Software License and Maintenance
Pricing Principles – Best Practices
and Case Studies
Walter Baker and Homayoun Hatami
SoftSummit Conference, Santa Clara, CA
October 18, 2004
Copyright 2004 McKinsey & Company
TODAY’S DISCUSSION
• Why pricing is important and why superior pricing
performance is hard to achieve
• Examples of software license and maintenance pricing
issues and best practices
1
PRICING IS BIGGEST LEVER AFFECTING PROFITABILITY
Average economics for ISVs between $100 million and $10 billion in sales
…increases
profit by 7%
Raising price
by 1%…
101
Improve
by 1%…
…yields operating
profit improvement
Percent
True nature of price/
volume tradeoff
Percent
15
7
Price
14
26
100
Operating
profit
7
Volume
5
Price
change
COGS
Fixed
costs
4
59
-5
COGS
Sales
Fixed
costs
How many resources are dedicated
to reducing costs or increasing
volume vs. improving pricing?
Source: CompuStat, 2002; McKinsey analysis
2
Do price reductions drive
sufficient incremental
volume?
Volume
change
required to
breakeven
on profit
basis
2
NUMEROUS CASES SHOW SUBSTANTIAL UPSIDE POTENTIAL
EXISTS FROM IMPLEMENTING PRICING BEST PRACTICES
Case example
DISGUISED
EXAMPLES
Improvement in return on sales
(within 9-12 months of implementation)
Percentage points
Enterprise software
10
Storage systems
(hardware, software,
and services)
7
Computers (servers
and software)
5
Telecom (hardware
and software)
Enterprise software
4
Pricing impact is
usually greater in
situations with:
• Complex product lines
• Many transactions
• Broad customer base
• High switching costs
• Weak current pricing
capabilities
2
3
Source: McKinsey engagement experience
EVEN SO, MANY TECHNOLOGY COMPANIES FEEL
THEIR PRICING MANAGEMENT SKILLS ARE "BASIC"
Pricing excellence skill level
Deficient
Basic
Very good
(1)
(2)
(3)
Strategic
pricing
• Proactive management of industry
•
•
Structural
pricing
Transactional
pricing
Superior
(4)
Lifecycle and
industry level
pricing abilities are
key differentiators
conduct
Systematic lifecycle pricing
Product differentiation to optimize
margin capture
• Quantification and communication
of value proposition
• Exploitation of alternative pricing
schemes
Ability to quantify
and communicate
value is weak
across the board
• Understanding/quantification of
•
Pricing
process,
organization,
tools, and
enabling
devices
Companies in top quartile
Companies in bottom quartile
discount elements
Creating discipline on discount
management
• Optimizing bid process
• Decision support tools
• Transaction-based monitoring
•
•
•
Wide variation in
capabilities across
core elements of
pricing enablers
and infrastructure
systems
Skill building and training
Pricing coordination across units
Impact on incentive system
Average score:
1.8
Source: Survey and interviews of 120 senior executives from technology companies, 2003
2.7
4
SUPERIOR PRICING IS CHALLENGING IN GENERAL…
• Top management attention focused elsewhere (e.g., growth, cost
Focus and
dedication
reduction)
• Limited investment in pricing function and infrastructure
• Few dedicated, capable pricing resources
• No transparency into actual net (“pocket margin”) pricing
Visibility into
opportunity
performance – across deals, customers, products, markets
• “Size of prize” and potential improvement opportunities not fully
appreciated and prioritized along with other initiatives
• Poor understanding by frontline decision makers of fundamental
Frontline
pricing
performance
tradeoffs and implications
• Incentives not aligned to drive improved pricing performance (e.g.,
sales focused on closing deals – “every deal is a good deal”)
