Saturday, October 26, 2019

The Platform License Problem

In my other three posts about licensing, I discussed simple products. But what about platform companies?

A platform company sells two types of products: the platform, which enables everything else, and the use cases which rely on that platform to solve specific problems. The key to the platform company definition is that the solutions will not work without the platform; they are add-ons sold by the first party. You can’t buy the add-on without the platform.

This model is really exciting for vendor and customer because it means lots of different problems solved In the same way, with a single decision. There’s an interesting pricing challenge down this road though: the platform plus one add-on is less compelling than the platform plus many add-ons. Worse, the platform cost buoys the total price to a point higher than single purpose competitor products. Result? The land and expand rarely works out in first deal pricing, unless the customer cuts to the chase and buys more add-ons in the first deal.

Every platform company has this problem.  Bundles, bands, and hide-the-sausage are the only ways I know to resolve it, by encouraging multiple add-ons to be purchased in the land stage.

• Bundles: Either permanently or on promotion, sell several things together so the platform price isn’t so glaring. This doesn’t solve the single-purpose entry point problem, but it makes jumping straight to expansion more appetizing. See anything with “Suite” in the product name.
• Bands: Same thing with more complexity. See Microsoft’s Office365 price book.
• Hide-the-sausage: Spread the costs of the platform by making it “free” or “cheap” and increasing the cost of all the modules. Discourages customers from buying many solutions unless combined with bundling or banding to force a second discounting scheme in. See Google.
• Of course, hide-the-sausage can be reversed: charge once for the platform and then make all the add-ons free. Doing so reverses the incentives and encourages customers to download lots of add-ons, increasing support and development costs and decoupling financial signals from product development. This is a great way to cross the Bill Gates line: your apps are published as guidance, and your partners are encouraged to make the money that you’re not making on your platform. See Salesforce.

There is no best option, in my opinion. I will quote Clint Sharp’s comments on pricing model changes though: “a great way to initiate a denial of service attack against your PM team is to constantly start up new debates about pricing models.”

Licensing thoughts continued...