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Fast Company
6 days ago
- Business
- Fast Company
Why tying B2B software pricing too closely to usage and performance is risky
During tough economic times, buyers' usage and performance often take hits, leading to financial losses for B2B software companies. [Courtesy of Chris Mele] The Fast Company Executive Board is a private, fee-based network of influential leaders, experts, executives, and entrepreneurs who share their insights with our audience. BY Picture this: You decide to focus on your fitness and order a monthly protein bar subscription. The protein bar company tells you that it will only charge you for the products if you build a certain percentage of muscle in the first year. That pricing strategy is absurd—certainly a great deal for you, the customer, but a bad one for the protein bar company. You could eat every single protein bar in your subscription, but still not build a certain percentage of muscle in the first year because you have a habit of skipping the gym. The problem with pricing strategies like this is that they tie pricing not only to customer usage but also to customer performance. I've yet to see a protein bar company that uses such a pricing approach, but unfortunately, I've seen many B2B software companies link their pricing to the usage and performance of their customers. Essentially, some leaders of software companies go beyond arguing that their products provide value; they are so convinced that their products are foolproof that they argue that, actions aside, customers will get results. Software companies that tie their pricing too closely to customer usage and customer performance often end up suffering, especially during uncertain times. On the surface, heavily tying pricing to customer usage and customer performance in the software world doesn't look as extreme as the two examples above. Some software companies might opt for one or the other—and/or have a softer interpretation. For instance, in terms of usage-based pricing, a corporate messaging solution provider might charge buyers by the number of active users or storage consumption. Moreover, not every example of usage-based pricing has the same level of risk. As for pricing centered on customer performance, a CRM solution provider might charge by the number of qualified leads a buyer produces with its software or by taking a percentage of revenue a buyer generates through its software. When the economy is doing well, sure, pricing tied to customer usage or customer performance can keep software companies afloat and even result in record profits. In a booming economic environment, buyers with usage-based pricing are likely to be willing to write larger checks for more users or storage. Buyers with performance-based pricing will be more likely to generate leads and revenue in a prosperous economy, leaving the software vendor with a larger share of the profits. But when the economy starts to decline, that's when software companies that have made their pricing too reliant on customer usage or customer performance—or worse, on both customer usage and customer performance—can find themselves in trouble. Tying pricing too heavily to customer usage and customer performance can harm software companies during times of economic uncertainty. Under a strained economy, buyers' usage and performance often take hits. For example, in terms of usage-based pricing, a software company that charges for the number of quotes generated through its platform might see a drop in numbers during tough economic times, as its customers have less of a need and lower budgets. As for performance-based pricing, consider the same software company instead charging for the number of quotes won through its platform. If those buyers start making less during an economic downturn, the software company could be left with even less. It is imperative that software company leaders revisit their pricing models as soon as possible to strike a balance between predictability for their companies and flexibility for their customers. Software company leaders should proceed carefully and thoughtfully, with detailed rollout plans that include iteration and testing schedules, when making more substantial changes to their packaging and pricing. An example of a larger change would be a software company's executives changing the basis by which they charge for the software, such as moving from the number of users to the number of surveys, especially during uncertain times. As far as the trifecta of licensing, packaging, and pricing, it's generally riskiest for a software company to change its licensing model. Pricing and packaging iterations tend to be less risky. Regardless of which part of the trifecta software company leaders want to change, they should take strategic de-risking measures. The specific de-risking measures they should pursue depend on their unique circumstances. However, there are several approaches they can consider. For one, they could revisit their offering models. When revising their offering model, executives of a software company could look for a lower entry point on an offer with less functionality, explore various sales promotions, or revisit their minimum purchase threshold, to name a few options. Software company leaders should also consider examining their cost structures to identify potential optimizations. By doing so, they can reduce their spending without impacting their margins or increasing prices for their customers. Software company leaders could also increase implementation