Thursday, June 7, 2007

How to set the right price

Peter Longini, Managing Editor for Inside Product Strategy discussed pricing strategies with Mike Naumuk of medSage Technologies in his latest Product Strategy Network newsletter.

Theory: Target the mix of offering to maximize customer value while at the same time meeting your own cost and revenue objectives.

In practice, more factors need consideration:

  • Competitive pricing - not just direct competitors, but also alternative solutions - maybe the competition for a software offering is not software at all, but a service.

  • Positioning the technology and business adoption lifecyle - Do you not charge for certain services that ultimately drive customer adoption.

  • What is the customer willing to pay? The price that sticks is based on what customers are willing to pay.

  • Revenue trails - Are there any opportunity for supplemental revenue from associated products or services?

The basic foundation of SaaS pricing for monthly or annual subscriptions typically uses a tiered subscription based on a metric such as: number of transactions, number of instances, activity thresholds or other value metric. The fee generally includes: use of the application, including periodic upgrades basic customer support and hosting services. The fee generally increases by a small amount each year to cover ongoing maintenance costs.

Pricing models for professional services are:

  • Fixed price for well defined bundled services

  • Menu based pricing where the buyer selects from a predefined list of services

  • Time and materials - where the cost is based on the effort required and associated costs
Mike Naumuk warns that the impact of future software releases on existing service capabilities is the most frequently overlooked cost driver. Customers ask for all sorts of value added features that tend to make applications more expensive to support. Factors to consider include pre-release testing, documentation, training materials, and configuration options.

I'm here to serve,

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