MITPS-PGP19 Meeting

5
Agenda:
1. Who wants to price an IT Service ?
2. Cost-Based Pricing Vs Value-Based Pricing
3. How to price an IT Product

How would you like to price these ?

(10
m)
1. Apply pricing ideas to the solution Wi-Fi based Classroom

MCQ dispenser to create an offering that you think will

maximize value
2. Queue-Breaker: Hospitals have patients who queue-up long
hours for consultations/investigations. Queue-Breaker has a
simple, smart-phone based server that sends SMS to patients or
bystanders indicating the next 2- or 3- people in turn. Build an
offering suitably.
3. A bus passenger sends an SMS to a fixed number (which
encodes the bus registration number) for a ticket of a specific
denomination. Debit is made from passengers phone talktime,
and transaction is acknowledged by SMS to both passenger and
conductor. Build an offering suitably.

How would you price a Managed

Service
A Managed Service usually corresponds to IT Body Shops
Firms that either lend hands for IT Infrastructure needs or handle remotely

A Monitoring Only Service

A Network-based monitoring and alerting services
Maybe able to monitor network, apply SW patches, do Backup for flat fee
Account Mining: Additional services may be identified as monitoring occurs

A Per Device Service

Eg. $69 per desktop, $299 per server, $29 per printer
Benefits to organization are not uniform/proportional from each device supported

A Per User Service

Charge based on number of Users, and supports all their devices used at all
locations

Managed Service Providers (Contd..)

A Tiered Service
Very popular among MSPs
A bundled package of services with each bundle having
increasing features
E.g. Bronze Package: basic phone-in and NW monitoring
based support
Silver Package: Site visits, Gold Package: Emergency AfterHours support
Often called a Service Portfolio in services management lingo

An All You Can Eat Service Provision

Helps an organization realistically budget their IT costs
24/7/365 support

What concepts can we learn in SW

pricing ?
Cost-based pricing of technology
How can you quote a price unless you incur the costs ?
CoCoMO and Function Point Analysis (or in Agile, Story Point analysis)

The defects of cost-based pricing

Technology developers may be saddled with lower returns
Customer relationships may be greatly threatened (eg. MIPS-based pricing)
CBP can be undercut by competitors, esp. in technology, and is purely tactical

Enter Value-Based Pricing

VBP depends on the economic value that client gets

Developer considers Willingness-to-Pay and likely reputational harm
Rule-of-thumb: VBP prices are above or equal to (true) cost-plus
Long-term, strategic, in nature

VBP doesnt come about overnight

SW Developers Organization needs to develop pricing capital
It may have to stop looking at the accounting books or balance sheet
VBP may help capture unique value from each market segment
CBP is further discredited because volume is impacted by cost
And in turn impacts the long-run cost
Eg: overprice in to recover margins, but lose volumes in the process

Back-ordered customers are a good illustration of why VBP is in !

Genesis of CBP: GAAP and its distinction between labour and capital
Total Cost of Ownership: clients transaction cost savings inform VBP

So, is CBP out of the reckoning

already ?
Traditional CBP methods Vs Value Chain Activity-Based
Costing
Traditional methods unusually tax high-volume or lesscomplex products
ABC has support from the strategic cost leadership community

Porters contribution to CBPs chokehold:

Cost Leadership and Differentiation are key to obtaining
competitive edge
The problem is: Differentiation based strategy will need
market research
Low cost is a differentiator only if price differences are
overwhelming

Some common approaches to SW

pricing..
Flat Pricing:

Fixed Price for unlimited, non-pirated, use

Typical to consumer software
Subsidises those who see greater value, yet drives away those who see less
Only possible segmentation volume discounts or preferred party discounts
Flat price could well be a monthly lease price which helps tryout
customers

Tiered Pricing:

Increasing number of features, increased prices

In-Product or bundled SM Services could be an example of a tier
Adobe PDF Reader with base version and comment-or-sign upgrade
IBM Mainframes with successively newer set of processors

SW pricing approaches (Contd.)