support to help customers get onboarded more quickly, which, in turn, enables them to see the value of the software faster. For instance, instead of taking six months for implementation, software teams could set a goal to reduce the timeframe to three months. Additionally, software company leaders might consider offering managed services. For instance, if an email marketing solution provider notices that its customers are laying off large numbers of marketing employees, it could offer a managed service to help those customers with email marketing in the interim. Finally, software company leaders could offer temporary sales promotions that protect their companies while giving customers some breathing room. However, they should make it clear that these price cuts are temporary sales promotions and not permanent. Permanently cutting a list price can backfire in a big way—cut a $1,000 list price down to $500, and good luck bringing it back up to $1,000 even once the economy gets better. During turbulent economic times, software companies should clean up and de-risk their products and pricing. If they're struggling or taking a hard hit, they should consider making larger changes to prevent further damage. However, at the core, the software companies that avoid tying their pricing too closely to customer usage and customer performance stand the highest chances of survival when uncertain times hit. The early-rate deadline for Fast Company's Most Innovative Companies Awards is Friday, September 5, at 11:59 p.m. PT. Apply today. ABOUT THE AUTHOR The Fast Company Executive Board is a private, fee-based network of influential leaders, experts, executives, and entrepreneurs who share their insights with our audience. More
Forbes
07-07-2025
- Business
- Forbes
Unlocking Growth: How Consulting Firms Can Evolve Into Software Companies
Chris Mele is the managing partner of Software Pricing Partners. Companies can increase their revenue in various ways, such as building new features in existing products, offering entirely new products or services and providing proprietary market insights derived from unique data or methodologies. The more types of differentiated offerings a company can provide, the more value it can deliver and generate. Of course, there is only so much firms can do, and at some point, they might have to decide which type of offering they want to focus on. For consulting companies, shifting to software as the primary offering can pay off, as software is more scalable and can have better margins than services. However, the transition is a challenging one that consulting companies should carefully navigate. How Shifting To Software Can Help Consulting Companies Avoid The Commoditization Trap Consider an HR consulting firm that offers guidance on employee compensation. Its compensation analysts spend hours analyzing salary data from various sources, creating customized reports and explaining their findings to clients. They bill their clients by the hour. However, there are only so many hours in the day and only so many dollars in the firm's hiring budget to bring new compensation analysts on board. By developing and deploying a software solution, the firm could scale. Thanks to the software solution, the compensation analysts (who are the company's employees) could automate some of the data-gathering and analysis processes. Clients could run their own models, exploring different compensation scenarios. They can then meet with the compensation analysts to get further insights and recommendations. Consulting companies face a commoditization trap. Especially in areas such as SEO strategy and marketing campaign ideation, there's usually constant pressure from the market to lower prices. Overseas service providers and AI further contribute to the view that certain services are commodities. Moreover, buyers are very attuned to the rates, given how exposed the cost structures are (whether hourly rates, project fees or retainers). By transitioning to software, consulting companies can combat, or even embrace, this commoditization. Software enables firms to charge by the value provided rather than by hours, project fees or retainers. Firms can also mix and match their pricing between services and software. For example, if there's downward pressure on pricing for services, they can make up for it with the cost of the software. The Challenges Of Shifting From Services To Software The first set of challenges consulting companies tend to encounter when transitioning from services to software is internal. Software can save team members time, but in a revenue model where time is money, cutting back on time is a problem. Going back to the example of an HR consulting firm, if the firm automates the compensation analysis process, it can't always justify billing clients by the hour on top of the software. The company's compensation analysts won't necessarily push back on this change, but the company's customers may. If what was being done in five hours now takes one hour, the company is left with the issue of what to bill the client—the client expects automation to lower their fees, but the consulting company would like the extra margin. Given downward pressure on hourly rates in certain industries, when consulting firms put software on the table, they're able to better play the competitive game. By proactively presenting customers with a value-add (the technology) and lowering their rates or hours charged, firms position themselves as innovative partners who can deliver greater efficiency—an approach that works