1、Software License and Maintenance Pricing Principles Best Practices and Case Studies,SoftSummit Conference, Santa Clara, CA,October 18, 2004,Copyright 2004 McKinsey & Company,Walter Baker and Homayoun Hatami,1,TODAYS DISCUSSION,Why pricing is important and why superior pricing performance is hard to
2、achieveExamples of software license and maintenance pricing issues and best practices,2,PRICING IS BIGGEST LEVER AFFECTING PROFITABILITY,Average economics for ISVs between $100 million and $10 billion in sales,Source:CompuStat, 2002; McKinsey analysis,3,NUMEROUS CASES SHOW SUBSTANTIAL UPSIDE POTENTI
3、AL EXISTS FROM IMPLEMENTING PRICING BEST PRACTICES,Improvement in return on sales(within 9-12 months of implementation)Percentage points,Enterprise software,Storage systems (hardware, software, and services),Computers (servers and software),Telecom (hardware and software),Enterprise software,Source:
4、McKinsey engagement experience,Case example,DISGUISEDEXAMPLES,4,EVEN SO, MANY TECHNOLOGY COMPANIES FEEL THEIR PRICING MANAGEMENT SKILLS ARE BASIC,Source:Survey and interviews of 120 senior executives from technology companies, 2003,Understanding/quantification of discount elementsCreating discipline
5、 on discount management,Optimizing bid processDecision support toolsTransaction-based monitoring systemsSkill building and training Pricing coordination across unitsImpact on incentive system,Proactive management of industry conductSystematic lifecycle pricingProduct differentiation to optimize marg
6、in capture,Quantification and communication of value propositionExploitation of alternative pricing schemes,Transactional pricing,Pricing process, organization, tools, and enabling devices,Strategic pricing,Structural pricing,Deficient(1),Basic(2),Very good(3),Superior(4),Pricing excellence skill le
7、vel,5,SUPERIOR PRICING IS CHALLENGING IN GENERAL,Top management attention focused elsewhere (e.g., growth, cost reduction)Limited investment in pricing function and infrastructureFew dedicated, capable pricing resources,Focus and dedication,Poor understanding by frontline decision makers of fundamen
8、tal tradeoffs and implicationsIncentives not aligned to drive improved pricing performance (e.g., sales focused on closing deals “every deal is a good deal”),Frontline pricing performance,No transparency into actual net (“pocket margin”) pricing performance across deals, customers, products, markets
9、“Size of prize” and potential improvement opportunities not fully appreciated and prioritized along with other initiatives,Visibility into opportunity,Share or volume growth aspirations dominate sales strategy instead of profitable growthPrice not value seen as primary competitive weaponFear of embr
10、acing price leadership,Strategic direction,6, AND EVEN TOUGHER FOR TECHNOLOGY COMPANIES, ESPECIALLY SOFTWARE BUSINESSES,Frequent innovation and short product lifecyclesSteady growth in feature functionality with often decreasing price/performance ratios,Dynamic environment,Value delivered is hard to
11、 quantify and communicate (e.g., for new innovations, software, and services)Marginal costs perceived to be at or near zero for software leading to extreme discounting,Communication of value,Potential for high user switching costs, network effects, and emergence of de facto standards drives push to
12、establish presenceDiscipline lost in rush to get to market,“Winner takes all” mindset,Myopic view of pricing strategy and tactics over product lifecycleMultitude of alternative pricing models and approaches available many degrees of freedom (e.g., across license/services),Complexity over lifecycle,7
