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Software License and Maintenance
Pricing Principles Best Practicesand Case Studies
SoftSummit Conference, Santa Clara, CA
October 18, 2004
Copyright 2004 McKinsey & Company
Walter Baker and Homayoun Hatami
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TODAYS DISCUSSION
Why pricing is important and why superior pricingperformance is hard to achieve
Examples of software license and maintenance pricingissues and best practices
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PRICING IS BIGGEST LEVER AFFECTING PROFITABILITYAverage economics for ISVs between $100 million and $10 billion in sales
59
26
14
100
increases
profit by 7%
15101
Sales Fixedcosts
COGS
Operating
profit
Raising price
by 1%
Source: CompuStat, 2002; McKinsey analysis
2
4
5
7
yields operating
profit improvement
Percent
Improve
by 1%
Price
Volume
Fixedcosts
COGS
True nature of price/
volume tradeoff
Percent
7
-5
Pricechange
Volumechangerequired tobreakevenon profitbasis
How many resources are dedicatedto reducing costs or increasingvolume vs. improving pricing?
Do price reductions drivesufficient incrementalvolume?
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10
7
5
4
2
NUMEROUS CASES SHOW SUBSTANTIAL UPSIDE POTENTIAL
EXISTS FROM IMPLEMENTING PRICING BEST PRACTICES
Pricing impact is
usually greater in
situations with:
Complex product lines Many transactions Broad customer base High switching costs
Weak current pricingcapabilities
Improvement in return on sales
(within 9-12 months of implementation)Percentage points
Enterprise software
Storage systems
(hardware, software,and services)
Computers (serversand software)
Telecom (hardwareand software)
Enterprise software
Source: McKinsey engagement experience
Case example
DISGUISEDEXAMPLES
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EVEN SO, MANY TECHNOLOGY COMPANIES FEEL
THEIR PRICING MANAGEMENT SKILLS ARE "BASIC"
Source: Survey and interviews of 120 senior executives from technology companies, 2003
Understanding/quantification ofdiscount elements
Creating discipline on discountmanagement
Optimizing bid process Decision support tools Transaction-based monitoring
systems
Skill building and training Pricing coordination across units Impact on incentive system
Proactive management of industryconduct
Systematic lifecycle pricing Product differentiation to optimize
margin capture
Quantification and communicationof value proposition
Exploitation of alternative pricingschemes
Transactionalpricing
Pricingprocess,organization,tools, andenablingdevices
Strategicpricing
Structuralpricing
Deficient(1)
Basic(2)
Very good(3)
Superior(4)
Pricing excellence skill level
2.7
Companies in top quartileCompanies in bottom quartile
1.8Average score:
Wide variation incapabilities acrosscore elements ofpricing enablersand infrastructure
Lifecycle andindustry levelpricing abilities arekey differentiators
Ability to quantifyand communicatevalue is weakacross the board
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SUPERIOR PRICING IS CHALLENGING IN GENERAL
Top management attention focused elsewhere (e.g., growth, costreduction)
Limited investment in pricing function and infrastructure Few dedicated, capable pricing resources
Focus and
dedication
Poor understanding by frontline decision makers of fundamentaltradeoffs and implications
Incentives not aligned to drive improved pricing performance (e.g.,sales focused on closing dealsevery deal is a good deal)
Frontline
pricing
performance
No transparency into actual net (pocket margin) pricingperformance across deals, customers, products, markets
Size of prize and potential improvement opportunities not fully
appreciated and prioritized along with other initiatives
Visibility into
opportunity
Share or volume growth aspirations dominate sales strategyinstead of profitable growth
Price not value seen as primary competitive weapon Fear of embracing price leadership
Strategic
direction
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AND EVEN TOUGHER FOR TECHNOLOGY COMPANIES, ESPECIALLY
SOFTWARE BUSINESSES
Frequent innovation and short product lifecycles Steady growth in feature functionality with often decreasing
price/performance ratios
Dynamic
environment
Value delivered is hard to quantify and communicate (e.g., fornew innovations, software, and services)
Marginal costs perceived to be at or near zero for softwareleading to extreme discounting
Communication
of value
Potential for high user switching costs, network effects, andemergence of de facto standards drives push to establish presence
Discipline lost in rush to get to marketWinner takes
all mindset
Myopic view of pricing strategy and tactics over product lifecycle Multitude of alternative pricing models and approaches available
many degrees of freedom (e.g., across license/services)Complexity
over lifecycle
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TODAYS DISCUSSION
Why pricing is important and why superior pricingperformance is hard to achieve
Examples of software license and maintenancepricing issues and best practices
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COMPONENTS OF SOFTWARE LICENSE AND MAINTENANCE PRICING
Product/pricing
architecture
Featurebundles
Segment-based valuepricingstrategy
Licensestructure
Model (e.g.,perpetual vs.
