Guest Column | May 9, 2016

Demystifying Mistakes ISVs Make When Pricing Software

Jerod Powell, Chief Executive Officer, INFINIT Consulting, Inc.

By Jerod Powell, Chief Executive Officer, INFINIT Consulting, Inc.

Pricing strategy is perhaps the most critical factor for gaining a competitive advantage for any ISV, but most still struggle to price their software effectively. Today, ISVs are dealing with quickly evolving markets and enterprise demands at unprecedented levels. For an ISV to thrive in a transforming marketplace, the road ahead is clear: ensure your software delivers real ROI and it is priced to perfection. In this discussion, we will be focusing on the latter part of this ISV challenge, i.e. pricing the software.

Why Is Pricing Becoming Difficult For ISVs?

Pricing is not only important for gaining immediate traction, but also for ensuring long-term success. The challenges are enormous as Big Data practices change, disrupt, and make decision-makers rethink their strategies. 2016 has been billed as the year when the Internet of Things (IoT) will gain the enormity it has been promising. Amid such a complex marketplace, pricing your product can be a tricky proposition. Despite ISVs investing in analytical research and discovering new, possible revenue channels, it is difficult to create a pricing bandwidth that is present and future-perfect. Gauging the market sentiments is equally demanding. Every ISV will agree there is no perfect formula for getting the price right every time. However, there are some software pricing habits that ISVs should not pursue — these common mistakes can derail the pricing strategy.

Mistake 1: Lack Of A Defined Pricing Goals

As an ISV, you might feel satisfied with a well-structured pricing model. Reality check — things might still go wrong! Why? Because you are not being clear about your pricing objective.

If you are a start-up, the pricing objective can be merely creating the first pool of customers. You are desperate to get sales underway and make a splash in the market. Here, the pricing should be humble, ensuring some engagement is created to get things started. If you are a globally competing ISV being challenged by regional providers, the pricing strategy can be about breaking the competitor’s foothold. Here, pricing lower than all expectations can be pursued for a short period.

If you are an established ISV providing unique solutions others don't provide, innovative offerings that justify their premium pricing, your pricing strategy becomes a lot easier. You merely need to find a pricing sweet point that doesn’t scare away prospective consumers, positions your brand at the top of the mountain, and makes business sense. Essentially, exclusive ISV solutions are the easiest to price.

Some other pricing goals are driven by short-term strategies such as seasonal pricing or discounted pricing for maximization of sales for a defined period. If maximizing goodwill is your goal, ancillary software solutions can be subsidized rather than discounting the core offerings. This is how ISVs can use price reduction as a productive tool.

Mistake 2: Underplaying Or Overexposing Customized Pricing

ISVs are increasingly becoming more flexible, and this applies to their pricing tiers as well. However, the balancing act between flexibility and losing credibility is challenging. Software vendors understand enterprises are asking for more customizable solutions. These are necessary to meet unique requirements and different budgeting bandwidths.

As an ISV, you want to make your pricing structure flexible, somewhat bendable but not a doormat — pricing overhauls can ruin your reputation. The idea should be to showcase customized pricing as one of the features but not the tagline or primary point of engagement. Similarly, underplaying this strategy can drive away small and medium-scale enterprises that have a preference for vendors who are ready with some pricing flexibility. If you overdo this bit, you create the risk of making your premium software look like just sales bait and dilute credibility associated with the brand.

Don't be willing to tweak pricing for every bit of the sales pitch. You can lure and hook a client with some customizable pricing leverage, but don't overprice and then create the impression of drastically cutting down your price. This will only raise more queries about your integrity rather than stimulating more sales.

