Chris Mele is the managing partner of Software Pricing Partners.
“How many model runs do you plan on using this year for your artificial intelligence needs?” It’s a question a software salesperson might ask a prospective customer during a conversation about purchasing AI models for vehicle detection, license plate detection, facial recognition and dozens of other use cases. This hypothetical B2B software company uses a pricing structure where customers pay each time an AI model runs.
The prospect in this scenario doesn’t have a clear answer—understandably. Predicting the approximate number of model runs is tough. The prospect gives a vague answer, telling the salesperson that the number of model runs will depend on various factors. The salesperson tries to get the prospect to provide a ballpark, but the prospect grows increasingly uncomfortable with the possibility of being locked into a contract where they don’t know if they’ll be paying more than their actual usage (because they can’t accurately predict it). The deal crumbles.
This type of scenario, where a bad approach to pricing negatively impacts sales negotiations, is one many software salespeople regularly experience. B2B software company executives tend to get a lot wrong about pricing. A core mistake? They view pricing as a product attribute when pricing is really a sales enablement tool. The job of pricing is to enable a simple sales dialogue where prospects can quickly understand what they’re paying for, how much they’re paying for it and why the cost is worth it. Unfortunately, when deals drag along or don’t close, software salespeople tend to get the brunt of the blame. But the reality is that their employers, the software companies, set them up to fail by giving them an incomplete playbook.
If pricing doesn’t make selling a product easier, then it’s really just an academic exercise in futility.
Bad Pricing Strategies Cause Challenges For Sales Teams
Bad pricing negatively impacts all of a software company’s departments, including marketing, finance and sales. But for the purpose of this article, I’ll focus on the sales department.
Often, instead of taking the time to strategically identify the right packaging and licensing structures, software executives, in a frenzy to get ahead in the market, just copy what their competitors are doing pricing-wise. They end up with a pricing approach that just doesn’t make sense for their particular product, and their sales teams are left to deal with the ramifications of those decisions.
A software company’s pricing policy can make the sales team’s job easier or harder. A convoluted pricing strategy puts salespeople in the difficult position of trying to defend and explain that price, which increases the likelihood of prospects feeling alienated during the process—and bailing. In fact, according to Gartner’s report, 2023 Global Software Buying Trends, a misalignment in pricing expectations is the top reason (41%) prospects remove a software provider from a shortlist of potential vendors. Other reasons include confusing or conflicting information from software providers (36%) and low-quality sales presentations or pitches (36%). Aggressive sales tactics (35%) accounted for another key reason.
Returning to the hypothetical example above, imagine that after dropping the AI software company with the complex sales approach, the prospect finds a competitor that merely charges them by the number of AI models they need access to in a year. This competitor’s leaders have done their homework; they understand their product’s customer usage and have factored it into their per-model pricing. Thanks to the easy-to-understand pricing approach, the prospect quickly signs on and might stay with that provider for many years.
Simplicity Wins The Day
Every time software executives add complexity to pricing, they pour molasses into the sales cycle, increasing the likelihood of extended sales cycles and, worse, deals not closing. When executives are multiple layers removed from their sales departments, they don’t have the complete picture of what’s happening on the ground between their salespeople and prospects—and often make pricing decisions that are harder to change later. In fact, many times, executives simply fail to properly understand the groupings of their customers and how those customers use their software. In turn, they don’t package the software correctly, either over-complicating it or over-simplifying it.
When software gets packaged poorly, it ripples into product engineering and sales. Engineers will have to weave decisions, such as feature limitations spurred by overly complicated usage constraints, into the product’s code. Over time, these engineering decisions become harder to undo, creating a set of self-imposed constraints. Salespeople are left to deal with the mess. They often adjust the pricing to accommodate special use cases. For instance, going back to the hypothetical example above, if a customer lives in a city with 10 times the amount of cars per capita as the company’s customers, the salesperson might decide to discount the product more heavily because of that odd-ball characteristic. After all, salespeople feel pressured to hit their numbers—they need to make a living.
But special discounts can jeopardize software providers’ long-term financial health because they simply won’t be getting paid the true value of their products. Prospects talk, and when one realizes that someone with a similar use case got offered a much better deal, it’ll negatively paint their impression of the company. Even if prospects become customers, discounts set up subsequent renewal challenges because these customers will likely want to secure additional discounts down the road.
Pricing shapes the dialogue salespeople have with prospects. Simplicity in pricing leads to simplicity in sales conversations. The Gartner study I referenced earlier also found that 47% of businesses took three to six months “to finalize a software purchase” in 2022 and that 48% considered four to six software providers before making a final decision. Given the time prospects take to finalize a purchase and the number of potential providers they engage with, it’s all the more important for software companies to simplify their sales approaches. In a sea of complex pricing, the company that steers the ship with the most streamlined sales process has the advantage.
Sales Strategies Should Align With Sales Teams’ Strengths
I’ve previously written about steps software companies can take to build frictionless, transparent pricing processes. Executives should work hand-in-hand with salespeople as they go through the steps of building new pricing strategies. As part of that collaboration, executives should examine quantitative and qualitative data to make the right pricing decisions.
Quantitatively, executives should develop a pricing approach that addresses all the various types of deal configurations by producing a reasonable (and rational) net price that is consistent with the value being delivered. That scheduled net price can be used to assess each salesperson’s performance. Salespeople should be recognized and rewarded for how closely they sell to the company’s scheduled net prices over time.
Qualitatively, executives should listen to recorded or live sales calls to see how pricing is playing out across sales dialogues. By listening to these calls, executives can determine to what extent their company’s issue has to do with pricing strategy and to what extent it has to do with sales skills. From there, executives can create and implement the proper pricing structure and policy for their company and provide the appropriate training to their salespeople, ultimately setting up everyone involved—the executive team, salespeople, other employees, prospects and existing customers—for success.
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