subscription) License
metrics License
scope
Maintenance
offering
Offering
Standardlicense
pricing
Discountingpolicy andpractice
Channelpricing
Speciallicense
pricing
Volumebased
models Enterprise
levelagreements
Promotionand demo
pricing
License
pricing
Renewalpricing
Lifecyclepricing
Renewal and
end-of-life
pricing
Warranty
Update/upgrade
Support Pricing
model Discounting
policy andpractice
Maintenance
pricing
Delivery and
management
Orderingand delivery
Licensemanagement
License andmaintenance
compliance
Revenue
operations
Paymentterms
Revenuedeferral
Internaltransfer
pricing
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COMMON ISSUES AND BEST PRACTICE EXAMPLES
Product/pricing
architecture
Featurebundles
Segment-based valuepricingstrategy
Licensestructure
Model (e.g.,perpetual vs.
subscription) License
metrics License
scope
Maintenance
offering
Standardlicense
pricing
Discountingpolicy andpractice
Channelpricing
Speciallicense
pricing
Volumebased
models Enterprise
levelagreements
Promotionand demo
pricing
Warranty
Update/upgrade
Support Pricing
model Discounting
policy andpractice
Renewalpricing
Lifecyclepricing
OfferingLicense
pricing
Renewal and
end-of-life
pricing
Maintenance
pricing
Delivery and
management
Revenue
operations
Orderingand delivery
Licensemanagement
License andmaintenance
compliance
Paymentterms
Revenuedeferral
Internaltransfer
pricing
Common issues
One size fits all product/pricingarchitecture
Price vs. benefit not assessed atsegment level
License metrics not aligned withcustomer value perception
Best practices
Unbundle software suites asappropriate to better addressunderlying segment needs
Analyze differences in valueperception by segment and setpricing strategy accordingly
Align license scaling metrics withfundamental customer impactparameters (within constraintsimposed by ease of administration)
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IMPACT OF UNBUNDLING SOFTWARE SUITESPercent
* Base now priced at 75% of original price; incremental modules each priced at 30% of original base price
20%
increase
from
unbundling
software
suite
Expectedrevenue withbase/moduleprice structure
120
20 10 100AssumptionsPercent change in
number of deals
Money left on the table
due to unsophisticateddifferentiation model
Convertlossesto wins
Pricesensitivemid-tier
Func-tionalityseekers
New customersegments
118
15
Baseonly
Baseonly
Base+1module
Baseonly
Base+2modules
Modules*
Wantbase only(80%existing)
Wantfunc-tionality(20%existing)
Current customers
7
-20
Currentrevenue
100
DISGUISEDEXAMPLE
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OPPORTUNITIES TO ADDRESS DISTINCT VALUE
PROPOSITIONS IN CUSTOMER SEGMENTS
Heavy
software
users
Moderate
or non-
softwareusers
No product
purchase strategy
Clear product
purchase strategy
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Competitor CCompetitor B
Company A
Valueadvantage
Valuedisadvantage
Competitor B
Company ASegment 2Segment 1
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Competitor B
Company A
Segment 4
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Competitor B
Company ACompetitor C
Segment 3
DISGUISEDEXAMPLE
Valueadvantage
Valuedisadvantage
Valueadvantage
Valuedisadvantage
Valueadvantage
Valuedisadvantage
~15%
Value pricing
opportunity
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CHOOSING WRONG LICENSING METRIC CAN LEAD TO
HEAVY DISCOUNTING OR BELOW VALUE PRICINGCompetitor pricelower
Company pricelower
Ratio between client and competitor list prices
1
2
4
6
8
10
15
20
Capacity 8 16 32 64 128
1.2 1.0 0.8 0.6 0.4 0.2
1.4 1.1 0.9 0.6 0.4 0.2
1.7 1.4 1.1 0.8 0.5 0.3
2.0 1.7 1.3 0.9 0.6 0.3
2.3 1.9 1.5 1.0 0.7 0.4
2.6 2.2 1.7 1.2 0.7 0.4
3.3 2.8 1.0 0.6
4.1 3.4 1.2 0.7
Number of ports
2.7 1.9
Company Competitor
Capacity PortsPricing parameter
Poor HighAlignment withperceived value
Company undercuts competitor
and does not fully capture value
Perceived
value
Com-
petitor
Company
?
