Gartner Tech Growth & Innovation Conference

12 – 13 June 2019 / London, UK

Using Pricing Models to

Differentiate and Deflect
Discount Requests
Rob Addy

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Why Are We Here Today?

• Combining pricing model and portfolio design is bad. Pricing should

help prospects to pay you what you want without discounting. Some
buyers hate risk. Some hate waste. Some have cash they must use
or lose. This session covers pricing model design, composite
consumption index creation and much more.

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By 2025, 40% of software that is
currently priced by named user will
transition to alternative
pricing mechanisms

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Key Issues

1. What should we be using our pricing models for?

2. What are the most common mistakes that others make?
3. What are the foundational design principles we need to follow?
4. What levers can we use? i.e., What are the constituent components
of a “good” pricing model?
5. How can we put this all into practice?

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The Primary Measure of a Pricing
Model’s effectiveness:

Discount Avoidance*

*Unless Discounting Helps to Improve Margins (And Then It’s Tolerable)

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Remember the Last Time You
Bought a New Car?

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If You Only Have One Pricing Model
And the Customer Doesn’t Like the
Price Point, You Only Have
Two Options …
Discount or Walk Away!

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Objectives of the Pricing Model(s)

• Reduce and/or deflect discounting requests

• Eliminate any glass ceilings on our revenue potential
• Enable customers to proceed with a purchase in a way that works for
them and us i.e., to reduce barriers to purchase
• Allow us to monetize our offering in such a way that our clients
actually want to pay us more
• Drive customer consumption profiles that maximize our margins
• Act as a differentiation mechanism and to help us to beat our rivals

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So How Can We Use Pricing Models as
a Differentiation Mechanism?

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Modes of Provider Differentiation

Believability
• Technical
• Operational
• Commercial
• Cultural
• Messaging
Quirkiness

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 Technical Operational Commercial Cultural Messaging Believability Quirkiness

Competence/ Customer Price Altruism Ability to Customer Swimming

Ability to deliver service levels articulate value references against the tide

Backward Scale Willingness to Social Consistency Quantified Swimming in a

compatibility negotiate responsibility evidence / Proof different sea all
commitments Reach / Global Slickness / Style points together
presence Contractual Environmentally Over substance
Architectural flexibility friendly credentials Ability to drill down Gimmicks and
elegance Agility Familiarity / into the detail goofiness
Variety of Pricing Aggressiveness Penetration and
Level of Degree of passivity Models Pervasiveness Reputation
investment in R&D / proactivity Heritage and
Ease of doing history Connections with Honesty /
Innovation / Specialists versus business critical Openness
Leader or laggard? generalists Thought constituencies
Deal ethics leadership Endorsements
Quality / Reliability Gaff avoidance
Pricing Staff morale Executive charm /
Implementation transparency charisma
prowess
Sales approach /
style

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Remembering That We Do Not Have to Be
Different and/or Better in Order to Differentiate!
The Muller-Lyer illusion Ebbinghaus illusion or
Titchener circles

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Pricing Model Design Is Nontrivial

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Ten Common Pricing Model Mistakes

1. Only having one pricing model 6. Failure to monetize the capability fully
2. Combining pricing model design and 7. Models that don’t work for all client
portfolio design as a single effort. sizes, use cases or usage profiles
3. Black box random number generators 8. Poor or nonexistent sales enablement
i.e., An inability to explain how the related to pricing and being unable to
price is calculated or why it’s at the explain/defend the rationale behind it
level it is at 9. Declining margin scenarios where the
4. Disconnect between the price provider is literally selling themselves
requested and the perceived value out of business
5. Basing pricing on an arbitrary 10.Treating pricing as a stand-alone issue
characteristic or attribute that can be without portfolio design, value
counted but doesn’t count articulation and product capability

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So There Are Lots of Potential
Problems …
What Guiding Principles Should
We Use to Help Us Avoid Them?

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We Must Be Mindful of the 3 “Types” of Buyers

Buyers with discretionary

Waste Averse Risk Averse
spend “available”

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The 5 Foundational Design Principles of Pricing

1. If you only have one pricing model it is always sub-optimal

2. Pricing needs to align with the value story and the cost of delivery
3. Enabling our customers to pay us what we want them to pay us in a
way that works for them is key
4. All pricing models should be created equal — We have no
favourites
5. Minimize model complexity without sacrificing any of the other
principles — If we can explain it to a 12 year old in less than 3
minutes then it’s simple enough
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So We Know Where We’re Heading …
How Do We Get There?