better than repeatedly fighting market pressure. The challenge, however, is that the company's team is telling customers that there is a new, powerful software that does the work in a fraction of the time and with presumably better accuracy. So, customers will naturally want those benefits expressed in the form of being billed for fewer hours. Consulting companies that continue to charge by hourly rates or fixed retainers can suffer financially when bringing forward technology—they bill less, make less and still have to absorb the costs of software development. The solution is for consulting firms to fundamentally change what they're selling. The consulting firm's business model must change alongside changes in customers' perception of value and how they may want to buy the software. So, instead of selling just services, consulting firms should drive revenue by changing the mix to services plus software. Specifically, executives should lower service fees and make up for those fees in the form of software access fees, which, over time, stand to drive stronger profits than services alone. There are revenue structure issues as well. Typically, pricing in a services-based model is relatively straightforward compared to that in software. Clients pay based on the hours they spend meeting with a service provider or, if the service provider doesn't charge by the hour, their agreed-upon project fee or ongoing retainer amount. Another major internal issue? Branding. Consulting firms build their reputations on the expert analysis and insights they offer. If they suddenly put software in front of clients, the market's perception of their brand could very well shift—some prospective and existing clients might not value the software solution as strongly as they value the services the company renders. Then there are the challenges on the client side. By moving from a services model to a software one, companies create ongoing client engagement and generate recurring revenue. But that benefit comes with drawbacks, particularly in the early stages of the shift. Communicating value and charging for that value becomes more difficult. Software's value is often elusive, and that elusiveness is more stark when compared to services, making it tough for clients to justify the additional cost. When suddenly faced with software pricing instead of, or alongside, hourly rates, customers might balk. If the company is still offering services, customers might question why they need them or push for lower rates in that area. The Keys To Effectively Managing The Transition From Services To Software Consulting firms should not attempt to become software companies overnight. If they suddenly reduce or halt their services, clients may overreact and churn, fearing they won't be able to achieve their goals. To navigate the challenges of moving from services to software, executives of consulting firms should pursue a hybrid approach, essentially running their companies as tech-enabled consultancies and iterating on their software over time. A hybrid approach offers several benefits. For one, firms can retain clients' perceived value of their expertise and position the technology as enhancing, rather than replacing, that expertise—and in turn, generate more revenue. Firms can also use the software to keep customers engaged and generate recurring revenue. Additionally, software can be a powerful tool for deal structuring. For instance, if a firm is offering services for $50,000 and software for $5,000 annually, and the buyer wants a discount on the services, the firm can offer structured incentives in exchange for a longer-term contract. With the hybrid approach, leaders of consulting firms can compare the profitability of the services side versus the software side. Over time, the software can become so profitable that many of the services can transition into value-added offerings in the form of support and professional services that surround the software. In this situation, sales conversations lead with the software first, followed by the supporting services, rather than the other way around. The ratio, however, matters. Some companies might never reach the point where the ratio favors their software, and that's okay. A full software approach, for many consulting companies, is not feasible. But by offering software alongside services, consulting companies can future-proof themselves against downward pricing pressure on services. Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives. Do I qualify?
Forbes
03-07-2025
- Business
- Forbes
Failing To Update Pricing Devalues B2B Software
Chris Mele is the managing partner of Software Pricing Partners. Against the backdrop of the rapidly evolving technology industry, not all B2B software companies produce products that last forever. The companies that survive into the expansion growth stage and become mature usually face an uphill battle to get there. Once they do, they have a new problem to tackle: market saturation. The Inflection Point Of Market Saturation At the point of market saturation, executives of B2B software companies have likely pursued the tried-and-true methods of growing the product's reach, such as expanding into new markets, selling through other channels and offering the software in other languages. They find themselves having to stand out in a sea of competitors fighting for the same pool of users. The path to growth turns into a battle to draw in users from the competition. To win that battle, leaders unleash new features and offer promotions and discounts. On the