An examination of how software companies often fail to understand how different customer groups value their products. This leads to firms offering both excessive price discounts and too many licensing vehicles. Companies can develop an integrated approach that targets the right pricing strategy and product offerings to different groups, in this case: "business professionals," "aspriants," and "general users."

1. PRICING ADVISOR
The 3535 Roswell Road, Suite 59
Marietta, GA 30062
770-509-9933
A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com
Segment Your Way to Greater Profits
power. Raychem made heat-shrinkable within specific organizations without
Bruce La Fetra, Senior Marketing tubing that was used in commercial, au- undercutting the high prices paid by ex-
Consultant for Rubicon Consulting, tomotive, industrial and military appli- isting customers. The most problematic
cations. While the company had dozens scenario is when the same or similar
examines how software companies of chemical formulations, a couple were applications are used by different user
often fail to understand how different sold into all of these markets, each at a sets for business-critical and non-criti-
different price with a low-to-high range cal tasks.
customer groups value their products. of about 3X. While the tubing came off
This leads to firms’ offering both ex- the same production line—often the Business-critical users (Business Profes-
same run—each run was only tested to sionals) are willing to pay top dollar.
cessive price discounts and too many the relevant specification for the intended They may not be happy about it, but in
licensing vehicles. La Fetra shows how market. Since applications ran the gamut the absence of close competitors, they
from exposure to hydraulic fluid in a M1 have few alternatives. At the same time,
companies can develop an integrated Abrams tank to strain relief in consumer there may be untapped, broader market
approach that targets the right pricing electronics, the QA certification was im- opportunities with users who are will-
portant. This gave the company total pro- ing to pay only a fraction of the amounts
strategy and product offerings to the tection against customers buying a lower paid by Business Professionals. How
groups he defines as “Business Profes- grade product even though some knew it does the vendor aim high and low at the
came off the same production run as “the same time?
sionals,” “Aspirants” and “General good stuff” that went into military and
Users.” For more information, you space hardware. The varying usages drove Most sellers respond to this situation by
different pricing for the same product. creating an entry-level or “light” version
can reach Bruce at: 408-395-3910. of their application that they can feature,
What’s at Stake and functionally differentiate, from the
W
Many vendors face a similar premium version. With only two user
hy do software vendors problem: they have multiple volume sets, this solution works well and gener-
offer so many buying ve- licensing vehicles, but target them ally is advisable. The situation gets more
hicles? indiscriminately at the entire user base complicated when there is a mid-market
with the well-meaning intent of giving set of price aware users. These purchas-
Most companies say they customers more buying options. There is ers are eager to use the high-end appli-
want to give customers multiple options, nothing unusual cations, but are
or they do it simply because “everyone about these often unable to
else” does. The actual strategic rationale vendors’ justify paying top
for offering a menu of different vehicles licensing Business-critical users dollar for occa-
and discounts is poorly understood or vehicles; they (Business Professionals) sional use.
forgotten within many vendors; yet it are the same are willing to pay top dollar.
represents the difference between ad- ones most Some vendors call
equate and great pricing. Great pric- sellers have: They may not be happy these users “pro-
ing allows a vendor to tailor its offers to contractual, about it, but in the absence sumers,” but in
various buying groups. This is not illegal transactional, an organizational
discrimination. Rather it merely reflects site and of close competitors, they context we refer
sellers’ taking advantage of differences concurrent have few alternatives. to them here as
between users in how they value—and licensing. “Aspirants.” Typi-
how much they are willing to pay for— Customers like cally, if the ven-
products. Understanding this (and suc- these hydra- dor sells a suite
cessfully putting it all into practice) is headed programs because they give them of applications, this often results in the
fundamental to price optimization. But lots of options (…to game the system Aspirants buying some (but not all) of
if it’s so essential, why don’t more ven- and to try to find the cheapest way to the premium offerings at a price lower
dors do it well? buy the products). than what Business Professionals are
willing to pay, but far above that which
Raychem Corporation provides a text- The dilemma faced by all these ven- lures General users. This makes Aspi-
book example of price discrimination’s dors is how to proliferate for broad use rants an important growth source, so
4 January 008

2. PRICING ADVISOR
The 3535 Roswell Road, Suite 59
Marietta, GA 30062
770-509-9933
A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com
the failure to price optimize is a strategic many vehicles and an opportunity exists the vendor’s advantage. It is a “push”
oversight. to simplify the set of offerings. Here vehicle created to generate demand and
are typical options and their distinct should be used to support a prolifera-
In short, charge too much and the ven- objectives: tion strategy.