Moores-Law Hobbler MIPS pricing:

Some say it is closer to VBP, some say it is plain cost/cost-plus recovery

Even ISVs for IBMs mainframe SW followed the MIPS pricing method !
$2000/MIPS: But 1980 -> 2000, 10 MIPS -> 2000 MIPS means cost GR 30%
Customers militated against being charged merely for HW they possess
Workload License Charges, where IBM creates a logical partition and charges

Per-User, Seat-based and High-Water Mark (Floating) licenses

Seat-based is particularly odd, since on a NW a user could be anywhere

Usage-based Pricing or ASP Licenses:

Subscription Model: charged Per transaction or for time-in-use
Total Cost of Ownership, GTM time is considerably reduced

So, what are the Basics of true

VBP ?
Principle #1: customers value
requirements.determine the level of product
(development) costs that the company is willing to
incur
A. Perceived benefits, and B. perception of price paid
are separate
Cross-subsidies are a way to absorb VBPs sometimes
adverse costs
Cross-subsidization (or Shared Economies) via:
Differential pricing across segments: shared costs, (some)
shared benefits

Crux of VBP: find Pre-purchase

characteristics
High Search Costs:
Not willing to spend time searching for product information
May associate quality with high prices, or buy at random

Low reservation price:

No pressing need, will wait for the right time and price

Segmentation via Special Transaction Costs

Pre-sales
Shipping and Handling
Installation
Switching Cost

VBP pricing strategies (vis--vis

Objectives)
Penetration pricing strategies:
Market of customers who are price-sensitive and have a low reservation
price
Aim is to drive higher sales volume
Low-price Leader
Reasonable features, low-price in mature market (ironic example: StarOffice)
Experience-Curve pricing:
Price below cost to drive volumes, especially since incremental costs are 0
Bundling of software:
An example of Product-Line pricing value for the Product Line is maximised
Also creates an important barrier-to-entry and, if possible, switching cost

VBP pricing strategies (Contd.)

Skim-Pricing:
No time to check all features in detail, but broadly know theyll
work
Innovators will take Skim-Priced products, because of
confidence in utilising
Price-Signaling:
Used in segment differential pricing, brand signals to buyer
the quality
Reference Pricing:
No innovators like Price-Signaling: a well-known alternative is
priced against
Prestige Pricing:

Hybrid Models in Pricing of SW

One may combine Penetration and Skim Pricing to produce hybrids
Cost-Plus: SW vendors who develop 1st-time systems for large clients
Also face unquantified risks
Special Transaction costs, eg. tendering, offset-regulations etc. are high

Since custom-built elements are likely to bloat the cost (and profits)
Clients insist on COTS components in at least the non-custom elements

Complementary Pricing:
Is when consumable products or services are offered as additional
The base product is sold at a low price s.t. resistance to purchase is minimized
ASP/SaaS (even MSP) can be considered as a case of Complementary Pricing

Hybrid Pricing (Contd.)

MS-Windows was a complementary product
to the PC computer sold by many hardware makers

Price Lining:
Higher search costs of one group Vs low reservation prices of
another group
Sometimes the software may have identical functionality

Periodic Discounting:
Higher search costs of Innovators employed to price higher
initially
Gradual cost reduction occurs as product matures
Relatively long technology or market lifecycles are necessary

Buzzword of the day

Outcome-based Pricing
Outcomes eg. lower IT costs, higher IT utilization, IT Ops
improvement
Normally pricing is based on volume of services
provided
Headcount, number of servers managed, no. of tickets closed

Outcome-based pricing may be tied to business results

Recall: Agile Programming required developers with buy-in for
outcomes

Difficulty is establishing tracing cause and effect will

ITS Cos. bite ?

Buzzword (Contd.)
ITS Cos. ask deal size to be $10M or above for outcomebased pricing
Has a more futuristic component called revenue-sharing
model
Where cause-effect is even harder to establish
The IT Service has to be the prime reason of the revenue
increase
Even if in measurable combination, e.g. an IVR
complementing keypad Ops

Further modification of outcome-based model: Gainsharing model

Vendor runs IT Ops, plus promises to find savings that (if

Fuzzword of the Day

Price Gouging..