As I write this we just entered my favorite month – October! I love October for three reasons:
- It’s the month my wife and I met.
- Fall is my favorite season.
- I’m a horror movie buff and October brings with it non-stop horror movies.
One of the things I enjoy most about being a dad is taking my two daughters to the movies. When they were younger, I never took them to see any horror flicks for obvious reasons, but we did enjoy all the animated movies like The Incredibles together.
But now that they’re older it’s game on for horror movies. Right now, they’re excited to go see Halloween Ends with me, which is just a tad more bloody than Finding Nemo.
You’re going to find this hard to believe, but it was during a trip to the movies with them that I had an epiphany regarding the discipline of software pricing. Seriously.
Let me quickly say that when it comes to this subject, my feelings are, oh, how shall I put this?
I hate it.
Incredibly, in some horrid turn of fate, I drew the short straw at most of my past software companies and got assigned the task of creating and managing each software product line’s pricing. Here’s some advice: if this happens to you and you then move on to a different company, never admit you’ve done pricing to your next boss.
Because once the executive staff finds out you can even spell ‘pricing’, their faces will twist into a Joker-styled smile, the pricing hot potato will be hurled into your lap, and the last thing you will hear is the door closing and the fading sound of them running away.
Pricing, as I found out during the years I handled it, is part science, art, and witch-doctorism. Mostly the latter.
Even when you finally land on a framework that seems to be working, you’ll be constantly buffeted by complaints, both externally and internally, that sound a lot like a person in a car who is never pleased with the inside temperature (I’m boiling, I’m roasting, I’m freezing!) This is why I’m especially sympathetic to inquiries I get at Gartner from those who own pricing for their company.
And because of my background, one area I handle is the review of vendor pricing models, primarily for DBMS or data-centric companies. A common issue has poked its head out in the last few pricing reviews I’ve done for clients, which is friction in moving customers up from their low-cost solution tiers to those that are usually labeled “enterprise” (AKA the most expensive offering). Because of this recent inquiry trend, I thought I would pass along a method I used in the past to make this happen with a pretty decent degree of success.
I call it the “movie coke” pricing model.
At the movies
The idea for the “movie coke” pricing model hit me one time when my kids and I were getting munchies for Kung-Fu Panda. My daughter wanted a small coke, and the concession stand attendant told me it would be $4.00. “What?!? That’s crazy! I can’t believe it costs that much!” said I.
And then came the lesson.
The attendant calmly replied, “Well sir, for .25 cents more, you can get a medium; .50 cents will get you a large; and for .75 cents more, we’ll bring a full keg of coke into the theater and hook you up to it so you can drink yourself into a sugar coma before half the movie’s done.”
“Oh”, I said, “well that’s not so bad…gimme the sugar coma option.” Sold!
When clients struggle with getting customers to either initially buy into or upsell to a more expensive tier, a commonality in their framework has been very large price jumps between the offerings – differences that would cause any reasonable person to pause and ponder whether they want to make that move.
If you’re a software vendor, you don’t want that.
Instead you want them to feel that when they move up to your higher tiers, they’ll be getting more than what they’re paying for (the sugar coma option) instead of stretching their budget to buy something that they hope will be worth it.
Moreover, remember that whatever your starter / basic / standard edition is, it likely contains all the foundational functionality that put you on the map. I often see vendors charge so little for their feature set bedrock and then price their extra features at nearly the same price, which is a no-no.
Don’t be afraid to charge $4.00 for that starter coke.
Once you’ve established the correct value for your standard offering, then use small price bumps for your additional value-add tiers. I rarely went over 15-20% bumps for my up-the-ladder offerings and the technique normally worked well. Analysis of our sales usually showed our most expensive offering to be 80+% of what we sold.
“But what about the down churn threat?”, you ask. I rarely experienced it for the simple reason that customers – even if they find they don’t use all the advanced features in your most expensive offering – only down churn IF they think they will save money in a meaningful way by doing it. The small percentage bumps in the upper product tiers usually precluded that from happening.
Of course the movie coke pricing model isn’t appropriate for every situation, but in quite a few scenarios, it’s a winning move that can make selling your most expensive solutions pretty darn easy.
With our pricing lesson concluded, my last piece of advice is to now go enjoy your October by finding a movie that will cause you to freak out over every bump in the night you hear for the next few days. I have recommendations if you’re interested…
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