Friday, June 8, 2007

Pricing in a market - Bumps, Rollers and Cheapos

I was reading Seth Godin's blog today, on bumps or price points within a market. I then though about how it affects the Enterprise Software market.

A funny thing that happens is that you come in with what you feel is a reasonable price for a product and you could be out of alignment with other solutions easily by a factor of 10. I.e. Vendor XYZ is selling a tool for $100,000, and finds itself up against Tool ABC at $10,000 and also Enterprise Suite HAL for $1,000,000 or more. And it isn't necessarily the cheapest or best tool that wins.

How can this happen?

Well, software is created in various ways. Engineers write code, designed by overall product architects to achieve business goals.

Cheap Tool
Sometimes, an engineer or a small group of independent people will write a small point solution product and then just release it onto the web. This becomes a low-end solution, when a few companies use these products to fulfil a business need, but in general these products need the customer to do most of the implementation, support and basically fund upgrades themselves. This forms the low end of the market (normally) because this software doesn't have a business that is actively selling it to support.

Mid-Range Tool
Above the low end tools are the mid-range solutions developed by large and small software houses, who support their products and usually actively develop them. They usually can also help customers implement the product, and can also sometimes get into the business of building business process around them.
These tools can be attractive because they are new disruptive technologies, niche players fitting custom needs, solutions accurately tailored to the problem, rather than systems designed to do everything or else just fit a price/benefit point good for the customer.

Rolls Royce
At the top end of the market, you get tools similar to mid-range solutions, but it is usually the Rolls Royce solution of that market. Usually these are long established tools, perhaps owned by Corporations who have acquired the original manufacturer, to own the best of breed solution and even put it into a suite or toolbox of tools.
These products usually have big lead in times for implementation, but the software company or its partners will do the whole implementation, it might even be a hosted solution that sits off site, and even the processes surrounding the product are managed by the vendor. The attractiveness of these tools is that they are well known, referenced, and are overall a safe choice for CIOs.

With this knowledge in place, you see that different kinds of customers will want a tool from a different part of the market. Some companies might not expect their staff to be able to use a command line tool. On the other hand, other companies will not want an extended on-site presence from the vendor.

In the end the Cost of Ownership of the products can be mapped out, and the customer might decide on that basis. Building a framework of infrastructure to get the cheapo tool to achieve the business need might cost much more than the tool.
Midrange tools might require an amount of staffing, but basically do enough to solve the problem.
Rolls Royce solutions might need only minor staffing, but they might have already priced themselves out of it.

1 comment:

Craig said...

cheers for this useful post!