Pricing and Licensing Strategies in a Tough Market

As we know, the technology solutions market is experiencing tough times. Corporate IT investments are flattening, and competition is extremely fierce in every segment of the industry.

In a climate where one deal can make or break a company, software companies and application service providers (ASPs) are thoroughly examining their pricing and licensing strategies to remain competitive and optimize revenue.

Here is one case in point. A Web infrastructure vendor, which will remain unnamed, has recently revised the way it packages solutions. The prior version of its suite enabled customers to license individual components of its platform. The current version requires customers to license its Web application server even though customers may be interested only in a single application.

This type of packaging strategy is pervasive throughout the industry. Other examples include partitioning platforms into individual applications, repurposing functionality to create “new” products, and forcing customers to purchase bundles versus individual licenses.

Unfortunately, these reactionary changes in pricing and packaging strategies are confusing customers and may be contributing to the overall slowdown in corporate technology spending.

Understanding the Buyer

I recommend pricing and licensing strategies that mirror the needs and objectives of your customers. In a tough market, corporate executives use a simple paradigm when making IT investment decisions:

• Is there a reasonable time horizon for a positive return on investment (ROI)?
• Will this investment help generate revenue?
• Are there high initial capital requirements?

The failure to fall on the correct side of these simple questions lowers the chances of closing licensing deals.

Here are some guidelines to help you develop effective licensing formulas:

• Structure quick wins for customers. To the corporate IT buyer, nothing is better that a quick ROI. In fact, many organizations are using this metric as the only factor in their purchasing decisions. Solutions that require low start-up costs and are fixed in nature have become more attractive investments.
• Maximize lifetime customer value. In a down market, lower upfront investments are more attractive that higher ones, regardless of potential ROI. Therefore, licensing deals that start out low and increase over time are more attractive than ones requiring a significant initial investment. Creating a scalable licensing model is not trivial. It requires a commitment to service your user base and a good understanding of how customers derive value from your products.
• Keep it simple and be consistent. Licensing deals are highly variable. There isn’t a common set of rules that apply to an industry, product type, or even vendor. This fact contributes to the hesitation many companies have in licensing technology products. Vendors that develop a simple formula have greater chances of successful sales in today’s market. In addition, companies that maintain consistency between customers will benefit in the long run. Nothing is more embarrassing than attempting to explain to customer ABC why it is paying three times as much as customer XYZ for the same solution.

Conclusions and Next Steps

Aside from cash, one of the most important and long-lasting commodities in a down market is customer goodwill. Tapering with licensing structures to gain greater revenue out of your customer base may produce incremental gains; however, the long-term effect can be very detrimental to customer goodwill and trust.

Companies with a long-term view acknowledge the rules of supply and demand by adjusting license fees to meet market conditions. Those looking for a short-term fix develop packaging gimmicks and licensing structures simply meant to confuse the buyer.

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If you are looking for some more advice, or if you like to take issue on any points, contact me.