Don’t be a terminator.

I’m sure you’ve heard the phrase that Product Managers are “the hub of the wheel”. I really don’t like that line. Who wants to be the hub of any wheel? That’s like saying someone is the hinge of the door or the latch of the hood. Boooring! And not true.

Product Managers are collectors, analyzers and dispensers of information. They are routers of information flow. And being a great product manager means understanding how to optimize the information flow so that other teams in your company who are directly or indirectly dependent on you for information get it in a timely manner and in a form they can understand and use.

The following image is a coarse example of the major communication paths that exists in a software company. The blue are internal teams and the red are external.

[click to enlarge]

I say a coarse example, because it really only represents a high-level view of how information flows. Not all links in the diagram contain the same amount of information flow; not all nodes contribute as much information as they receive; and to keep the diagram from becoming cluttered, a number of links that rightfully should be shown are not.

I call these communication pathways the Information Supply Chain. And as a Product Manager, you are directly or indirectly responsible for a lot of the product and technical information that flows throughout your organization. How many times have you been asked if certain functionality is in an upcoming release? Or when a particular release is coming out? Or the details of a beta program? Or whether any pricing or packaging changes are being made to address market needs?

People are asking these questions because they are making decisions and need information to decide wisely. You can have a significant positive impact on those teams if you understand what information people need, when they need it, and in what form they need it? If you can do that for them, they’ll be able to make educated decisions sooner, streamline their work and be more effective. Deliver meager, late or difficult to understand information, and the opposite occurs. There is a real top-line impact to poor information flow in a company.

If you really want be analytic about mapping out the flow, you can do that. You need to look at all the stages of the product development cycle, from conception to completion to launch and beyond, and map out what information different groups need and when they need it. One way to represent it is via a heatmap that may end up looking something like this.

[click to enlarge]

The coloured cells represent areas where communication happens during the development cycle. The deeper the colour, or higher the number (from 1-3 in this case), then the more activity and information flow that happens. As you can see, Product Management is deeply involved in the information flow through all phases of the development cycle, but most heavily early on and in the middle, whereas Marketing and Sales, for example, really start toward the middle and have heavy information flow from the launch stages onward.

By understanding this, you can determine what information you need to produce and deliver to those groups to optimize their activities and decisions. Keep in mind that this is not solely a task for Product Management. Ideally all groups in the company use this analysis to optimize their communications. But, if you want to apply an 80/20 rule (80% impact for 20% effort), then teams like Product Management and Product Marketing must be the first ones to optimize their information flow to other downstream groups.

As technology workers, we exist in an information economy. And just like the manufacturing world, where materials, parts and inventory requirements are optimized for efficiency and minimizing costs, information needs can be understood and delivery processes optimized for greater efficiencies. And because of our role in defining product direction and driving strategy, Product Managers can play a key role in optimizing the Information Supply Chain. The question is, are you up to the task?

Saeed

Part 4 - The 4 Cs of leadership

Part 6 - Own the product from conception to completion and beyond 

Good PR or another bad pricing move?

If things come in three, I’m expecting another example of bad pricing policy to come my way in the next 24 hours. I just finished writing about how my shoe cobbler is leaving money on the table when along came another prime example of it.

We were out visiting last night and some friends were showing us around their $200,000 renovation project, currently under way. In the middle of the tour, my friend Harold explained how they had paid $15,000 for the design of the addition. Then he told about how his designer reduced her price by $750 after quoting on the deal, because, so she said, she had to do less drawings than she had expected.

Has this ever happened to you? After you agree to a price, the seller reduces it. Initially I thought how crazy she was, refunding $750. But then it dawned on me that this might be a brilliant move on her part. After all, she only gave up 5% of her fee, but now she has him telling his friends what an honest business person she is. Maybe she’s crazy like a fox…

I suspect that this move was not pre-meditated; his designer did legitimately over-quote, and did in fact reduce the price when she finished the job.

But as a marketer, I just can’t leave the analysis alone. I like her model for services, at least occasionally. After all, she didn’t really lose much.

What do you think? Let me know by email, or leave a comment below.

Value-based pricing

One day last week, my sandals broke. One of the straps just came undone at the seams. These were pretty nice sandals; I got them on sale for $75, but they retail at about $200 in Canada, and there were in otherwise good shape. So I decided to get them fixed.

So after work on Friday, I took them to a cobbler. I just love an old fashioned shoe cobbler; their shops often wreak of glue and polish, which makes the experience that much more authentic, and they practice a dying art of repairing things in a society that mostly just throws things away.

This guy is the real deal, and I’ve had him repair and resole several pairs of shoes for me. But this time I wanted to give him a bit of marketing advice. You see, he fixed my sandals in an hour while I sat at a nearby pub with some friends, and when I went to pick up the sandals, he only charged me $4.50.

Four dollars and fifty cents? The beer I drank while I was waiting was more expensive than that! Let’s review: this guy saw that I was getting a pair of sandals fixed on a Friday afternoon before a long weekend, realized that I would probably wear them on the weekend, offered to stop what he was doing and fix them while I waited, fixed the right sandal and reinforced the left one too, and then charged me four dollars and fifty cents.

I would have paid $15 - $20 to have these things ready for the weekend … $15 seems right, and $20 for a rush job.

I paid him $5 and told him to keep the change, and he thanked me for the tip. But I left thinking that, while I love this guy and his business, he’s leaving money on the table! I should have given him a real tip and discussed his pricing model.

Pragmatic Marketing provides a very useful 2×2 grid, with the horizontal axis being “impact” and the vertical axis “cost to implement”. My shoe cobbler was charging me based on his own costs, which were irrelevant to me. What was relevant was the impact: my $200 sandals were ready for the weekend, and would last me through another summer. The impact to me was big, but his cost was low.

We make the same mistake all the time in high-tech pricing, but rarely is the example so easy to explain. Next time my cobbler makes this mistake, I think I might give him a real tip and help him with his pricing.

What do you want to read about?

Hello. We’ve been at this for a couple of months now, writing about various PM related (and sometimes unrelated) topics. And while we will continue posting as we see fit, we also want to hear from you about what topics you’d like us to cover.

Now that may be atypical of blogs, to ask readers what they want to hear about, but being Product Managers, it would be unnatural of us not to ask.

Is there something about Product Management or Development or Innovation that piques your interest? Want to know more about product pricing, positioning, process or partnerships? Any interest in SaaS or Agile? Want to know more about designing demos? Got a burning question you want to ask?

• What would you like to read about?
• Is there anything we’ve written, that you’d like to see more of?
• Is there anything we should stop writing about?

Let us know.

Software as a Service: Just a delivery model?

I was speaking yesterday with someone in charge of the SaaS initiative at a very large technology company. In the conversation he described Software as a Service (SaaS) as a “delivery model”. Now of course SaaS is a delivery model, but it is not just a delivery model, nor is it primarily a delivery model.

In fact the word delivery starts from the wrong place. Isn’t SaaS mostly about the consumption model?