Where Does Product Management Belong in the Organization?

ABetter Reference Process Means Better Launches

Effective Sales Presentations: Advancing the Sales Cycle

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16 035 N. 8 0 th Street, Suite F Inside this issue: Scottsdale, AZ 85260 Nov/Dec 2005 Volume 3 Issue 5 President and CEO Craig Stull Pragmatic Marketing, Inc. Managing Editor 4 Where Does Product Management Kristyn Benmoussa Belong in the Organization? Contributing Writers Steve Johnson Product Management’s placement in an organization Amy Perkel is an indicator of the CEO’s understanding of its Daniel Shefer potential. In an ideal world, Product Management has a Stephanie Tilton seat at the table with the executives—positioned to play a critical role in a company’s overall success in the marketplace. Interested in contributing an article? Email submissions to [email protected] 8 A Better Reference Process Means Better Launches No part of this publication may be reproduced, stored in any retrieval system, or transmitted, in any form Good references are critical or by any means, electronic, mechanical photocopying, to a successful launch. Proper recording or otherwise, without the prior written permission of the publisher. planning and sufficient lead time can result in publicity that productmarketing.com™ is available free of charge to qualified subscribers. For subscription will wow even the toughest or back issues call (480) 515-1411; or visit executives—and launch your www.pragmaticmarketing.com/subscribe/ product into the spotlight. To be removed from the mail list, visit www.pragmaticmarketing.com/unsubscribe/ or send an email to [email protected]

For advertising rates, call (480) 515-1411. 16 Effective Sales Presentations: Advancing the Sales Cycle Other product and/or company names mentioned in this journal may be trademarks or registered trademarks of their respective companies and Sales presentation effectiveness hinges are the sole property of their respective owners. on the value of the message and the quality productmarketing.com™, a Pragmatic Marketing, Inc. of the content. Read proven methods for publication, shall not be liable regardless of the cause, ensuring your sales team is armed with the for any errors, inaccuracies, omissions, or other defects in, or untimeliness or unauthenticity of, the information content it needs to win deals. contained within this magazine. Pragmatic Marketing makes no representations or warranties as to the results obtained from the use of this information. Pragmatic Marketing does not warranty or guarantee the results 24 Pricing for Software Product Managers obtained from the use of this information and shall not be liable for any third-party claims or losses of any Pricing has far-reaching effects beyond kind, including lost profits, and punitive damages. the cost of the product. productmarketing.com is a trademark Here is the ultimate guide of Pragmatic Marketing, Inc. to understanding pricing Printed in the U.S.A. and how critical it is to All rights reserved. product managers. About Pragmatic Marketing, Inc. Pragmatic Marketing, Inc. was formed in 1993 to provide product marketing training and consulting to technology firms by focusing on strategic, market-driven techniques. Pragmatic’s training courses emphasize business-oriented definition of market problems, resulting in reduced risk and faster product delivery and adoption. Since its inception, Pragmatic Marketing has successfully graduated over 30,000 product managers and marketing professionals. For more information, visit www.PragmaticMarketing.com or call (480) 515-1411. productmarketing.com • November/December 2005 • 3 Where Does Product Management Belong in the

Organization?l By Steve Johnson

4 • productmarketing.com • November/December 2005 Product Management is “messenger of the market,” delivering market and product information to the departments that need facts to make decisions. That is why it is not surprising that 23% of product managers report directly to the CEO, acting as his or her representative at the product level. Yet many organizations subordinate the job under one of the other VPs: • 13% are in Development or Engineering • 25% are in the marketing department • 8% are in a sales department In effect, subordinating Product Management relegates it to a support role for the primary goal of the department. Vice presidents and department heads have a natural inclination to support their primary department. The VP of Development has a primary responsibility of delivering products, so he tends to use product managers as project managers and Development gofers. Product Management soon evolves into a group of Gantt chart experts—project managers. The VP of Marketing owns collateral, sales tools, lead generation, and awareness programs. So this VP uses product managers as content providers to Marketing Communications. And the VP of Sales, focused on new sales revenue, uses product managers to achieve that goal: product managers become “demo boys and demo girls” who support sales people one deal at a time. As our companies grow larger and become more mature, the company president needs someone thinking about the product we ought to be offering, new markets we could serve. The company president needs someone thinking about the future of the product. We already have people focused on product, promotion and place. Who—if anyone—is identifying market problems for the next round of products? Who is the VP of market problems? And what results does the president want from Product Management?

productmarketing.com • November/December 2005 • 5 Where Does Product Management Belong in the Organization?

Increasingly we see companies creating a small company, all of these functions VP of Product Management, a department are performed by one person. In large at the same level in the company as the companies, they are performed by four other major departments. This VP focuses departments. But they are all part of the product management group on the product management. business of the product. The product Yet when we hire a new product management group interviews existing manager, one of two things happen and potential customers, articulates and quickly: the product manager imposes quantifies market problems in the business some well-needed discipline, helps the case and market requirements documents, company run like a business and becomes defines standard procedures for product a respected member of the product team. delivery and launch, supports the creation Or the product manager becomes the of collateral and sales tools by Marketing source of the best demo and is rarely Communications and trains the sales teams effective in any other role. on the market and product. Product Management looks at the needs of the Product Management’s reporting structure entire business and the entire market. corresponds to the results the company Product managers should never be can expect from Product Management. In involved with one customer or one Development, product managers shepherd salesperson. the development projects; in Marketing, they provide technical content; in Sales, Recognizing that existing and future they become demo boys and girls. products need different levels of attention, some companies split the product If you want better products in the future, management job into smaller bits: one if you want a messenger for the market, group is responsible for next year’s Product Management should have a seat products while another group provides at the senior executive table; you need sales and marketing support for existing a VP of Product Management. products. These companies often add a product marketing component to the marketing communications effort, supporting them with market information and product content. As we grow ever larger, the product marketing role expands further: we still need a group defining our go-to-market strategy and providing content to Marketing Communications, but now we also need more marketing assistance in the field. So field marketing is born: product marketing people in the sales regions create specific programs for all of the sales people in a given geographic area. As companies grow, the product management role entails three or four functions: product strategy, technical product management, product marketing and field marketing. It is a big job. In a

6 • productmarketing.com • November/December 2005 Why we need to evolve from ST:TOS to ST:TNG

I have found that the key to success in to make a quick decision. As we saw in man, as Spock rarely did. Beverly Crusher, technology companies is an understanding Star Trek IV (the one with the whales), in the marketing role, is a good doctor, as of Star Trek. Most engineers, developers, Bones implored Spock to make a guess. was McCoy, but she also understands the and technical people are familiar with Spock: “Guessing is not in my nature.” business of the starship, can and does serve these characters. Perhaps the Star Trek Yet in many cases, a development “guess” as an executive officer with understanding characters are most familiar because we is adequate to make decisions. of all roles, and uses scientific metrics to work with them every day. The characters evaluate the health of the crew. Unfortunately, sales people are often like of Star Trek give us the typical personas Captain Kirk: action without thought, In “Relics” (Episode #130, Season 6) Scotty in a technology company. asking for the impossible and frequently has survived for three quarters of a century If you were not a fan of Star Trek and violating the prime directive. Meanwhile, by keeping himself suspended in molecular need to get acquainted quickly, go rent Dr. Leonard “Bones” McCoy is like many limbo in the ship’s transporter system. the movies numbered II, IV, and VI. If marketing people: emotion without logic, When he and Geordi La Forge attempt you never watched ST:TNG, you'll also frequently complaining about what they to work together, Scotty listens in horror need to get Star Trek: First Contact or aren’t: “Damn it, Jim. I’m a doctor, not a as Geordi delivers an accurate assessment Star Trek: Insurrection. Now you're bricklayer.” Thankfully, we have Scotty as of the situation to Captain Picard and reasonably up-to-speed on both series. a stand-in for our sales engineers or field Commander Riker. With Star Trek fresh in your head, consultants. Scotty initially tells Kirk that SCOTT: (Shocked) “Ye didna tell consider your company. whatever he wants is impossible and him how long it was really going fifteen minutes later, says, “Okay, you’ve to take you?” Is your company The Original got warp drive.” GEORDI: (irritated) “Of course I did.” Series or The Next Generation? Where is the president in all of this? Of course, everyone can equate Spock Back at Starfleet, without a clue of what SCOTT: “Oh... Laddie. You’ve got a with the typical developer: quite logical is really happening in the field. Alas, lot to learn if you want them to without emotion, using facts and reason in many companies, the sales people think of you as a miracle worker.” * to draw conclusions. Spock is willing to are running the show; the VP of Sales spend hours on a problem despite pressure is really the COO. Here is the difference: Picard can be trusted with accurate information while As our company grows, we need to Kirk cannot. Picard never makes promises evolve to be more like Star Trek: that his crew cannot keep while Kirk The Next Generation. Here we have frequently does. And the crew knows it… Captain Picard, acting as our president; in both cases. The “old school” acts more Commander Riker is our sales people. on instinct and hope while the next Data, in the development role, continues generation acts on procedure and to use logic, as Spock did, but attempts knowledge. to understand the human elements of Is your company like the Next Generation or stuck in the Original Series?

