www.pwc.

com/technology

Technology Institute

The future of software

pricing excellence:
The new state of the art
Executive summary
The current state of pricing in the software
industry is, to put it mildly, chaotic.
Although vendors have pricing policies and
strategies, they often fail to enforce them.
More commonly, they change their pricing
approaches from one deal to the next, based
on a combination of past sales, limited
customer information and minimal insight into
competitors prices.
Unsurprisingly, the results are all too often
disorganised and inconsistent, increasing risk,
degrading efficiency and hindering revenue
generation. Yet whilst many industry leaders
realise their pricing is suboptimal, they dont
know how to fix the problems. Indeed, many
dont know where to start the process.
A significant contributing factor is the broader
shift in the software industrys approach
to software licensing. A small minority of
vendors remain committed to the traditional

business model based on permanent licensing

of software as a product. A company providing
infrastructure software sold to data centre
managers would fit this model of a traditional
pricing model.
However, a small but growing number of
vendorstypically start-ups but a handful of
notable exceptions like Salesforce.comare
focused exclusively on emerging models,
including subscription SaaS with cloud
deployment, pay-as-you-go based on actual
usage and/or charges for premium features
added to free basic services (freemium). The
remainder, including most consumer and
enterprise software companies, are combining
both approaches in a hybrid business model.
(See Figure 1)
Complicating matters, vendors following every
business model may be following industryleading practices in some aspects of pricing,
lagging behind the curve in others and squarely
in the mainstream majority in the rest.

The future of software pricing excellence /1

Three different pricing models are in use by software vendors that may be leading edge, in the
mainstream or lagging their competitors.
Figure 1:A myriad of pricing strategies for a myriad of business models

Pricing strategy

Price
formulation

Transaction
management

Performance
management

Traditional software
pricing model

Hybrid software pricing

model (hybrid)

Emerging software
pricing model

Well-defined but poorly

integrated pricing
processes

Reactive pricing strategy

Proactive pricing strategy

with defined workflow to
handle exceptions

No cross-functional
coordination in pricing

Limited cross-functional
coordination

Limited cross-functional
coordination

Centralised price strategy

and execution

Formal customer
analytics and market
intelligence

Formal customer
analytics and market
intelligence

Exceptions are managed

ad hoc

Centralised price strategy

and execution

Centralised price strategy

and execution

Decentralised deal
management

Centralised deal
management

Centralised deal
management

Ad hoc training on
product value and
negotiation skills

Ad hoc training on
product value and
negotiation skills

Regular training on
product value and
negotiation skills

Underutilisation of
available tools

Limited automation of
pricing data management

Fully automated
pricing data
management

Sporadic measurement of Systematic management

pricing performance
of pricing performance
against set targets
Lagging

Mainstream

Leading

Regularly performed and

systems-based advanced
analytics
Source: PwC

At a time when the enterprise software sales

model is shifting from product-based to
portfolio-based and customers are adjusting
their purchasing decisions to include their
perception of added business value, vendors
can no longer consider their pricing models
incidental. Pricing can, in fact, play a critical
role in business strategy.

Higher win ratesclosing a higher

percentage of sales opportunities can
increase revenues by 2-3%

PwC has developed a powerful methodology

that helps its clients become leaders by
incorporating software pricing excellence
strategy and tactics in the face of changing
business models. Software vendors using PwC
methodology to develop their pricing strategies
have realised benefits in six to 18 months. In
addition to a typical ROI of 30x, PwC clients
have achieved:

Decreased revenue leakagereducing the

gap between committed-to purchase and
actual purchase volumes can boost revenues
by 2-4%

Improved price realisationreducing the

gap between pocket (real) and list prices at
constant business volume can increase gross
margins by one to four percentage points

The time to move definitively toward best

pricing practices is now. This paper provides
a path toward a more coherent, organisationwide pricing model that delivers proven
results by combining analytics with formalised
processes and standards.

The future of software pricing excellence /2

The PwC pricing excellenceframework

Pricing excellence is an ongoing process of optimising the price of goods and services. PwCs
pricing management framework focuses on the elements that drive pricing maturity and impact
financial results throughout the pricing lifecycle: pricing strategy, price formulation, transaction
management and performance management. (See Figure 2) These four elements of pricing work
together in a functioning business. Each element affects and is affected by process, organisation,
technology and data analytics.
Figure 2:PwCs pricing management framework