surface, those actions might appear to work as new customers sign up. But dig deeper, and it becomes clear that those new customers usually haven't translated to increased profitability. Why? Because executives didn't take the discipline of monetization into account. Enhancing the value of a B2B software product without charging more for it devalues it. The Reality Of Product Development Software development, by nature, is expensive and time-consuming. Product teams hold numerous meetings to discuss new features and put together roadmaps. Developers pour thousands of hours into undoing technical debt and building, testing and deploying new features. Marketing teams painstakingly craft and refine messaging about the new features that will resonate with customers and prospects. However, when new features are rolled out, the packaging and pricing usually don't get the same level of attention; they often go unchanged. Customers tend to get software with increased capabilities without paying a cent more. B2B software is a quintessential example of a product that you can pay the same price for as before while getting access to newer, more powerful features. Consider this: According to data science company Parrot Analytics, Netflix experiences low customer churn for various reasons, including having a massive content library, good customer service and a 'sustainably sticky offering.' When Netflix increased prices in 2025, it did so in small increments. When the company ended its least expensive ad-free option in 2024 (which was $11.99 a month), subscribers didn't have to pay much more for the standard ad-free plan ($15.49 a month). The lesson here? In the B2C world, consumers can generally absorb smaller price increases, which reduces the likelihood of churn. Now, compare this to B2B software, which is like a box of chocolates—you never know what you're going to get in terms of new value. Stickiness depends on how far and how quickly users embed the new capabilities into their workflows to extract value. Moreover, software companies tend to make pricing changes that are all over the place. Sometimes, the pricing changes cause sticker shocks—this could be from price increases or, other times, from the licensing metric itself changing to usage-based, inadvertently delivering additional price increases. And with discounts all over the place at many B2B software companies, customers can be left with substantial price hikes, which increases churn. Modeling these types of outcomes in a spreadsheet rapidly becomes complicated, and most software companies lack the tools required to both simulate customer impacts and forecast future ones. Overall, B2B software pricing is typically convoluted, hidden, obscure and rarely transparent. Many B2B software companies lack usage details and are far from a default solution for buyers, given market saturation. Granted, not every change made to a software product warrants new packaging and pricing. Software improvements can be broken into three buckets. First, there's maintenance, which is basic bug-fixing to ensure a software solution is running as intended. Then there are investments made in the core product that improve the software's architecture, documentation and adaptability, addressing technical debt—and in turn, essentially future-proofing it. Finally, there are value-added improvements that enhance performance, such as new features and user workflow refinements. Maintenance improvements don't call for updated packaging and licensing. Neither do investments in the core product, because they aren't necessarily customer-facing (although they could set the foundation for future value-added improvements that call for updating packaging and pricing). However, value-added improvements in the core product, such as new features and user workflow refinements, call for updating a software company's packaging and pricing. Before the advent of the cloud, when software was mainly sold on-premise, it was relatively easy for companies to separate maintenance from the other types of improvements, such as new features, in their pricing models. Generally, after paying for the software upfront, customers would pay an additional annual fee to account for maintenance. If the company released software with new features, customers would have to pay for the upgraded on-prem solution to get access to those new features. Unfortunately, that distinction is more challenging with today's cloud software solutions. Year after year, many software companies offer their customers certain improvements without getting their fair share of compensation for the added value they're providing—which ultimately devalues their software. How Software Companies Can Ensure Their Products Are Properly Valued It's only by updating their packaging and pricing when they add new features and make other customer-facing enhancements that software executives can achieve continuous monetization. Software leaders can turn to the old on-prem model for guidance. Specifically, they should first identify which of the three improvement buckets applies whenever there's a proposed change to the product. For example, if customers are complaining that a software solution's performance is slow, that calls for a maintenance improvement. If the software company's developers fix the issue and customers are delighted, the software company needs to be able to take credit for that improvement—it involved time and resources. No, the software company's leaders won't charge for it or revisit the packaging and pricing in light of that change, but