Steve Johnson is an expert in technology product management. He works for Pragmatic Marketing® as an instructor for the top-rated courses Practical Product Management® and Requirements That Work™ as well as onsite courses. Contact Steve at [email protected]

*source: http://www.twiztv.com/scripts/nextgeneration/season6/tng-604.txt

productmarketing.com • November/December 2005 • 7 A Better Reference Process The Director of Public Relations (PR) has just finished informing the executive management team that there is no way this launch will be a success without customer references. He has fewer than six reporters who want to speak with customers about the new features. The Director of Industry Analyst Relations (IAR), attending the meeting as well, chimes in that there are four industry Define customer requirements analysts who want to speak with customers. Even the normally-sedate Director It is important to know precisely of Investor Relations (IR) is expressing frustration that there are no customers how you want customers to assist you with your launch so that you available to speak with stock analysts about the merits of the new features can clearly communicate the request touted on the past three earnings announcement calls. to customers. Your customer likely needs approval from his manager These people, whose job it is And then there is the customer and his corporate communications to influence the company’s key reference manager who told the group. Your communication should influencers—the press, industry beta team manager that all of the take into consideration the customer’s analysts, and stock analysts—do customers in the beta program have ultimate approvers. Launch activities not have what they need to be policies against public reference are straightforward and include: successful. They need customers activities. “Why didn’t you follow up to speak with these key influencers with the customers I recommended— • Quotes in a press release to validate the product’s claims so the ones we know will provide a • Quotes for general marketing that the company will 1.) get “ink” quote and speak with the media?” purposes such as web, collateral, on the new product in target This is a not-so-uncommon scenario, presentations publications, 2.) have industry with fingers pointing in every direction analysts recommend the products • Interviews with media, industry except inward. It is painful for to the target market, and 3.) have analysts, and stock analysts everyone. sell-side stock analysts recommend the company’s stock, and for the Long before the launch, the launch buy-side stock analysts to buy it. team must determine: Who is to blame for the shortfall • How many customers are needed in customers willing to participate? to support a launch “Not me,” according to the beta manager. He sent the product • A starting point marketing manger a spreadsheet • What it takes to secure customer of customers who said they would be participation in order to pull off an a reference. The product marketing effective, customer-focused launch manager sent it to the customer reference manager. “No one followed up with the customers,” the product marketing manager continues. The product marketing manager claims he did his job: “I told the customer reference manager to follow up with numerous customers who are really excited about the new feature set.”

8 • productmarketing.com • November/December 2005 Means Better Launches By Amy Perkel

How many participants Let’s assume two. Given these above, a company would need do you need? circumstances, the key influencers seven customers willing to speak will want to speak with 15 customers. to the merits of the new product’s Do you have two references? Or 18? features—assuming the customer is It is unrealistic to expect a customer How many do you need? The first step willing to speak with two interviewers to do more than two interviews in determining how many customers of any sort. It is important for the PR, with any combination of reporters you need for launch support is to ask IA, and IR managers to recognize that or analysts, owing to people’s busy the PR, IAR, and IR managers how there is a limited pool of available schedules. And it is not uncommon many people they will be briefing. participants, so they need to prioritize for a customer to participate in only The assumption is that all who will be their analysts and provide fewer one interview. Based on the scenario briefed will want to speak with one references than they requested. customer, if not two or more. The PR manager might brief five reporters, the IAR manager might have three analysts who will want to speak with customers, Launch-related customer interviews needed to satisfy key influencers and the IR manager two stock analysts who will want to speak with customers. Generally, one customer interview Reference requests No. of key influencers No. of references No. of customer is sufficient for a reporter; however, per launch needed per influencer interviews needed industry and stock analysts prefer to speak with more than one customer. Media 3 - 6 1 3 - 6

Industry Analysts 2 - 4 1 - 2 2 - 8

Stock Analysts 2 - 3 1 - 2 2 - 6

Totals 7 - 13 3 - 5 7 - 20

Note: [1] This chart is a guide and may vary depending on number of influencers your company engages; [2] assumes customers likely to assist with one and no more than two interviews of any combination.

productmarketing.com • November/December 2005 • 9 A Better Reference Process Means Better Launches

Allow ample time major retailers—with very strong Even those in the 30% pool who do brands—protect their brand very participate may be too busy to assist, Recognize that getting customers to closely. It may still be possible for as noted above. I would put this number publicly endorse your products is a customers at these companies to speak at 15%, leaving approximately 15% of multi-touch process that takes weeks, with industry or stock analysts since your beta participant pool who may be if not months. It is critical to factor interview notes are not published, so able to assist. If there are 100 people in enough time for the customer it is worthwhile to ask. But in terms of in your beta program, you are in good reference manager to secure customers a public endorsement, look elsewhere. shape. However, if you have a smaller participating in the launch. Customers beta program of 50 people, only 7.5 There are a number of companies able are as busy as you and often their people are likely to assist! objectives are not the same as yours. to assist with public-facing reference activities, but have policies against Customer reference people know these Remember that your customer’s speaking about a product that is not ratios and have experienced them first manager, who needs to sign off, production; i.e., they do not want hand but it is hard for many people has a busy schedule as well. And your to risk endorsing a product that has involved in the launch process such customer’s PR manager has her own not been fully implemented, or has as PR, Product Marketing, the Beta objectives that are not your customer’s not been in production for a certain team, and certainly executives, to and certainly not yours. For all of these period of time. Even if such a corporate recognize this. reasons, allow ample time for getting policy is not in place, some individuals Determining the number of customers approvals. A two-week approval period are reticent to endorse a product until you want in the beta program who is very aggressive. Most customers it is implemented. Conservatively, will support you in the launch is a cannot come back with approval so that cuts another 10% from your straightforward mathematical equation. quickly. Allow at least one month beta program, leaving 60% of the If you need seven customers to speak or a full quarter. pool of beta participants who can with your key influencers, and you possibly participate. The reference program know approximately 15% of the people The funnel continues to narrow. A in your beta program will be willing The customer reference business is a certain percentage of people will not and able to assist, then you need nearly numbers game. For many companies, be pleased with the features in your 50 people in your beta program. corporate policies simply do not allow new release. Let’s say that equates customers to publicly endorse products, to 15%. A certain percentage will drop Seed your program for a myriad of reasons. out of the beta program because they Getting to this point—knowing One great source of references is did not have the time to participate. Let’s say that equates to 15% as well. You which of the 7.5 customers can the product beta program. While the publicly endorse your product—is primary role of the program is to test are now left with 30% of your beta participants who may be able to assist. time consuming. Keep in mind that the product in customer environments, a “yes” given to the beta manager it can also generate references from your early adopter clients. With that said, you should assume Estimate of beta customers willing to assist public reference activities that at least 30% of your customer base, which includes Beta program Reasons for not assisting Eliminated Remaining pool participants, is not allowed to engage Policies prohibit 30% 70% in public-facing reference activities— Policy requires completed including a quote in a release and 10% 60% implementation speaking to media. The financial services and insurance industry have Dissatisfied with features 15% 45% very strict policies and may not even allow a name mention. A number of Dropped out of beta program 15% 30%

