Saturday, November 10, 2018

Licensing thoughts, round two


Tweetise.

License Models Suck got a lot of interesting conversations started, time to revisit from the customer’s perspective. Let’s also be clear, this is enterprise sales with account reps and engineers: self-service models are for another day.

As a vendor, the options I describe seem clearly different; but as a customer I just want to buy the thing I need at a price that works. “Works” here means “fits in the budget for that function” and “costs less than building it myself or buying it elsewhere”.

A price model has to work when growth or decline happen.  As a customer I build a spreadsheet model to find if the deal would quit working under some reasonably likely future scenarios. If it passes that analysis, fine. I don’t care if the model is good or bad for the vendor.

So, the obvious question: why doesn’t flat rate pricing rule the world? It’s certainly the easiest thing to model and describe! Answer: organizations are internally subdivided.

The customer may work at BigCo, and BigCo may use some of the vendor’s products, but the customer doesn’t need to buy for all of BigCo. They need to solve the problem in front of them. Charging them a flat BigCo price for that problem doesn’t work.

What’s more, the customer can’t do anything to make it work. Maybe they can help the sales team pivot this into a top-down BigCo-wide deal, but that’s going to take a long time and require all sorts of political capital and organizational skill that not every customer has.

This is easy to solve, right? Per-unit pricing is the answer! Only, we’re talking enterprise sales and products that require hand-holding. The vendor has a spreadsheet model too, and that model doesn’t work if a sales team isn’t producing enough revenue per transaction.

If the customer’s project isn’t big enough, then the deal won’t work with per-unit pricing. In response, the vendor will drop deals that are too small, set minimum deal size floors for their products, or make product bundles that force larger purchases.

If the customer has no control over the number of units, a per unit price might as well be a flat rate. There’s no natural price elasticity, and the only way to construct a deal is through discounting.

Why not get unnatural then? Just scale the price into bands! You want 10 of these? That’s $10,000 each. You want 10,000 of these? That’s $10 each. Why not sell the customer what they want?

Because the cost to execute a deal and support a customer is variable and difficult to model, and the more complex a pricing model is, the less clarity your have into whether your business is profitable and healthy.

The knock on effects from that non-clarity are profound, because they affect anything that involves planning for the future. It’s more difficult to raise capital or get loans, negotiate partnerships, hire and retain talent.

And so we mostly see fairly simple pricing systems in mid-sized enterprise software vendors. I’m most familiar with “platform with a unit price, less expensive add-ons locked to the same unit quantity.”

This pricing works for the middle of the bell curve, but small customers are underserved while large customers negotiate massive discounts or all-you-can-eat agreements that can hurt the vendor.