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TODAYS DISCUSSION
101
15 Price
14
7
26 100
Operating profit
Volume
-5
How many resources are dedicated to reducing costs or increasing volume vs. improving pricing?
NUMEROUS CASES SHOW SUBSTANTIAL UPSIDE POTENTIAL EXISTS FROM IMPLEMENTING PRICING BEST PRACTICES
Improvement in return on sales (within 9-12 months of implementation) Percentage points
10
DISGUISED EXAMPLES
Case example
Enterprise software Storage systems (hardware, software, and services) Computers (servers and software)
Pricing impact is usually greater in situations with: Complex product lines Many transactions Broad customer base High switching costs Weak current pricing capabilities
Enterprise software
2
3
EVEN SO, MANY TECHNOLOGY COMPANIES FEEL THEIR PRICING MANAGEMENT SKILLS ARE "BASIC"
Pricing excellence skill level Deficient Basic Very good (1) (2) (3) Strategic pricing
Superior (4) Lifecycle and industry level pricing abilities are key differentiators
Structural pricing
Transactional pricing
Understanding/quantification of
discount elements Creating discipline on discount management
Wide variation in capabilities across core elements of pricing enablers and infrastructure
Source: Survey and interviews of 120 senior executives from technology companies, 2003
Frequent innovation and short product lifecycles Steady growth in feature functionality with often decreasing
price/performance ratios
Myopic view of pricing strategy and tactics over product lifecycle Multitude of alternative pricing models and approaches available
many degrees of freedom (e.g., across license/services)
6
TODAYS DISCUSSION
Offering
Product/
pricing architecture Feature bundles Segmentbased value pricing strategy
Standard
license pricing Discounting policy and practice Channel pricing
Warranty Update/
upgrade
Ordering
and delivery
Payment
terms
Renewal
pricing
License
management
Revenue
deferral
Lifecycle
pricing
Support
Pricing model Discounting policy and practice
License and
maintenance compliance
Internal
transfer pricing
License
structure Model (e.g., perpetual vs. subscription) License metrics License scope
Special
license pricing Volume based models Enterprise level agreements
Maintenance
offering
Promotion
and demo pricing
8
Offering
Product/
pricing architecture Feature bundles Segmentbased value pricing strategy
Standard
Warranty
Ordering
Payment
Renewal
License
structure Model (e.g., perpetual vs. subscription) License metrics License scope
Maintenance
offering
license and delivery terms pricing pricing Update/ Discounting upgrade License Revenue Lifecycle policy and management deferral pricing Common Best practices practice issues Support Channel Pricing License and Internal One size fits all product/pricing Unbundle software suites as pricing model maintenance transfer architecture appropriate pricing to better address Discounting compliance underlying segment needs Special policy and license practice pricing Price vs. benefit not assessed at Analyze differences in value perception by segment and set segment Volume level pricing strategy accordingly based models License metrics not aligned with Align license scaling metrics with Enterprise customer value perception fundamental customer impact level parameters (within constraints agreements imposed by ease of administration) Promotion and demo pricing
DISGUISED EXAMPLE
Money left on the table due to unsophisticated differentiation model Current revenue Want base only (80% existing) Want functionality (20% existing) Convert losses to wins Price Funcsensitive tionality mid-tier seekers Expected revenue with base/module price structure
Current customers
Modules*
Base only
0
Base+2 modules
Base only
20
* Base now priced at 75% of original price; incremental modules each priced at 30% of original base price
DISGUISED EXAMPLE
Clear product purchase strategy
Segment 1
8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6
Company A Competitor B
9 8 7 6
Segment 2
Company A
~15%
Value disadvantage
5 4 3
Value advantage
7 8 9 10
2 1 0
10 9 8 7 6
10
9 8 7 6 5 4 3
5 4 3 2 1 0 0
Value disadvantage
Value advantage
0 1 2 3 4 5 6 7 8 9 10
Value advantage
1 2 3 4 5 6 7 8 9 10
2 1 0
11
CHOOSING WRONG LICENSING METRIC CAN LEAD TO HEAVY DISCOUNTING OR BELOW VALUE PRICING
Company Pricing parameter Alignment with perceived value Capacity Poor Competitor Ports High
DISGUISED EXAMPLE
Competitor price lower Company price lower ?