13、,TODAYS DISCUSSION,Why pricing is important and why superior pricing performance is hard to achieveExamples of software license and maintenance pricing issues and best practices,8,COMPONENTS OF SOFTWARE LICENSE AND MAINTENANCE PRICING,Product/pricing architectureFeature bundlesSegment-based value pr
14、icing strategyLicense structureModel (e.g., perpetual vs. subscription) License metricsLicense scope Maintenance offering,Standard license pricingDiscounting policy and practiceChannel pricingSpecial license pricing Volume based modelsEnterprise level agreementsPromotion and demo pricing,Renewal pri
15、cingLifecycle pricing,WarrantyUpdate/ upgradeSupport Pricing modelDiscounting policy and practice,Ordering and deliveryLicense managementLicense and maintenance compliance,Payment termsRevenue deferralInternal transfer pricing,9,COMMON ISSUES AND BEST PRACTICE EXAMPLES,Product/pricing architectureFe
16、ature bundlesSegment-based value pricing strategyLicense structureModel (e.g., perpetual vs. subscription) License metricsLicense scope Maintenance offering,Standard license pricingDiscounting policy and practiceChannel pricingSpecial license pricing Volume based modelsEnterprise level agreementsPro
17、motion and demo pricing,WarrantyUpdate/ upgradeSupport Pricing modelDiscounting policy and practice,Renewal pricingLifecycle pricing,Ordering and deliveryLicense managementLicense and maintenance compliance,Payment termsRevenue deferralInternal transfer pricing,10,IMPACT OF UNBUNDLING SOFTWARE SUITE
18、S,Percent,*Base now priced at 75% of original price; incremental modules each priced at 30% of original base price,DISGUISEDEXAMPLE,11,OPPORTUNITIES TO ADDRESS DISTINCT VALUE PROPOSITIONS IN CUSTOMER SEGMENTS,Heavy software users,Moderate or non-software users,No product purchase strategy,Clear prod
19、uct purchase strategy,Competitor C,Competitor B,Company A,Value advantage,Value disadvantage,Competitor B,Company A,Segment 2,Segment 1,Competitor B,Company A,Segment 4,Competitor B,Company A,Competitor C,Segment 3,DISGUISEDEXAMPLE,Value advantage,Value disadvantage,Value advantage,Value disadvantag
20、e,Value advantage,Value disadvantage,15%,Value pricing opportunity,12,CHOOSING WRONG LICENSING METRIC CAN LEAD TO HEAVY DISCOUNTING OR BELOW VALUE PRICING,Competitor price lower,Company price lower,Ratio between client and competitor list prices,Capacity,8,16,32,64,128,1.2,1.0,0.8,0.6,0.4,0.2,1.4,1.
21、1,0.9,0.6,0.4,0.2,1.7,1.4,1.1,0.8,0.5,0.3,2.0,1.7,1.3,0.9,0.6,0.3,2.3,1.9,1.5,1.0,0.7,0.4,2.6,2.2,1.7,1.2,0.7,0.4,3.3,2.8,1.0,0.6,4.1,3.4,1.2,0.7,Number of ports,2.7,1.9,Company,Competitor,Capacity,Ports,Pricing parameter,Poor,High,Alignment with perceived value,1.5,2.2,256,DISGUISEDEXAMPLE,13,COMMO
22、N ISSUES AND BEST PRACTICE EXAMPLES,Product/pricing architectureFeature bundlesSegment-based value pricing strategyLicense structureModel (e.g., perpetual vs. subscription) License metricsLicense scope Maintenance offering,Standard license pricingDiscounting policy and practiceChannel pricingSpecial
23、 license pricing Volume based modelsEnterprise level agreementsPromotion and demo pricing,Renewal pricingLifecycle pricing,WarrantyUpdate/ upgradeSupport Pricing modelDiscounting policy and practice,Ordering and deliveryLicense managementLicense and maintenance compliance,Payment termsRevenue deferr
24、alInternal transfer pricing,14,WIDE VARIABILITY IN FRONTLINE PRICING,License discount Percent of list price,Deal sizeDollars,Deal level analysis,DISGUISEDEXAMPLE,15, OFTEN INDICATES OPPORTUNITIES TO IMPROVE FRONTLINE PERFORMANCE,Distribution of deals by discount levelPercent of sales,Maximize upside
