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.

How much revenue for each PM in your company?

Someone asked me a question recently and I couldn’t find an answer on the Web, so I decided to ask all of you for help.

After reading my article, “You can never have too many Product Managers“, the person asked me whether I knew of any published numbers that provide guidelines for the number of product managers a company should have relative to it’s revenue.

The answer is, unfortunately: it depends.

It depends of the stage in the lifecycle of the product, the market, the kind of customers etc.

To get data, I need your help. In return for 30 seconds of your time — that’s all it will take I promise — I’ll collect the data and share it back with all of you in a future post.

Survey is closed. Click here for the results.

Thanks.

Saeed

The End of Infrastructure

Yesterday Amazon announced Amazon SimpleDB, an on-demand database service similar to their EC2 and S3 services. With this final piece of the puzzle, Amazon has put an end to the need to own server infrastructure.

Now, don’t get me wrong, Dell, HP and IBM are hardly about to go out of business. But until now one of the biggest barriers to entry in some types of enterprise software was the capital cost of servers (which was already at a historic low). With this on-demand database service, any web-based product you can think of can be deployed without spending a cent on infrastructure. Regardless of what kind of software you sell, today your competitive differentiation just got a little bit smaller.

Thank you Plaxo: You synchronize my life

For years I have wanted this service. Some promised, but no one delivered. And now along comes Plaxo.

I remember Plaxo a bit in the same way that I remember PointCast. PointCast was really a first generation RSS reader, in that it would go out to various websites and pull down new content, new articles that were published. I don’t recall all the details, and probably never knew them anyway, but I do recall that PointCast went down in a ball of flames, largely because the whole “push” model went down in flames. I was disappointed when the IT director started to block PointCast traffic, and then I realized that it was happening everywhere, and PointCast fell away.

Now of course Plaxo is a much newer service, but in a way, I think the name still carries some “first generation” baggage with it. Plaxo used to be about keeping my address book up to date; it would walk through my contact list and email everyone in there, giving them the option of updating their own information. I liked the idea initially because it pushed the problem out where it belogned … to the owner of the information. You know if your information is up to date, and you can quickly re-enter it for me, thank you.

But soon Plaxo got a bit of a bad reputation. People got sick of receiving the self-updating invitations, and many spam filters started blocking Plaxo traffic. It seemed to many, especially with the upsurge of social networks and free competition from CardScan, that Plaxo would die a slow death, or that it was already dead.

Not so! Plaxo came back a few months ago with a 3.0 beta product that is now central to my life. They have identified out a most difficult problem: synchronization across home and work. So now I have Plaxo running on my MacBook Pro at home, my iMac in my home office, and my Outlook at work. Not only that, but it is connected in wild and wacky ways with my Google GMail account, so now my Google Calendar and Address books are automatically synchronized with my home and work life.

And everything is all good. No longer do I have to wonder whether something I create at home will be sync’d with my work calendar. No longer do I actually have to fire up Outlook or Outlook Web Access to set an appointment from home. I simply enter it anywhere … on my iPhone, on my iMac, on my MacBook Pro, on my Google Calendar, or on my Outlook at work, and it magically appears everywhere else.

It’s missing a few things in my view. For example, its duplicates tool is not good enough to be useful, and I think it needs a sort of audit service. I have 1000 contacts, and I’m sure there have been a few mistakes in sync’ing; I have found some entries that are total nonsense, so I wonder if there may be some bugs. Also, Plaxo does not sync photos from my Mac address book. I know that Outlook doesn’t have photos as an option, but both of my Macs do, and my iPhone does, and I’d like to sync them.

Customer service is also on Plaxo’s radar. I had one inquiry that went well beyond their promised SLA. I emailed their “Customer Advocate” after not getting my response in time, and I got a response pretty quickly.

Notwithstanding these glitches, this is a service that I love. They have overcome their own first generation hurdles and created a new product that solves a big problem for me, and I hope they are successful forever. Amen.

Transparency in Product Priorities

Product managers are always looking for better ways to get feedback from customers on which new features are most important. A few companies have embraced the “Web 2.0″ model and are putting their feature candidate lists out there for everyone to see and comment on.

Dell has Dell IdeaStorm where anyone can register and submit their ideas and vote other ideas up or down.

Salesforce has, not surprisingly, creates a SaaS service which they sell to other companies but which they also use themselves. IdeaExchange is viewable by everyone, but only registered Salesforce users can comment or vote on ideas.

Sun has always made their bug (and FR) database for Java publicly available, which was certainly great back in my days as a Java developer.

It’s an interesting idea to implement this for the product I’m currently working on, but is it always appropriate? Just like with roadmaps, it’s not a good idea for small companies to put too much data out in public as it gives too much away to competitors. For companies like Salesforce.com, Sun and Dell, there’s not much here that’s really a secret; it wouldn’t take a competitor very long to figure out the gaps in specific functional areas of Salesforce. But consider your own product - would giving away these details to competitors be a bigger drawback then the greater level of customer engagement you’d get in return? 

Fantasic Followups

Recently I got a fantastic followup email from a service I had signed up for online:

This is amazing. It’s short, it’s to the point and it’s dead easy for the user. It’s even personalized! For the product manager at TimeBridge (or whoever is filling that role - it’s a startup) you get great data.

What’s even more amazing is that this is the first time I’ve ever gotten an email like this. This technology is dead easy, though I may be biased by having worked at an email marketing company in the past. Personalization is trivial. And online surveys are not really cutting-edge any more. But very few people do it. While doing this kind of survey certainly isn’t free, the best data never is. Real data that leads to real insights costs money. That money may be spent as PM time, travel costs, phone costs, conference fees or whatever, but very little worth having comes for free. The smart thing to do is to try to maximize your return on investment by gathering very tactical pieces of data that will have maximum impact on your product development process.

As far as I can tell, TimeBridge is using RightNow to power this email, but any decent email service provider should be able to enable the same sort of functionality in conjunction with your web analytics tools. And if your email marketing software isn’t integrated with your web analytics tools, get with the program - are you running a real lead generation effort or just throwing money around and hoping leads show up? Even if it took a week and several thousand dollars to set up this kind of feedback mechanism for your product, what would it give back in terms of actionable insight and hard data for your product planning process?

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.

SaaS: A revolt against Enterprise Software

How many failed enterprise IT projects will it take, till too many people have died?

OK, the Bob Dylan reference may be overkill, but SaaS represents a revolt against the sins of enterprise software past. The challenge today selling enterprise software is that buyers are jaded; they have heard it all before, and they no longer believe. They want to see proof that you can deliver what they need, and they are extremely wary of projects with large up-front capital expenses.

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?

I gotta get me some of that!

A long time ago, at a trade show far far away :-), just as I finished giving a demo of our new software product to a pair of attendees, one of the people looked at the other, pointed at the monitor and said “I gotta get me some of that!” I remember that moment well.