Willing, but too busy 15% 15%

10 • productmarketing.com • November/December 2005 A Better Reference Process Means Better Launches does not necessarily mean yes. It is Don’t skip approvals Pave the way certainly a good base to start from, but not all willing customers know if their Your customer likely will need to get Proactively provide all the information corporate policy prohibits PR and approval from management, and if you your customer, his manager, and his media participation of a vendor’s are asking for a quote in a press release PR manager need to make a decision launch effort. Further-qualify your or customer willingness to speak with as quickly as possible. This means potential “yeses.” the press, permission from their PR crafting a detailed email that states manager is necessary. Do not overlook exactly what you are asking for and You can count on the customer this step. It is important to let your when. Further, the PR and product reference manager spending an customers know in advance that marketing mangers should draft the average of one hour per customer in public-facing activities like a quote that they want the customer press release and media interview to approve. The customer reference • initiating customer contact by phone require their company’s corporate manager will tell the customer that and email communications approval. This adds this is the ideal quote as drafted by • subsequent follow up if you do not a lot of time to the approval process. PR and product marketing, but the reach them in person One well-known vendor requires 13 customer should feel free to tailor weeks for a quote to be approved by it to reflect his environment. • recording communication notes all the involved departments. But Also, remind the PR and product A product beta program with 50 don’t take shortcuts. Here is why. marketing managers not to get too participants equates to a week and Shortcuts generally result in a few wrapped up in their messaging. a half’s worth of work. The 50 hours unsavory outcomes: Most people, and in particular your occurs over several weeks, as it takes customers, do not talk in messaging. that long for your customers to respond. • your customer will get admonished If customers make tweaks to your quote, by upper management You can now see the value in truncating or even radical edits, so long as they this process. And the best way is to • your PR team will get a call from are generally on point, accept the edits. seed the program with people you know your customer’s irate PR team Why? Because that likely is the only can help, based on their knowledge and/or an irate customer executive way you will get a quote approved of corporate policies. The customer by that customer. • your customer will tell you at the reference manager is the person to last minute that they cannot assist Work directly with your customer’s PR recommend these people. It is very because their corporate policies do whenever possible, although it is OK important for the beta manager to not permit such participation to work through your customer if that closely monitor the progress of is what the customer prefers. Find out these customers. In any of these scenarios, you have how the customer’s PR team likes to likely lost this customer as a reference If some of your best references are too be engaged. Are they OK with their for good. busy to participate in the beta program, employees speaking directly with the you want to provide a mechanism This brings us to the scenario of when press? Or do they require a PR person for them to learn about new features. executives are dissatisfied that there are to join the call? Some PR groups require Arrange a webcast where the product not enough “big name” companies in advance the questions the reporter marketing manager covers the product’s supporting the launch. Your CEO will is likely to ask. Or, the customer’s new features, and the customer want to know why, for example, there PR manager may require any copy reference manager explains and is not a quote from Big Name Company to be reviewed. Many reporters will invites customers to this event. XYX in the release. You have heard not allow this, so that requirement directly from the account manager, the generally rules out that customer customer, and his PR manager that Big for media opportunities. Name Company XYX will not provide Finally, find out how the customer a quote in the release. Corporate policies should be alerted to the media at some companies are so strict that opportunity once it arises. Should you not even a name mention on a website call and/or email? Should you send it is allowed. Accept that some companies to the customer and PR manager? do not allow endorsement of vendors, and turn your attention for launch support to the customers who will assist.

productmarketing.com • November/December 2005 • 11 A Better Reference Process Means Better Launches

Ensure no trouble with the media Schedule time slots Thank your customers The worst case scenario would be your for media interviews You need your customers’ help to customer speaking negatively about In order to ensure getting “ink” on what make the launch a success. Let them your product to the media. We all your customers have to say about your know the importance of the activity: assume customers who are a part of new product, secure two to three time “In order to be successful, we need the beta program are pleased. The slots of 30-minute increments on your to have our customers let our key customer reference manager should customers’ calendars multiple weeks influencers know that what we double-check this. And be direct! The in advance of the expected time that are saying is validated by you, our customer reference manager should reporters will want to speak with your customers.” And when customers tell the customer we assume they are customers. This may seem overzealous, agree to assist you, genuinely thank a happy customer, as confirmed by the but if you want to ensure your them. Thank the customers who beta manager, account manager, or customer’s schedule is free, this is are unable to assist as well. other such party. the recommended approach. Reporters Is it common for customers to ask are usually on deadline with a small If you are not familiar with this for something back in recognition of window of free time. customer, you should directly state their participation? In general, the best in a polite fashion that bringing up To make this work, the PR manager references do not expect anything in any product issues with the media needs to tell the customer reference return. They are willing to assist for is not ideal. You can even express manager when they will be briefing a variety of reasons: embarrassment at having to say that, reporters, and when they expect the • a general willingness to be helpful but to avoid mishaps, be direct. The reporters will want to speak with customer reference manager needs customers. They all have publishing • a love of the product because to directly state and hear that this deadlines, and your PR team should it is integral to their success customer will be suitable to speak know them. While the PR and product with the media. marketing teams are briefing reporters • pride in what they have during the media tour, you can be sure accomplished using the product While some customers are perceived reporters will want to speak with your as better references than others in that • the desire to showcase their success customers. By arranging time slots with they are particularly well-spoken and customers in advance, the PR manager A few customers recognize the excellent communicators, do not rule can ask the reporter what times work symbiotic relationship between out those who are more understated. best, then share that information with customer and vendor. In order for a Assuming they have a good story to the customer reference manager, who vendor to sell more products, it needs tell that meets the writer’s requirements, will confirm the pre-agreed time slot existing customers to publicly state they should make a fine reference. In with the customer. the merits of the product. A successful, general, the only customers to rule revenue-generating company is then out are those that are “hot and cold” or unreliable.

12 • productmarketing.com • November/December 2005 A Better Reference Process Means Better Launches able to pour additional funds into a points system, do not underestimate Better references development, so that customers the infrastructure required to launch, mean better launches continue to get excellent products. When execute, and manage such a program. a customer vocalizes this relationship, Following these suggestions, the For all of these reasons, it is best to you know you are working with a beta, product marketing, customer provide a genuine thank you to your very helpful reference. reference, and PR managers, working customers during your reference request together, ensure target media write Numerous problems may arise if you process and to conclude the launch glowing articles about your new compensate customers for reference process with a thank you gift. It could release; industry analysts tell your activities. First, you may run into a be immediately after the launch or prospects to purchase your products; tit-for-tat scenario. A customer may part of a quarterly thank you program. and investors buy your stock. Good require you to compensate them for A logoed item, such as a high-end pen references are critical to a successful every activity. This means that your set, makes a nice gift, as does a box launch. It is almost impossible to find marketing people need to have good of chocolates. Depending on how much these references afterwards. So be sure negotiating skills, which is not likely the customer assists, a coupon or to identify references early in your an area of expertise. Do you have free pass to your annual user group launch-planning cycle. a budget to accommodate frequent conference or some level of free compensation? Second, should a training, should your company be customer renege on an agreement, able to support such gifts, is much are you prepared to insist that the appreciated. customer uphold their end of the bargain? Third, would you—the Amy Perkel is principal of Red-Spark Customer Marketing, a consulting practice marketing organization—be prepared focused on customer reference programs. Working with hundreds of executives to be one of the first phone calls from Fortune 1000 companies, she has created unique systems to track customer a customer makes when they are interactions, extract business stories, and leverage customer reference activities. unhappy with the product? Amy has ten years of high tech marketing experience, working for Oracle, Some companies do put into place Hyperion, and Documentum. She can be reached at [email protected] a “points” system and have good success with this. However, this depends on the makeup of your customer base. If your customer base is high-level executives, they are not motivated by redeemable points. If your customer base is motivated by

Key responsibilities by launch team member Role Key responsibilities

Customer reference manager • Recommends customer references • Secures customers participating in the launch • Provides realistic number of customers able to assist to PR, IAR, and IR managers

Beta team manager • Shares list of beta participants with CR manager • Invites customers recommended by CR manager into beta • Closely monitors progress of CR manager’s recommended customers

Product marketing manager • Delivers webcast on product features to reference customers not participating in beta program • Works with PR to draft ideal quotes for customer approval

Public relations manager • Works with Product Marketing to craft ideal quotes for customer approval • Alerts CR manager to timeframe of release and media interviews • Schedules interviews between reporters and customers Jim Davis, Senior Vice President & Chief Marketing Officer, SAS Institute, Inc. “Our overall goal is to deliver products and solutions that provide customers with differentiated value. Pragmatic Marketing® has given us a framework for managing the entire supply chain—from initial development to customer acceptance.”

–Jim Davis Senior Vice President & Chief Marketing Officer SAS Institute, Inc.

If you are trying to leverage your investment in product management and marketing, the first place to start is with a proven methodology. Pragmatic Marketing has always focused on the unique challenges of managing and marketing high-tech products.