it was still an improvement that delivered value for customers. Not every improvement falls under the maintenance category. A change could be an investment in the core product that's not customer-facing, which wouldn't typically call for new packaging and pricing since customers tend not to want to pay for what they can't see. A change could also be a value-added improvement, such as a new feature or a refined user workflow, which should prompt executives to consider how they can adjust their packaging and pricing models. Leaders of B2B software companies should be mindful of how they distribute their improvements. Not everything can fall under the maintenance category, because then the innovation and value-add categories could become overlooked. Moreover, regardless of which category improvements fall into, software company leaders should refine their messaging to make sure customers are aware of those improvements. After reassessing their packaging and pricing, software teams should carefully introduce them to existing customers and prospects. Related to this is the concept of product-led growth, which often involves introducing new features within a product and allowing users to try them for a limited time period, with the understanding that they can upgrade for continued use. In this case, value is determined by the user and their usage, as opposed to a sales-led push. If a customer sees enough value, they'll likely upgrade to get those capabilities. As for legacy customers, those who are satisfied with their existing software and don't want the expanded capabilities should be informed, well in advance of their renewal dates, that they will eventually need to switch (ideally at the start of the next renewal cycle). That way, executives can avoid the slippery slope of having to maintain and support legacy packaging and code forks. B2B software company leaders might opt to give certain concessions to long-time customers to avoid churn, but these cases should be exceptions. Some customers who want the updated capabilities might balk at the fact that they're now being asked to pay for them—after all, they've become used to getting free upgrades. Once a software company creates the expectation that upgrades don't cost anything, it's hard to walk back on it. That's where messaging plays a major role. Stakeholders on the software company's team, such as those in the marketing and sales departments, must clearly communicate how updates will benefit the decision-makers footing the bill. Over time, as a B2B software company's executive team makes a habit of updating its packaging and pricing alongside value-added improvements, fewer and fewer customers will protest having to pay more—because the product's pricing will be harmonized with the value it delivers.
Yahoo
22-02-2025
- Sport
- Yahoo
'Win or go home,' Hickory vs. Sharon: Round three
HERMITAGE, Pa (WKBN) – Tuesday, Feb 25, Hickory will play Sharon for the third time this season in the PIAA Class 4A Semifinals. Watch above for reactions on the rivalry from both the Tigers and Hornets. 'Every single game is that just tough,' said Sharon head coach Louis Brown. 'Everybody we played in our region is tough, great coaching in our region, great athletes in our region.' 'Anytime you play Sharon-Hickory, it's extra juice and now it's the playoffs,' said Hickory head coach Chris Mele. 'They were the number one seed last year, we got them in the playoffs in that game. So I know they have extra motivation.' Hickory defeated Slippery Rock 53-45 to advance in the playoffs. Sharon also downed Oil City 59-39 to set up the next playoff rivalry match. 'Win or go home, we knew that we needed it,' said Hickory senior Marco Miller. 'It means everything. I would like to go get that win, especially I want to win it my senior year.' 'We don't really care who we play, we feel we're good enough,' said Sharon freshman Cedric Boyd. 'If we perfect our craft we'll beat anybody.' This past season the two teams have played each other twice. Sharon downed Hickory each time, 73-54 in January and 66-43 in early February. Hickory plays Sharon Tuesday, Feb. 25. Copyright 2025 Nexstar Media, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Yahoo
15-02-2025
- Sport
- Yahoo
Hickory wins first region title in four years
GROVE CITY, Pa. (WKBN) Hickory boys basketball is crowned the District 10 Region 4 Champions after an overtime victory against Grove City 55-50, Friday night. Watch above for extended highlights and interviews with coaches and players. The win notches Hickory's first Region 4 title in four years. 'The hustle plays towards the end of the game were huge for us, big rebounds, big foul shots,' said Hickory head coach Chris Mele. 'We stay composed and in a hostile environment — so proud of my seniors.' The Hornet's Trevor Borowicz scored a game-high 20 points in the win. Also, Ashton Boal scored 13 and Matt Huff scored 10 points in the win. 'Since I've been on the varsity level, I haven't won a region championship,' said Hickory senior Marco Miller. 'That's my first one — really means a lot and next goal is keep looking forward to the next.' 'We've been looking forward to this,' said Hickory senior Matt Huff. 'Every year we've been here, just means a lot to us.' Grove City's Nathan Greer scored a team-high 17 points in the loss. Also, Ben Fischer recorded 15 points and Daniel Mariacher posted eight in the defeat. Hickory ends the regular season at (15-5). Grove City falls to (16-6). Copyright 2025 Nexstar Media, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
