I’ve been thinking a lot about pricing recently. It’s one of those topics that we all deal with, but my guess is that none of us, myself included, deal with it as well as it deserves.
Pricing optimization is also one of those areas I think technology vendors neglect, much to their own detriment.
What other aspect of a business has such a direct, immediate and lasting impact on company revenues than pricing?
Hiring more sales reps or spending money on marketing campaigns cost money, have lead time requirements and are no guarantee of positive lasting revenue impact.
There are no guarantees with pricing either, but analysing and optimizing pricing costs very little to do and will have impact as soon as the price changes are made.
My most memorable experience with pricing analysis and changes involved a product line about 10 years ago. It consisted of a large number of components for application development. The components could be bought individually or in a combinations as suites. They could be purchased with or without annual maintenance. Source code or object code could be purchased. There were also various reseller and distributor discounts based on type and geography of the channel partner. Think about the complexity of that pricing matrix.
Now, the pricing had evolved over time as new products were introduced, so it was ripe for optimization. Two things were working in my favour, and I think both of these are critical when making pricing decisions.
- I had awesome sales data down to individual transactions by SKU, by territory, channel etc. This allowed me to slice and dice the data in different ways and get a really good sense of what was selling, who was selling it and how much was being sold.
- The products were good products in a growing market. i.e. there was real demand for the products and the sales team was capacity bound when following up and closing leads.
Why are both of these important? Well, it’s hard to make good decisions without good data, and when it comes to pricing, hard analysis is absolutely necessary. Make the wrong pricing changes, and you can reduce revenues rather than improve them. As for demand, that one is fairly straight forward. In a sellers market, price is not as singularly important as it is in a slower (buyers) market.
So, to make a long story short, I used the data at hand and did my analysis. I looked at what was, and in particular, what wasn’t selling and tried to understand why by talking to the sales reps and channel partners. We also looked at simplifying the price list as much as possible — essentially taking *away* purchase options.
We removed some slow selling items from the price list. They could be bought as part of the suites, but not stand alone. We added maintenance to every single item. i.e. you no longer had the option of buying maintenance. When it was an option, only about 15% of people were buying it. When added in, well, 100% of all purchasers would buy maintenance.
We significantly increased the price of source code, and harmonized the prices of other items overall.
My logic was that with a simplified price list, and high prices for individual items, people would be driven toward the suites, and those people who wanted source code would not be as price sensitive and would pay for it. The other objective was to significantly reduce the transactional business our sales people did — that would be handled by channels — and have the sales people focus on larger deals.
When the new pricing was unveiled to the sales team, many people took it at face value while several others got very upset at the “25% increase” (the bundled maintenance) and the negative impact it would have on their customers.
I explained to them that the market was not as price sensitive as they thought and with a growing market there was more than enough demand to make up for any deals lost due to price sensitive customers. A few reps still were upset and all I could say was “Trust me, I know what I’m doing.”
Senior management had bought into the price change, including the VP of Sales, so I had confidence that I had the support I needed.
The first quarter after the price change was introduced, revenues went up 25% over the previous quarter. How’s that for ROI?
It was Q1, which was typically a slow quarter, yet we not only had a record Q1, but a record quarter overall. I felt proud, and relieved, as there was a chance that the analysis and pricing could have been wrong.
About a year or so later, after I had left the company, the next PM for that product line did the what I did. He looked at the data, and saw there was still demand for the products, though the market had changed and matured somewhat, and optimized the pricing again, eliminating individual product licenses and only selling suites. He also raised prices, adjusted reseller margins etc. The net result, from what I heard was increased revenue.
The point here is that pricing for technology cannot be static and is never perfect. It needs constant attention, good data for analytics and a clear understanding of market dynamics and buyer needs. While this is something that Product Managers oversee, it’s also something that has enough specialization and business value, that companies should consider specifically staffing for. i.e. hire a pricing analyst or some similar role. This should be someone who has a business or finance background, but can stay close to the market and channels, and work with Product Management to ensure that pricing is set optimally and is maintained in an ongoing manner to maximize revenue.
This doesn’t mean monthly price changes or SKU reorgs, but it does mean collecting and monitoring the right information from multiple sources to ensure revenue is being maximized over the life of any given product.
What are your thoughts on this?