Most technologists only ever consider pricing in the context of buying technology from other firms – not in the much more important task of setting the price of the technology you create. But haggling over the price of a software license you buy will have a much smaller impact on the success of your business than working to establish a coherent and maximising pricing schedule.
Let’s look at this with some examples:
A sell-side equity technology vendor charges £x per server module and a user access fee of £y per user per month. Back in 2000 that made sense – since the value to the business was perceived to be in the number of users of the system. Roll forwards a few years as algorithmic trading took hold and the number of sell-side equity traders and sales traders fell. What’s the impact on the vendor? Well, clearly negative during the period that £x and £y are constant. But consider what happens if the vendor aims to hold revenue constant by
(1) Increasing £x and holding £y constant. The price ratio between client and server changes – the server is relatively more expensive, but it that where the client perceived the value?
(2) Increasing £x and increasing £y to maintain the ratio of x:y. The price ratio between client and server remains constant. But is that sensible?
(3) increasing £x and increasing £y to increase y by more than x, expressed as percentages. The price ratio between client and server moves to increase relative price of client. Again, is that sensible?
At this point the dismal science comes into play (yes, your humble author is an Economist by training) and this can could get lost in a maze of optimisation, price frontiers and other dullness that does not really help with the core problem:
“the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” -- Jean-Baptiste Colbert
Which can be rewritten as
“the art of technology pricing consists in setting the price to obtain the largest possible amount of money with the smallest possible amount of hissing within the timeframe that is of interest to the management of the firm.” – Alignment Systems © 2020
And here is where we enter into another part of Economics, the agent/principal problem. The shareholders of a firm have a timeframe in which they view their investment, this may not align with the rewards due to the management. Note that the word management is used above rather than owners, since the owners should have ensured that the management they hired have aligned interests from the word go...
Let’s work through a case-study:
Software Vendor XXX
Software Vendor XXX decided to go for growth in sales in a number of key markets. So they went for a classic, simple to explain, naïve strategy.
- Hire a bunch of salespeople.
- Give them a decent expense account.
- Give them a compensation structure heavily weighted towards commission rather than basic salary
So, what happened next? The sales people acted in their individual best interests and offered discounts to prospective clients. Which are of course diminishing the perceived value of the product on sale. And when the product was not a good fit, so a prospect walked away, not on price grounds but on product fit grounds, they then bullied the software vendor in-house contracts department to offer contractual obligations to deliver functionality in order to win deals.
And then?
Stage One – Sunlight fields of joy
New clients signed deals
New clients started projects
Sales people were paid their substantial commission and rejoiced.
Stage Two – a few patches of cloud on the horizon
Sales people are still happy and getting paid
Some new clients start complaining that feature X is not working properly
Implementation staff are asked to do bits and pieces of development, rather than implementation tasks, but this is kept quiet.
Stage Three – sunny in patches, some rain storms
Implementation staff are asked to do more and more pieces of development and this starts to become clearer to all within the vendor
Stage Four – rain storms with the odd sunny spell
Sales people are still happy and getting paid but some have ran out of prospects and sense a change in the weather and quit.
Yet more new clients start complaining that feature X, Y, Z, A, B, C, D, E, F is not working properly
New clients are complaining the projects are overrunning and under-resourced
Some new clients start to talk among themselves and realise there are structural issues
Implementation staff are writing code at client sites that is being emailed to head office and added to the main code base.
Half-baked, often untested (if it compiles, ship it) code is polluting the product in more and more places. Often competing approaches to one problem are merged into a codebase that starts ballooning in size and shrinking in quality.
Stage Five– rain storms with hail
Sales people are quitting in droves.
Most new clients start complaining that feature X, Y, Z, A, B, C, D, E, F, G, H etc. is not working properly
New clients are complaining the projects are overrunning and under-resourced
New clients start to fire the software vendor
Relationship management staff are hired to try and keep new clients onboard by offering platitudes
Stage Six– a hard rain is fallin’
Sales people are mostly gone
Nearly all new clients start complaining that feature X, Y, Z, A, B, C, D, E, F, G, H etc. is not working properly
New clients have joined forces to present a unified face to the vendor complaining their projects are overrunning and under-resourced
New clients continue to fire the software vendor
Relationship management staff are hired to try and keep new clients onboard by offering lies
Stage Seven – endgame
Sales Director leaves the firm “by mutual agreement”. Remaining Sales people are fired.
Relationship management staff who were hired to try and keep new clients onboard by offering lies are themselves fired
The polluted and frankly wrecked codebase is locked down and a reversion to a clean, older version is announced.
Nearly all remaining new clients fire the software vendor
Stage Eight – autopsy
The salespeople had committed to a development workload that would take the entire development team more than six years to deliver. With a typical implementation taking around nine months there was no real way to make that work, no squeezing a pint into a half pint pot.
We started off discussing pricing and here we have gone into a case-study of failure – what is the link? Simply put – the link is “everything is linked”.
Key points:
Pricing, sales, sales remuneration, sales management, project management, product management, client support, implementations - they all need to be considered and reconciled before any pricing models are determined.
Do the people involved in your pricing decisions have alignment with the interests of the management of the firm and ultimately the owners?
An unhappy goose, earlier
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