My presentation at ProductCamp Austin September 2018 Updated with examples for Cloud and SaaS pricing models

1. Product pricing considerations
Jay Kruemcke
jay@kruemcke.com
http://Kruemcke.com
ProductCamp Austin
Sept 15, 2018
Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 1

2. ADVOCATES
Sponsors
SUPPORTERS
Thanks
In Kind

3. Prologue
• Introduction
⎼Jay Kruemcke jay@kruemcke.com
⎼Product Manager at SUSE
⎼Long career in product management
• Why am I giving this presentation?
• Assumptions
⎼ Scope is traditional software product (License, Subscription, Cloud)
⎼ Competition exists
⎼ Relatively difficult to change the price once set
⎼ Price is elastic
⎼ Customer value based pricing model
⎼ This discussion has to fit into one hour
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4. Pricing – An essential Product Manager task
• Why? Because its really important
⎼Key determinant of product success or failure
⎼Essential component of the product
• What characteristics of “good” pricing
⎼ Facilitates product success
◦ Competitive
◦ Flexible to address different customer needs
◦ Doesn’t leave money on the table or price you out of a desired market
⎼ Simple as possible (but not too simple)
⎼ Reflects the underlying product and business strategy
All pricing is a compromise
Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 4

5. What is Value based pricing?
Price
Value
Elements of Perceived Value
• Utility for intended task
• Scarcity
• Luxury / Status
• Quality
• Leading edge/early adopter
Elements of Perceived Cost
• Purchase price
• Risk
• Change vs Stability
• Required investments (capital, people)
• Opportunity cost
• OpEx vs CapEx
Price reflects Perceived Customer Value vs Perceived Cost
$ $$$
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6. What is your product market power?
Market position
⎼Entry with no competition
⎼Weak with competition
⎼Existing but competitive
⎼Market leader
Price elasticity
Market maturity
Target markets
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7. Product Pricing Strategies
• Skimming
⎼Grab all you can, then lower to get share
• Penetration
⎼Lower price to grab market share
• Loss leader
⎼Sell low to encourage other sales
• Limit pricing
⎼Protect against competition
• Product mix strategy
⎼Total number of products available to customers
• Tiered product pricing
⎼Different price points for similar products.
Price
Value
$ $$ $$$
Tiered product pricing
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8. Value / Charge Metric
• Typical Software Charge Metrics
⎼Processor capacity available
⎼Number of Users
⎼Named user
⎼Usage per interval
⎼Per device
⎼GB of storage used
⎼Per use
⎼Site license
⎼Two part pricing
◦ Fixed portion
◦ Variable portion
⎼Add ons
Selecting a charge metric
• Existing product / product line metric
• De facto industry standard
• Provides competitive advantage
Charge metric requirements
• Has to relate to the customer value
• Have to be able to measure
• Simple as possible
• Customers have to understand
• Sales people need to understand
• Needs to scale with demand
Cost = Charge metric * price per unit
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9. Licensing Models*
• Perpetual license
⎼You can use the product forever (Example: Oracle DB)
⎼Customer uses capital budget (CAPEX) to purchase
• Product Subscription
⎼You have maintain a subscription to use the product (Ex. Adobe)
• Support Subscription
⎼You purchase support and/or fixes for a set time period (Ex. Linux)
⎼Open-source software fits this model
⎼Perpetual licenses often have a support subscription component
• Consumption
⎼You pay based on usage (Ex. AWS)
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General rule – More flexibility for the customer results in higher price *Subject to Terms and Conditions

