The advent of cloud computing has made subscription-based solutions more widely available and a popular alternative to on premise enterprise solutions. Not only do subscription-based solutions provide customers with greater flexibility in terms of scaling their business, they are often more cost-effective for small and medium-sized businesses (SMBs). Instead of spending thousands on a dedicated server and the necessary infrastructure, customers can ‘pay for what they use’ with subscription-based solutions hosted in the cloud.
The resulting software-as-a-service (SaaS) model has led to a significant change in pricing practices for many solution providers. Before we look at how pricing has evolved with the development of new technology, it is important to first examine the role pricing plays in an organization and what should be included in an effective pricing strategy.
Who is responsible for pricing?
Regardless of the industry or vertical you work in, there is often a lot of push and pull between the two departments most responsible for establishing price: Marketing and Accounting. While successful pricing involves the input and cooperation of both teams, pricing can have a significant impact on how a company is perceived by customers, which distribution channels they can use and ultimately their ability to communicate their brand. For this reason, Marketing typically takes the lead on pricing a company’s products and services, and pricing is seen as a marketing function within a business.
When establishing your pricing strategy, you should rely on Marketing’s knowledge of the market as well as your business strategy and financials. Here are some key considerations that should be part of the decision-making process:
- The cost to provide and sell your product or service
- Revenue goals and forecasts
- The functionality and price of competitor solutions
- Brand and positioning strategies
- Target customer base
- Market trends
- Pricing structure (e.g. tiered subscription model, usage-based model based on licenses, users, etc.)
These can be broadly categorized into three groups: value, cost and competitors. An effective pricing strategy should take all three into consideration and use them to determine the best possible price for a product or service.
Understanding the value a solution offers customers requires insight into their challenges and goals – how can your solution help them overcome obstacles they face in their role? How can your product help them achieve their objectives at work? Depending on who your target customer base is and whether you are selling an enterprise or SaaS solution, you have to align your customers’ interests with the features and functionality of your product.
For the large manufacturer with multiple locations around the world and existing IT infrastructure, an on premise enterprise solution will likely meet their needs in terms of scale, security requirements and the ability to manage the environment onsite.
For the SMB with a single office and less than a thousand devices under contract, a SaaS solution may make more sense in terms of cost, ease of implementation and the ability to scale rapidly as they grow their business.
Context is essential when you are trying to determine the perceived value of your solution. You need to clearly identify how it benefits users and frame your pricing strategy around the features and functionality of your solution which provide users with the most value.
Your own solution should only be one half of your pricing strategy; the other half should consist of competitor solutions, particularly how much your competitors are charging, how your solution compares to theirs and their share of the market. Competitive intelligence like market share can be difficult to get if you your competitors are privately held organizations that are not required to publish this information, but you should do as much sleuthing as possible to better understand what your competitors have to offer.
The functionality and price of competitor solutions will provide you with better insight into the potential value of your own solution and guide your marketing strategy. Regardless of whether they offer enterprise, SaaS or both, you should examine all the products and services they have to offer. The type of solution itself may even be a competitive advantage you can market to your target audience if your competitors do not have one of their own.
A good pricing strategy will determine the price point at which a company can maximize profits on their products and services, and a large part of this depends on the cost of goods sold (COGS), sales volumes and the expenses to run the business. Your Accounting team is responsible for these figures which will ultimately determine the revenue the company needs to meet its financial obligations and make a profit.
Calculating the cost to build a software solution depends largely on the type of solution, but here are some questions to ask when figuring out your COGS:
- How much did you spend on labour to produce your solution?
- How much did you spend on tools and materials to deliver your solution?
- Are there any general overhead costs to include (e.g. facilities, customer service, order processing)?
The work necessary to build and implement an on premise enterprise solution is generally more visible to customers as it often involves onsite work to set up the requisite IT infrastructure. Hardware, IT resources and onsite installation can drive the cost of an enterprise solution up so the high price point of these solutions seems proportional to the product.
Pricing a subscription-based solution is trickier because a significant amount of work goes into building the solution, but a lot of it is not visible to the customer and they expect a much lower price than they would for an enterprise solution. Developing a cloud-based SaaS solution involves a lot of remote, behind-the-scenes work, so much so it may appear that all a customer has to do to get started is click a button.
Enterprise software can be a large investment for businesses while subscription-based solutions come with a significantly lower financial commitment and risk, but the perceived effort and work that goes into developing the solutions can often impact how price is perceived and how much leeway businesses have in terms of pricing.
Pricing is a fundamental part of your overall marketing strategy which ultimately impacts your revenue and plays an important role in how your MPS program is structured. A lot of considerations go into determining the right price for your solution, but how you assign that price to customers is equally important.
There has been a lot of debate in the MPS space about billing models, particularly how MPS providers bill their customers and whether cost per page (CPP) or seat-based billing (SBB) is better in today’s print economy. The market for MPS is relatively mature, highly competitive and—as some in the industry have argued—commoditized. Many MPS providers are looking to new billing models as a way to manage these market pressures. Sign up for our free CPP and SBB webinar to learn more about the benefits and drawbacks to both models, resources to help you choose the right model for your program and more!