• Share or volume growth aspirations dominate sales strategy
Strategic
direction
instead of profitable growth
• Price – not value – seen as primary competitive weapon
• Fear of embracing price leadership
5
… AND EVEN TOUGHER FOR TECHNOLOGY COMPANIES, ESPECIALLY
SOFTWARE BUSINESSES
Dynamic
environment
• Frequent innovation and short product lifecycles
• Steady growth in feature functionality with often decreasing
price/performance ratios
• Potential for high user switching costs, network effects, and
“Winner takes
all” mindset
emergence of de facto standards drives push to establish presence
• Discipline lost in rush to get to market
• Value delivered is hard to quantify and communicate (e.g., for
Communication
of value
Complexity
over lifecycle
new innovations, software, and services)
• Marginal costs perceived to be at or near zero for software –
leading to extreme discounting
• Myopic view of pricing strategy and tactics over product lifecycle
• Multitude of alternative pricing models and approaches available –
many degrees of freedom (e.g., across license/services)
6
TODAY’S DISCUSSION
• Why pricing is important and why superior pricing
performance is hard to achieve
• Examples of software license and maintenance
pricing issues and best practices
7
COMPONENTS OF SOFTWARE LICENSE AND MAINTENANCE PRICING
Offering
License
pricing
Maintenance
pricing
Delivery and
management
Revenue
operations
Renewal and
end-of-life
pricing
• Product/
• Standard
• Warranty
• Ordering
• Payment
• Renewal
terms
pricing
pricing
architecture
– Feature
bundles
– Segmentbased value
pricing
strategy
• License
structure
– Model (e.g.,
perpetual vs.
subscription)
– License
metrics
– License
scope
• Maintenance
offering
license
pricing
– Discounting
policy and
practice
– Channel
pricing
• Special
license
pricing
– Volume
based
models
– Enterprise
level
agreements
• Update/
upgrade
• Support
– Pricing
model
– Discounting
policy and
practice
and delivery
• License
management
• License and
maintenance
compliance
• Revenue
• Lifecycle
deferral
pricing
• Internal
transfer
pricing
• Promotion
and demo
pricing
8
COMMON ISSUES AND BEST PRACTICE EXAMPLES
Offering
License
pricing
Maintenance
pricing
Delivery and
management
Revenue
operations
Renewal and
end-of-life
pricing
• Product/
• Standard
• Warranty
• Ordering
• Payment
• Renewal
pricing
architecture
– Feature
bundles
– Segmentbased value
pricing
strategy
• License
structure
– Model (e.g.,
perpetual vs.
subscription)
– License
metrics
– License
scope
• Maintenance
offering
license
and delivery
terms
pricing
pricing
• Update/
– Discounting
upgrade
• License
• Revenue
• Lifecycle
policy and
management
deferral
pricing
Common
Best practices
practice issues• Support
– Channel
– Pricing
• License and • Internal
• “One
size fits all” product/pricing
• Unbundle software
pricing
model
maintenance
transfersuites as
architecture
appropriate pricing
to better address
– Discounting
compliance
underlying segment needs
• Special
policy and
license
practice
•pricing
Price vs. benefit not assessed at
• Analyze differences in value
perception by segment and set
– segment
Volume level
pricing strategy accordingly
based
models
•– License
metrics not aligned with
• Align license scaling metrics with
Enterprise
customer
value perception
fundamental customer impact
level
parameters (within constraints
agreements
imposed by ease of administration)
• Promotion
and demo
pricing
9
IMPACT OF UNBUNDLING SOFTWARE SUITES
DISGUISED
EXAMPLE
Percent
11
100
8
15
-20
120
20%
increase
from
unbundling
software
suite
7
Money “left on the table”
