This new model also has four key factors, but this time they are the 4Cs.

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1 Services to industry groups e-business suppliers factsheet Pricing Pricing needs to be seen in the context of the overall Marketing Mix of your company. This would traditionally have been considered to be a combination of four key factors, the 4 Ps. This model was popularised by the marketing author Philip Kotler in the 1970s. The 4 Ps are: Product; Promotion; Price; and Place. Attractive though this model is, it has one major drawback, and that is that it is internally oriented. So, so in the last 10 years, we have used a more customer oriented model to help software companies in their development of an appropriate marketing mix. This new model also has four key factors, but this time they are the 4Cs. The 4 Cs are: Customer Value; Communication; Cost of Ownership; and Convenience. Of course, this does not mean that you do not have to appreciate your 4Ps, just that you need to understand the customer viewpoint in order to determine your offering.

2 Turning to classic Pricing Theory there are two other key aspects to be considered: what is your market segmentation - which customers are you planning to serve?; and what is your product strategy - what are your value propositions and positioning/differentiation? You also need to be aware that your pricing objectives interact: to achieve a target return on investment; to balance volume and margin; to achieve a market-share target; to enhance your competitive position; and to enhance your image and reinforce your positioning. Of course classic Pricing Theory relies heavily on Economics, in particular the concept of Price Elasticity - the ratio of the change in sales revenue with the change in price. The higher the ratio, the more elastic demand is. For a typical product an increase in price will produce a decrease in sales (or so the theory goes, this is not always true in software!) For products where an increase in price leads to an increase in sales the elasticity is negative. New products are typically aimed at segments with the least (or even negative) elasticity i.e. where prices can be high. As products mature and customers understand their needs more clearly, prices are lowered to reach other segments. The big assumption here is that of assuming that consumers operate with perfect information. In business-to-business sales in general, and in software sales in particular this is seldom the case. Pricing strategies Many companies do not have an explicit pricing strategy, but if you were to describe it, it could be said to be "opportunistic". Unfortunately, this leads to taking orders when they are unprofitable, to customers feeling that they can negotiate even better deals and generally has a negative impact on the business. To prevent the problems that arise from this, we will cover the main options for pricing in general, then apply these to software, in particular to the smaller software company

3 The main pricing strategies which companies use can be described as: cost plus; market pricing; street pricing; tied pricing; premium / value-added pricing; confusion; and pay-per-use. Cost Plus This is defined as a markup on the cost of the product or service. This method is popular with accountants because it appears simple and looks as if it preserves margin (both are fallacies). This is a poor strategy because it is usually either: too high, resulting in lost sales and competitive position; or too low, resulting in lost profits. This is because it does not take market factors or customer value into account. Of course if cost-plus is too high a price, then it means that your business model is not appropriate for the marketplace - either re-design your product, service or process to reduce cost in the business or find another opportunity. Market Pricing This is defined as pricing determined by the market e.g. the price of a barrel of oil. This method assumes products are commodities. The problem is that you may not want to have your product viewed this way! If you have a high value differentiated product then market pricing usually undervalues your products! In addition, if there is not a sufficiently large "marketplace" then price levels are difficult to determine in any case. Sometimes Software Service or Customer Service is treated in this way (e.g. "The market price for service is 10% of the product price, why should I pay any more?" - see also Tied Pricing (anchor link)).