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You Have Lots of Different Levers to Pull …

Contract What constitutes

term consumption

Price Consumption
predictability calculation
mechanism/
Minimum sampling rate
monthly Upfront balloon
retainer level payment

Payment Payment
schedule terms
Uplifts and
Cost capping
discounts
threshold
Pricing step
Ability to switch increment levels
pricing plans and trigger points

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… And Multiple Baseline Model Options

True
Capex- Variable
Opex
Capped
Hybrid
Variable Offset
Variable

Fixed
Monthly

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What Is a Composite Consumption Index?
And Why Does It Matter?
• A mechanism whereby the level of consumption is calculated using a
variety of factors that are (ideally) linked to the level of value derived
by the customer and the associated costs of delivery incurred by the
provider
• It should ensure that margins are protected and that the capability is
monetized without placing an artificial ceiling on earnings.
• It should minimize commercial risk and maximize the revenue
opportunity while removing upfront financial barriers to adoption
and/or usage.

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But What Does All That
Really Mean?

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Worked Example — The SaaS Analytics Provider

A “Platform” Per User Per Month Pricing

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Worked Example — The SaaS Analytics Provider
They Choose the Single Worst Pricing Model Possible

• Number of users doesn’t materially • The only person that is happy about any
increase of this is the AWS/Rackspace/Microsoft
• As they start using it, they like it; and Azure rep…
they use it even more …
• Comms costs increase. Storage costs
increase. Compute costs increase.
• Revenue are flat. Margins decline.

AWS: Amazon Web Services

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Worked Example — The SaaS Analytics Provider
So what Should They Have Done?
The analytics value story … Their cost base …
• More questions “answered” More users = Negligible impact
• Better “answers” More data = More storage +
– More data/More sources comms
– More models applied against the Federated sources = More comms
same problem (false positive
More models = Negligible impact
reduction etc.)
Model complexity = More compute
• Faster “answers”
– As close to “real time” as possible More model runs = More compute

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 Number of Volume Frequency of
Algorithms Of Data Algorithm Runs

Specialist capabilities/Unproven Tier 4 custom-made customer defined

“bleeding edge” functionality service model

Feature rich end-to-end solution

augmented with next generation Solution functionality enhanced and
capabilities that enables customers extended with value added services,

SERVICE VALUE
to grow while transitioning from their constituency specific elements, routine
Tier 3 activities, contextual proactive
current state-of-the-union processes
to a state-of-the-art model at a pace interventions, penalty backed performance
that suits them. guarantees and content streams.

Fully functional solution with core Extended service capabilities with

capabilities required to compete with improved security options and
Tier 2 enhanced performance
Type B and C organizations

“Bare bones”/“No frills” tool that gets Scalable robust solution delivered on
them up and running and into the game Tier 1 enterprise grade infrastructure

CUSTOMER INVESTMENT

Tier Multiplier: 1 1.2 1.5 3

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 Great!
We Have a Plan ...
We Have Tools ...
What Next?

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Putting This Into Practice …

• Understand your value story and your cost base

• Identify pricing model parameters and determine if telemetry exists to
capture them
• Run the numbers.
– i.e., Check what the historic consumption profiles of your customers would
have caused them to be charged
• Use the tier multipliers to refine and hone the price calculated
– Remembering to keep the tier-to-tier ratios in line
• Develop pricing model story lines and sales enablement content
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Takeaways

• Pricing is a very powerful tool that most providers fail to leverage.

• Having only one pricing model is wrong. You need 2 to 5 models to
allow your customers to select the one that works for them best.
• Aligning the value story with the cost base with the pricing model is
critical. Misalignment always causes problems and pain.

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Recommended Gartner Research

 How Tech CEOs Should Select the Right Software Pricing Model
Jeff Chamberlain and Eric Trenk (G00379015)
 Market Insight: Key Pricing Principles for Tech CEOs — Choose the
Right Model
Carrie Cowan (G00370072)
 How Freemium Can Work — 5 Case Studies
Bill Ray and Jeff Chamberlain (G00377134)
 Consumption-Based Pricing Is Emerging From Leading SaaS Providers,
but Beware
Jo Liversidge and Stephen White (G00379668)
 Choose the Right API Monetization and Pricing Model
Mark O’Neill, Paolo Malinverno and Others (G00382797)
For information, please contact your Gartner representative.
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