25、 potentialSet list prices competitively and fairly Avoid additional automatic discounts (e.g., volume discounts)Focus marketing program and executive visits,Tighten range of discountingCreate disciplined pricing/escalation processesAlign sales force incentives to reduce discountingCreate tools to tr
26、ack and support frontline pricing performance,Discount bandPercent of list price,DISGUISEDEXAMPLE,16,POOR MANAGEMENT OF EXCEPTIONS MAKES IT “EASIER TO NEGOTIATE INTERNALLY THAN EXTERNALLY”,Quotes from sales force interviews“Managers are no deterrent, they approve everything”“We never walk away from
27、deals”“These big deals with huge discounts only get done because of senior management approving them”,Approval/rejection of exceptional discount for dealsNumber of deals,Discount approved,Discount rejected,Salesmanager,Area VP,VP Sales,105,72,53,DISGUISEDEXAMPLE,17,IMPACT OF IMPROVING END-OF-QUARTER
28、 BEHAVIOR,First 11 weeks,Last 2 weeks,Change initiativesMarketing role expanded to includeCompetitive intelligencePrice negotiation supportSales incentivesMid-quarter quota targetsPrice realization incentives and penaltiesCommitment to change behaviorsCEO approval for EOQ deals over Area VP discount
29、 authorityInternal and external communication strategy,DISGUISEDEXAMPLE,18,DISCOUNTING POLICIES SHOULD REFLECT DIFFERENCES IN CUSTOMER SEGMENT VALUE PERCEPTIONS,Academic,Government,Pharmaceuticals,Professional services,Utilities,Packaged goods,Manufacturing,Financial services,License discount Percen
30、t of list price,30%,40%,50%,One-size-fits-all discount floors,Traditionally higher discount segments,Discount policies should be tighter in those segments where software titles are of intrinsically greater value,DISGUISEDEXAMPLE,19,COMMON ISSUES AND BEST PRACTICE EXAMPLES,Product/pricing architectur
31、eFeature bundlesSegment-based value pricing strategyLicense structureModel (e.g., perpetual vs. subscription) License metricsLicense scope Maintenance offering,Standard license pricingDiscounting policy and practiceChannel pricingSpecial license pricing Volume based modelsEnterprise level agreements
32、Promotion and demo pricing,Renewal pricingLifecycle pricing,WarrantyUpdate/ upgradeSupport Pricing modelDiscounting policy and practice,Ordering and deliveryLicense managementLicense and maintenance compliance,Payment termsRevenue deferralInternal transfer pricing,20,SOFTWARE WARRANTY/MAINTENANCE CO
33、NCESSIONS CAN REDUCE ANNUITY OPPORTUNITY,Effective warranty/maintenance period due to concessions given away at time of license salePercent of licenses,18+,Standard industry practicefor warranty (90 days),Coverage periodMonths,Due to “forward sale” or “shelfware” customer not ready to use software,D
34、ue to previous deals or concurrent sales (e.g., hardware) with customer,DISGUISEDEXAMPLE,21,NET EFFECT OF SOFTWARE MAINTENANCE DISCOUNTS CAN BE SIGNFICANT,Maintenance revenue, indexed to revenue = 100,DISGUISEDEXAMPLE,22,License,MAINTENANCE SERVICES CAN BE DISCOUNTED MUCH LESS THAN LICENSE SALES,Sha
35、re of list revenuePercent,Average 50%,0-10,10-20,20-30,30-40,40-50,50-60,60-70,70-80,80-90,90-100,DISGUISEDEXAMPLE,License discounting rules often violatedLicenses in biggest deals almost given away,23,THERE IS NO DOMINANT SOFTWARE MAINTENANCE PRICING MODEL,Source:Gartner 2001 software support portf
36、olio (October 2001); IDC 2001 support services for enterprise-level applications;Company website; McKinsey analysis,Software maintenance pricing modelPercent, N = 24 companies,Percent of license net priceBMCHDSClarifyDEAIFSNetwork AssociatesOracleSAP,Mixed modelsVeritasHPCalderaLinuxcareMicrosoftNCR
