This is Part 2 of a series of four posts on pricing a solution portfolio.
Part 1 - How Pricing Changes Over Time (this post)
To come …
Part 3 - Looking for Interactions
Part 4 - An Integrative Solution
Pricing one offer can be a challenge, but the challenge has a lot more dimensions when you need to price a portfolio of solutions. This is the situation that many companies find themselves in as the result of a series of acquisitions, organic expansion in the range of offers, and the move away from products to services and then to solutions. This was one of the key themes at the Technology and Services World conference in San Diego last week. Ibbaka participated as one of the selected solution partners.
Is there a systematic way to do this? What frameworks can help make sense of the cascade of choices that face portfolio managers?
There are a few simple principles we can bring to pricing portfolios.
Pricing changes over time.
Each offer has its own goals that define the role it will play.
The interactions matter.
This is part one of a four part series.
In part two we will look at how goals can differ for each part of a portfolio.
In part three we will look at interactions between different parts of the portfolio.
Finally, in part four, we will provide a framework to pull the pieces together.
How pricing changes over time
We all know this, but we often fail to act on it. Pricing often becomes a frozen accident. Once the pricing model is set early on in a product’s history, it seldom gets changed, with most pricing teams doing little more than playing with price levels in efforts at price optimization or in response to competitive threats. This is not enough. How to price changes across the technology lifecycle. Which means that any portfolio pricing strategy has to include an honest assessment of where a product is in that cycle.
Innovators, early adopters, early majority, late majority and laggards all require different approaches to pricing. Knowing where your product is will shape your portfolio strategy.
Innovators - Innovators buy technology because they want to be the first to use it. They tend to want to get things for free and you should generally accommodate them. But you want something in return. Sometimes this is product feedback, innovators tend to be articulate and opinionated and you want to listen to them about features and functions. You also want them to introduce you to early adopters. But they can tell you almost nothing about price. Pricing studies, conjoint analysis and other sophisticated data collection with innovators is a complete waste of time. They will just mislead you as to the value and possible price of your offer.
Early adopters - Early adopters buy to get a competitive advantage. They are willing to pay a premium for something that will give them a strategic edge over the competition. These buyers will give you a lot of insight into where your real value lies. You need to interview them and use them to act as your advocates in the market, especially at conferences and with industry analysts. But be careful about how you use their willingness to pay as an input into pricing. They have a high willingness to pay as they are buying strategic advantage. They may even like having a high price tag as it will keep their competitors out. In most industries though, there are not enough early adopters to build a sustainable market and early adopters quickly move on to the next thing that will give then an edge. You can expect your pricing in the early majority market to be lower than your pricing for early adopters. In consumer markets, this is often seen in the skim (charge high prices) then penetrate strategy that companies like Apple have mastered.
Early majority - This is the most important and difficult market to enter. The failure of many products to make from early adopter to early majority is why the gap between them is called the chasm (Geoffrey Moore even called his company The Chasm Group). It is here that a value-based market segmentation is your most important tool. You need to know how the potential market will perceive the emotional and economic value (you have to understand both) and then choose a chasm crossing beachhead that gets extraordinary value. Provide enough value to overcome the normal inertia and fear that any new solution evokes in a market, and the FUD (fear, uncertainty and doubt) that incumbents will try to spread.
The critical thing is to identify the value drivers that mean the most to specific segments, to understand the value metrics associated with those value drivers (a value metric is the unit of consumption by which a buyer gets value) and to align pricing metrics (the unit of consumption for which a buyer is charged) with value metrics.
In early majority, the goal is to find the vertical value drives that really align with how narrow market segments perceive value. Price levels in the bowling alley are often lower than for early adopters.
The tornado - Some markets enter the ‘tornado.’ This is the classic high growth software market, where revenues can bloom from tens of millions of dollars to billions of dollars in a few years. Tornado market buyers are buying because everyone is buying. The product now has a stable configuration, people understand what it does and what the value is, and the buying process is well understood. Today, collaboration software like Slack and Microsoft Teams is in the tornado. If you are not using one of the these platforms today you soon will be. Judging from the chatter at the Technology Services Industry Association (TSIA) in San Diego from May 6 to 8, customer success software like Gainsight may be tipping over into a tornado.
In tornado markets pricing flips. Instead of sharply defined vertical value drivers the focus is on broad horizontal value drivers. The value metrics, and therefore the pricing metrics, need to be as generic as possible. It has to be as easy as possible to price and sell solutions because speed is key. Lose momentum in a tornado market (like Hipchat did in collaboration) and your competitor races by you and it is almost impossible to catch up.
Not all product categories enjoy a tornado market. The majority do not, and transition smoothly from early majority to majority without ever experiencing hypergrowth. The marketing and pricing team need to be alert for the beginnings of a tornado market, and if one develops be prepared to act quickly.
Main Street - Thriving Markets - The solution is now well established and competitive options are emerging. Buyers know what they are getting and expect vendors to provide real and demonstrable value. It is important to offer the whole product solution for well targeted market segments. As the product will often be bundled, pricing has to be composable. It has to be possible to easily combine the solution with other parts of the offer to come up with a total price that makes sense to the buyer. Value drivers and value metrics are generally combined with services, data or some other value enhancers. Pricing has to be able to capture this. In B2B software, DAM (Digital Asset Management), Supply Chain Management (SCM) and Customer Relationship Management (CRM) solutions are near the end of their thriving market phase or have already entered the mature phase.
Main Street - Maturing Markets - It is at this point that commoditization begins to overwhelm the market. Buying is dominated by procurement. It becomes more and more difficult to maintain meaningful differentiation. Having a portfolio of offers is key at this point. One wants to be able to take these late stage products and create bundles with more differentiated products and services to maintain a high level of value and at least some differentiation. Data is often a good thing to bundle, as by this time there should be many integrations, and a lot of data available for benchmarking. This is the case with most office productivity software. Today we buy our word processors, spreadsheets and presentation software in carefully designed bundles. Microsoft is the master here. Adobe is also doing a good job of this with its Creative Cloud.
Laggards and End of Life - There are some people who will only technology if tricked into it. I have an uncle who is proud that he does not own a computer, but has a car that only runs because of its very sophisticated software and he owns a smart TV. Most technologies never really die. They just get pushed lower and lower into the stack. Few of us buy databases anymore, but almost all of the software we use has a database in it somewhere, often one running on cloud servers from Amazon, Oracle or Microsoft. If you have a technology at the end of its market life, you can often find opportunities to provide it as a service to products higher in the stack.
A good portfolio will have offers across the technology life cycle and pricing will have strategies in place to evolve pricing as a product moves along the inevitable path from innovation and differentiation, to commodification, and eventual obsolescence. If your pricing model and metrics are not changing as you move across the portfolio, that is a good indication that you are doing something wrong.
The first thing to do with your portfolio is to map where each product sits in the technology lifecycle. Then identify what is happening in the market that could tip the product into the next phase.
In part two we will look at how goals can differ for each part of a portfolio. This will depend in part on the phase the product is in.