Mistake 3: Misinterpreting Customer’s Perception

If you have been keeping tabs on what is trending in the niche of software solutions, one aspect must have captured your attention; there is a premium on understanding buying mindsets, the decision-maker’s perception, basically the psychology of consumerization. However, some ISVs make the mistake of not pricing their software in harmony with a consumer’s outlook. They either go overboard with the buyer’s assumed enthusiasm or price their software too modestly. There is always a perceived value of software — this can be very different from your sticker price. This can be much lower than what your market analysis suggests. As an ISV, you need to understand the demand curve better and create more reliable tools for better Predictive Analysis. Perceptions can change rather quickly but pricing tiers cannot be revised too soon.

Mistake 4: An Overwhelming Pricing Tier

Most ISVs are prone to pitching a pricing tier as soon as they sense the probability of a sale. There is nothing wrong with being proactive, but what if the pricing structure itself works against you? Complex pricing tiers can overwhelm the buyer’s mind. We have seen pricing tiers with unrelated, difficult to apprehend titles, often in Latin!

While lack of pricing tiers might alienate you as an ISV with a rigid pricing platform, potential customers prefer pricing tiers that are easy to understand. Your pricing plan should be simple. Use nomenclatures that are easier to recall. If you have read about the “Paradox of Choice”, you will understand that too many choices can fuel anxiety and dampen the happiness associated with a purchase. Here, simplicity breeds more conversions.

Some ISV websites lead to a questionnaire-like page upon choosing a tier. You don't want the buyer to lose interest just because the buying procedure is too complex or lengthy. Don't get too creative, sometimes being too unique can hurt. Just ensure you have:

  • minimum tiers (anything between three and five is considered normal)
  • clearly differentiated tiers (highlight advantages of higher-priced tiers)
  • tiered to address a wider pricing range (spread the price point)

Mistake 5: Trying To Sell More By Pricing Higher

Some software marketers believe the top-end of your pricing range should be intentionally bloated. The idea is to create an illusion there is a market for such outrageous prices, too. However, there is a downside to this approach. What if consumers buying from the mid or lower-segment software tiers feel they are missing out on too much? Pricing higher is generally considered to be an effective way of increasing the “premiumness,” but you need to exercise control. It might not always help when you are pricing software is meant for enterprises that have quick, real-time decision makers. The better approach is to highlight how your software is uniquely positioned. Justify the pricing rather than just adding zeros!

Mistake 6: Selling Only The Differentiator(s)

Most ISVs would have a key differentiator — one feature that sets them apart from the growing crowd of software vendors. Highlighting the differentiator is good and highly recommended, but justifying your pricing solely on the basis of a unique feature can backfire. Enterprise wants software solutions that pack all the standard features then offer something more. Not discussing the core competencies of your software can make your product look incomplete. The pricing structure should clearly indicate all the standard offerings and then, create an impactful, engaging pitch for the key differentiator. Play around with your trump card to justify the pricing.

Concluding Thoughts

ISVs should be vigilant about other pricing influencers. For instance, maturity of a software solution is a major parameter. Tried and tested software should not undergo frequent price revisions unless it has evolved dramatically whereas you don't want to offer extended Free Trials for software that is a proven performer. ISVs need to take into account the volatile nature of software purchasers. A rival is just a click away. Identifying and hyper-defining a consumer demographic can help if your software is not meant for mass consumption. When software surpasses the break-even point and no longer requires exhaustive promotional or marketing efforts, you can gradually hike the price, albeit you do this by incorporating a few upgrades. Software that continues to evolve, become smarter and more intuitive is easier to price and sell.

Jerod Powell is CEO at INFINIT Consulting, Inc., a highly acclaimed IT provider and consultancy company he founded in 2006. Jerod develops strategic business plans, identifying key IT services to support business objectives and is the key facilitator in developing partnerships to support business priorities and objectives. , Jerod serves on several advisory boards and boards of directors. He is a member of the Cloud Partner Advisory Council of Microsoft. He has also been repeatedly named Tier 1 Cloud Champion and partner of the year for Microsoft. He is a member of Microsoft’s SMB Advisory Council and Cloud Champions Club. Jerod is also a member of the Cloud Community Council and the Ingram Micro Partner Advisory Council.