37、Sybase,Percent of license list priceNovell PeoplesoftProgressCASunIBMEMCFilenetLegato,2001 DATA,24,COMMON ISSUES AND BEST PRACTICE EXAMPLES,Product/pricing architectureFeature bundlesSegment-based value pricing strategyLicense structureModel (e.g., perpetual vs. subscription) License metricsLicense
38、scope Maintenance offering,Standard license pricingDiscounting policy and practiceChannel pricingSpecial license pricing Volume based modelsEnterprise level agreementsPromotion and demo pricing,Renewal pricingLifecycle pricing,WarrantyUpdate/ upgradeSupport Pricing modelDiscounting policy and practi
39、ce,Ordering and deliveryLicense managementLicense and maintenance compliance,Payment termsRevenue deferralInternal transfer pricing,25,ELECTRONIC LICENSE MANAGEMENT CAN HELP ENFORCE ENTITLEMENT RIGHTS,Breakdown of software related customer service support callsPercent,DISGUISEDEXAMPLE,Entitled to su
40、pport,Not entitled,26,COMMON ISSUES AND BEST PRACTICE EXAMPLES,Product/pricing architectureFeature bundlesSegment-based value pricing strategyLicense structureModel (e.g., perpetual vs. subscription) License metricsLicense scope Maintenance offering,Standard license pricingDiscounting policy and pra
41、cticeChannel pricingSpecial license pricing Volume based modelsEnterprise level agreementsPromotion and demo pricing,Renewal pricingLifecycle pricing,WarrantyUpdate/ upgradeSupport Pricing modelDiscounting policy and practice,Ordering and deliveryLicense managementLicense and maintenance compliance,
42、Payment termsRevenue deferralInternal transfer pricing,27,COMMON ISSUES AND BEST PRACTICE EXAMPLES,Product/pricing architectureFeature bundlesSegment-based value pricing strategyLicense structureModel (e.g., perpetual vs. subscription) License metricsLicense scope Maintenance offering,Standard licen
43、se pricingDiscounting policy and practiceChannel pricingSpecial license pricing Volume based modelsEnterprise level agreementsPromotion and demo pricing,Renewal pricingLifecycle pricing,WarrantyUpdate/ upgradeSupport Pricing modelDiscounting policy and practice,Ordering and deliveryLicense managemen
44、tLicense and maintenance compliance,Payment termsRevenue deferralInternal transfer pricing,28,INEFFICIENCIES IN RENEWAL PROCESS CAN VOID OPPORTUNITY,Renewal opportunitiesIndexed to total opportunity,DISGUISEDEXAMPLE,29, AND ALSO DELAY OPPORTUNITY CAPTURE,Percent of renewal opportunity value,Before e
45、xpiration,1-30,30-60,60-90,90-120,120-150,150+,Time to renewal beyond contract maintenance expiration Days,Average = 29,DISGUISEDEXAMPLE,30,MAINTENANCE RENEWAL SALES CAN BE DISCOUNTED MUCH LESS THAN AT TIME OF LICENSE SALE,Q1,Q2,Software maintenance discountPercent of list price,Renewal,Time of lice
46、nse sale,Same discount floors in place at time of license sale and renewal,DISGUISEDEXAMPLE,31,32,NO DEFINITIVE LICENSE/PRICING MODEL,Perpetual,Customers can predict expenditures Payments can be capitalized,End-of-quarter pressures result in deep discounting One-time payment could be relatively larg
47、e and can be focus of customers price reduction efforts,Pros,Cons,Pricing model,33,BEWARE OF ASSUMPTION THAT MARGINAL COSTS ARE ZERO,Configured list price,*Includes sales costs, allocated R&D acquisition/goodwill, royalties, license fees*Including professional, installation/integration, and maintena
48、nce/support services,Professional services,Installation/ maintenance services,Application/ feature functionality software,Core operating software,Invoice price,Pocket price,Pocket margin,100,Percent, indexed to configured list price,15,25,5,5,20,10,40,20,10,10,2.5,2.5,55,40,5,30,Actual service costs*,COGS/effective transfer price*,Payment delays (e.g., A/R, acceptance criteria),Rebate/old version or credit/ peripheral giveaways,
