One of the best parts about buying a new car, other than getting a new car, is that you can get the basic model plus a long list of extras. Often certain packages have been designed that include the basic model plus a certain set of extras: the “sport” model, the “winter” edition, the “luxury” package etc. You can start at a lower price point and then just add the extra features you want, without adding or paying for what you don’t want or need.
This is similar to building an effective software pricing strategy: the ability to license features individually, and to create packages or bundles with various advanced features already included. Many software vendors fear that if they unbundle their features and sell basic packages plus some premium features, they will end up losing revenue with their current customer base. For some customers, the basic package will be good enough, and they will pay a lower price accordingly, meaning less revenue is gained. Why take the risk and make less money?
In reality, we actually see software vendors increase their revenues after disaggregating their offering. The same is true for hardware vendors licensing their premium features which are enabled through software, or who start controlling the performance of their devices. There are several drivers behind this:
- All products are not priced (nor created) equal. The customer segment that only demands a basic feature set usually compares a high-end product to lower-end competitors. While they may appreciate the advanced feature set in the high-end product, they will utilize the price pressure from the lower-end vendors to negotiate a discount. The end customer may just be thrifty, or may indeed have hard budget limitations. Actual pricing typically doesn’t equal list pricing, particularly in the B2B market, therefore most ISVs offer some type of discount. But if they cannot reduce the feature set at the reduced pricing level, the customer will get the extra functionality for “free”.
- The upsell opportunity. The opportunity to upsell additional features to existing customers provides an incremental revenue stream. Customers buy those features as they need them, and incremental functionality can be sold for pricing that reflects its real value. The value is typically much higher at the time of demand than at the start of the customer relationship, largely because some advance features are not yet needed nor well understood by the customer.
- Pricing flexibility. Once an ISV separates pricing into a base and a full version, the ISV gets much more flexibility with their pricing strategy. The new pricing structure doesn’t necessarily have to be “full version = old price” and “base version = old price minus discount” – new options become available to scale and bundle features based on demand. Additionally, as the customer now has the opportunity to buy reduced feature sets at lower pricing than previously available, customers who are interested in the full version will see the value the incremental functionality provides. This allows ISVs to actually increase the price of the full version higher than the old price. The intensity of competition at the full feature set is typically also heavily reduced.
Software and hardware vendors monetizing software offerings will find many examples of successful software pricing strategies to enter lower-end markets. By using attractive baseline offerings, and then upselling additional features, ISVs actually can generate both more revenue and more value in their premium solutions. Has this approach worked for you? Share your findings with our community.