Chris Mele is the managing partner of Software Pricing Partners.
In times of crisis, some of the worst parts of our human nature can surface—and raise prices sky-high in the hopes of capturing more revenue.
During the Covid-19 pandemic, for instance, some Amazon sellers price gouged hand sanitizer (and New York Attorney General Letitia James fined three). Just before Hurricane Milton hit, over 200 complaints about price gouging had been submitted to Florida Attorney General Ashley Moody. And according to the Wall Street Journal (paywalled), “many companies increased prices rapidly in preceding years when supply chain and labor costs rose, and flush consumers were willing to pay more.” But now, reality has set in, with the Wall Street Journal explaining that ”demand for many goods that aren’t necessities, such as home furnishings or pricey sneakers, has fallen, leaving companies that sell those goods in a battle for a larger piece of a smaller pie.”
These are all examples of situational pricing, the practice of charging customers different prices for the same use case based on their perceived willingness to pay during challenging times or situations. The software world is not immune to some of the worst parts of our human nature. Many software companies have engaged in situational pricing at some point—but it often bites them down the line.
How Situational Pricing Can Manifest In The Software World
In the software world, situational pricing can manifest on the individual level and the company level.
On the individual level, salespeople—trying to survive in a dysfunctional environment—can pick up on factors such as how well-informed a prospective buyer is and how much rapport there is with that prospective buyer. With those data points, salespeople might think, “I can get an edge here if I offer them only a 10% discount versus the 20% discount I’m authorized to give,” or “This prospect is tough; I should raise the list price to get ready for a nickel-and-diming session on our price point later.” The blame shouldn’t fall on the salespeople, as they’re just doing their best to get by under the pressure the software company has placed on them. They are engaging in behaviors that the company, at best, has tacitly encouraged—and that the industry as a whole has normalized.
Then there’s the company level, which usually plays out in one of two ways. First, salespeople, either through information that prospects have willingly offered them or through information gathered from somewhere else, realize that prospective companies that want to sign on are facing a compelling event that makes them desperate for a solution. For instance, a company that’s just suffered a chemical spill is likely to put down more money for a software solution that offers real-time, industrial time-series data management—that company doesn’t have the time to price shop. They needed a solution yesterday. The second way situational pricing can occur at the company level is with the salespeople’s knowledge of the type of company involved. For instance, an enterprise customer in manufacturing and an enterprise customer in oil and gas both need data management to solve similar problems, but a salesperson, thinking the oil line and gas company has better margins, might sell the software to them at a much higher price.
The Dangers Of Situational Pricing
Software leaders can fall into the trap of confusing situational value with the concept of value-based pricing. The term “value-based pricing” can be a bit amorphous; it can be defined differently depending on who is in the room. Value, in general, captures value contributions in aggregate, so it’s easy to mistakenly attribute value to software that isn’t necessarily coming from the product itself. When software companies stuff too much value under the hood of “value-based pricing,” they run into trouble. For instance, tapping into situational value can put you at odds with your customer because they can feel that their situation is being taken advantage of. At the core, situational value isn’t tied as directly to a product’s value. A situation can be a short-term moment, and once a crisis is over, the customer’s perception of value isn’t necessarily going to stay arbitrarily inflated. If the customer subsequently finds out others who weren’t in a similar predicament paid less, watch out. Emotions will flare in ways that threaten ongoing business relationships. So, situational value, by definition, may not always become permanent value for buyers. Of course, all of this hinges on the philosophy that customers should be treated fairly, uniformly and consistently. Unfortunately, in the software industry, this is not a universally shared philosophy.
These days, pricing is not a secret. People talk. A salesperson who moves from one company to another might take the previous company’s price list with them, and even if they don’t, they’ll be well-versed in their former employer’s street pricing, which they’ll likely share internally with their new sales team. A CEO looking into purchasing software for their company might decide to contact some of the featured customers on that vendor’s website to learn how much they’re paying. Two companies on opposite sides of the globe could merge, and the pricing disparity for the same software would come to light. Three CIOs could meet at a conference, realize they use the same vendor and compare notes on payment. These examples are just a few of the many potential scenarios that play out more often than software companies realize.
When these truths surface, software companies end up with damaged customer relationships and tarnished brand reputations. A customer who realizes they’re paying a software company twice what another customer is paying for the same use case will no longer be able to trust that vendor. Throughout the countless customer interviews our firm has conducted since the early eighties, customers have consistently reported that they go out of their way to tell others about being treated unfairly—not only to protect others but also out of spite for being taken advantage of. In fact, a report by the Qualtrics XM Institute found that consumers “were most likely to tell friends and family about both a very good (45%) and a very bad (50%) experience.”
Over time, a tangled web of stories will emerge from the situational pricing game software companies play. Think about the stories in our lives. It’s more common to share and hear stories about ways we’ve been wronged—stories about our anger—than stories about the times we were treated right. Software companies that play the situational pricing game become the perfect villains when the stories of the game they play are revealed.
Why Value-Based Pricing Beats Situational Pricing
To avoid becoming the villains of prospects’ and customers’ stories, software leaders and their teams should focus on value-based pricing devoid of situational pricing. Value-based pricing involves examining what the software company is bringing to the table. Under value-based pricing, 10 analytics reports a month offer the value of, well, 10 analytics reports a month. Just because one customer puts cryptocurrency trading data into their reports, subsequently making millions, doesn’t necessarily give you grounds to charge them more. If you’re crunching algorithms and insights behind the scenes specifically for cryptocurrency users, enabling them to make millions as part of your solution’s value proposition, that’s a different story. That capability is beyond a mere analytic report and can be packaged creatively to the segment of cryptocurrency customers so they’re encouraged to buy more capabilities. Put another way, if a group of customers is truly willing to pay more for software, they are likely using the software differently in some way to extract additional value. If you can’t find this different usage, then it signals you’re on the slippery slope of charging for value you don’t provide. For instance, if your organization can only describe willingness to pay in terms of industry descriptors like “oil and gas customers have a higher willingness to pay,” then you and your team likely haven’t dug deeply enough into that segment’s workflows to better understand the software’s role in that value creation.
Buyers are smart. Software leaders should operate under the assumption that if they pursue situational pricing, buyers will eventually catch on. Acting with transparency and integrity will help software leaders avoid being the villains in a complex web of stories—and will ultimately help put them on a path to continuous monetization.
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