Online Event: Best Practices in Pricing B2B Software and SaaS

This was an online event. The recording is here. Q&A from the meeting can be found at the bottom of this event page...

Software and software-enabled systems can be overwhelming complex to price and monetize. But with the right framework, tools, and a value-based mindset, product teams can improve how they price, package, and segment their offerings to maximize their solution’s full revenue potential.

This session will discuss best practices and tactics that address some of today’s most challenging pricing scenarios for B2B software, new innovation (AI, IoT), and SaaS.

Scott Miller, CPP, is Founder of Miller Advisors Inc (www.miller-advisors.com), a boutique consultancy specializing in pricing and offer design strategies for B2B software companies. With over 20 years of pricing experience that includes senior consulting roles as well as corporate global pricing director roles with $10B technology firms, Scott is also a partner and lecturer with the International Software Product Management Association (ISPMA) and the Professional Pricing Society (PPS)

While Scott took time during the presentation to answer some of the great questions asked, due to time limitations he was not able to answer all of them. Scott has kindly reviewed your questions and provided his answers below:

• Q: ISPMA? A: https://ispma.org/ = International Software Product Management Association
• Q: How should we pricing integrations? ie. a business wants to integrate their app to our platform but that means we/they may need to surface api for point solutions that were never built for interactivity, need to account for dev time on both sides as well.
• • A: Some companies will charge just time & materials (T&M) for this, but I believe there is a too often a missed opportunity to also include this as part of a recurring (or usage-based) fee – reason being is that integration points need to be maintained, monitored, and fixed from an on-going perspective. There can also be different types of integrations (real v. batch) that have different value, and pricing, as well. Example: Know of one company that charges $2,400/yr for 1 real-time integration, and $1,400/yr for a 1 batch-based integration. Oracle has some similar fees (eg., “Oracle Application Adapters for Data Integration for E-Business Suite”) at $3,000, upwards to $17,000 (“Oracle Integration Adapter for SAP R/3 - Processor License”). Suspecting the higher pricing is based on the higher amount of usage expected, which is something to think about. In your case, you may also want to consider a #API calls/msgs as well (usage-based metric).   
• Q: Is there a typical range for revenue share?
• • A: I haven’t seen a rule of thumb here and would depend on to what degree your software contributes to your client being able to charge their own fees (part of the revenue share equation). Example: government charges $100 fee per passport application and your software drives that process – perhaps you charge 15% of their application fee? Example#2: Bank charges $15 per wire transfer and your software API is a small sub-process in that overall transaction – perhaps you charge 0.05% of that transaction fee? Ie., no rule of thumb but understand how your product helps that client to be able to generate revenue (eg., mission critical software to their operations could likely charge higher %s).
• Q: Could you comment on Freemium type models for b2b...
• • A: Easy setup b2b software (ie., no implementation fees) can usually follow typical freemium approaches you see in B2C. This could include having a lower-featured version for free (upgrade to full feature), or a time-bound trial usage of a full feature version. Or perhaps free # users (eg., first 3 users are free, pay for anything above that amount). The one difference I notice with B2B is the more company users you can get with a freemium approach, the better the stickiness that gets created. So perhaps 20 free users for a 3-month period is a good way to quickly create wider stickiness (and hopefully conversion) with your offer.
  • A: More complex B2B solutions with an implementation component typically don’t use a freemium model (too costly to setup the client who may or may not use the product), but instead focus on pilot programs that gets a client setup with a minimum viable product – in this case, the client has an investment with the pilot project (but its not for free).    
• Q: Is there an initial valley when you switch from X model to subscription model? How do you compensate for that?
• • A: In short, “maybe”. Most companies with low-priced high-volume price models (eg., from $129 one-time license to $49/year subscription) have typically experienced a dip in year 1 and 2 revenue as a result of migrating to SaaS subscription from on-premise perpetual. There’s an educational process that might be needed with the Executive team (and board members) in these cases – be prepped with a projected YoY business forecast, and usually a snapshot of what happened with Microsoft and Adobe post-migration (ie., an 8 to 10x fold increase in stock valuation) does the trick. Even Adobe dropped 8-10% in revenue in their first year under subscription. The hardest part is where Exec teams still want it all: “we still want our usual +15% annual growth and migrate to subscription next year” without fully appreciating the implications of the new business model. Also work closely with your revenue recognition team to understand rev rec implications. A good article on this topic: https://www.miller-advisors.com/post/migrating-from-on-premise-to-saas
• Q: Regarding revenue share, is that a valid approach for lead generation services where other varying factors influence the conversion to sale? E.g. SaaS that provides sales leads and the effectiveness of salesperson impacts lead conversion rate.
