Five Sources of Software Pricing Pressure | Sandhill

Performance-based pricing trends

For our 2014 study, (“Software CEO / CFO Outlook 2014: The Complications of Change”) we asked the executives participating in phone interviews if their companies currently use any pricing models based on success, value or outcome. As the figure below shows, 29 percent reported that their companies are using performance-based pricing.

pricing

The study found that some software companies implemented value-based pricing a year ago and another as recently as six months ago. A vice president described his company’s strategy as using value-based pricing when billing for new technologies that customers demand the company implement and also around new technologies that the company pushes out to customers.

Some software firms are more successful than others at transitioning to performance-based pricing. Outcomes range from a company reporting success in using both a value-based and a success-based pricing model to a company reporting pushback.

A COO whose company offers vertical industry solutions stated, “Whenever we experienced a pushback on pricing in the past, we tried offering success-based pricing. But in every case the customers chose the traditional pricing model instead of success-based pricing.” He added that since performance-based pricing is becoming more common in the industry today, his company is considering offering it again.

Status quo dilemmas

Although our 2014 study revealed high expectations around growth in the industry and in the participants’ companies, the study found strong agreement among participants around the dilemmas they face from the changes in their methods for growing their businesses and in their pricing models.

Competing interests pull software companies in two different directions. It is difficult to balance the effort to acquire new customers without risking the satisfaction level of existing customers. Newer deployment and pricing models — cloud and subscription-based software — are more cost-effective for the software vendors as well as new customers. Yet vendors still must invest in supporting their existing structure in order to maintain competitiveness with their existing customers.

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Five Sources of Software Pricing Pressure.