The Pragmatic Framework has been fine-tuned by 30,000 attendees over 12 years and has been proven to create high-tech products that customers want to buy. Pragmatic delivers on the promise in its name—presenting a practical course of action that really works.

The Industry Standard in Technology Product Management and Marketing Education

Visit www.PragmaticMarketing.com to learn more. Effective Sales Presentations: Advancing the Sales Cycle

By Stephanie Tilton

Effective sales presentations are at the

core of a successful sales cycle, yet

many presentations miss the mark in

terms of appropriate content and flow. Taking inventory Before you begin creating a presentation, take inventory of the While presentation skills contribute to the information you will need to get started. This will serve as a checklist to ensure that you and your team are staying on course success (or failure) of a sales presentation, and creating a presentation that will hit the mark. Engage your sales representatives in creating this list—they typically know which presentation effectiveness also hinges on messages resonate best with different prospects. They can also provide input as to how they intend to use the presentation and the value of the message and the quality what tactics and content have (and have not) worked in the past. of the content. Your sales team members • Identify the target audience and its business issues

rely on you to deliver a solid presentation • Determine the goal of the presentation and its role in the sales process (e.g., to generate interest in learning more about your that they can successfully use in their product or service, or to gain introduction to the decision maker?) • Determine the level of detail appropriate for the audience selling efforts. Here are proven methods • List key messages for the solution (e.g., value proposition for ensuring that your sales team is armed and key differentiators)

with the content it needs to win deals. • Enlist appropriate reviewers (e.g., Sales, Marketing, and pre-sales technical engineering personnel) to ensure full content accuracy as well as help establish interdepartmental “buy-in”

16 • productmarketing.com • November/December 2005 Think outside the PowerPoint slide Many presentation writers try to brainstorm For example, the following is a sample the story they want to tell while using guide for an IT-industry presentation that Microsoft® PowerPoint®. But crafting a story can help you outline an overall concept and when you are limited to bulleted concepts define what content needs to be included. can be difficult. Instead, try writing out An outline also helps the presentation team the story you would like to tell. (You can members consider “branch slides” that can leverage this to create speaker notes—more help address a specific industry or audience on this later.) By formally capturing your member (e.g., a CFO). thoughts in a written document, you can craft your story more quickly and easily. Key reviewers may find it easier to provide critical feedback on your “story” as well.

# Slide Title Key Elements and Messages Possible Branch Slide Sets 0 Title Slide (Self explanatory)

1 Agenda Summary of content to be covered

2 Key Trends If applicable, describe key industry or business trends in order to provide Vertical audiences: branches that drill down a context for the business problems/customer pain points described in on industry-specific trends the next slide.

3 Business Challenges/ List the pains/challenges facing businesses/employees that do not have Vertical audiences: branches that drill down Pain Points the particular solution being offered. The goal is to help the audience on industry-specific pain points identify personally and feel the “pains” as their own.

4 Understanding Elaborate on the complexity of the problem and how existing processes, Line-of-Business (L.O.B) audiences: branches that drill the Problem workflows, customer demands, etc. require a new approach to the down on business problems to be solved, for example, particular business area. for a VP of Sales or CEO

5 The Answer: Introduce your solution by providing a high-level introduction that IT audience: a branch that discusses the larger IT Your Solution answers the questions,“What is it? Why should we spend our limited environment that this particular solution requires budget on it? What is the real value?” If possible, graphically illustrate the solution and how it provides business value (show rather than tell).

6 Key Capabilities Prove the business value by explaining how the solution provides a Industry audiences: include branches with industry-specific and Business Value capability or benefit that solves one or more of the business challenges benefits that demonstrate a deep understanding of the listed previously. industry-specific pain points and how the solution addresses them

7 ROI/Business Case Summarize the business case for the solution by providing benefits backed Expand the business case with branches that may include: up with ROI data (dollar amounts or percentages regarding cost savings, increased productivity,reduced downtime, etc.). CXO audience: Slides that elaborate on how the solution impacts both the top and bottom line through “hard” and “soft” returns (reduce costs, increase revenues) Industry-specific audiences: industry-specific ROI data, if available

8 Customer Success Story Describe a powerful customer success story with ROI data, if available. Industry audiences: branches of industry-specific success stories L.O.B audiences: branches with L.O.B.-specific success stories

9 Next Steps What is the call to action? Depending on the audience, the next step may be to seek an introduction to the decision maker or to show a demo of your solution to the technical group.

productmarketing.com • November/December 2005 • 17 Effective Sales Presentations: Advancing the Sales Cycle

Keep it focused… Plan for customization some content control is to include an on the customer appendix with branch slides suitable Experienced marketers know that their for various industries and company In today’s business world, your audience sales representatives will customize sizes, etc. For instance, survey the sales probably already has researched your presentations to fit their prospects’ force during presentation development company and its products on your needs. This behavior should be to learn which success stories would be website. So if prospects invite your encouraged, not discouraged. After most useful and include those as extra sales representative to their offices, all, your sales representatives will be slides for use as needed. By providing they really want to know how your most successful if they have done their easy-to-use, ready-made slides, you solution will solve their business issues homework to understand the unique know your sales people can customize and pain points. The prospects must business pains facing their prospects the presentation to meet their needs be convinced that you understand the and how your company’s solution can without compromising the standards business obstacles they are trying to address those issues. The salesperson of the material. overcome. This fact alone may mean may not be presenting to an individual you need to create more than one or group for the first time, and Balance brevity with therefore, may have to tailor the presentation for a specific product or useful detail and illustrations solution, perhaps focused by industry content to cover only the most or by audience type (e.g., the budget relevant information. After all, nothing For better or for worse, bulleted lists owner wants to hear different points loses an audience more quickly tend to be the dominant form factor than the implementer of the solution). than covering stale material. in PowerPoint. The advantage of bullet points is that they prevent overzealous The following table of typical While you must be willing to relinquish authors from trying to convey every stakeholders across a company can some control over how and precisely bit of information about your company. help you consider the presentations what your sales team presents, your Bulleted lists present a concise summary that you may need to create for role is to provide the foundation of your message and can be easily read different audiences. (This list is for a logically flowing, compelling by those listening to the presenter. oriented toward IT presentations, presentation that adheres to corporate The presenter expands on points but stakeholder profiles are typically standards for messaging, language and where necessary, which can often similar from company to company.) design. One way to maintain only be determined by “reading” the audience. To ensure that the bullet points are read, make sure they convey valuable information and are not reduced Stakeholder Profile Characteristics to industry jargon and sound bites. Initiator Has identified the problem areas to address and has asked staff to identify possible solutions.

User Will be the one to actually implement/use the solution. Concerned about ease of use and support.

Influencer Will likely define technical specifications and provide information for evaluating options. Wants to understand the technical underpinnings of the solution and how it fits into the overall enterprise architecture.

Decision maker The one to make the final recommendation to the approver. Ultimately responsible for ownership of the solution, including implementation, integration, internal support, and tracking ROI.

Buyer Controls finances. May question price, ROI, TCO.

Approver Top management with final budget authority. Needs to be convinced the solution is the best option for the money.

18 • productmarketing.com • November/December 2005 Effective Sales Presentations: Advancing the Sales Cycle

Similarly, do not try to fit every piece supporting content, such as industry Test and revise of information about a point onto statistics, analyst quotes or customer the slide. Leaving something for testimonials, you are likely to see a Finally, make sure you test the the speaker’s notes ensures that the positive response to your presentation. presentation with a few sales people audience will listen to the presenter (both senior and junior). As part of Your sales representative may and keeps the amount of screen- this testing, you should see how well choose to present only portions cluttering text to a minimum. At the the presentation works when skipping of the presentation. For that reason, same time, your content should be certain sections. Obtain feedback and “modularize” the presentation into memorable and meaningful to the revise the presentation appropriately. discrete sections that make sense on prospect. Remember that people Nothing ruffles the feathers of the sales their own. Ensure the presentation grasp pictures more quickly than team more than being handed a sales flow is strong regardless of which or words. Visually illustrate your points tool that doesn’t meet their needs— how many modules are skipped. whenever possible with a graph or especially when they are sitting down image and choose visuals that help to the hall from you and are often eager further the audience’s comprehension What goes into speaker notes? to provide input into the development of these tools. of your points. As the marketing guru, you need to provide scripted speaker notes so No sales presentation will be successful Mastering organization the presenter has detailed information without aligning your sales and about each of the points on the screen. Although a story is not compelling if marketing organizations. With such And since you started the creation it does not flow properly, determining goal-oriented cooperation in place, you process by capturing your presentation the optimal flow of a story is difficult can help your sales representatives in story form, you can now lift until all the parts have been recorded. succeed by providing them with a from that document to build your Even best-selling authors rarely establish customer-centric message that clearly speaker’s notes. the flow without many rounds of explains how your solution solves the prospect’s business issues. Ultimately, reorganizing. So, after you have While some presenters may add a by managing the messages in your created your first draft and walked personal twist to the story, the story company’s sales presentations, you through a practice run, shift the should essentially remain the same— can increase the effectiveness of your content around until the flow feels by providing speaker notes, you can sales team’s communications and natural and the presentation tells a ensure a basic level of messaging help shorten the sales cycle. compelling story. If you have backed consistency. Have faith in your sales up your key points with persuasive people—in many cases, they do not require a narrative script as much as clear, concise talking points presented in a logical order.

