Human nature and software pricing (#1)

10 06 2009

For over seven years, it was my responsibility to price a complex software product.  I didn’t expect it to be a place to learn about the psychological interplay of rules and human relationships.

Over the next several posts, I will share what I’ve learned empirically.  No, there is no pricing magic wand.  However, if you’ve searched the product management literature and the Internet, you’ll find that very few people have discussed pricing anything more complex than single user software licenses or golf balls.

So let’s begin.

Pricing jujitsu and your evil twin

The customer is not your adversary.  Yes, you are trying to extract money from their wallet.  But your job is to quantify the value of your product so your sales force and customers can come to a long-term, mutually beneficial agreement.

This is why complex software never gets sold for list price.

Knowing this, you must establish a structure that captures your product’s “art of the possible”.  Each customer will have a different perception of your product’s potential.  Your company will always think the product is infinitely powerful, flexible, and cures world hunger.

You are the intersection between the product’s perceived value in both the customer’s and vendor’s minds.  You just have to write it down.

Therefore you need to think like a good corporate citizen, and immediately pit your evil twin against that good citizen.

Your evil twin’s job is to think both like a sales person and a customer. Use your evil twin to turn the power of the pricelist against itself, game the system, and expose the gaping holes you might have overlooked.

Just realize that there will always be holes.  We’ll talk about acceptable risk later.

“But nobody would use it that way!”

No matter how evil your twin is, it will only uncover coarse problems.  You cannot break your own pricelist.  It’s like asking developers to test their own software.  In both cases, you (or the developer) will tend to “use it correctly”.

I learned this the hard way. 

Long ago, I developed a rogue intranet application.  It was a simple portal into a CRM database.  Easy right? 

After I tested it, I felt it was ready for consumption.  So I confidently strode into my main user’s cubicle, handed him its URL and prepared to witness him bask in its awesomeness.

The first thing he did was type a word into a field that was meant to only accept numbers.

Within 5 seconds, the portal had blown up in a dramatic and catastrophic way. 

This wasn’t very awesome.  So, I was introduced to something called “error trapping”.  Evidently that’s important.

Pricing is no different.  You create knobs and dials to generate a quote for a customer.  Customers and sales people will tweak those knobs up to 11 or in ways you (and your evil twin) cannot anticipate.

Use your own personal relationships

The best thing I did while pricing was create a loose team of sales, executive management, and customers that would work with me to break my price list. 

You cannot ask a customer or sales person “would you buy this?” or “would you be able to sell this?”  That’s impossible to predict because sales are a function of timing, relationships, and pricing.

Your pricelist is a tool that cements the relationship at a fixed time.

If you have a quorum of people that will devote time and thought to your pricelist, you will gain insight, but not certainty about your pricing.

Like a concept car, pricelist iterations may never see the light of day.  Everyone must understand this.  You don’t want sales to start quoting it to customers, and you don’t want customers expecting alterations to their established agreement with your company unless that pricing goes live.

Remain calm, count to 10…

Pricing is all-consuming.  It is an art, not a science.  You will become attached to your work like an artist.  When someone breaks it, you must remain objective. 

Your intentions cannot be codified.  The pricelist will get used and interpreted uniquely by everyone.  It will be ridiculed and bitched about.  When this happens during its development, remember these points:

  • Every piece of feedback is a gift – people’s interpretations are subjective and unpredictable, so take good notes now and determine the likelihood of the scenarios later.
  • It’s better to fail early in the process – somewhat like Scrum development.  Get a prototype together early and see if the basic principles work before investing months of effort into it.
  • Pricing and licensing are leverage points – this is the common ground shared by sales and customers.  It is the third party in negotiations that represents the faceless, rule-setting “establishment”.  Customers and sales people use it to make the establishment work for each other.

Nobody can tell you how to price your product, but I can help you think about the many dimensions involved.  Please submit your comments!

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2 responses

10 06 2009
Tom H

What a challenging topic to handle! Before making too many comments, I will anxiously await the next entry(s).

Pricing is one of the trickiest art forms ever created. Whatever model you choose in the beginning is what you are stuck with for a long time. Finding the correct price point is challenging. Determining what price the market will bear is critical.

I was once tasked with establishing new pricing for an existing product. I e-mailed, called and harassed every person in the company with almost no comments … until the new pricing was introduced. Believe me, everyone let me know they were unhappy with my choices.

11 06 2009
spackle

I’m going to insert one extra entry in the series as, interestingly enough, someone on Twitter has taken issue specifically with the line about pricing being an art and not a science.

I strongly believe marketing and product management in general are sciences. But the judicious application of these practices must needs incorporate more intuition and emotional intelligence than pure numbers can render.

Looking beyond the numbers and crafting pricing that takes into account sales and customer perception in addition to the economics is an art.

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