10. How to get started?
• Understand your current pricing
⎼Existing product or product line
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11. Understand your pricing in relation to your competition
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12. How to get started?
• Understand your current pricing
⎼Existing product or product line
• Look at your competition or similar offerings
⎼But consider that different pricing can be an advantage
• Talk to your sales channels
⎼Identify problems and potential opportunities
• Build a pricing model spreadsheet
⎼Project revenue for different volumes
⎼Evaluate against competition
• Socialize proposed pricing
⎼Validate with sales channel and other stakeholders
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13. Pricing Adjustments
• Promotional pricing
⎼ Useful to drive early adoption
• Volume discount
• Channel discount
⎼Encourage reselling
⎼Market Development Fund rebates based on sales
• Segmentation
⎼Different price for different customers (E.g. Geographic pricing)
• Customer appreciation discount
• Bundle pricing
• Discount for multiple years
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14. Terms and Conditions / Terms of Use – Protection for the vendor
• A legal agreement between the provider and the customer that governs the
use of the product and the responsibilities of both parties
⎼ Allowable use
⎼ Redistribution / resale
⎼ Ownership of the product
⎼ Limitation of liability
⎼ Disclaimer of warranties
⎼ Termination
⎼ Customer responsibilities
⎼ Vendor responsibilities
⎼ Prohibited actions
⎼ Charge metrics
⎼ …
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15. On-Demand Cloud Pricing – One approach
Scenario: Customer wants to use an application hosted by a Cloud Service Provider (CSP)
Inputs to calculating price:
⎼ Standard annual price for the product (if purchased normally)
⎼ Adjustments for CPU capacity available (in vCPUs)
⎼ Minimal cloud billing interval (minute, hour, month)
⎼ Adjustment for Multi-tenant vs Single tenant
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Cloud Pricing Example
Non-Cloud Price per Year $100,000
Hours in a year 8,760
Single Tenant Cost Multi-Tenant Cost
Annual price / Hours in a year
(Base price per Hour) $ 11.42
VM size Hourly cost
Equivelent
Annual Cost VM size Hourly cost
Equivelent
Annual Cost
1-2 vCPU adjustment factor 0.55 1-2 vCPU $ 6.25 $ 54,750 1-2 vCPU $ 5.19 $ 45,443
3-4 vCPU adjustment factor 1.10 3-4 vCPU $ 12.50 $ 109,500 3-4 vCPU $ 10.38 $ 90,885
5+ vCPU adjustment factor 1.31 5+ vCPU $ 15.00 $ 131,400 5+ vCPU $ 12.45 $ 109,062
Multi-tenant adjustment factor 0.83 Hourly price calculation: Base price per hour X vCPU adjustment X Multi-tenant adjustment

16. SaaS pricing models
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Thanks to - https://www.inturact.com/blog/the-top-10-saas-pricing-strategies
Approach Comments Example
Per User
Very common. Charge for each additional users. Downside is fewer users get to
use your product hurting future growth. Probably not the best choice
Salesforce
Tiered User
Similar to per user but the number of users increase in tiers of multiple users
such as 1-10, 11-50, 51-200
Confluence
Per Storage
Cost increases as more storage is used. Usually grouped into tiers. Often with
free tier. Advantage: gets customers hooked on free, then easy upgrade to paid.
Dropbox
Feature based Increased features with higher priced options. Trick is to select the right features PandaDoc
Pay as you go Costs go up as usage increases. Downside for customer is predicting costs. AWS
Roll your own Start with a base price and select individual features at a higher cost. Intercom
Freemium
Free offering with upgraded features for higher cost. PM challenge is to provide
enough features in free tier to hook customers and pick the features customers
would upgrade for
LinkedIn
Flat rate / Subscription Free for base. Flat rate price for all additional features. Easier than Feature based Buffer
Free, Ad supported Free to use. Cost to remove advertising. Wix
Per active user Free for small number of users. Tiers for more users with refund if not used Slack

17. Guidelines
• Don’t set price too low
⎼Easier to discount with promotions than to increase price later
• Don’t set price too high either
⎼Setting price too high can discourage consideration
• Customer flexibility comes at a higher price
⎼Flexibility such as Cloud comes at a higher overall price
• Tiered offerings are usually a good approach
⎼New capability comes as a higher cost. Easier to scale offerings
• Understand competition pricing but don’t just mimic
⎼Pricing model can provide a competitive strategy
All pricing is a compromise!
Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 17

18. Last words
• Pricing is one of the key tools Product
Managers have – don’t be afraid to use it
• The pricing model should align with the
customers perception of value
• Tiered pricing is often a good approach
• Be sure to get buy in from the sales channels
before making changes
• Promotions and adjustments can be used to
vary the price as a short term tactic
Jay Kruemcke - ProductCamp Austin - http://kruemcke.com 18

19. Thanks!
Jay Kruemcke
jay@Kruemcke.com
http://kruemcke.com
@phastflyer
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