Stephanie Tilton ([email protected]) is a senior marketing consultant for Hoffman Marketing Communications, a business and technology writing company that specializes in developing sales presentations, white papers, and other strategic marketing collateral. Claim your Hoffman-authored free best practice articles on how to avoid the most common sales guide and white paper mistakes by visiting http://www.hoffmanmarcom.com/bestpractices.php

© Hoffman Marketing Communications, Inc., 2005. All rights reserved.

productmarketing.com • November/December 2005 • 19 Problems. Solved.

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Pricing has far-reaching effects beyond Product the cost of the product. Pricing is just as much a positioning statement as a definition of the cost to buy. Price defines the entry threshold: who your buyers are and their sensitivities, which Managers competitors you will encounter, who you will be negotiating with and what the customers’ expectations are. Good pricing will remove the price issue from Pricing software products • Estimating the potential being an obstacle to a sale. Pricing market for a product is is also used as a weapon to fight the When it comes to pricing possible, but estimating competition as well as gray markets. demand is problematic. software, Economics 101 Pricing is also unique from other Most customers tend to be marketing decisions for several reasons: does not apply enthusiastic when seeing a • Price is the only marketing element When pricing software, the new product, but their input is not that produces revenue; all other “Economics 101” you learned a good indicator for real demand. in college is irrelevant. There marketing decisions produce costs. • For enterprise software, sales are many reasons for this: • Pricing is the most flexible marketing numbers are too small for a decision. • Supply and demand curves statistically significant study. are based on the assumption By the time a company has sold • Pricing reflects a product’s strengths that the marginal cost for enough licenses, it has advanced and weaknesses; it implies value as manufacturing additional to a newer version or the market well as positioning. products is non zero and that has changed, or both. it decreases with quantity. • Pricing has the most immediate impact • For most products, there are In the software industry, the on the bottom line. In the high tech competing products, and their marginal cost for an additional industry, a 1% increase in prices can influence on the demand curve copy of software is zero. lead to a 10% (or more) increase in is hard to estimate. profit. This is twice the effect that the • Estimating price elasticity for • Product life cycles are short, making same change in volume and fixed or a specific product is practically comparisons more difficult. variable costs have on profits. impossible. Hence, pricing decisions cannot be based on • Purchasing decisions are complex supply and demand curves. and are influenced by many constantly changing factors.

24 • productmarketing.com • November/December 2005 Tips for Setting Prices The company’s perspective • Before making pricing decisions, you must thoroughly understand your target market’s decision-making and buying processes. • Properly-priced software will not guarantee the company’s profitability. • When deciding which product competes with your own, the market’s perspective is what counts. • Internal company parameters such as distribution costs come into play only when looking at the potential profitability of the product. I.e., can the company make money selling the product at a given price point? • The price of the software must be higher than the cost of selling it, and the margins must be higher than the cost of creating, marketing, selling and supporting it or else the product will lose money. • When new to a market, being a small, unknown company minimizes brand value. Lower, “penetration” pricing may be required. • If customer segments value the product significantly differently, this may justify segmenting the product for each of these markets. • When attempting to price commodity products, it is basically the competition that sets the price of the product. Setting a higher price in a commodity market is limited to the company’s ability to differentiate the product from its competition. On the flip side, offering a lower price in such a market is sustainable only if the company has a lower cost structure. • Just like other aspects of the product, pricing needs to follow the technology adoption lifecycle of the product. Early market buyers may be interested in your product but tend not to be willing to pay its full price. It may make sense to price the product at its target price for larger markets and offer early adopters the product at a discount.

The customer’s perspective • The price has to consider what the customers feel is reasonable. For example, market leaders are expected to charge more. Hence their higher prices can be perceived as “legitimate,” up to a certain level. • Using the pricing model as a differentiator is always worth considering as long as the model is easy to explain and it makes sense to the customer. • The costs of training, implementing and supporting the product are perceived as additional costs by the customer. • When setting the price within a range of competing products, it is important to understand how reference prices affect your customer’s price evaluation. This is imperative when customers have limited product or price knowledge.

productmarketing.com • November/December 2005 • 25 Pricing for Software Product Managers

Guidelines for setting the price - The difference in brand value that Guidelines for setting the price of software in existing markets customers attribute to the products. of software in new markets When setting the price for a software - The difference in cost for If there are no reference products, the product, classical economic theory implementing the respective approach is slightly different. The first comes up short. Here is an empirical, products. step in setting a price is identifying iterative method to arrive at a price. - Any other item that customers how customers will position it in their minds. If the product is perceived by The purpose of these guidelines is to attach value to such as localization customers as a utility or productivity arrive at the “right” price. This is the of the application, geographic tool, price it in these ranges—that is, price that lets the company accomplish proximity (for services), etc. until the product can be positioned its goals for revenue, profit, market If the product excels in a certain aspect, (in the buyers’ minds!) as belonging share, renewals, etc. The method then simply add that value to the price, to a higher place in the food chain. detailed below will help you identify if it lags, simply subtract the value. This See below for examples of products the highest price a market with existing step must be iterated for each competing and typical price ranges. competitor presence will bear: product. The price of the software must If the product does not fall into the • The price of the software must be less be similar or less than that of the main previous category, start by defining the than the ROI it provides. The smaller competing product in each segment price ceiling. This is the highest price the ratio of the ROI to the cost of the minus the difference in price that is based on a product’s benefits. A high software, the easier the sale. justified by the functional and other aspects previously identified. price will work if early adopters are • Create a market segmentation chart willing to pay a premium for a new based on feature sets. Identify all • The price must be below the product. However, this price level may competing products and place them purchasing authority of the targeted prove to be unrealistic as there may on this chart. Identify and group the decision maker signing off on the not be a sufficient number of buyers value elements in the product that purchase. for a new product at that price level. address the needs of each segment. • The price should be outside the Then, choose a “penetration” price. For each segment, identify the features “Dead Zone” of $5,000 to $20,000. Penetration pricing is used when a for which customers are willing to product is first launched in order to pay extra and that differentiate your • The price must fit how the market gain market share. A low penetration product from the competitor’s. Attach a perceives the product category. For price is used to discourage competitors price tag to the value of each attribute example, desktop utilities can be from entering the market and to gain that is not identical such as: priced up to $50, productivity tools up market share. Its drawbacks are lower to $500, etc. If the product is priced margins, difficulty in raising prices in - The feature and functional too high, the price will become an the future because pricing expectations differences. issue. If it is priced too low, customers are now set and the risk of customers will perceive it as not worthy. perceiving the low price as a low quality indicator.

