Tuesday, November 09, 2004

Pricing in Hi-tech companies

This is a favorite topic of mine - pricing. It intrigues me when we have so many ways of pricing to completely confuse customers. Here are some common ways, and what works and what does not:

a. Price by CPU

You pay an egregious amount of money like $one kajillion per CPU. If you add more - perhaps indicative of excessive usage since more CPUs = more people using the app - you need to pay more.

Pros: It's a logical premise to an extent.
Cons: Difficult to capitalize of falling hardware costs. If you can now afford a multi CPU box for much cheaper, the costs are offset by the increase in payment to your vendor. Definitely a bad strategy for a customer.

b. Price by Seat/Named User

You have to declare the number of people - internal and external - using the application.
Pros: For a small company with a back office role, it probably makes sense.
Cons: This ignores one critical aspect - growth of a company and user adoption. More users should mean good things for both the company and vendor (from a reference perspective). Definitely doesn't make sense to penalize the customer.

Companies like Chordiant, and other call center companies like Genesys have made their $$$s here.

c. Enterprise Pricing

The pricing model is not restrictive and is based on the revenue growth of the company. If the revenue increases over the next few years, you owe more to the vendor. You do not if the investment does not affect revenue.

Pros: Very customer centric, profit sharing model with growth actually being encouraged.
Cons: Not every vendor's solution has a direct impact on revenue or growth. Customers will be reluctant for such pricing schemes from smaller vendors.

Some examples of who do this are PeopleSoft, PeopleSoft and PeopleSoft :-)

d. Subscription based pricing

Based on per user, this is a monthly subscription fee that will be charged.

Pros: Useful is stretching out payments over several months, resulting in better cash flow management.
Cons: Lack of stickiness (really a vendor problem). Easy to switch. Low F

e. Utility Pricing

Pay as you go pricing,you pay by the drink. More you use, more you pay.

Pros: The nirvana of Sun and IBM and HP for utility computing. Helpful for companies that have a spike in computing for some weeks based on seasonal demand - so a period of spikes followed by slumps.

Cons: Practical solutions that have been put into place is still in the early adopter phase. Large upfront investments will need to be made by some companies desirous of introducing this functionality to their customers to budget to spikes in demand.

f. Free

Now what can beat this ?

Pros: You gotta be kidding me!
Cons: Cost of support, maintenance. Necessary to have skilled resources and/or a quick relief support structure to be viable for the enterprise.