Enterprise Pricing Strategy: Optimize Your Prices to Power Growth
5 Pricing Strategy Tweaks to Make Your Pricing More Attractive to Customers
View all the posts in this series on Enterprise Pricing Strategy:
- An Essential Lever of Growth for Expansion-Stage Companies
- Optimize Your Prices to Power Growth
- Develop a Long-Term View
- Focus on Value
In my previous post, I kicked off my series of blogs on pricing for enterprise deals by discussing the two fundamental aspects of a pricing strategy:
- The pricing discrimination mechanism: By which a company can create different tiers of customer demand, requirements, and charge different prices accordingly.
- The way and extent to which the specifics of pricing is disclosed or kept confidential: Each datum of information on pricing dramatically changes the dynamics between buyer and vendors.
However, in a way, the phrase “pricing model” is misleading, because most companies still have to customize their price to specific customers in one way or another, discretionary discounting (by salespeople or account managers) being the most common reason. Especially in the enterprise world, each customer always wants to have a “special” package that is tailored to their needs and their ability to pay.
What are the other levers in a price structure that can be tweaked to both satisfy the customers’ specific demands and generate top line growth and bottom line profits for the company? Five basic options come to mind:
1. Payment Structure and Terms
With the same sticker price, you can structure the payment stream in many ways.
For example, for a subscription-based business, you can consider annual payment upfront, monthly payment, or quarterly payment.
Obviously, from your company’s cash flow management point of view, having more payments earlier is better, but ultimately there must be a compromise between your demand to have more cash upfront and the customers’ inevitable desire to hold on to their cash as long as possible.
If you charge by usage and you are sure that your product will add tremendous value to the customer, then you can be even more aggressive and require a guaranteed usage/payment level of contract. This has two benefits: turning a usage-based business into more or less a subscription business, and incentivize the customers to fully utilize your product (to get their bang for the buck), which ultimately makes your product stickier in their organizations.
I have touched on discounting in pricing strategy previously, but did not go into it in-depth because it’s worth a whole series of blogs by itself.
A company can set out transparent guidelines for its non-discretionary discounting policies by considering discounting for the following scenarios:
- volume purchase
- longer than standard contracts
- guaranteed payment schemes
- usage growth guarantees
- specific promotional campaigns, or
- replacing existing solutions
As I have noted, the important thing to consider is not just how much to discount, but how to communicate so customers actually see the drop in price as value to them.
Beyond this, there is also a whole layer of discounting that salespeople can determine in the field. I will not go there now, as it is more relevant to sales compensation strategy. There has been some ground breaking research on the pros and cons of encouraging discretionary discount tactics in enterprise software sales, which I encourage you to check out if interested.
3) Non-Monetary Benefits
Non-monetary components of the pricing strategy can be extremely useful for companies in the earliest stages. The reason is that in this stage, the value for the customers has not been fully established and therefore major enterprise customers might not easily accept a hard dollar price.
In this situation, having a non-monetary component to the deal can be tantamount to a major discount or barter that is mutually beneficial for both sides.
Examples can include:
- Use of customer’s technology
- Opportunity to co-market
- Opportunity to feature the customer as a showcase or case studies, etc.
4) Price Protection Package
A major concern of enterprise software buyers is the future increase in prices, especially for upgrade to new version, expansion of usage, or for continuous maintenance. Therefore, if the vendor offers price protection as a component of the package, this will sweeten the deal without forcing the vendor to give away major discount.
Having the price protection package will also help overcome the buyers’ reluctance to commit to a new, relatively unknown vendor, which is typically one of the main reasons why smaller companies find it extremely hard to break into the enterprises.
A vendor can go even further by giving offering customers optionality, such as the ability to expand their usage at the same price level, or the ability to access new features or new products from the company (in the future) either at a discount or integrated into their existing modules at no additional charge.
This sweetens the deal for some customers. While it does not alter the price or the immediate cash flow it might have a more long-running impact in the future.
Are there other components of a pricing structure that I’ve missed here?
As you put together the first cut of a pricing model, remember to think about the eventual evolution of the company, as well. Your pricing strategy is not going to be static — it has to evolve as the company grows and expands its target market.
Therefore, you should structure your pricing model with enough flexibility so that in the future you can change key elements of the model without causing major disruption and backlash from your customers and targets.
In my next post I will discuss how companies typically develop their pricing strategy, and how they should continually evolve the pricing structure over time using inputs from the customers and related market players.