Typical software price ranges • Utilities: $50 to $70. Purchases of utilities are many times spur-of-the moment decisions. Customers need to feel that the potential financial risk of buying the wrong product is minimal. • Productivity tools: $100 to $500. These are purchases that are within the budget of a low-level manager. • Professional tools: $1,000 to $5,000. Applications that are required by professionals to do their job, such as computer-aided design tools and many others. • Enterprise applications: $20,000 and up. Applications that impact many functions and departments in the customer’s organization and that require an evaluation process, and sometimes, a purchasing committee. Selling into such a 26 • productmarketing.com • November/December 2005 customer is many times a costly and labor-intensive process. The penetration price has to be sustainable and higher than the company’s variable costs. If possible, the price should be low enough to remove the price of the product from the buying decision. These two markers set the price range for a new product. Follow the relevant perspective, it lets them buy into the guidelines in the previous section to product while minimizing their initial finalize the price point. investment and exposure. From the independent software vendor’s (ISV) The software price “Dead Zone” perspective, it keeps them focused on The Pricing Dead Zone is a price range making the customer successful with between $5,000 and $20,000. Some the product rather than the “fire and When offering a subscription model, would even say that the range extends forget” approach to selling software. the vendor is betting its future on its up to the $40,000 - $50,000 range. Moving from a perpetual license to ability to keep customers. For hosted Software products in the Dead Zone a subscription model increases the apps, setting up a hosting environment are the exception. This is because vendor’s risk as it becomes easier can be very costly. The vendor is software priced in this range is hard for customers to walk out on them. basically giving customers a loan that to sell profitably. It may also have a negative effect on will be paid back over the length of the short-term stock price due to Wall the contract. This creates additional Products that cost less than $5,000 risks that vendors may want to avoid. can be sold over the web or through Street’s focus on quarterly revenue vs. channels. A purchase of this size is cash flow as the vendor is mortgaging So now, the bottom line. How much within the decision authority of middle their present for their future. This do you charge for a subscription managers, and there is no need for is because, over time, the income model? There are no axioms here, on-site visits to close a sale. More statement reflects the growth from but many companies charge one-third expensive products require higher- prior years’ bookings, as the deferred of the cost of a perpetual license for level signing authority or purchasing subscription revenue is transferred to an annual term. When offering a committees. A committee’s decision the income statement. Over the long subscription model, maintenance can cause the sales cycle to drag on term, the subscription model allows is usually mandatory. for months and get entangled in for significantly better revenue visibility and consistency. This is beneficial, as internal politics. These products Pricing maintenance and support require sales reps’ on-site visits but Wall Street loves companies that make have to produce enough profit to their numbers. For example, when For enterprise applications, 18 to support this type of sales effort. signing a three-year license for 20% of the list price is the “standard” $20,000 is at the bottom of the price $100,000, one-twelfth of it can be cost of support. This usually includes range that can support a complex sales recognized each quarter with high support over the phone for a single process. The exact boundaries of the certainty. In such a case, cash flow contact from the customer during Dead Zone depend on the specifics becomes the much more representative regular business hours as well as of how the product is sold. indicator of income. This works as product updates (both point and major long as the renewal rate is high. releases). More advanced packages that include 24/7 support are priced Perpetual vs. By offering a subscription-pricing model, higher, in the 20 to 25% range, subscription licensing customers face smaller payments. From and require a minimum of $30,000 the sales reps’ perspective, a lower Subscription software is an application to $100,000. Minimums of $200,000 to initial price lets them aim their pitch that is “rented” on a temporary basis. $300,000 are the norm for packages that lower in the customer’s organization. Licensing is usually on an annual basis, include assigned support engineers. Another advantage for the sales process but monthly terms also are available. Onsite support should always be is that calculating an ROI on a shorter Subscription licensing works when priced as an extra. time scale makes it more tangible, customers see an ongoing benefit from hence helping the sale along. the software. From the customers’

productmarketing.com • November/December 2005 • 27 Discounting and Calculating volume discounts non-linear pricing The way most companies calculate their Discounts come in two variations, discount schedules is surprisingly off scheduled and negotiated. Scheduled the cuff. They simply decide how much discounts are those that are pre-approved money they would like to get from by the company, based on pre-defined a large target customer per user and criteria such as the volume of the then draw a curve between the price purchase. Negotiated discounts are an of one unit and the price of a unit at ad-hoc result of the sales process that the high-volume level. They then Most companies have a no-discount differ from or go beyond the pre-set stand back, look at the curve and policy on support. That is, even when scheduled discounts. This article will play with it until “it looks good.” the software is discounted, the support only discuss scheduled discounts. pricing stays at a percentage of the list Another, more rigorous method for price. Very large deals may justify a calculating volume discounts is to Volume discounts discount, such as if all support calls select a consistent discount rate for are routed from a single person at the There are multiple reasons why ISVs every growth in units. For example, customer. One approach is to give away offer volume discounts: a 10% discount on the 10 - 20 units, a few months of support during the a 10% discount from the previous • Many times, the utility to the customer first year. Psychologically, it is better price on the next 10 units (which of additional licenses decreases as to give away “months” than to lower equals a 19% discount from the volume increases. To guarantee that the price of the yearly contract. original price) and so on. the value to the customer is more than the price of the software, the price For non-corporate users, there are two VAR discounts basic models for providing support: must decrease as the volume goes up. Value Added Resellers (VARs) get • The per-incident model: The most • In many sales situations, the cost of the software they resell at a discount. common model for personal support sale per unit decreases. This savings Discounts are typically between 40 and is “per incident”—that is, a flat rate can then be passed on to the customer. 60%, depending on the marketing and for resolving each support question, • A volume purchase increases the sales efforts required by the VAR to regardless of call length. The median customer’s investment in your product promote the software. Many companies per-incident price for surveyed and reduces his or her chance of design incentives for VARs by creating companies that offer this option buying the competitor’s product. volume thresholds that increase their is now $100, with 50% of these discount level. Tier discounts require companies charging per-incident prices • Large customers are convinced that it VARS to commit to sales volume. between $35 and $185. Support for is their inherent right to pay less per For example, they may give a 15% developer tools and more technically unit than smaller customers. discount for no commitment and advanced issues run into the hundreds • Buying more units now rather 35% for very serious ones. VARs of dollars per incident. For example, receive training and licenses for an a call into Microsoft’s tech support for than in the future has a discounted current value. additional cost. In comparison, reference developers costs $245. These models partners whose activities are limited to typically include a refund if the Once a discount is offered, buyers referring customers to the vendor get problem is determined to be a defect will assume that this discount—or 5 to 10% of the deal. in the vendor’s product. a better one—will be offered for all future purchases. When setting a pricing schedule for • The per-minute model: A less-popular VARs, take into consideration that the model is a “per minute” rate. Here, Before offering discounts, you have VAR has to make a profit and may be there is less variation in pricing: The to understand the impact on revenue. feeding its own distribution channels. median per-minute price is $2.71 and When offering a 10% discount at This approach is relevant to original the 50% range is $2 to $2.95. Note a contribution margin of 70%, you equipment manufacturer (OEM) that the $3 per-minute rate is one will have to increase sales—above pricing as well. of the few service prices where there baseline—by 17% to make a positive is significant customer sensitivity contribution to profit. and pushback.

28 • productmarketing.com • November/December 2005 Pricing for Software Product Managers

OEM pricing Pricing discrimination One of the difficulties of pricing OEM Price discrimination is a technique for maximizing profits by offering the deals is that there are no industry same or similar product at different prices to different customers. The idea standards or accepted price ranges. behind this is to set prices so that purchasers who are able and willing to pay higher prices do so. Pricing discrimination allows vendors to capture When signing an OEM agreement, additional market share by addressing segments that attribute a lower some companies require an up-front perceived value to the product. fee for Non Refundable Engineering (NRE), which are efforts needed to Price discrimination can be explicit or implicit. Explicit price discrimination tailor the product to the OEM’s is when a special price is limited to customers who meet certain criteria. specific needs. NRE fees include For example, academic pricing is a form of explicit price discrimination charges for developers, QA and because only students and faculty can buy at that price. Implicit price project management. These fees can discrimination is when all customers are technically eligible for the easily run into the six digits. Some special price, but the vendor inserts a condition that makes it unattractive OEM deals will tier their pricing based to some. For example, rebate programs are a form of implicit price on the up-front fees and volume discrimination. commitment. As a rule of thumb, the higher the commitment and up-front To make pricing discrimination work: fee, the lower the royalties. • Each segment needs to have a version unique to that segment