1.52.2Company price far exceeds competitor
price and perceived value, forcingsales force to discount heavily
Perceivedvalue
Com-petitor
Company
256
DISGUISEDEXAMPLE
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COMMON ISSUES AND BEST PRACTICE EXAMPLES
Product/pricing
architecture
Featurebundles
Segment-based valuepricingstrategy
Licensestructure
Model (e.g.,perpetual vs.
subscription) License
metrics License
scope
Maintenance
offering
Offering
Standardlicense
pricing
Discountingpolicy andpractice
Channelpricing
Speciallicense
pricing
Volumebased
models Enterprise
levelagreements
Promotionand demo
pricing
License
pricing
Renewalpricing
Lifecyclepricing
Renewal and
end-of-life
pricing
Warranty
Update/upgrade
Support Pricing
model Discounting
policy andpractice
Maintenance
pricing
Delivery and
management
Orderingand delivery
Licensemanagement
License andmaintenance
compliance
Revenue
operations
Paymentterms
Revenuedeferral
Internaltransfer
pricing
Common issues
Lack of frontline discountingdiscipline (e.g., at end of quarter)
Target discount structure doesnot differentiate by segment
Special license agreements areall one-off deals
Enterprise license agreementsused with smaller accounts
Best practices
Establish discount floors andexception managementprocesses with incentives tied tomeasurable performance
Differentiate target discounts bysegment based on underlyingvalue differences
Standardize volume/ELA dealT&Cs and centralize approvalprocess to ensure consistency
Set rigorous account criteria toqualify deals for ELAs
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WIDE VARIABILITY IN FRONTLINE PRICING
0
10
20
30
40
50
60
70
80
100 1,000 10,000 100,000 1,000,000
License discount
Percent of list price
Deal size
Dollars
Deal level analysis
What is justificationfor such widelyvarying discounts forsimilar sized deals?
Why are there so
many deals (evenmedium ones) at fulllist price?
Why do smallerdeals receive suchlarge discounts?
Can sales
behavior bechanged tolimit discountsat standard
levels?
DISGUISEDEXAMPLE
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OFTEN INDICATES OPPORTUNITIES TO IMPROVE
FRONTLINE PERFORMANCE
0.9
2.9
7.6
4.5
1.5
11.0
18.8
11.1
3.82.7
21.6
1.0 0.72.0
0.2
8.0
1.30.3
85
Distribution of deals by discount level
Percent of sales
Maximize upside potential Set list prices competitively and fairly Avoid additional automatic discounts
(e.g., volume discounts) Focus marketing program and
executive visits
Tighten range of discounting Create disciplined pricing/escalation processes Align sales force incentives to reduce
discounting Create tools to track and support frontline
pricing performance
Discount bandPercent of list price
DISGUISEDEXAMPLE
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POOR MANAGEMENT OF EXCEPTIONS MAKES IT EASIER TO
NEGOTIATE INTERNALLY THAN EXTERNALLY
100
7050
3
2
5
Quotes from sales force interviews
Managers are no deterrent, they approve everything We never walk away from deals These big deals with huge discounts only get done
because of senior management approving them
Approval/rejection of exceptional discount for deals
Number of deals
Managers rarely rejectescalated deals
Sales reps are not afraidto request high levels ofdiscount
Sales reps do not suffer
any consequences fromoffering excessivediscounts
Discountapproved
Discountrejected
Salesmanager
Area VP VP Sales
105
72
53
DISGUISEDEXAMPLE
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IMPACT OF IMPROVING END-OF-QUARTER BEHAVIOR
First 11weeks
Last 2weeks
45%
44
56
37%
Initial situationPercentage of total deals100% = 220
Average discount
Impact Shift in deal volume away from end-of-quarter Reduced discounting on largest deals Improved profitability (on higher deal volume)
14% profitimprovement
28
72
First 11weeks
Last 2weeks
After 1 yearPercentage of total deals100% = 263
43% 28%
Change initiatives
Marketing role expanded to include Competitive intelligence Price negotiation support
Sales incentives Mid-quarter quota targets Price realization incentives and
penalties
Commitment to change behaviors CEO approval for EOQ deals
over Area VP discount authority
Internal and externalcommunication strategy
DISGUISEDEXAMPLE
SCO G O C S S O C C S
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18
40
38
68
58
58
56
46
44
DISCOUNTING POLICIES SHOULD REFLECT DIFFERENCES IN
CUSTOMER SEGMENT VALUE PERCEPTIONS
Academic
Government
Pharmaceuticals
Professional services
Utilities
Packaged goods
Manufacturing
Financial services
License discount
Percent of list price
30% 40% 50%
One-size-fits-alldiscount floors
Traditionally higherdiscount segments
Discount policies should betighter in those segments wheresoftware titles are of intrinsicallygreater value
DISGUISEDEXAMPLE
COMMON ISSUES AND BEST PRACTICE EXAMPLES
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COMMON ISSUES AND BEST PRACTICE EXAMPLES
Product/pricing
architecture
Featurebundles
Segment-based value
pricingstrategy
Licensestructure
Model (e.g.,perpetual vs.
