Many software companies develop pricing strategies — and, by extension, their business models — through basic cost analysis and sometimes with the help of third party research. All too often, final decisions are based on intuition and educated guesses.
We think there’s a better way — a path where product leaders are in full control of pricing decisions and can set profit targets based on a structured framework with a repeatable methodology.
Taking Control of Software Profitability
Product leaders must understand what they control and how they are constrained. Once these boundaries are understood, they can take action by exerting control and managing constraints.
That’s why we’ve developed The Principles of Software Profitability:
- Successful software starts with a deep understanding of what customers value.
- Customer value must be precisely aligned with how customers pay to receive that value.
- Every software business model decision directly impacts licensing, compliance and architecture.
- The most successful software products have a profit engine at their core. A well-tuned profit engine creates multiple revenue opportunities over the life of the product.
- Pricing is a language for customer communication. It must be clear, well-structured, and based on policies that maximize profit.
- Communicating customer ROI is the key to influencing buying decisions.
Don’t Leave Money on the Table
Many software companies are leaving money on the table due to misalignment between customer value and price — customers are paying less than the value of the product.
Many software companies also leave money on the table due to a lack of customer segmentation. Specifically, populations of customers that are willing to pay more are paying the same price as cost-sensitive customers.
Business model choices significantly impact licensing and compliance, which directly affects software architecture. Further, changing business models generates disproportionate costs that product managers must consider for new and existing products.
Learn More about Software Profitability and the Profit Engine Framework
While there are many great resources for understanding and documenting a business model, few give deep insight on maximizing software product profitability. To go deeper on this subject, I recommend reading more about the Profit Engine Framework and consider our Product Management Accelerator training program, which puts software profitability at the center of the learning experience.