Site licenses • One market segment cannot buy the product created for another segment Site licenses give customers unlimited • The difference in pricing must be justifiable and must not create use of a product across their enterprise a feeling with customers that they are being treated unfairly while paying a flat fee. A buyer’s Another common form of pricing discrimination is introductory pricing. request for a site license is mostly a The idea behind this technique is to release a new product at a purchasing ploy. The reasoning is that premium price and to lower the price in time. This is a common with a site license, the buyer does not technique in the computer chip industry where power-hungry buyers are have to worry about counting seats. willing to pay extra for the latest and greatest. The reverse can also be However, it’s only another way to ask: true: introduce a product at a significant discount for a limited period to “what is your best price?” One problem stimulate early sales and then return to the higher list price once the initial with this model is that as a vendor, you surge of excitement has passed. lose your ability to track the number of installations at the customer site, and if your product is successful, you will be Illegal pricing discrimination leaving money on the table. Another The Robinson-Patman Act made it illegal for sellers to directly or drawback of site licensing is that indirectly discriminate in the price of similar commodities, if the effect when you sell a site license, you have hurts competition. This is especially important when selling to distributors effectively lost that customer for any and VARs. For example, if a vendor has two distributors that compete repeat sales. If you are concerned against each other, they have to be offered the same basic terms. If one about getting the product in front of distributor is allowed to buy software from you at a lower price than as many users as possible, just offer another, competition is adversely effected because the second distributor, steeper discounts to encourage buying at the higher price, will have a greater difficulty in reselling proliferation and use. the software. Site licenses must provide adequate It is important to note that there are situations where pricing discrimination safeguards so keep usage within the is explicitly legal. These include situations where the vendor’s boundary of the site. Customers may manufacturing, delivery or financing costs are different for different not want to count “seats” but they customers as well as situations where a competitor dropped its prices. need to have a means for controlling Meeting the lower price is not illegal even if this price is not offered the use of the product. to other customers. Note that the law applies only to products and not to services.

productmarketing.com • November/December 2005 • 29 Pricing for Software Product Managers

Bundling Bundling is when a group of products (or services) is offered as a single Legal issues when package. By offering bundles, ISVs can increase their sales to segments bundling that would buy only one product. There are two types of bundling: All mixed bundling strategies are legal. • Product bundling. Product bundling is when two products are This is because the customer’s ability integrated into a single package. The purpose of product bundling is to choose the product they want is not to create a combined product that has more value to customers than hindered. On the other hand, pure pricing the separate parts. An example of product bundling is the Oracle bundling is illegal if the vendor has “market ERP® package where the database and application layer are bundled power.” Market power means that the vendor into a single package. can force a consumer to do something that he would not do in a competitive market • Price bundling. This is when an ISV provides a discount to customers or when “a substantial amount of commerce who buy two or more products at the same time. is at stake.” There are basic differences between price and product bundling. If a vendor possesses market power, Whereas price bundling is a pricing and promotional tool, product pure product bundling is legal only if bundling is more strategic in that it creates added value. Price bundling the benefits to consumers offset potential products does not create added value in itself. Therefore, a discount damage to competition. For example, in the on their combined prices has to be offered to motivate consumers Microsoft® vs. DOJ case, Microsoft’s claim to buy the bundle. of consumer benefit was enough to justify the integration of Internet Explorer with Bundling can be “pure” or “mixed.” Pure bundling is when a vendor does Windows®. Note that merely combining not offer any other option but the bundled products. Pure price bundling products together in a single installation is basically forcing a customer to buy at least one product that they are not does not constitute integration and will interested in and can be illegal. Mixed bundling is when a vendor offers be difficult to defend as providing benefit both the bundle and the products separately. to consumers.

Price bundling is used to: Compensating for bundling’s effects on profits • Increase sales to segments that have Unbundling different perceived values for the vendor’s An issue that must be addressed when Unbundling is a process where a products. offering products as a bundle is the potential product offering is split into modules loss of revenue. The higher the variable costs • Expose a new product to a large with some becoming optional. By for the products in a price bundle, the larger customer base. taking a complex product and splitting the increase in sales needed to overcome the it into modules, the product can become • Provide product visibility and a discount involved. For example, consider two attractive to additional segments. low-cost opportunity for customers offerings: a refrigerator and stove costing Furthermore, each segment tends to to test a new product. $2,000 and $1,000 with variable costs of become less price-sensitive regarding $1,600 and $800 respectively.The second the modules they need. For unbundling • By offering bundles, vendors make it offering is a bundle of a spreadsheet and to make business sense, sales to difficult for consumers to price-shop. a package of financial macros costing $300 additional customers have to make up and $100 with variable costs of $20 and $10 Product bundling is used to create added for the optional modules that customers respectively.When sold separately, the packages value for customers. By using integrated passed over. Another drawback of will provide $600 and $370 of profit. By products, customers can increase unbundling is the added complexity offering a discount of 10% on the bundles, productivity, performance, lower costs of to the product. After unbundling the the profit will be reduced to $300 and $330 ownership and reduce purchasing costs. product, there are multiple options respectively.Therefore, the appliances company for customer installations, managing In both types of bundling, vendors can has to sell 100% more units to make up for the product and supporting it increase increase customers’ switchover costs by the discount vs. the software company that in complexity. One risk of unbundling selling them more products than they has to increase sales only by 9% to make up is that if the product becomes too intended to buy. for the discount. granular, vendors run the risk of giving the customer a feeling that they are “nickel and dimed.” 30 • productmarketing.com • November/December 2005 Pricing for Software Product Managers

International pricing Other pricing issues Price wars The international prices of identical A price war occurs when two products vary widely compared Pricing NRE projects companies drop their prices regularly to U.S. pricing. The “uplift” as it is to close sales. Pricing wars start once Non-Recurring Engineering (NRE) is called, varies anywhere from zero the differentiation between products a one-time engineering effort by a to a premium of 50%. This uplift is has eroded. Proper product planning vendor that is paid for by a customer. justified by increased costs due to the and positioning can help prevent a NRE is driven by a feature or capability need for localization of the product price war by allowing the leading that a product lacks for which a as well as marketing and sales vendor to charge a premium. However, customer is willing to pay. expenditures the vendor faces in if two competing products have similar foreign markets. The cost of localizing In theory, costing an NRE project is offerings, as the market matures, price the software has to be considered, but easy. Estimate the engineering hours becomes a bigger factor in the buying in many cases is not the bulk of the and overhead costs, add a “fudge” decision. Unless the vendors can investment in foreign sales. Higher factor for uncertainties and risks and extract themselves from the price war support costs are due to the additional multiply it by your grossed cost rate. with better positioning, the vendor that languages needed, the more expensive The result should then be multiplied is able to offer lower prices over time labor (at least in Western Europe) and by a factor of 5 or so. This is assuming will win the war. of course increased business risk. On that your company spends 20% of its Reducing prices don’t necessarily the flip side, in some geographies such revenue on R&D. cause a pricing war. It also depends on as in Asia, services are less expensive where the product is positioned. If it is than in the U.S. It is critical to understand the reason for this “5” factor, especially when the the highest-priced product, dropping Note that differential pricing in NRE takes up a significant portion of the price to be more competitive will international markets runs the risk engineering’s resources. If engineering probably not result in a price war. If of creating a “gray” market for costs amount to approximately 20% you are the lowest-priced competitor, the product. of revenue, an NRE project costing X you may serve a different customer would have a 5x negative impact on segment and your competitors may Another issue that makes international sales. This is because the resources not respond. pricing difficult to manage is fluctuation used for the NRE were diverted from in exchange rates. There are two Some factors that increase the producing sale-generating products. approaches to adjusting prices when likelihood of a price war in a given This indirect cost must be taken into the exchange rates change: market are: consideration and not doing so runs • Adjust the local price to reflect the the risk of embarking on revenue • A perception by managers that price in U.S. dollars. This approach generating but money-losing projects. pricing is an easy to implement may cause difficulties in countries and reversible tactic A company that is in good financial where the currency’s buying power condition can follow this procedure for • Commoditized products that decreases compared to that of costing NRE projects but a company on customers cannot differentiate the dollar. the brink will probably not be able to between them • Adjust the local price to partially achieve these premiums. • Multiple competitors with compensate for the change in the Support and maintenance costs need to manufacturing over-capacity exchange rate. be priced as well. If the results of the • Low switching costs between Both should be done with an eye on NRE efforts are not incorporated into products optimizing sales, taking into consideration the product and are available only to how revenue is affected as well as the the customer who paid for it, support • High price sensitivity effect the change has on gray market is extra. These costs should be more pressures. than the going rate to compensate for One of the ironies of price wars is that the added difficulty of supporting code while price wars are usually started as which is basically a one off. This is an attempt to increase market share, when because each maintenance release the dust settles, the respective market becomes an NRE project in itself. shares of the players tend to remain constant but at lower prices and margins.

productmarketing.com • November/December 2005 • 31 Pricing for Software Product Managers