subscription) License
metrics License
scope
Maintenanceoffering
Offering
Standardlicense
pricing
Discountingpolicy andpractice
Channel
pricing
Speciallicense
pricing
Volumebased
models Enterprise
levelagreements
Promotionand demo
pricing
License
pricing
Renewalpricing
Lifecyclepricing
Renewal and
end-of-life
pricing
Warranty
Update/upgrade
Support Pricing
model Discounting
policy andpractice
Maintenance
pricing
Delivery and
management
Orderingand delivery
Licensemanagement
License andmaintenancecompliance
Revenue
operations
Paymentterms
Revenuedeferral
Internaltransferpricing
Common issues
Concessions at time oflicense sale can delay
maintenance revenuestream
Excessive discountingof maintenanceservices
Choosing betweenpercent of list vs.
percent of net
maintenance pricing
Best practices
Enforce strict criteriaand require approval
for nonstandard terms
Establish tight discountpolicies and practicesfor maintenance (e.g.,sales commission
carve outs)
Either practice can beviable provided there issufficient discipline
SOFTWARE WARRANTY/MAINTENANCE CONCESSIONS CAN
DISGUISED
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SOFTWARE WARRANTY/MAINTENANCE CONCESSIONS CAN
REDUCE ANNUITY OPPORTUNITY
Effective warranty/maintenance period due to
concessions given away at time of license salePercent of licenses
45
25
5
25
0-3 3-6 6-9 9-12 12-15 15-18 18+18+
Standard industry practicefor warranty (90 days)
Coverage periodMonths
Due to forward sale or
shelfware customernot ready to use software
Due to previous deals orconcurrent sales (e.g.,hardware) with customer
DISGUISEDEXAMPLE
NET EFFECT OF SOFTWARE MAINTENANCE DISCOUNTS CAN DISGUISED
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NET EFFECT OF SOFTWARE MAINTENANCE DISCOUNTS CAN
BE SIGNFICANTMaintenance revenue, indexed to revenue = 100
DISGUISEDEXAMPLE
List value ofrevenue
Discounts attime oflicense sale
Discounts atrenewal
Customersatisfactionand otherhiddendiscounts
Net revenue
35
25
175
15100
MAINTENANCE SERVICES CAN BE DISCOUNTED MUCH LESS DISGUISED
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License
MAINTENANCE SERVICES CAN BE DISCOUNTED MUCH LESS
THAN LICENSE SALES
Share of list revenue
Percent
69 10 10
6
16 15
9 811
Average ~50%
0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100
DISGUISEDEXAMPLE
Discount
Percent of list price
0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100
Maintenance Average 3%
75
1015
0 0 0 0 0 0 0
(all at 0)
Maintenance discounts were rarelyallowed
Sales reps were required to sellmaintenance with license and were
penalized if they discounted it
License discounting rulesoften violated
Licenses in biggest dealsalmost given away
THERE IS NO DOMINANT SOFTWARE MAINTENANCE 2001 DATA
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THERE IS NO DOMINANT SOFTWARE MAINTENANCE
PRICING MODEL
Source: Gartner 2001 software support portfolio (October 2001); IDC 2001 support services for enterprise-level applications;Company website; McKinsey analysis
Software maintenance pricing model
Percent, N = 24 companies
Percent of license
net price BMC HDS Clarify
DEA IFS Network Associates Oracle SAP
Mixed models
Veritas HP Caldera Linuxcare Microsoft NCR Sybase
Percent of license
list price Novell Peoplesoft Progress
CA Sun IBM EMC Filenet Legato
33
29
38
There is no rightanswer either modelcan be viable
Mix of models used byindustry
Can usually realizeany given absoluteprice point under eithermodel
Best choice of model
depends on salesobjectives, incentives,frontline discipline, andsometimes tacticalfactors (e.g., systems)
2001 DATA
COMMON ISSUES AND BEST PRACTICE EXAMPLES
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COMMON ISSUES AND BEST PRACTICE EXAMPLES
Product/pricing
architecture
Featurebundles
Segment-based value
pricingstrategy
Licensestructure
Model (e.g.,perpetual vs.
