It’s rare to find a tech company that’s completely confident in their pricing. Determining pricing is one of the key business functions that never gets the practice and attention it deserves. Business books abound about leadership, sales, marketing, branding. Yet revenue gives businesses life. And revenue results from price.
Think about insurance. Brokers don’t set pricing. Insurers do. The price is pre-determined. That piece of the game is set for everyone; a more or less level playing field. For those in the broker distribution channel, the pricing muscle is never flexed. I imagine this is the same within many verticals where tech companies spring up from founders who had long played in that space.
Pricing is as much art as it is science. Perhaps even a touch of magic. How we set pricing is determined by a number of factors. In starting to build a framework for pricing, it’s imperative to understand our tech’s place in the world.
At the highest level, your technology falls into one of two buckets: “NEED TO HAVE” or “NICE TO HAVE”. NEED TO HAVE technology is fundamental to business operations. Like glucose for our cells, an enterprise ‘needs’ this technology to deliver its product or service. NICE TO HAVE, on the other hand, is just that; a luxury. It is not essential. It may deliver high value, but it’s not essential.
Need to Have: Core Systems
Knowing where your technology falls on the NEED versus NICE framework is key to pricing. In the insurance broker distribution channel, BMS (Broker Management Systems) fall into the NEED category. It’s the same with PAS (Policy Administration Systems) in the insurer realm. In today’s world, it’s practically impossible to compete without these core systems. They’re NEED TO HAVE for brokers and insurers, respectively.
As an essential tool, NEED TO HAVE becomes an operating expense. We don’t talk about the ROI of internet access, computers, offices, desks, or phones. No. For all of these items, you talk about the cost.
NEED TO HAVE technology is viewed through a cost lens. It’s an expense. For buyers, it becomes a comparison game to competitive solutions. At the highest level, buyers are looking at a Functionality/Cost ratio or comparison: what do we get for what we pay. And, how does this compare to competitive solutions?
Functionality-to-Cost Ratio
Total Cost of Ownership (TCO) is the metric, not Return on Investment (ROI). Thinking from a cost lens means asking questions like, “Who costs more?”, “What are my upfront versus recurring fees?”, “What will this cost me every year?”, “Are there additional costs if my needs change or if I grow?”. Again, the conversation is cost focused.
The Functionality-to-Cost ratio is really an expression of how much useful functionality the buyer gets for every dollar spent. Framing this is not only cost, but relative functionality to competitive products.
Nice to Have: Tech Stack Layers
NICE TO HAVE, on the other hand, is a different game. Businesses can survive without NICE TO HAVE tech. But using it should give rise to a material lift in operations. It improves the buyer’s life by either increasing revenues, decreasing costs or (ideally) both, to the point where spending money on the tech is a compelling investment.
Which is another way to say that NICE TO HAVE tech is an ROI conversation. Buyers are not simply thinking, “I know my business needs this so I have to determine what functionality I need at what price”. No. Now the thought process is, “if I use this tech, how much more efficient or effective will my operation be?” In other words, how much more money will I be able to make or save? And so enters ROI.
As sellers, the challenge now is not simply price. Total cost of ownership is only one part of the pricing obligation. Now it’s the financial outcomes that your luxury software can provide. But there’s more. The cost of your NICE TO HAVE tech is now measured:
Against the cost of your buyer’s NEED TO HAVE tech (think tech stack implications);
Against the cost as it’s compared to other NICE TO HAVE direct competitors;
As an expenditure that needs to pay for itself i.e. ROI.
What this means is that NICE TO HAVE tech, while typically priced less than NEED TO HAVE solutions, face the challenge of justification. Now, however, the simple Functionality/Cost equation becomes one of ROI and either Cost Savings, Revenue Growth, or both:
Determining ROI
Of course, the onus on vendors now becomes proving any ROI claim. It must be accurate and repeatable to be truly believable.
Beyond the First Framework
Determining if you are a NEED to have system or a NICE to have application is a good start. But we’d still be pulling numbers out of a rabbit’s hat without some more frameworks.
Next up we’ll look at pricing frameworks and look at what the research says.