4 Street Pricing This is a variant of Market Pricing - companies have a list price, but few customers pay it. Software packages from the major vendors are like this (see pages of magazines and websites for examples). The available discount can be significant off list price. This method has the same disadvantages for smaller companies as Market Pricing. Tied Pricing This is defined as the pricing of one component (usually service but can be applied to other items) as a proportion of another element (package price or hardware price). This method is effectively a variant of Cost-plus Pricing. It also leaves the supplier vulnerable to effective unbundling by competitors. This method is common in software but that does not necessarily mean it is a good strategy for you! Premium / Value-Added Pricing In this strategy there is a Premium in the price related to the perceived Added Value provided to the customer. The added value can be based on business analysis or on Exclusiveness, Cachet, Leadership, etc. A review of your Pricing Environment will tell you if Value Added Pricing is a feasible strategy for you. For most smaller companies, this is the only strategy that makes sense because: unit costs are typically higher than the major companies; reserves of cash are usually lower than the majors; and niche markets provide the opportunity to price to Value Added without incurring market entrants. Confusion Pricing Provide so many options and deals that it is difficult if not impossible for the customer to work out which price is best. For an example look no further than the Mobile Phone Companies.

5 This strategy can generate a backlash from customers when they realise that they have been paying more than the expected or needed to pay. It can also provide an opportunity to competitors "We are straight with you " Implementing a pricing strategy raises many issues. Even after choosing a strategy you need to distinguish between: pricing structure (your pricing strategy); and price levels (the particular values you set within your pricing strategy). There are many pricing issues to consider: bundling component pricing free offers configurators volume licences frequency of change upgrades & new releases the whole product; and pricing & the web. Bundling Bundling is where one price is set for a "package" of component parts. This used to be the standard for all pricing in the computer industry. With bundled pricing high-margin business subsidised low-margin. This also meant that margins could to some extent be concealed from the customer. The interesting, but little understood fact is that once one company unbundles then everyone has to (or face the consequences). But what are the consequences of not unbundling in a marketplace where one or more competitors has unbundled? First of all your high-margin customers work out that they are paying too much and so buy from an unbundled competitor. On the other hand, the customers who were being subsidised by those highmargin customers are unable to get a better deal elsewhere and so the lowmargin customer continues to buy from you. As a result you end up with massive margin deterioration. Bundling can still be worthwhile, for it can be used to attract or to help lock in customers. It does, however, need to be used carefully since it can disguise your true margins and so lead to poor decision-making.

6 Component Pricing Component Pricing is typically used when there are many options in the software and when the total price for every option is so large that it could potentially deter customers. This then permits a "buy-when-you-need" approach which helps customers to get on the ladder. This may be used in combination with a special deal on the full options or combinations of options. Some specific software product pricing issues relate to the use of "Lite" versions and Tasters for your software. A Lite version is a cut down version of the full product, often selling at a fraction of the price of the full version. The purpose of a Lite is to encourage customers to start using the software. Lite versions are often used as nocharge downloads from a web site. Their functionality is limited by definition, in order to protect the margin of the full version, but a Lite product is still capable of real work A Taster is a demonstration version, often with full functionality but reduced scope (e.g. limited number of records or time expired). A Taster is sometimes combined with Component Pricing by offering Taster versions of the modules which the customer has not purchased so as to encourage the customer to upgrade later. Both Lite and Taster versions operate on the principle that once the customer has made the effort to use them they are unlikely to throw this effort away and so will purchase the full version later. In practice the real problem with these methods is that many customers download the software, may even install them, but seldom use them without support or encouragement from the vendor. If you intend to use such versions in your sales efforts then you need to consider how to follow-up customers who have signed up for the versions. E- mail and telephone contact should be planned - at the very least you will find out why customers do not want to upgrade and can use this information in your next campaign. Free Offers Free Offers are usually combined with other products to encourage buyers to place orders, for example where there is a choice of a free software package with order. This is also often used in a time-limited form (order by end of the month and receive free installation). Free offers are, of course, not free - they are a form of bundling.