subscription) Licensemetrics
Licensescope
Maintenanceoffering
Offering
Standardlicense
pricing
Discountingpolicy andpractice
Channel
pricing
Speciallicense
pricing
Volumebased
models Enterpriselevelagreements
Promotionand demo
pricing
License
pricing
Renewalpricing
Lifecyclepricing
Renewal and
end-of-life
pricing
Warranty
Update/upgrade
Support Pricing
model Discounting
policy andpractice
Maintenance
pricing
Delivery and
management
Orderingand delivery
Licensemanagement
License and
maintenancecompliance
Revenue
operations
Paymentterms
Revenuedeferral
Internal
transferpricing
Common issues
Inadequate licensemanagement tools
result in lack ofinstalled base usageinformation
Entitlement check andenforcement practices
for license andmaintenance are weak
Best practices
Use electronic licensemanagement tools to
facilitate registration,trial usage, purchase,and customer softwareasset management
Entitlement systemscan limit unlicensed
usage and createopportunity formaintenance renewal/up-sell
ELECTRONIC LICENSE MANAGEMENT CAN HELP ENFORCE DISGUISED
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ELECTRONIC LICENSE MANAGEMENT CAN HELP ENFORCE
ENTITLEMENT RIGHTS
Breakdown of software related
customer service support calls
Percent 20% of calls were not entitled to support Significant support cost reduction
opportunity Opportunity to upsell/renew
maintenance contracts
Electronic license management tool,combined with entitlement system can: Bring visibility to compliance issues Clamp down on unlicensed usage Lower cost of managing support
entitlement
80%
20%
DISGUISEDEXAMPLE
Entitled tosupport
Notentitled
COMMON ISSUES AND BEST PRACTICE EXAMPLES
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COMMON ISSUES AND BEST PRACTICE EXAMPLES
Product/pricing
architecture
Featurebundles
Segment-based value
pricingstrategy
Licensestructure
Model (e.g.,perpetual vs.
subscription) Licensemetrics
Licensescope
Maintenanceoffering
Offering
Standardlicense
pricing
Discountingpolicy andpractice
Channel
pricing
Speciallicense
pricing
Volumebased
models Enterpriselevelagreements
Promotionand demo
pricing
License
pricing
Renewalpricing
Lifecyclepricing
Renewal and
end-of-life
pricing
Warranty
Update/upgrade
Support Pricing
model Discounting
policy andpractice
Maintenance
pricing
Delivery and
management
Orderingand delivery
Licensemanagement
License and
maintenancecompliance
Revenue
operations
Paymentterms
Revenuedeferral
Internal
transferpricing
Common issues
Prepaid or earlypayment terms often
generous beyondsound give and get
Service giveaways andconcessions lead tomisaligned sales vs.
corporate financedeferral methodologies
Best practices
Ensure businessobjectives and logic
underlying prepaid orearly payment termsjustify margin reduction
Reducing or eliminatingservice giveaways andconcessions can help
reinforce and clarifyoverall corporatedeferral guidelines
COMMON ISSUES AND BEST PRACTICE EXAMPLES
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COMMON ISSUES AND BEST PRACTICE EXAMPLES
Product/pricing
architecture
Featurebundles
Segment-based value
pricingstrategy
Licensestructure
Model (e.g.,perpetual vs.