due to unsophisticated
differentiation model
Current
revenue
Want
base only
(80%
existing)
Want
functionality
(20%
existing)
Convert
losses
to wins
Price
Funcsensitive tionality
mid-tier
seekers
Base
only
New customer
segments
Base
Base+1
only
module
20
10
Current customers
Modules*
Assumptions
Percent change in
number of deals
Base
only
Base+2
modules
0
Expected
revenue with
base/module
price structure
10
* Base now priced at 75% of original price; incremental modules each priced at 30% of original base price
10
OPPORTUNITIES TO ADDRESS DISTINCT VALUE PROPOSITIONS
IN CUSTOMER SEGMENTS
No product
purchase strategy
Clear product
purchase strategy
10
10
Segment 1
9
Heavy
software
users
Company A
Competitor B
8
7
6
Segment 2
9
Company A
8
Competitor C
7
Competitor B
6
5
5
Value
disadvantage
4
3
2
2
Value
advantage
~15%
Value
disadvantage
4
3
1
Value pricing
opportunity
Value
advantage
1
0
0
0
1
2
3
4
5
6
7
8
9
0
10
10
1
2
3
4
5
6
7
8
9
10
10
Segment 4
9
Segment 3
9
8
8
Company A
Value
disadvantage
6
5
6
Competitor B
5
4
4
3
3
2
1
2
3
Value
advantage
1
0
0
0
Value
disadvantage
2
Value
advantage
1
Company A
Competitor B
Competitor C
7
7
Moderate
or nonsoftware
users
DISGUISED
EXAMPLE
4
5
6
7
8
9
10
0
1
2
3
4
5
6
7
8
9
10
11
CHOOSING WRONG LICENSING METRIC CAN LEAD TO HEAVY
DISCOUNTING OR BELOW VALUE PRICING
Company
Competitor
Pricing parameter
Capacity
Ports
Alignment with
perceived value
Poor
High
DISGUISED
EXAMPLE
Competitor price
lower
Company price
lower
?
Ratio between client and competitor list prices
Perceived
value
Number of ports
Capacity
8
16
32
64
128
256
1
1.2
1.0
0.8
0.6
0.4
0.2
2
1.4
1.1
0.9
0.6
0.4
0.2
4
1.7
1.4
1.1
0.8
0.5
0.3
6
2.0
1.7
1.3
0.9
0.6
0.3
8
2.3
1.9
1.5
1.0
0.7
0.4
10
2.6
2.2
1.7
1.2
0.7
0.4
15
3.3
2.8
2.2
1.5
1.0
0.6
20
4.1
3.4
2.7
1.9
1.2
0.7
Competitor
Company
Company undercuts competitor
and does not fully capture value
Perceived
value
Competitor
Company
Company price far exceeds competitor
price and perceived value, forcing
sales force to discount heavily
12
COMMON ISSUES AND BEST PRACTICE EXAMPLES
Offering
License
pricing
Maintenance
pricing
Delivery and
management
Revenue
operations
Renewal and
end-of-life
pricing
• Product/
• Standard
• Warranty
• Ordering
• Payment
• Renewal
terms
pricing
pricing
architecture
– Feature
bundles
– Segmentbased value
pricing
strategy
• License
structure
– Model (e.g.,
perpetual vs.
subscription)
– License
metrics
– License
scope
• Maintenance
offering
license
and delivery
pricing
• Update/
– Discounting Common
upgradeissues • License
policy and
management
practice
Support
• Lack
of frontline discounting
– Channel
– Pricing (e.g., at• end
License
and
discipline
of quarter)
pricing
model
maintenance
– Discounting
compliance
• Special
policy and
license
practice
• Target
discount structure does
pricing
not differentiate by segment
– Volume
based
models
• Special license agreements are
– Enterprise
all “one-off” deals
level
agreements
• Enterprise license agreements
• Promotion
used with smaller accounts
and demo
pricing
• Revenue
Best
practices • Lifecycle
deferral
pricing
• Establish discount floors and
• exception
Internal management
transfer with incentives tied to
processes
pricing
measurable
performance
• Differentiate target discounts by
segment based on underlying
value differences
• Standardize volume/ELA deal
T&Cs and centralize approval
process to ensure consistency
• Set rigorous account criteria to
qualify deals for ELAs
13
WIDE VARIABILITY IN FRONTLINE PRICING…
Deal level analysis
DISGUISED
EXAMPLE
Why do smaller
deals receive such
large discounts?