Gray markets Price capping How pricing affects A gray market is created when a At times, customers may ask for a sales methods product that costs less in one market cap to future price increases. Pricing As a rule, the lower the price of the is sold to another market where prices caps are a negotiation issue. As in product, the less effort vendors can are higher through unofficial channels. all negotiations, never give away spend selling it. Enterprise applications There are multiple pressures that can something for nothing. Agree to the are costly to sell. Marketing programs foster the creation of gray markets. price cap in return for something that for generating leads can cost anywhere These include price differentials or an is important to you. This could be a from $20 to thousands of dollars per authorized retailer that can’t sell all its press release, closing the deal by the lead at targeted tradeshows. Then inventory and may move the leftovers end of quarter, etc. One trick is to there is the time spent by the sales rep to unauthorized dealers. agree to a maintenance cap only if qualifying the prospect and traveling to the customer will commit to a number meet him. An onsite sales call typically A classic example is the current sale of years or whatever term for which costs them $2,000 to $5,000. It costs of pharmaceuticals from Canada to the the customer wants price protection. roughly $2,000 per day to send a B2B U.S. Canada places limits on the prices sales rep into the field. If the sales rep of pharmaceuticals and so they are Just remember that like any forward- takes a sales engineer with her, this significantly cheaper than they are in looking commitments, potential buyers will entail an additional $2,000. Then the U.S. This creates a strong motivation of your company would not appreciate there is the rep’s compensation to factor for U.S. customers to import drugs long-term price commitments that cap in. The bottom line is that fully-ramped from Canada. Another example is your revenue. sales reps can cost a company $200,000 Amazon.com®. Books sell for different One way to reduce the impact of a price to $250,000 a year and prices on the local Amazon websites. cap is to price new features separately. more. Therefore, a direct What prevents a German customer Instead of adding a great new feature sales force selling $2,000 from buying a book on the American into the base product, consider making software is simply not a Amazon website and having it shipped it an extra option. Offering the feature tenable situation. to her home in Germany if she can separately gives you price negotiation save money? When it comes to Companies selling mid-ranged flexibility and makes you seem like a consumer software, where delivery products usually have inside larger company with more products. costs are zero, the problem is more sales reps that prospect You can always turn back around pronounced. and take orders over the and offer a discounted “bundle” that phone. When enterprise- Gray markets can damage channel includes both the base product and wide deals come up, a relationships but the aspect that is the extra option. specialized sales rep is sent relevant to this article is the undermining onsite. For smaller software of the segmented pricing schemes. Two additional issues packages that vendors want An important aspect of international to sell directly, the only pricing is the ability to price at the • By offering price caps, you may solution is to offer the software level that each market can bear. When get into legal problems with other online and through indirect a gray market forms, it can limit the customers (see the Robinson- sales channels such as company’s ability to charge a premium Patman Act). Amazon.com and CompUSA®. in a given market. • If you cap increases to customers, Gray markets aren’t always bad. As make sure to factor in any up-stream, long as they do not directly clash third-party fees that you owe your with the existing channels, there can suppliers. For example, if you can be beneficial sides to them such as only increase your price by 5% per incremental sales and the ability to year and your suppliers do not have reach into untapped markets. caps on their price increases, your margins could shrink. One way to avoid this is to exclude third-party fees from the price cap.

32 • productmarketing.com • November/December 2005 Pricing for Software Product Managers

By reducing the price of a product, ISVs reduce the risk Retail pricing to consumers trying an unfamiliar product. Assuming that the consumer has a good experience with the product, Natural price points they will be more likely to purchase it the next time, Natural price points are prices at which there are even without a discount. This is especially true if by using discontinuities in the price/demand curve. Customers the product, there are significant switching costs for the expect to see commodity software products priced customer. From a competitive perspective, rebates and at natural price points that are traditionally, $19.95, other forms of temporary discounts are used to lower $29.95, $49.95, $99, $199, $495, etc. The effect of prices while attempting to avoid a price war. increased demand for a $19.95 mouse vs. one that costs When executing a promotion, vendors have to beware that: $20 may stem from an underestimation mechanism. One explanation is consumers’ tendency to round • By reducing the price of their product, even temporarily, prices down and to compare prices from left to right. vendors risk implying that their product has inferior value. • If a temporary price promotion goes on for too long, Temporary discounts customers may begin to expect the lower price. The Temporary discounts are used to stimulate short-term “reference” price is then perceived as expensive and increases in sales and for enticing price-sensitive buyers customers are reluctant to pay it. that would otherwise be reluctant to buy at the regular • The promotion must be targeted to new buyers and price. A temporary discount can increase customer not to repeat buyers. demand for a product. However, this peak in demand is usually temporary and will many times decrease One way to meet these criteria is by creating a trial offer. future short-term demand. Price promotions may This is basically a type of temporary discount. Usually, a entice new, price-conscientious buyers, but they can condition is attached to emphasize the trial offer’s “special actually hurt future sales to the existing customer nature.” This can be done by setting an expiration date to base. Promotions are tactical, not strategic, and they the offer, requiring an additional purchase (a form of need to be managed that way. bundling) or an exchange of something of value. For example, the customer’s agreement to present at a tradeshow on the vendor’s behalf.

Rebates and coupons Rebates and coupons are discount mechanisms. There are several ways rebates and coupons work: • A discount at the register. This has a 100% redemption rate and is therefore not used very frequently. • Coupons at the shelf presented at check-out. • Mail-in rebates. Another type of rebate is given to the retailer. These are given after the consumer’s purchase and are a form of a discount to the retailer. These rebates are used primarily for adjusting prices to fit the closest natural price point. Another factor to consider is the cost of administrating mail-in coupons. The cost averages between $1.50 and $3, depending on the processing services offered with the rebate program.

productmarketing.com • November/December 2005 • 33 Pricing for Software Product Managers

Charging for beta software Pricing post mortem Testing the validity Most companies do not charge for the After setting a pricing model, it is always of the pricing model Beta versions of their software. Another useful to go back and look at a deal’s The pricing model should always be approach is to charge the customer closing price. In many cases, you will tested against sales scenarios. The best for the Beta version and then offer see two things: the average price that fit should be within the target market. a substantial discount for the final deals close at is lower than the list price Most models will not be optimized for release. The company gets to use the and a distribution curve of prices. Low some segments. In some cases, it may beta version of the product, pays for closing prices indicate a lack of discipline cause money to be left on the table or it and is used as a reference account. in the sales force or a price that is set deals to be lost due to too high of a When the official version is released, unrealistically high. price. One way to test the fit is to list the customer will then “buy” it. How various sales scenarios and compare When the deal prices fit a wide curve, long the reduced price is offered once the effect on revenue caused by changes this is a negative indicator and can be the product has been released is a of the pricing model and the price caused by: matter of negotiation. points that feed into it. This exercise • Lack of sales process discipline. Sales should be repeated at least twice a Revenue recognition reps are closing deals as they see fit, year. The assumptions used in the squeezing as much (or as little) as comparison should be validated and If a contract calls for onsite training and they can from customers. the model should be tested on the service to a customer as part of the deal, previous quarters’ sales. the revenue cannot be booked until the • Customers varying in the value they service is delivered. A simple email perceive and therefore the price they Another test for the fit of the pricing from a sales rep stating that they will are willing to pay. model and price point within a market send someone onsite to help with the segment is that a comparison with the implementation can cause problems • Fragmented buying power. The competitors pricing must be made. Take since it would be considered as an product is being sold into market into account the pricing differential element of the transaction and the segments that significantly differ in based upon positioning and functional revenue would have to be deferred until their ability to pay for a solution. differences. If the differences between the company delivered the service. your price and that of your competitors’ cannot be justified, you will either have Make sure the product roadmap doesn’t to change the model or the pricing end up in the contract. If the contract factors in it. mentions future product features or that it will support a new operating The last test is the market. Make sure system, the revenue cannot be booked that your prospects and customers “get until those capabilities are available in it.” The pricing model should be simple the product. to explain. If you need more than a couple of sentences to explain the pricing model, it is too complex.

Summary Daniel Shefer is Director of Business Development at SanDisk. Daniel has a decade of experience in the software industry, mostly Understanding pricing is critical in Product Management and Product Marketing. Prior to joining to Product Managers. Pricing goes SanDisk, he was instrumental in product design with Interwise, beyond setting a numerical value establishing and managing the product management and the for the product. It sets customers product marketing operations. Additionally, he has also managed technical sales expectations, positions the product and drove technology partnerships with third-party vendors. Daniel’s Software and impacts the way it is sold. Product Management & Product Marketing website is www.shefer.net. You can Successful pricing is an ongoing email him at: DS_PM/delete-this/@spamex.com effort and should be reexamined continuously as the product goes More on this article is available online at though its life cycle to ensure http://www.shefer.net/Articles/Pricing_for_Software_Product_Managers.pdf congruency among all elements.

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