subscription) Licensemetrics
Licensescope
Maintenanceoffering
Offering
Standardlicense
pricing
Discountingpolicy andpractice
Channel
pricing
Speciallicense
pricing
Volumebased
models Enterpriselevelagreements
Promotionand demo
pricing
License
pricing
Renewalpricing
Lifecyclepricing
Renewal and
end-of-life
pricing
Warranty
Update/upgrade
Support Pricing
model Discounting
policy andpractice
Maintenance
pricing
Delivery and
management
Orderingand delivery
Licensemanagement
License and
maintenancecompliance
Revenue
operations
Paymentterms
Revenuedeferral
Internal
transferpricing
Common issues
Inefficiencies inrenewal process can
void and delay renewalopportunity
Discount policies are
same for maintenancedeals at both time oflicense sale andrenewal
Best practices
Provide sales incentiveto renew contracts well
before expiration andsupport reps withefficient renewalprocess (e.g., insidesales support)
Tighten discounting
policies for renewaland enforce disciplinein renewal negotiations
INEFFICIENCIES IN RENEWAL PROCESS CAN VOID DISGUISED
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INEFFICIENCIES IN RENEWAL PROCESS CAN VOID
OPPORTUNITY
Renewal opportunities
Indexed to total opportunity Best practice renewal
rate for software is 85-95%
Sales not pursuing allrenewal deals (lack ofsales priority/capacity)
Sales not closing allrenewal deals (lack ofproductivity or skill)
EXAMPLE
Totaloppor-tunity
Cancelledfor adminreasons
Forgoneoppor-tunity
In quote orpendingcustomerresponse
Cancelledby cust-omer
Renewed
15
10
100
60
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Percent of renewal opportunity value
28
16 1614
9
6
4
Beforeexpiration
1-30 30-60 60-90 90-120 120-150 150+
Time to renewal beyond contract maintenance expiration
Days
Average = 29
Best practice is to send renewal
quote and P.O. 90 and 30 days(respectively) before contractexpiration to lock in renewal
Long renewal processteaches customers thatrenewal decisions can wait
EXAMPLE
MAINTENANCE RENEWAL SALES CAN BE DISCOUNTED MUCH DISGUISED
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LESS THAN AT TIME OF LICENSE SALE
25
30
50
55
Q1
Q2
Software maintenance discount
Percent of list price
Renewal
Time of license sale
At time of renewal Fewer competitive options are
available to customer (e.g., third-partyor self-maintenance not always viablefor mission critical applications)
Renewal approval is scrutinized lessthan initial license deal, often bydifferent buyers
Software companies should: Have tighter discounting policies for
renewal sales
Hold line in renewal pricingnegotiations
Same discount floors inplace at time of licensesale and renewal
EXAMPLE
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NO DEFINITIVE LICENSE/PRICING MODEL
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Perpetual Customers can predict
expenditures Payments can be capitalized
End-of-quarter pressures
result in deep discounting One-time payment could be
relatively large and can befocus of customers price
reduction efforts
Subscription Lessens impact of end-of-quarter pressures
Can facilitate customeradoption due to lower up-front costs and shortercommitments
Transition to new revenuemodel may not be welcomed
Risk of renegotiation beforeend of contract
More difficult for customersto capitalize payments
Pros ConsPricing model
BEWARE OF ASSUMPTION THAT MARGINAL COSTS ARE ZERO DISGUISEDEXAMPLE
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Configured
list price
* Includes sales costs, allocated R&D acquisition/goodwill, royalties, license fees** Including professional, installation/integration, and maintenance/support services
Professionalservices
Installation/maintenanceservices
Application/featurefunctionalitysoftware
Coreoperatingsoftware
Invoice
price
Pocket
price
Pocket
margin
100
Percent, indexed to configured list price
15
25
5
5
20
10
40
20
10
10
2.52.5
55
40
5
30
Actualservicecosts**
COGS/effectivetransferprice*
Paymentdelays(e.g., A/R,acceptancecriteria)
Rebate/old versionor credit/peripheralgiveaways
Giveaway install/integration andmaintenance/support services
Giveawayprofessionalservices/customization
Featurefunctionalitystuffing/giveaways
Competitivenegotiated
discretionarydiscount
Standardcustomervolume/ tier
discount
EXAMPLE
BUNDLING OF SOFTWARE INTO HARDWARE SALES DISGUISEDEXAMPLE
-
7/30/2019 McKinsey BakerHatami
35/35
34
45
30
25
Distribution of deals by type
Percent of deals100% = 500
Softwareonly
Hardwareonly
Hardwarewith software
55
30
Hardware
withsoftware
Software
only
Weighted average discount of deals
Percent
Wrapping software into hardware deals can result in heavydiscounting (to sweeten the deal)
Software is often bundled with hardware because of desire tomaximize product revenue may need to correct incentives
EXAMPLE