License discount
Percent of list price
80
What is justification
for such widely
varying discounts for
similar sized deals?
70
60
50
40
30
20
Can sales
behavior be
10
changed to
limit discounts
at “standard”
0
levels?
100
Deal size
Dollars
Why are there so
many deals (even
medium ones) at full
list price?
1,000
10,000
100,000
1,000,000
14
… OFTEN INDICATES OPPORTUNITIES TO IMPROVE
FRONTLINE PERFORMANCE
DISGUISED
EXAMPLE
Distribution of deals by discount level
Percent of sales
Maximize upside potential
• Set list prices competitively and fairly
• Avoid additional automatic discounts
(e.g., volume discounts)
• Focus marketing program and
executive visits
Tighten range of discounting
• Create disciplined pricing/escalation processes
• Align sales force incentives to reduce
discounting
• Create tools to track and support frontline
pricing performance
21.6
18.8
11.0
11.1
8.0
7.6
4.5
2.9
0.9
3.8
1.5
2.7
1.0
0.7
2.0
0.2
1.3
0.3
<5 5-10 10- 15- 20- 25- 30- 35- 40- 45- 50- 55- 60- 65- 70- 75- 80- >85
15 20 25 30 35 40 45 50 55 60 65 70 75 80 85
Discount band
Percent of list price
15
POOR MANAGEMENT OF EXCEPTIONS MAKES IT “EASIER TO
NEGOTIATE INTERNALLY THAN EXTERNALLY”
DISGUISED
EXAMPLE
Approval/rejection of exceptional discount for deals
Number of deals
Discount
rejected
105
5
• Managers rarely reject
72
Discount
approved
2
53
100
70
50
Sales
manager
Area VP
3
escalated deals
• Sales reps are not afraid
to request high levels of
discount
• Sales reps do not suffer
any consequences from
offering excessive
discounts
VP Sales
Quotes from sales force interviews
• “Managers are no deterrent, they approve everything”
• “We never walk away from deals”
• “These big deals with huge discounts only get done
because of senior management approving them”
16
IMPACT OF IMPROVING END-OF-QUARTER BEHAVIOR
Initial situation
Percentage of total deals
100% = 220
Average discount
After 1 year
Percentage of total deals
100% = 263
72
14% profit
improvement
DISGUISED
EXAMPLE
Change initiatives
• Marketing role expanded to include
56
– Competitive intelligence
– Price negotiation support
44
28
• Sales incentives
– Mid-quarter quota targets
– Price realization incentives and
penalties
First 11
weeks
45%
Last 2
weeks
37%
First 11
weeks
43%
Last 2
weeks
28%
• Commitment to change behaviors
– CEO approval for EOQ deals
over Area VP discount authority
• Internal and external
Impact
• Shift in deal volume away from end-of-quarter
• Reduced discounting on largest deals
• Improved profitability (on higher deal volume)
communication strategy
17
DISCOUNTING POLICIES SHOULD REFLECT DIFFERENCES IN
CUSTOMER SEGMENT VALUE PERCEPTIONS
DISGUISED
EXAMPLE
License discount
Percent of list price
68
Academic
Government
58
Pharmaceuticals
58
Professional services
56
Utilities
Packaged goods
Manufacturing
Financial services
Traditionally higher
discount segments
Discount policies should be
tighter in those segments where
software titles are of intrinsically
greater value
46
44
40
38
One-size-fits-all
discount floors
30% 40% 50%
18
COMMON ISSUES AND BEST PRACTICE EXAMPLES
Offering
License
pricing
Maintenance
pricing
Delivery and
management
Revenue
operations
Renewal and
end-of-life
pricing
• Product/
• Standard
• Warranty
• Ordering
• Payment
• Renewal
terms
pricing
pricing
architecture
– Feature
bundles
– Segmentbased value
pricing
strategy
• License
structure
– Model (e.g.,
perpetual vs.