dor is unable to penetrate the Aspirant • Contractual Licensing offers volume • Concurrent Licensing is an attractive,
and General user segments. Charge too discounts to the vendor’s best customers. but often underutilized way to expand
little and the vendor risks seeing its lu- Buyers are required to enter into a con- the vendor’s reach to a large number
crative Business Professionals trade down tract committing them to a minimum of users who are not doing business
to a lower price band. This is a loss of purchasing volume during the con- critical work (i.e. if the license server
real, not potential revenue. Because they tracted period. This is a “pull” vehicle, is occasionally oversubscribed, it’s not
fear undermining their existing business, which addresses customers that already a disaster). Concurrency should be
many sellers fail to act on the Aspirant want to buy the vendor’s products. priced so it is attractive when only low
opportunity. It contrasts with “push” vehicles (see availability levels are required. (The
application may not be
In this situation, vendors immediately accessible
will often pursue a Gold- at all times.) But at high
Silver-Bronze type prod- availability levels (imme-
uct assortment. Not only diate access is required),
does this complicate the it is more expensive than
development process, but the corresponding con-
also it muddies the mes- tractual vehicle. Many
saging and buying pro- vendors discourage
cesses as well. Customers concurrent licensing,
feel encouraged to base seeing it as simply a
their buying decisions on way for customers to
an analysis of their actual reduce the number of
use rather than on their licenses they buy. This
aspirational intent. reflects a problem with
the underlying pricing,
In a licensing situation, not with the vehicle it-
the solution is to vary self. Many vendors use
the vehicles and offers transactional licensing
by user set, so vendors to address this need, but
can direct customers to concurrency offers addi-
the preferred option. Like water that below) which service situations where tional flexibility and often represents
always flows downhill, corporate buy- the vendor must generate end-user de- a better choice. It is a “pull” vehicle so
ers are good at finding the cheapest way mand before users will buy a product. vendors should price to value. Con-
to purchase a given product, so it is best current licenses are usually offered at
when the seller can get them to self-se- A common error for vendors is to pres- a premium over a similar number of
lect the desired vehicle. Done correctly, ent too many offerings with excessive contractual licenses, but they don’t
the vendor will be able to price optimize discounts because they are trying to have to be.
for each user set without the customer’s serve both high- and low-end user seg-
feeling manipulated. It’s the proverbial ments. Discounts don’t really encour- Mapping User Sets to
having one’s cake and eating it too. age Business Professionals to buy more Preferred Vehicles
(see below), but they are demanded by The next section lays out the preferred
Mapping Licensing Vehicles corporate buyers because that is how licensing vehicle by user set from
to Objectives software is sold. Sellers should under- the vendor’s point of view. Product
The first step is to think strategically stand the discount levels required for a selection is used to steer customers to
about the objectives for each offering. given industry, and resist the urge to add the desired licensing vehicle. In our
Licensing vehicles should be driven by a costly extra tier or two for a vendor’s example, all products are available via
strategy, not the other way around. For “really good customers.” contractual licensing, and all or most
example, without considering products, • Site Licensing is designed for large by concurrent licensing. But only basic
are there different price points or sites with casual usage where the ven- products can be purchased via a site
buying behaviors the vendor needs to dor wants to drive broad proliferation. license. The view from each user set is
address? If the objectives overlap too If the customer is likely to buy via as follows:
much, then the vendor probably has too another vehicle, site licensing is not to • Business Professionals are interested in
January 008 5

3. PRICING ADVISOR
The 3535 Roswell Road, Suite 59
Marietta, GA 30062
770-509-9933
A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com
the professional versions and premium Figure 1
suites. Since these users have no interest
in using the basic versions, site licensing More expensive
All products,
Loyalist
is not attractive. Because their usage is Premium products
than Contractual in
business critical, concurrent licensing including high-use
not available via
does not meet their requirement for Master Suite Site License
environments
high availability (access at all times).
