Following a Competitor’s Pricing Leads to Failure

3 Strategic Action Steps to Calculate IT Price Correctly and Increase High Tech Business Success

Executive Summary

IT business success requires a planned process where pricing is correctly selected to maximize the company’s revenue goals, market penetration and profit objectives.

Most sales teams in a competitive buying position often declare that their price is too high, but price must equal value and value must be positioned correctly. Often pricing is not strategically positioned based on the company’s planned needs, but frequently calculated based on alignment with a competitor’s price point.

This approach never works because your competitors are not you. Their operational assets, costs, brand acceptance and core company capabilities do not transpose to your business model, needs and overhead. So, pricing must be based on a calculated success model and on your business needs where it drives your corporate performance, not hinders it.

To build the most successful technology pricing model, there are three selection criteria that must work in tandem.

Introduction

There are multiple technology pricing options available today to executive teams who are trying to determine correct price positioning. Each option has multiple variations and often more than one pricing option can be deployed simultaneously to increase business success. The selection of price is a strategic discussion based on corporate needs internally to pay for overhead and profit and externally to sell based on the buyer’s perception of your IT offerings’ value. The correct selection can accelerate corporate growth year over year. Incorrect selection can force companies to lose market share, reduce R&D funding and if not adjusted can affect corporate cash flow.

Pricing Strategy

To correctly price your IT offerings, there are three strategic sequential steps that must be deployed to drive your decision process accurately.

Step 1: Determine & Prioritize Your Corporate Objectives

To maximize the success of your pricing model selection, specific company objectives must be determined and then used as key performance indicators when selecting the price position options—independently of pricing in a SaaS, enterprise, project or hourly billing model.

Here are some company objectives to consider when creating (or changing) your technology price:

• To maximize company EBITDA
• To increase corporate revenue
• To maximize business valuation
• To increase market share
• To eliminate competitors

Each one of these company objectives adjusts pricing selection. Company objectives are the primary drivers in price selection. Once you have determined what your business objectives are for your pricing selection, you then need to choose one or more price options that meet those objectives.

Step 2: Select a Pricing Option to Accomplish Your Objectives

Each pricing option has unique specific strategic variables that must be weighed to determine their viability for your IT firm’s corporate objectives. Here are 12 strategic pricing options for technology, software and professional service companies to consider when building out this pricing model.

12 Strategic IT Pricing Options

1. Skim Pricing is selling products and services at a higher price point to maximize profit. It is often used during a new product or service launch to reimburse development and start-up costs.
2. Competitive Pricing is setting a price as a strategic position above or below your direct competitors to position your offering differently.
3. Cost-Plus Pricing is calculated by taking costs and adding margin.
4. Cost Loss Leader is a price model that positions an offering at a low or below cost price point to generate other add-on revenue streams once the primary technology offering is purchased.
5. R.O.I. Pricing is based on the return on investment it creates for the buyer. Most R.O.I. pricing models shoot for at least a 5X return within 12-24 months following the technology purchase.
6. Penetration Pricing focuses on setting a price low enough to generate increased market share. Often the IT price is raised after market share is captured.
7. Discrimination Pricing utilizes different pricing based on a variety of business verticals, segments or sub-markets that you sell to (i.e., manufacturing versus wholesale; under 1000 seats versus over 1000 seats pricing).
8. Premium Pricing is when the price of your offering is positioned artificially above competitors’ pricing to create a perception of increased value.
9. Predatory Pricing is a market model designed to drop your offering price to a point that eliminates competitors.
10. High-Low Pricing is used where your offering is priced above your competitors as a planned process but your firm aggressively discounts your IT products or services through promotions or buyer negotiations to below retail.
11. Value-Based Pricing is when pricing is based on the total value (not just the R.O.I value) that your offering creates. Many times it takes into consideration indirect value that is hard numerically to calculate like accelerated decision making, improved productivity and better customer service.
12. Freemium Pricing is a business approach that offers a product or service free of charge while charging a premium price point for features or services that are more advanced. Sometimes this is also used in Proof of Concepts (POC) or in shrink-wrap software package offering.

Each of these twelve options drives company business model adjustments. Each price model selected affects the entire company holistically as sales, marketing, strategy, finance, operations and development departments align their functioning requirements collectively based on how the chosen pricing changes their business processes and budgets.

Step 3: Align Your Pricing With Your Corporate Life Cycle

Once price options are selected that match your corporate objectives, then you must plot these decisions on your IT product or professional service life cycle to see if they are positioned correctly.

All IT offerings have a life cycle that is driven by the number of competitors, age of market deployment, buyer demand, market gap size and price acceptance value. It is not unusual for a company to select an IT price model option that meets their corporate objectives and then discover that it is incorrectly positioned on the product or corporate life cycle and it ultimately fails.

Here are the stages of product life cycle you must consider:

Product Life Cycle Curve

Introduction/Innovation Stage Characteristics

• Few competitors
• Educational sale
• High value perceptions
• Early adopter buyers
• High price
• Skim market model

Growth Stage Characteristics

• Me-too competitors enter the market
• Buyers understand offering’s value
• Demand increases
• Market share growth by market leader
• Price drops
• Profits increase

Maturity Stage Characteristics

• Price drops
• Margins decrease
• Sales start to decrease and stabilize
• Brand leaders aggressively try to differentiate products and brands
• Aggressive competition
• Intense price discounting

Decline Stage Characteristics

• Many competitive players leave the market
• Buyer demand shrinks
• Companies reduce costs aggressively

By looking at the life cycle position of your IT offering (or offerings) and then overlaying your objectives and price model selected, you can correctly price your technology or service to reach your goals. Pricing success is the intersection of these three variables and when done correctly, pricing becomes a strategic growth driver.

Conclusion

Revenue capture is a company responsibility. Pricing your offering correctly is as important if not more important than the other business drivers of sales, marketing, operations and the quality of technology you offer. Pricing is a lead driver that will intersect your other company competencies and the decision processes needed to make those departments maximize their efficiencies and capabilities.

Price correctly... and hit your high tech company objectives.
Price incorrectly... and struggle to be successful.

About The Author

Paul DiModica is the founder and CEO of Value Forward Group, a high tech revenue capture specialist advisement and management consulting firm. Paul is also editor of the world’s largest IT sales, strategy and marketing strategy newsletter called HighTechSuccess read by high tech executives in over 110 countries.

Additionally, he is the author of the books High Tech CEO Business Success Strategies, How to Sell Technology^®, Value Forward Selling, and Revenue Capture Scorecard^®.

Prior to launching the Value Forward Group in 2001, Paul spent over 20 years in high tech businesses as a Senior Vice President of Sales and Marketing, Vice President of Strategy Worldwide (Renaissance Worldwide Inc.), Vice President of Operations, Chief Operating Officer and company Founder in private, family-run and public IT companies with annual revenues up to $900 million.

Paul has been featured or interviewed in dozens of media outlets including the New York Times, Investors Daily, Fox News, Selling Power Magazine, Sales and Marketing Magazine, CIO Magazine, CFO Magazine, Entrepreneur Magazine, Training Magazine, Marketing Magazine, Computer World Magazine, Entrepreneur Radio, Chicago Tribune, Executive Travel Magazine, Value Added Partners and many others.