subscription)
– License
metrics
– License
scope
• Maintenance
offering
license
pricing
– Discounting
policy and
practice
– Channel
pricing
• Special
license
pricing
– Volume
based
models
– Enterprise
level
agreements
• Promotion
and demo
pricing
• Update/
upgrade
• Support
– Pricing
model
– Discounting
policy and
practice
and delivery
• Licenseissues • Revenue
• Lifecycle
Common
Best practices
management
deferral
pricing
• Concessions at time of • Enforce strict criteria
• license
License
andcan delay
• Internal and require approval
sale
maintenancerevenue
transfer for nonstandard terms
maintenance
compliance
pricing
stream
• Excessive discounting
of maintenance
services
• Choosing between
“percent of list” vs.
“percent of net”
maintenance pricing
• Establish tight discount
policies and practices
for maintenance (e.g.,
sales commission
“carve outs”)
• Either practice can be
viable provided there is
sufficient discipline
19
SOFTWARE WARRANTY/MAINTENANCE CONCESSIONS CAN
REDUCE ANNUITY OPPORTUNITY
DISGUISED
EXAMPLE
Effective warranty/maintenance period due to
concessions given away at time of license sale
Percent of licenses
Due to “forward sale” or
“shelfware” – customer
not ready to use software
45
Due to previous deals or
concurrent sales (e.g.,
hardware) with customer
25
25
5
0-3
3-6
Standard industry practice
for warranty (90 days)
6-9
9-12
12-15
15-18
18+18+
Coverage period
Months
20
NET EFFECT OF SOFTWARE MAINTENANCE DISCOUNTS CAN
BE SIGNFICANT
DISGUISED
EXAMPLE
Maintenance revenue, indexed to revenue = 100
175
35
25
15
100
List value of
revenue
Discounts at
time of
license sale
Discounts at
renewal
Customer
satisfaction
and other
hidden
discounts
Net revenue
21
MAINTENANCE SERVICES CAN BE DISCOUNTED MUCH LESS
THAN LICENSE SALES
DISGUISED
EXAMPLE
• License discounting rules
Share of list revenue
Percent
often violated
• Licenses in biggest deals
almost given away
Average ~50%
License
16
6
9
10
10
15
9
6
8
11
0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100
Maintenance
Average 3%
• Maintenance discounts were rarely
allowed
• Sales reps were “required” to sell
maintenance with license and were
penalized if they discounted it
75 (all at 0)
10
15
0
0
0
0
0
0
0
0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100
Discount
Percent of list price
22
THERE IS NO DOMINANT SOFTWARE MAINTENANCE
PRICING MODEL
2001 DATA
Software maintenance pricing model
Percent, N = 24 companies
Percent of license
list price
• Novell
• Peoplesoft
33
38
• Progress
• CA
• Sun
• IBM
• EMC
29
• Filenet
• Legato
Mixed models
• Veritas
• HP
• Caldera
• Linuxcare
• Microsoft
• NCR
• Sybase
Percent of license
net price
• BMC
• HDS
• Clarify
• DEA
• IFS
• Network Associates
• Oracle
• SAP
• There is no “right
answer” – either model
can be viable
– Mix of models used by
industry
– Can usually realize
any given absolute
price point under either
model
• Best choice of model
depends on sales
objectives, incentives,
frontline discipline, and
sometimes tactical
factors (e.g., systems)
Source: Gartner 2001 software support portfolio (October 2001); IDC 2001 support services for enterprise-level applications;
Company website; McKinsey analysis
23
COMMON ISSUES AND BEST PRACTICE EXAMPLES
Offering
License
pricing
Maintenance
pricing
Delivery and
management
Revenue
operations
Renewal and
end-of-life
pricing
• Product/
• Standard
• Warranty
• Ordering
• Payment
• Renewal
terms
pricing
pricing
license
architecture
pricing
• Update/
– Featureissues
– Discounting
upgrade
Common
Best practices
bundles
policy and
Segment- license practice
• Support
• –Inadequate
• Use electronic
license
based valuetools – Channel
– Pricing
management
management
tools to
pricing
pricingfacilitate registration,
model
result
in lack of
strategybase usage
– Discounting
installed
trial usage,
purchase,
• Special and customer
policy
and
information
software
• License
license asset management
practice
structure
pricing
Model (e.g.,
– Volume
• –Entitlement
check and
• Entitlement systems
perpetual vs.
