Pricing Model Tuning

The insight that turned the company around was a recognition that the market could be segmented neatly in two, with different pricing models. Sales of the new product are robust, with both volume and revenues on target

A software company needed to address competitive threats to its business leadership. Customers had begun creatively deploying the desktop application in a server-based topology. New competitors emerged and out-maneuvered the company by offering server-based products to address the customer desire. Although the company still had dominant market share, they knew that they were at risk of becoming “old news” in a dynamic market.

The company responded by engineering a server-based version of its product, but had little experience in pricing and marketing to the larger enterprise market. They knew that they had to move quickly and decisively to regain their momentum, serve their customer base, and expand into the new server-based market.

Rubicon was brought in to help create a pricing model for their new product line.

The Challenges

Slow response to evolving market
Customers had begun using creative deployment of the desktop product in order to enable a server-based usage model, and competitors had also introduced server-based products. While the company was quick to introduce their own server-based offering, the company was aware that it had lost ground to the competition, and faltered in the eyes of their customers.

Hasty pricing reaction
In order to regain market share, and drive out the new competitors, the first reaction from Marketing and Sales was to compete on price. The sales force was inclined to lower the pricing below that of the competition to ensure that they retained the customer base, but some executives had concerns about the revenue impacts of such an approach.

No methodology for pricing
The company had no experience in server-based pricing. They had no model for establishing value-based pricing, and continued to rely on a cost-plus model. The cost-plus model was effective for smaller, shrink-wrap sales, but was not effective in the larger enterprise markets.

The Rubicon Solution

Rubicon was convinced that the company’s position did not justify a retreat into a price-war with the competition. Instead, Rubicon noted that the company had a well recognized brand that was not being fully leveraged for its value. Rubicon recommended that the company use the strength of its reputation and name in the desktop marketplace to move boldly into the server-based market. This strategic approach to the pricing question is proactive and powerful.

Rubicon led the team in a comprehensive review of five key components of pricing and positioning, and how each influences the potential market for the server-based offerings:

Market environment
Customer needs & loyalty
Channel requirements and capabilities
Competitive environment
Segmenting the market and how to address those segments uniquely

This discussion was then developed into three pricing scenarios:

Per named-user
Per CPU
Per Server

The Results

The insight that turned the company around was a recognition that the market could be segmented neatly in two, with different pricing models. The sales force was able to focus on value selling, and they had the appropriate market offerings to meet competition. Sales of the new product are robust, with both volume and revenues on target.