Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business by Thomas Lah & J.B. Wood

Author:Thomas Lah & J.B. Wood [Thomas Lah]
Language: eng
Format: epub
ISBN: 9780986046230
Published: 2016-04-10T17:00:00+00:00

FIGURE 6.11 The Four Pricing Quadrants – Offer Components

Phase 1: Set Your Boundaries

1. Determine how much friction you can tolerate by placing your portfolio in the profit horizon framework.

2. Determine how you will bundle the offers in your portfolio using the portfolio definition exercise.

3. Determine whether any of your individual offers are limited by or must match your competition using the pricing power framework.

4. Calculate your actual unit cost (COGS) so you will know the gross profit at various prices.

5. Determine how much financial benefit your customers can achieve by consuming your portfolio. Ideally, this number should be readily provable and defensible. These last two steps frame in your boundary conditions.

Phase 2: Apply Pricing Tactics

6. Determine the pricing mechanism you will use for each bundle.

7. Identify what you will anchor the actual price to.

8. Apply a pricing model and set the initial price of the offer inside your boundary conditions.

Many valuable conjoint and regression models can be used to supplement this process, but we think these common-sense steps will help ensure that you cover some very important considerations:

• Do I know how much money we can make for customers, because that will probably determine the highest price of each offer and/or the entire bundle in my portfolio?

• Do I know what our unit costs are and what competitive limitation(s) we have, because one of them will probably determine the lowest price for each bundle?

• Did I consider how much friction I can or want to insert into the portfolio based on my profit horizon when I make my bundling decisions and set my prices? Do I have a plan for evolving my portfolio over time?

• Did I examine a reasonably broad number of pricing techniques rather than only one or two? There are many interesting ways to anchor pricing in XaaS. A creative anchoring strategy can make a huge difference in your margins.

The main objective of this chapter is to put forth some thinking that senior XaaS executives should consider as they evaluate the final pricing analysis and proposals made by their team.

One final observation on XaaS pricing strategy: It’s easy to blow this off. It’s easy to say we just price by the user by the month, and we will throw everything into that price. In an environment where investors are rewarding rapid unit growth and market share, pricing decisions can easily be weighted toward rapidly acquiring new customers. We can see the attractiveness and convenience of that decision. Some XaaS companies may even set the price at zero to really eliminate friction and encourage adoption. Although these approaches will certainly drive initial trial, they have rarely proven to yield consistent profits. It’s going to take some effort and focus to work through the exercises we are advocating, but when your offer is the first in its category to achieve GAAP profits, you’ll be glad you did.

Playbook Summary

Three plays are identified in this chapter:

Play : Portfolio Definition

Objective : Create and get agreement on a first-cut definition of the XaaS offer portfolio.

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