Yes, it's "Déjà vu all over again" -- Yogi Berra.
Some further thoughts on the topic and more case studies...
When pricing software it's hard to work out what is a sensible price. For old-fashioned deployed software the marginal cost of the software is effectively zero. Pricing up the support required is relatively easy when you have some experience - FTE count * (total compensation) * factor to account for overheads. That comes to a $ amount, express that as a percentage of the cost and then go ahead and charge a 15% annual fee. And if you want to be cute, add in an uplift related to RPI.
Right - but...
Two case studies:
(a) A fintech vendor with class-leading software acquired by a PE firm.
The PE firm saw a large client list of many top-tier names and felt it was time to increase prices. An example - a customer firm was paying an annual support fee of around $40,000. At renewal time, after the PE guys were in charge, the uplifted annual support fee proposal was $400,000...
That was rejected, the client had a perpetual license with a lock-in of RPI+z maximum increase per year.
Roll forward one year and the PE backed vendor had a brainwave. Let's announced the "end-of-life" of the original product. And then, in order to keep clients "happy", offer an Application Binary Interface compatible new product. For a annual license fee of $400,000.
Some pretty simple analysis showed the ABI compatible new product to be simply a renamed old product. Cue much wailing and gnashing of teeth as budgets were examined and seen not to be able to fit this huge uplift.
What happened next?
Every firm that could pushed back on the huge increases. All client projects that were considering the vendor in question soon removed this vendor from consideration. Clients that could, dropped the vendor. The sales team pretty much gave up trying to sell the product as the market assessed the vendor as presenting too much risk
TL,DR; if you are charging Ford Focus money and try and charge Ferrari money, you will end up in a world of pain.
(a) A fintech vendor with class-leading software seeking to grow market share
A privately owned vendor decided to "go for growth" and cut prices. The strategy was successful in the sense that a number of competitor firms were driven out of the market as they could not compete at the aggressive low prices. But...
With an sales lifecycle from first contact to first payment of anything up to 24 months and an implementation process that could be between 12 and 36 months, the impact of any changes to live clients would take some time. And the change was simple - the new low prices were a form of "slash and burn" farming. The CLV from the license fees and support fees was too low to support the business, hence the way to rescue the firm from poor profitability was simply to ship barely tested code and then force customers to pay for implementation staff to make it work.
What happened next?
This particular vendor was lucky enough in that no new entrants entered the market, so the slash-and-burn could work for a time. But when a new entrant did emerge, the vendor was fortunate (for the management) to find a firm with deep pockets to buy the firm. Clients are slowly abandoning the vendor as the bitter taste of poor service has ruined the joy of a low price.
TL,DR; if you cut prices to win business, make sure you have a sensible end game to return the business model to balance.
|An unhappy goose, after laying a large golden egg|