enforcement
practicesbased can limit unlicensed
modelsusage and create
forsubscription)
license and
–
License
– Enterprise
maintenance
are weak
opportunity for
metrics
level maintenance renewal/
– License
agreements
up-sell
scope
• Promotion
• Maintenance
and demo
offering
pricing
and delivery
• License
management
• License and
maintenance
compliance
• Revenue
• Lifecycle
deferral
pricing
• Internal
transfer
pricing
24
ELECTRONIC LICENSE MANAGEMENT CAN HELP ENFORCE
ENTITLEMENT RIGHTS
Breakdown of software related
customer service support calls
Percent
20%
80%
Entitled to
support
Not
entitled
DISGUISED
EXAMPLE
• 20% of calls were not entitled to support
– Significant support cost reduction
opportunity
– Opportunity to upsell/renew
maintenance contracts
• Electronic license management tool,
combined with entitlement system can:
– Bring visibility to compliance issues
– Clamp down on unlicensed usage
– Lower cost of managing support
entitlement
25
COMMON ISSUES AND BEST PRACTICE EXAMPLES
Offering
License
pricing
Maintenance
pricing
Delivery and
management
Revenue
operations
Renewal and
end-of-life
pricing
• Product/
• Standard
• Warranty
• Ordering
• Payment
• Renewal
terms
pricing
pricing
architecture
– Feature
bundles
– Segmentbased value
pricing
strategy
license
and delivery
pricing
• Update/
– Discounting
• License
Common
issues upgrade
Best practices
policy and
management
practice
• Prepaid
or early • Support
• Ensure business
– Channel
– Pricing objectives
• License
and
payment
terms often
and logic
pricing beyond model underlyingmaintenance
generous
prepaid or
– Discounting
compliance
sound “give and get”
early payment
terms
• Special
policy and
justify margin reduction
• License
license
practice
structure
pricing giveaways and • Reducing or eliminating
• Service
– Model (e.g.,
– Volume lead to
concessions
service giveaways and
perpetual vs.
based sales vs.
misaligned
concessions can help
subscription)
models finance
corporate
reinforce and clarify
– License
– Enterprise
deferral
methodologies
overall corporate
metrics
level
deferral guidelines
– License
agreements
scope
• Promotion
• Maintenance
and demo
offering
pricing
• Revenue
• Lifecycle
deferral
pricing
• Internal
transfer
pricing
26
COMMON ISSUES AND BEST PRACTICE EXAMPLES
Offering
License
pricing
Maintenance
pricing
Delivery and
management
Revenue
operations
Renewal and
end-of-life
pricing
• Product/
• Standard
• Warranty
• Ordering
• Payment
• Renewal
terms
pricing
pricing
architecture
– Feature
bundles
– Segmentbased value
pricing
strategy
• License
structure
– Model (e.g.,
perpetual vs.
