Re: Tiered pricing (was Tiger tools...) -- MIDRANGE-L


Shannon O'Donnell wrote:
>
> I hate to do it :-) but I have to agree with Brad on this one.  I've never
> held a very high opinion of tierd pricing, or vendors who price their
> product based on that model.

A lot of them are very successful.

> The argument that you have to support more users on a larger box is not
> relevant.

Actually the argument is that the customer is getting more use
and value out of the software. The usefulness of the software is
what creates its value. That is its reason for being. Software
generally saves the customer money by making some process
cheaper or more convenient. In some way or another, the customer
is making money by having the software in place. The more use
the customer gets from the software, the more money they are
making or saving. The customer wants to keep it all, but the
software vendor wants to share in the benefit.

Who is being greedy here? Both the software vendor and the
customer are being greedy.

> Vendors typically charge one price, tier priced, for the software
> itself, and then charge a secondary (monthly or annual) fee for maintenance.

How many of your vendors are still using tiered pricing? I don't
see it much in document content management.

> There's no good reason why a vendor couldn't charge  a single fee for the
> product itself, and then charge a sliding fee for the maintenance, based on
> actual number of users. Wouldn't that be more fair?

It weould be impossible. Customers complain about 15%
maintenance, much less the 18% to 20% others charge. If the
software was cheap and the maintenance was, say, 35% of the
software price, the vendor would never sell the software.



> I know of one example off the top of my head where a vendor (I won't name
> names, but they are very big in their own niche in the iSeries market)
> charges for their software based on processor group.  The customer that is
> interested in their product could use their product...but they only have
> about 10-15 users that will use it on their P40 processor.
>
> The cost of the software at that processor group is well over $100K.  That
> price doesn't change if the number of users goes up or down. It's based
> soley on processor. So a company that has 200 users of that product is
> getting a much better value than this other company with only 15 users.
>
> Where's the equity in that pricing model?

Well, the equity is in supposing that a larger firm (who has a
bigger processor because of their general business size) is
going to get more dollar value out of using the software, even
if the same number of people are using it as at a smaller firm
(which might not be so profitable or efficient.)

Her's a somewhat twisted example, to cast it in a different
light. Suppose you are a small airline. You use Canadair jets
that hold 60 people, using a pilot and copilot. Suppose I sell
you magic software that makes your jet go 10% faster. You reduce
your fuel costs and some of your overhead by 10% for 60
passengers per trip.

Now you use the same software on a Boeing 767 holding 120 people
- with the same pilot and copilot. That same 10% savings is
making you at least twice as much money. Should the cost of the
software be the same? If it was, wouldn't you think you were
taking advantage of the software company, and offer to pay them
more?

> In my humble opinion...and only my opinion...tiered pricing is nothing more
> than a license to steal.

Well I hope my little exposition makes it seem a little
different. People use it because it works. (It never worked for
me.)

> If I was selling a product, I'd have a hard time selling it based on tiered
> pricing, and still being able to look myself in the mirror the next day.

Werll, part of the problem is that costs are visible and value
tends to be invisibile. Or costs are conscious and value tends
to be unconscious. I've always had difficulty pricing software
for sale. I always want to make it cheap, then I find that
customers spend more than the price of the software, evaluating
the software, ebcause they have certain habits and procedures.
Meanwhile my salespeople, developers, and tech support guys
starve. There's no rationality about it.

For example, I sell a report archiving system. it's priced so
that it is cheaper than printing and handling paper for
virutally everyone in our market. It also is simpler than having
an operator print reports day and night, having people waiting
for reports, having limited copies of reports, having insecure
reports anybody can read or take home, having reports that have
to Fedexed to Timbuktu. Using a computer to assemble information
and then print in on paper where it is no longer digital
information, where it has to be processed by human methods
rather than digital storage and retrieval, is like building a
Toyota from raw materials then smashing it back to bits with
sledgehammers as it comes off the assembly line.

Something like 85% to 90% of midrange shops don't have an
archiving system. Why? Inertia? Indifference? It isn't sexy?
There are still people using microfiche! Paper in binders in
file cabinets in U-Store-Its! 5,000 year old data processing
technology!

Vendors try to predict the amount of value that you get from
using their software, and price accordingly. The market tells
them if they have guessed right.

Despite what they taught me in economics class, lowering the
price does not necessarily lead to competitive advantage or
higher sales volume. It is perception of value that leads to
purchase, and in unfamiliar territory price is often taken as
the best indicator of value.

> My 2 cents.

I'm not trying to defend tier pricing here, but to explain
pricing decisions by vendors. There is something of the quality
of a dartboard experience about it, at least for me.

Believe it or not, I do want to sell my product at the lowest
price that I can make a living at, both from the mirror point of
view, and under the continuing expectation that it will lead tot
he fastest market penetration, greatest customer satisfaction,
and highest overall value for all of us.

Sure I want to make millions of dollars - and I know the best
way to do so is to help my customer save or earn many millions
of dollars.

I hope all this discussion doesn't seem too commercial for you
all. I mean it as an exposition of the vendor's point of view on
pricing. We aren't evil greedy horrible people - we want to pay
our employees, send our kids to college, and maybe have a place
at the lake for our trouble. A number of us are entrepreneurs
who are at some risk as we attempt to create value for an
apparently fickle and faddish market (at least if you go by what
the magazines focus on). I don't have any venture capitalists or
stockholders to impress - I just want to write great software
and sell it a decent and affordable cost. How do I make that
cost affordable to people with different levels of needs and
benefits? 25 years after starting as a programmer at a Burroughs
1700 shop, I can honestly say I am still winging it.

Many of our prospective customers burn up the cost of our
product at least once over in the time it takes them to go
through their decision-making process, evaluation of 3
alternatives, and whatever secret voodoo chicken dance they do
to purchase. Like many software vendors, I know that you are
already paying for my product now - but all you get is paper and
filing cabinets instead of something useful and fun. Talking you
into making the change from bronze-age papyrus technology, at a
price you are happy with, is the great challenge of our lives.
I know that the price is variable, but the cost is less than
what you are paying now, so it is already a good deal.

I went out last week and bought a new Chrysler minivan (to
replace my three year old one.) I paid the sales reps asking
price. It's costing me $25 more than my previous car payment.
I'm enjoying the experience of driving my new car. I also have
the feeling that I am helping all of the rest of you. I amy be
wrong, but that is what I feel. It's RED!

By the way. some of my competitors charge by seat. I try to
avoid it, but sometimes it is difficult - because the toolkits
we use want to charge US by seat.

--
Brad Jensen brad@elstore.com
President
Electronic Storage Corporation Tulsa OK USA
918-664-7276

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