12 hours ago
In uncertain times, software buyers need the right balance of flexibility and predictability
In times of economic uncertainty—such as now —it's imperative that software leaders de-risk their pricing and contracts to assuage the fears and spending hesitation that many buyers might have.
Specifically, software leaders need to balance predictability and flexibility.
WHY BALANCING PREDICTABILITY AND FLEXIBILITY IS CRUCIAL
During shaky economic circumstances, some software buyers seek more flexibility in pricing and contracts, whereas others place a greater emphasis on predictability. For instance, the owner of a newly-launched clothing retailer looking for a CMS might want the ability to scale up or down depending on their company's rate of growth. On the flip side, the owner of an established small business in the market for a new CMS might want to lock in steady pricing for the next year or so because they have a good idea of the company's annual growth rate.
If the owner of the new clothing retailer is presented with a rigid pricing structure and contract, they'll likely feel they're about to get trapped. If the owner of the established small business isn't given the option to secure a guaranteed price for a given time, they'll likely feel exposed to cost hikes that could threaten their budget. Software teams need to cater to both of these types of customers. If they don't, buyers might delay purchases or walk away altogether to competitors who better meet their needs.
Flexibility and predictability are two sides of the same coin for buyers and sellers. Consider analysis by Tropic, a spend management solution provider, that found that software vendors 'are increasingly accepting longer contract terms with the average contract length now 14.2 months, a 6% YoY increase. This is true particularly with enterprise-focused vendors, in exchange for pricing predictability and more favorable commercial terms.' Give a buyer a longer contract with a clearly defined pricing structure as a software executive, and you can have peace of mind that that revenue is coming in. Give a buyer more flexible terms, and you'll have a higher chance of converting them into a customer. Moreover, arguably, greater flexibility translates to software companies being able to retain customers longer (hence, increasing their customer lifetime value metrics).
Software leaders can leverage different strategies to de-risk their pricing and contracts.
At a foundational level, they should simplify their pricing models to reduce complexity for buyers. Simplicity is paramount. The faster buyers can understand a vendor's pricing model, the better. In tough economic times, people typically have less bandwidth to think through complicated pricing structures—they're trying to figure out how they can keep their jobs, how to increase their companies' chances of survival, how they're going to meet their budgets, and so forth. How can software leaders achieve simplicity in pricing? At the core, by reducing the number of licensing metrics (the basis by which a software company charges), revamping the packaging, and taking another look at SKUs. Generally, one metric and fewer packages and SKUs make pricing models easier to grasp. Moreover, when pricing is easy to understand, buyers are more likely to feel that they are being treated fairly and transparently.
As far as contracts and renewal cycles, software leaders can consider offering one to three free months as an incentive. Free months push out renewals further into buyers' budget cycles, creating more predictability. When buyers do renew, they're actually using fewer dollars in that year.
Software companies must also carefully evaluate how they're charging for generative AI (GenAI) capabilities. Pricing GenAI capabilities in software is a nuanced topic, but on a high level, software companies should not necessarily charge for them separately. Instead, they should bake those costs into the overall value that their solutions provide. Moreover, software companies should provide customers with more visibility and control over their consumption of highly variable features within their products, such as AI-powered ones. This greater visibility and control also protects software companies from having to absorb unnecessary costs.
Software companies should also provide good-faith estimates and commit to making right-sizing adjustments for customers at the end of the year to account for uncertain usage during uncertain times. For example, despite running a beta program, a software company that rolls out GenAI features will likely not have an accurate understanding of consumption rates in year one because it only has, say, 10 customers using it, and it might decide to absorb more of the costs. But as the economy becomes more stable and the pool of customers leveraging GenAI features increases, the company could decide to absorb less, or none, of the costs—while being diligent about communicating that change and the reason for it to customers. Cohort-based strategies can be particularly valuable for right-sizing adjustments. For instance, a software company could offer a cohort consisting of buyers who sign up during an economically uncertain quarter greater flexibility on renewals. However, it could stipulate that a cohort of buyers who become customers during a more stable economic period would have more standard renewal contracts. The key to cohort-based strategies is to be consistent within a given cohort and avoid having multiple cohorts differ significantly.
In de-risking their pricing strategies and reaching a balance between flexibility and predictability, software leaders should keep in mind that their pricing strategies must evolve alongside changes in the market, their solutions, customer expectations, and other factors.
Software leaders should make a habit of proactively revisiting their pricing—and always aim for more simplicity. Simplicity in pricing is ultimately what protects software companies and buyers in good times and bad.