• • A: I’ve seen lead generation examples more as outcome-based (or performance-based) whereby you charge $X per lead generation that results in a phone conversation with a new client prospect. Revenue share I view more as “you closed a $500,000 deal, so we get a 15% finder’s fee = $75,000”). So you could have the two pricing models available, though the % revenue share on closed deals likely goes up or down depending on your level of involvement to help close that deal. Again, no silver bullet answer… but a process the evaluate pros & cons of options likely the best route on this one.
• Q: How should you respond when larger players employ predatory pricing strategy as a way to kill off smaller players?
• • A: Focus heavily on value and your differentiation against larger players. They can always be (and will be) more aggressive on pricing when need be, but pricing to purposely kill off  the market is a legal topic on its own. In today’s digital age, smaller players can often be more nimble and quicker to innovate, or a willingness to customize – a big value add to many clients. Meaning you can deliver better value and faster than the bigger players (hopefully!). Whereas larger players can be a slow turning boat with much more complexities. ie., Avoid it becoming just about price points and table-stakes value – big players will win that game.       
• Q: What is a good Economic Value pricing approach for brand new products to market that don't have a track record yet?
• • A: Recommend to walk through an exercise with the team and understand how your software directly impacts a client and impacts their KPIs. Translate those changes to $$ (cost savings and/or revenue growth). Use “conservative” estimates you feel a client could realistically achieve. Back it up or apply some industry reports / numbers where possible. If possible, vet it with your best relationship client partner (does it make sense). And keep it simple too! You’re not trying to overly complicate the sales process, just to get a nod they agree those are realistic benefits (and then comes your pricing conversation).  
• Q: Do you use this tool when selling to customers and justifying the value-based pricing?
• • A: Definitely! And recommend it in many cases! I’ve had sales people use the economic value tool onsite with clients and got their input into what they felt were more realistic numbers. Once the client buys into the benefits, they’ll have a better appreciation for your pricing. One SVP Sales was over the moon when he used this to convert a client from on-premise to SaaS (ie., “it worked! Loved the tool – they want SaaS and didn’t question the pricing”)
• Q: I’m assuming the 30% and 70% are the weights? (referring to one of the slides in your presentation).
• • A: Correct. For most B2B software, 30% of a decision is based on price, and 70% is based on value. Anyone below 20% price, is price insensitive, and anyone above 40% is price sensitive.
• Q: How do you assess whether you've marked everything objectively. Seems very open to bias.
• • A: It is definitely biased if completed by oneself – so key is to understand the client’s perceived value, not yours. I recommend the price-value scoring to be done in various steps (a) as an individual PM, (b) as a product team, (c) product team v. marketing team v. Sales team << shows gaps/consistencies in what each group thinks drives the product value and (d) the client (via interviews, market research, or survey studies).   
• Q: Who does the value analysis, in some cases you may not know what the pricing is of another company in the RFP bid or even know what the company is.
• • A: win-loss analysis with clients post-rfp are key to tease out this information for future rfp’s. Some companies or government agencies will give you the scores (ask for the scores as well – doesn’t hurt to ask). Sometimes having a champion at the client can help you get a sense as well around price positioning. Though you may not have exact price point, knowing if your are +20% or -20% in general relative to the competition still helps to provide some guidance from the price-value (though be wary of what procurement teams will tell you!). Some firms will conduct market research to get a good sense of how their value (scores) are perceived in the marketplace.
• Q: Thanks for such an informative presentation; would you be able to suggest a resource or a book for Software and software-enabled systems pricing? As a next step in learning …
• • A: Pricing B2G Software is coming out in September (book is completed). I’ll be publishing a book on B2B software this year (will announce as I get closer to publication date). There is also my online pricing software course available through the Professional Pricing Society: https://pps.mclms.net/en/package/754/course/748/view. I’m also available to conduct product pricing bootcamps (50% training, 50% hands-on) with your teams. I’ll also see the odd white paper on the topic, but the volume of material on the subject is definitely lacking.
• Q: How would you go about calculating price elasticity?
• • A: Much easier to do in a high volume SKU environment that has a “healthy amount of differently tested price points”. In many cases for B2B software, there really isn’t that high level of volume nor a range of price points to analyze. In this case, price elasticity is more dependent on conducting actual price tests and measuring those outcomes to determine price elasticity. For software, I find its more about cross-elasticity, or rather, how prices of differently priced packages influence buyer decisions. Usually those can be determined using a conjoint study, or a conducing a price test. I’d stay away from price elasticity = ‘X value’ as well; too linear in my opinion and often neglects implications of price threshold hurdles (eg., crossing from $99 to $120) and cross-elasticity implications.

We will provide a link to this Q&A on our LinkedIn group, so if you have any further comments to add, please feel free to continue the conversation on that post. You can also contact Scott directly via LinkedIn at https://www.linkedin.com/company/miller-advisors-software/

From both Scott Miller as well as the TPMA, Thank You again to all those who participated in the TPMA webinar!