Ratio between client and competitor list prices Number of ports Capacity 1 2 4 6 8 10 15 8 1.2 1.4 1.7 2.0 2.3 2.6 3.3 16 1.0 1.1 1.4 1.7 1.9 2.2 2.8 32 0.8 0.9 1.1 1.3 1.5 1.7 2.2 64 0.6 0.6 0.8 0.9 1.0 1.2 1.5 128 0.4 0.4 0.5 0.6 0.7 0.7 1.0 256 0.2 0.2 0.3 0.3 0.4 0.4 0.6 Company price far exceeds competitor price and perceived value, forcing sales force to discount heavily 12 Perceived value Competitor Company Perceived value Competitor Company
20
4.1
3.4
2.7
1.9
1.2
0.7
Offering
Product/
pricing architecture Feature bundles Segmentbased value pricing strategy
Standard
Warranty
Ordering
Payment
terms
Renewal
pricing
License
structure Model (e.g., perpetual vs. subscription) License metrics License scope
Maintenance
offering
license and delivery pricing Update/ Discounting Common upgrade issues License policy and management practice Support Lack of frontline discounting Channel Pricing (e.g., at end License and discipline of quarter) pricing model maintenance Discounting compliance Special policy and license practice Target discount structure does pricing not differentiate by segment Volume based models Special license agreements are Enterprise all one-off deals level agreements Enterprise license agreements Promotion used with smaller accounts and demo pricing
Revenue Best practices Lifecycle deferral pricing Establish discount floors and exception Internal management transfer with incentives tied to processes pricing measurable performance Differentiate target discounts by
segment based on underlying value differences
DISGUISED EXAMPLE
1,000
10,000
100,000
1,000,000
14
DISGUISED EXAMPLE
Maximize upside potential Set list prices competitively and fairly Avoid additional automatic discounts (e.g., volume discounts) Focus marketing program and executive visits
Tighten range of discounting Create disciplined pricing/escalation processes Align sales force incentives to reduce discounting Create tools to track and support frontline pricing performance
21.6 18.8
2.0 0.2
1.3
0.3
<5 5-10 10- 15- 20- 25- 30- 35- 40- 45- 50- 55- 60- 65- 70- 75- 80- >85 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 Discount band Percent of list price
15
DISGUISED EXAMPLE
Discount approved
53
100 70 50
escalated deals Sales reps are not afraid to request high levels of discount Sales reps do not suffer any consequences from offering excessive discounts
Sales manager
Area VP
VP Sales
Quotes from sales force interviews Managers are no deterrent, they approve everything We never walk away from deals These big deals with huge discounts only get done because of senior management approving them
16
DISGUISED EXAMPLE
Average discount
72
Change initiatives
56 44
28
Sales incentives
Mid-quarter quota targets Price realization incentives and penalties
First 11 weeks
45%
Last 2 weeks
37%
First 11 weeks
43%
Last 2 weeks
28%
17
DISGUISED EXAMPLE
Academic
Government
58 58 56 46 44 40 38
68
Pharmaceuticals
Professional services Utilities Packaged goods Manufacturing Financial services
Discount policies should be tighter in those segments where software titles are of intrinsically greater value
Offering
Product/
pricing architecture Feature bundles Segmentbased value pricing strategy
Standard
license pricing Discounting policy and practice Channel pricing
Warranty Update/
upgrade
Ordering
and delivery
Payment
terms
Renewal
pricing
Support
Pricing model Discounting policy and practice
License
structure Model (e.g., perpetual vs. subscription) License metrics License scope
Special
license pricing Volume based models Enterprise level agreements
Licenseissues Revenue Lifecycle Common Best practices management deferral pricing Concessions at time of Enforce strict criteria license License and Internal and require approval sale can delay maintenance transfer for nonstandard terms maintenance revenue compliance pricing stream Excessive discounting
of maintenance services
Choosing between
percent of list vs. percent of net maintenance pricing
Maintenance
offering
Promotion
and demo pricing
DISGUISED EXAMPLE
25
0-3
3-6
6-9
9-12
12-15
15-18
18+18+
DISGUISED EXAMPLE
175
35
25
15 100
Discounts at renewal
Net revenue
21
DISGUISED EXAMPLE
16 6 9 10 10 6
15 9 8
11
0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 Average 3%
Maintenance
75 (all at 0)
10
15 0 0 0 0 0 0 0
22
0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100
Discount Percent of list price
2001 DATA
There is no right
answer either model can be viable Mix of models used by industry Can usually realize any given absolute price point under either model
Source: Gartner 2001 software support portfolio (October 2001); IDC 2001 support services for enterprise-level applications; Company website; McKinsey analysis