7 Configurators For complex software products some companies use pricing configurators. This provides a means of generating a price, taking into consideration the pricing elements. It requires a formal model of the price structure plus individual pricing elements. The configurators can be used by sales staff to provide rapid quotes or on the Web to provide customer generated quotes. Indeed if you plan to sell over the web then it is worth having some form of formal pricing configurator or you will generate many manual interventions to service your customers. Volume licences Volume licences are a must for selling software products to large organisations. Normally, there is a decreasing unit price and most licences are "stepped" i.e. unit price changes in steps, so much for the first tranche, then the next tranche and so on. You need to take care in your choice of the steps, both in size and price. Ideally your structure should encourage the customer to buy more licences since this spreads the use of your product. Some companies make the mistake of having a step which is too large and so customers only buy a small number of licences and so limit the use of your software which may in turn lead to declining rather than increasing business. Release version changes offer the ability to provide the previous version at a lower price, though you also need to consider support. Frequency of Change The expectation in software (and in computing as a whole) is for prices to decrease over time. Traditionally, price changes were infrequent, now, however, the Web provides the facility to have instant pricing (e.g. airline seat pricing on the Web). Support & Maintenance Support is a major concern nowadays for customers. The previous "tied" pricing strategy is no longer adequate. Most companies have moved to Web based support with backup (mostly free). Thereafter paid support at different levels, contracted support for a time period (usually annual), so much up to a maximum number of incidents.

8 Other companies use premium phone lines though this method can be open to user backlash. Still others offer a "Service Portfolio" where there is a menu of options from which the customer can pick and mix to select a tailored service. This has the benefit of limiting the number of services (good for your margins and for consistent standards) while at the same time offering the customer a wide choice of services and levels of service. Upgrades & New Releases It is important to distinguish between a Service Release for fixes - this is primarily fixing bugs and an Upgrade - this is providing some new functionality. A New Release is different again - this is providing a significant increase in functionality and/or performance. It is normal to have Service Releases free, Upgrades free with Support Agreement, and New Release paid for (though usually at a preferential rate for existing customers). In general consider how to look after your customer base. Offer incentives to upgrade to the latest version. Consider what your support policy will be for old versions - how many releases will you support? At what pricing? The Whole Product This Marketing Concept was popularised by Theodore Levitt in his seminal text The Marketing Imagination and later "borrowed by Silicon Valley guru Geoffrey Moore. The concept is that there is a certain minimum level of product functionality and performance which the customer expects - this is termed the Whole Product. Of course this changes over time, just think how our expectations of a car have changed in the last ten years or so. Now even small cars come with air conditioning and twin airbags as standard. If your product offering is less than the whole product then this will lead to customer dissatisfaction (even supposing you are able to sell your product in the first place.) You may need to have a relationship with another organisation in order to deliver the whole product to the company (e.g. a content supplier on the web may team up with a platform company to offer a complete solution to the customer). In some cases the customer has to supply the missing components although this is usually only acceptable in the early stages of a product life cycle. Your pricing needs to take account of the cost to the customer of the whole product (whether you supply all the components or not!).

9 Pricing & The Web Software Component size is critical if you are going to sell over the web. Lower price items sell easier, so better to have multiple modules/components of $50 than one of $500 or even $750. Here are a few key points to consider if you are going to sell software over the web: What will the impact on your existing distribution channels be? Do you need to revisit your pricing for them?; Special offers and Freebies work in encouraging impulse buying (provided the price levels are appropriate) - How will you do this without undermining your traditional channel sales; Beware of giving too much price information on your site - this is where a configurator comes in useful, that way only people who are interested or are prepared to give their details get the price; Remember that competitors can see what you are doing if you have too much information on pricing; Bear in mind that there is a trade-off here - you want potential customers to have enough information to buy or to influence them favourably towards you; You can use competitors' web sites for competitive research; and Always archive your site, you may need proof of your price offer. Contributor Bill Dale Bill Dale founded WADALE Associates in 1978 to meet the needs of information technology companies for specialised advice in sales, marketing and management of growth. Since then the company has developed an approach which is applicable to any company experiencing rapid change. This is particularly true of the technology sector, though it also applies increasingly to public sector organisations. WADALE are the authors of the innovative Think Customer programme now being offered through Scottish Enterprise as part of their programme to provide customer orientated skills to the Scottish ICT base. Website: bill@wadale.co.uk