subscription)
– License
metrics
– License
scope
• Maintenance
offering
license
pricing
– Discounting
policy and
practice
– Channel
pricing
• Special
license
pricing
– Volume
based
models
– Enterprise
level
agreements
• Update/
and delivery
upgradeissues • LicenseBest practices
• Revenue
Common
management
deferral
Support
• Inefficiencies
in
• Provide sales incentive
– Pricingprocess •can
License and
• Internal
renewal
to renew
contracts well
model
maintenance
transferand
void
and delay renewal
before expiration
– Discounting
compliance
pricing
opportunity
support reps
with
policy and
efficient renewal
practice
process (e.g., inside
sales support)
• Discount policies are
same for maintenance
deals at both time of
license sale and
renewal
• Lifecycle
pricing
• Tighten discounting
policies for renewal
and enforce discipline
in renewal negotiations
• Promotion
and demo
pricing
27
INEFFICIENCIES IN RENEWAL PROCESS CAN VOID
OPPORTUNITY…
Renewal opportunities
Indexed to total opportunity
100
DISGUISED
EXAMPLE
Best practice renewal
rate for software is 8595%
15
10
<10
<5
Sales not pursuing all
renewal deals (lack of
sales priority/capacity)
Total
opportunity
Cancelled
for admin
reasons
Forgone
opportunity
60
Sales not closing all
renewal deals (lack of
productivity or skill)
In quote or
pending
customer
response
Cancelled
by customer
Renewed
28
… AND ALSO DELAY OPPORTUNITY CAPTURE
DISGUISED
EXAMPLE
Percent of renewal opportunity value
28
Best practice is to send renewal
quote and P.O. 90 and 30 days
(respectively) before contract
expiration to lock in renewal
Long renewal process
teaches customers that
“renewal decisions can wait”
Average = 29
16
16
14
9
6
4
Before
expiration
1-30
30-60
60-90
90-120
120-150
Time to renewal beyond contract maintenance expiration
Days
150+
29
MAINTENANCE RENEWAL SALES CAN BE DISCOUNTED MUCH
LESS THAN AT TIME OF LICENSE SALE
DISGUISED
EXAMPLE
Time of license sale
Renewal
Software maintenance discount
Percent of list price
• At time of renewal
55
Q1
30
50
Q2
25
Same discount floors in
place at time of license
sale and renewal
– Fewer competitive options are
available to customer (e.g., third-party
or self-maintenance not always viable
for mission critical applications)
– Renewal approval is scrutinized less
than initial license deal, often by
different buyers
• Software companies should:
– Have tighter discounting policies for
renewal sales
– Hold line in renewal pricing
negotiations
30
31
NO DEFINITIVE LICENSE/PRICING MODEL
Pricing model
Perpetual
Subscription
Pros
Cons
• Customers can predict
• End-of-quarter pressures
expenditures
• Payments can be capitalized
result in deep discounting
• One-time payment could be
relatively large and can be
focus of customer’s price
reduction efforts
• Lessens impact of end-of-
• Transition to new revenue
quarter pressures
• Can facilitate customer
adoption due to lower upfront costs and shorter
commitments
model may not be welcomed
• Risk of renegotiation before
end of contract
• More difficult for customers
to capitalize payments
32
BEWARE OF ASSUMPTION THAT MARGINAL COSTS ARE ZERO
DISGUISED
EXAMPLE
Percent, indexed to configured list price
100
Professional
services
15
10
Standard
customer
volume/ tier
discount
Competitive
negotiated
discretionary
discount
25
Installation/
maintenance
services
Giveaway
professional
services/
customization
20
Rebate/
old version
or credit/
peripheral
giveaways
5
Application/
feature
functionality
software
55
5
5
40
2.5
Feature
functionality
stuffing/
giveaways
Core
operating
software
Payment
delays
(e.g., A/R,
acceptance
criteria)
40
Giveaway install/
integration and
maintenance/
support services
30
Configured
list price
2.5
Invoice
price
* Includes sales costs, allocated R&D acquisition/goodwill, royalties, license fees
** Including professional, installation/integration, and maintenance/support services
COGS/
effective
transfer
price*
20
10
10
Pocket
price
Actual
service
costs**
Pocket
margin
33
BUNDLING OF SOFTWARE INTO HARDWARE SALES
Distribution of deals by type
Percent of deals
100% = 500
DISGUISED
EXAMPLE
Weighted average discount of deals
Percent
55
Hardware
45
only
30
30
Hardware
with software
25
Hardware
with
software
Software
only
Software
only
• Wrapping software into hardware deals can result in heavy
discounting (to “sweeten the deal”)
• Software is often bundled with hardware because of desire to
maximize product revenue – may need to correct incentives
34