Offering
Product/
Standard
Warranty
Ordering
and delivery
Payment
terms
Renewal
pricing
pricing license architecture pricing Update/ Feature Discounting upgrade Common issues Best practices bundles policy and Segment- license practice Support Inadequate Use electronic license based valuetools Channel Pricing management management tools to pricing pricingfacilitate registration, model result in lack of strategy Discounting installed base usage trial usage, purchase, Special and customer policy and information software License license asset management practice structure pricing Model (e.g., Volume Entitlement check and Entitlement systems perpetual vs. based can limit unlicensed enforcement practices subscription) models for license and usage and create License Enterprise maintenance are weak opportunity for metrics level maintenance renewal/ License agreements up-sell scope Promotion Maintenance and demo offering pricing
License
management
Revenue
deferral
Lifecycle
pricing
License and
maintenance compliance
Internal
transfer pricing
24
DISGUISED EXAMPLE
20% 80%
Not entitled
Entitled to support
25
Offering
Product/
pricing architecture Feature bundles Segmentbased value pricing strategy
Standard
Warranty
Ordering
Payment
terms
Renewal
pricing
license and delivery pricing Update/ Discounting License Common issues upgrade Best practices policy and management practice Prepaid or early Support Ensure business Channel Pricing objectives License and payment terms often and logic pricing beyond model underlying maintenance generous prepaid or Discounting compliance sound give and get early payment terms Special policy and justify margin reduction License license practice structure pricing giveaways and Reducing or eliminating Service Model (e.g., Volume lead to concessions service giveaways and perpetual vs. based sales vs. misaligned concessions can help subscription) models finance corporate reinforce and clarify License Enterprise deferral methodologies overall corporate metrics level deferral guidelines License agreements scope Promotion Maintenance and demo offering pricing
Revenue
deferral
Lifecycle
pricing
Internal
transfer pricing
26
Offering
Product/
pricing architecture Feature bundles Segmentbased value pricing strategy
Standard
license pricing Discounting policy and practice Channel pricing
Warranty Update/
Ordering
and delivery
Payment
terms
Renewal
pricing
License
structure Model (e.g., perpetual vs. subscription) License metrics License scope
Special
license pricing Volume based models Enterprise level agreements
upgradeissues License Revenue Common Best practices management deferral Support Inefficiencies in Provide sales incentive Pricingprocess License and Internal renewal can to renew contracts well model maintenance transferand void and delay renewal before expiration Discounting compliance pricing opportunity support reps with policy and efficient renewal practice process (e.g., inside sales support)
Lifecycle
pricing
Tighten discounting
policies for renewal and enforce discipline in renewal negotiations
Maintenance
offering
Promotion
and demo pricing
27
DISGUISED EXAMPLE
<5
Sales not pursuing all renewal deals (lack of sales priority/capacity)
60
Total opportunity
Forgone opportunity
Cancelled by customer
Renewed
28
DISGUISED EXAMPLE
28
Best practice is to send renewal quote and P.O. 90 and 30 days (respectively) before contract expiration to lock in renewal Long renewal process teaches customers that renewal decisions can wait
14 9 6 4
Average = 29
16 16
Before expiration
1-30
30-60
60-90
90-120
120-150
150+
29
MAINTENANCE RENEWAL SALES CAN BE DISCOUNTED MUCH LESS THAN AT TIME OF LICENSE SALE
Software maintenance discount Percent of list price
DISGUISED EXAMPLE
At time of renewal
55
Q1
30
Fewer competitive options are available to customer (e.g., third-party or self-maintenance not always viable for mission critical applications) Renewal approval is scrutinized less than initial license deal, often by different buyers
50
Q2
25
30
31
End-of-quarter pressures
result in deep discounting One-time payment could be relatively large and can be focus of customers price reduction efforts
Subscription
Lessens impact of end-ofquarter pressures Can facilitate customer adoption due to lower upfront costs and shorter commitments
DISGUISED EXAMPLE
15
Invoice price
Pocket price
Pocket margin 33
* Includes sales costs, allocated R&D acquisition/goodwill, royalties, license fees ** Including professional, installation/integration, and maintenance/support services
DISGUISED EXAMPLE
Hardware 45 only
30
30
25
Software only