376: The nuances of pricing B2B software products – with Chris Mele

What product managers need to know about value-based pricing

Today we are talking about product pricing, specifically the best practices for pricing B2B software products.

Joining us is Chris Mele, who has spent his 25+ year career in software products, with much of that time as a pricing specialist. He is the Managing Partner at Software Pricing Partners, which focuses on helping software companies develop better pricing strategies. The company has helped IBM, Dell, Cisco, HP, McAfee, Microsoft, and others.

Summary of some concepts discussed for product managers

[6:11] Who owns pricing?

Pricing has suffered from the idea that it’s an attribute that can be decided two weeks before launch. That’s a dangerous proposition that causes a lot of great products to fail to meet their revenue objectives. Who owns pricing is one of the most important discussions you’ll ever have. With software, you can get a new version tomorrow with groundbreaking features and capabilities that deliver enormous value. Product managers are at the heart of the product’s new capabilities, so they have perspective on the value of the product. They have the thumbprint of the customer and know what value customers get out of the product. Your pricing strategy needs to address the broad array of customers you serve. Pricing is rapidly becoming a discipline and a science, and people are using pretty sophisticated tools to approach perspectives on pricing.

[11:18] Can you give us some examples of products you’ve helped price?

Everything Software Pricing Partners has done is B2B software. I want to tell the story of Black Monday, the recession prior to the Reagan years. Back then, there was no Cloud, so you shipped software on-premise. Software Pricing Partners invented financial overlays, which is selling software as a subscription. There was no way for two people to use a single software license at a time, so companies were sure to be paid fairly for the licenses. However, some companies realized they could pass a license out on a network. Out of that came the Concurrent User Model, a monetization approach to sell network licenses and charge based on the number in use at one time.

Value pricing is often confused with charging what each customer will pay, so if you and I bought the same thing we’re paying wildly different prices. That’s the opposite of transparency and creates a lot of problems in defending your value. Value-based pricing requires market fairness and transparency, keeping the net price calculation the same for all your customers. Many of the techniques from B2C don’t work in B2B at all.

[18:41] What are the factors involved in pricing?

There are three pillars of intellectual property:

* Licensing—the licensing metric describes the range of deals the sales team might be making. Choosing the correct units to sell is one of the most important decisions you’ll ever make—for example, you don’t want your smallest product to be a $1 million list, while your competitor has a $20,000 list, but you also don’t want to charge a flat fee so your customers can do anything with just one site license, because then they won’t upgrade.

* Offering Model—When you’re monetizing intellectual property, you’re monetizing capabilities. The Offering Model is describing your ideal B2B customers and usage patterns, how they use your product and extract value, and how they pass on value to their customers. Understanding the value chain and the similarities between different types of customers helps you keep your packaging and sales dialogue simple.

* Pricing—Be able to take in a wide variety of data and get it cleaned and structured to make pricing decisions. Willingness to pay requires a context, and you must have a dialogue with your customers to understand their context and do a deep dive to determine...