Thus, the contractual licensing program
Customer Type
is the clear choice. More expensive Standard and Insufficient volume
Aspirant
• Aspirants are primarily interested in than Concurrency
the professional products, but buying a
for moderate use
Premium to qualify for
full license for each person or worksta- products Site License
environments
tion is much too expensive, especially
so if several applications are desired. General Users
If forced to buy via contractual li-
censing at the same premium prices Too expensive for Too expensive for Basic products
as Business Professionals, customer
organizations are likely to restrict who
occasional use occasional use only
can obtain and install the vendor’s
applications. This is a missed opportu-
nity for the vendor as it makes adding Contractual Concurrent Site License
Aspirants to the Business Professional
set more difficult. High availability, Licensing Vehicle
however, is not needed, so concurrent
licensing looks attractive as it provides
economical access to the professional no new product variations are needed. General Users is reduced. In general,
versions. Aspirants prefer to use the If only a single product offering exists, leaders who have less competition at
professional versions—and the vendor a low-end version is needed to isolate the high end of the market also risk
should reinforce this in its messaging. the general use market successfully. the greatest opportunity cost from in-
But, just in case, minimums for the site Where possible, product and licensing action, or from a poorly thought out
license are set high enough to exclude vehicle development should reinforce the broad market pricing and licensing
most of this group. buying segmentation process. This will strategy.
• General Users will only buy at scan- provide the vendor with more options
dalously low per-seat prices—com- and greater clarity from the buyer’s Summary
pared to Business Professionals. point of view. Software vendors with a loyal base
However, high minimums and lack of of users can use licensing vehicles to
access to professional products are not Figure 1 provides an overview of the address the broader market without
obstacles in environments where the nine buying possibilities available for cannibalizing premium priced vehicles.
vendor is trying to drive broad prolif- three user sets and three licensing vehi- We’ve shown here how to balance not
eration. Because basic applications are cles. The gray squares describe the disin- only high-value and low-value users,
just fine for this user set, these buyers centives for each user set / licensing com- but also how to include a third, mid-
may be successfully isolated from the bination, which help vendors steer buyers market, aspirational customer group
rest of the customer base. The result toward the most desirable options—rep- in the mix. Since the aspirational
is a low-cost, per-user site license resented by the circles. set represents a large, ripe, and only
that opens up heretofore unaddressed partially-tapped, growth opportunity, a
markets without undercutting the This methodology works particularly vendor must understand how to direct
highly lucrative Business Professional well when the vendor is a leader in its these Aspirants toward the high-end
market. field and has a strong base of profes- Business Professional set rather than
sional users. In this scenario, vendors the low-end General users. A properly
The Keys to Success can skew toward optimized pricing since designed pricing, licensing and product
The keys to success are: (a) offering an Business Professionals will be unlike- strategy is able to deliver on the needs of
appropriate range of products to create a ly to defect to competitors because of each buying group, while also creating
sophisticated assortment across customer high prices. For vendors facing a greater unique disincentives to steer specific
sets; and (b) targeting access to specific competitive threat, the same structure customers away from non-optimal
licensing vehicles. If an adequate high- holds, but the achievable price premium buying vehicles.
to-low range of products are in place, for Business Professionals compared to
January 008