Organisation

Quotin
g
managand deal
ement

Data & analytics

3-T
rans

isation
Priorit cation
llo
and a

en Po
for lic
ce y
me
nt

and nt
rce leme
o
f
ab
les
Sa er en
n
t
r
pa

Segment-specific
pricing and policies

Technology

Pri
c
anding d
rul ata
es

i ce f o rmu l at i on

Process

ies
nit ts
rtu es
po equ
Op nd r
a

gm
e
str nt-s
ate pe
gy cifi

ce

Pricing performance
measurement
and management

rfo
-Pe

g
cin
pri ies
l
l
era lic
Ov nd po
a

Se

nt

lian

2-Pr

rmance ma na geme

mp

lio
Portfo is
analys

ng
ici
Pr oals
g

Co

c ing s t rat egy

Overa
strate ll
gy

1-Pr i

a c t i on m a n a g e m e

nt

Source: PwC

The future of software pricing excellence /3

Element I: Pricing strategy

To achieve and maintain pricing excellence, companies must first consider the critical
building blocks of pricing strategy:
Understanding what customers value;
Predicting what the customer is willing topay;
A
ligning various functional areas (sales, marketing, R&D and finance amongst them)
to position products in the marketplace; and
Ensuring that products meet customer needs at an attractive price
Competitive products and their positioning in the marketplace
What drives cost to serve
Pricing strategy, therefore, incorporates both pricing goals and customer price thresholds.
Understanding what customers value occurs not by guesswork or rudimentary testing, but
through a thorough analysis of product use, prior transactions and customer-based segmentation,
as well as secondary research. This portfolio analysis and research are designed to answer the
followingquestions:
What drives value to our customers?
What is the value of our product compared to alternatives?
What is the competitions pricing strategy?
How strong is our brand and reputation?
Are there significant economies of scale?
What are the price variations across regions/channels/customer segments?
What drives cost to serve?
Where is our product in its life cycle?
The answers to these questions form the basis of the overall and segment-specific pricing strategy.
As Figure 3 illustrates, those answers drive development of value-based pricing and other pricing
tactics, such as regional or channel price variations.

The future of software pricing excellence /4

Element II: Price formulation

Solid data about product costs and benefits, customer demands and competing products and
services forms the foundation of decisions about base pricing. After creating standardised overall
pricing policies, companies can then create segment-specific pricing policies that govern how much
and how often to deviate from the baseline.
Access to data about customers, transactions and usage drives further customer segmentation
analysis and helps to shape offerings that maximise customer utility, reduce complexity and
increase overall value. Combined with historical transactions and secondary research, this analysis
helps align prices with customer willingness to pay.
Once a company sets broadly segmented pricing policies, it can apply a price waterfall to each
individual transaction. This is a structured approach to calculating the price of a transaction,
offering
frameworkand
to manage
price discounting and shape customer purchasing behaviour.
Pricinga strategy
price formulation
(See
Figure 4)
Maximize
revenue and margins by understanding your customers, competitors,

positioning of your products in the market place, what drives value to customers,
and
what
to serve
Figure
3:Odrives
ptimalcost
pricing
inputs
Processrequires multiple
Organization
Technology
Data and Analytics
What drives value
to the customer?
What drives cost
to serve?

What is the
competitors
pricing strategy?

ILLUSTRATIVE
Pricing model

Value-based pricing
Premium pricing

How strong is
the companys
brand and reputation?

Competitive pricing
Skimming pricing

Are there
significant
economies of scale?

What is the
value of our
product compared
to alternatives?

Penetration pricing

Price-based
competition

Where is the product

in its life cycle?

Value-based
competition

Targeted pricing positioning

Pricing base
Price points
Regional base
Channel price
Segment price
Volume brackets

What are the price

variations across
regions, channels,
customer segments?

Source: PwC

The future of software pricing excellence /5

The price waterfall is driven by a series of steps:

3. Defining policies for the use of each pricing

lever, including who has the authority
to decide when lever boundaries can
beexceeded.

1. Identifying the right pricing levers given

business models, overall pricing strategy,
operational factors and routes to market.
Recent transaction data helps inform
discounting and premium pricing practices
in order to reveal trends and develop
minimum and maximum values.

4. Developing implementation plans.

With greater visibility into price adjustments,
companies can analyse data about customer
and market segmentation, product design,
discounting, channel strategy and other
business decision points in order to refine
policies for greater efficiency and profitability.

2. Using the identified levers to determine

various price levels, such as list price,
regional list price, volume price,
manufacturers suggested retail price
and invoice price.

Performance management
Figurelike
4: Analysing
pricingalso
waterfalls
helps close
leaksprofitability leaks
Tools
a price waterfall
help identify
and close
FX adjustments
Country
adjustments
Region
adjustments
Language
adjustments
Programme
discounts
Volume
discounts
Contractual
pricing

List
price

Standard
channel
discounts
Special partner
discounts
Partner
contractual
discounts
Promotional
discounts
Additional
negotiated
discounts

Buy
price

Logistics
Off-invoice
promos
Cash discount
terms
Credits/Rebates
Mktg dev
funds/Ads
Sales programmes
Returns
Commissions
Pricing errors
Invoice

COGS
Technical
support
Sales costs
Services costs
Special coststo-serve
Pocket
price

Pocket
margin

Source: PwC

Reviewing the factors that influence the potential flow of cashbeginning with the list price
and down through to the minimum required revenuehelps identify and shut off revenue leaks.

The future of software pricing excellence /6

Element III: Transaction management

Using the pricing data and rules that emerge
from Element II, companies can next segment
opportunities, requests and deals into
threecategories:

Systematising pricing and discounting levers

in this way greatly reduces the need for
touches that use sales resources and increase
time-to-quote.

1. No-touch sales of baseline products and

configurations that require no internal
sales involvement;

Transaction management differs in one critical

way for companies that offer SaaSthese
companies have infrastructure costs that the
traditional model lacks. These costs must be
factored in when setting discounting floors
and deal parameters.

2. Low-touch sales of standard and

custom products and configurations
that may demand minimal internal sales
assistance;and
3. High-touch sales at a level of value and
complexity that place them beyond standard
pricing rules and demand non-standard
pricing and/or terms and conditions.
Companies may want to create a Global
Deals Desk dedicated exclusively to
shepherding this type of deal to completion,
as high-touch sales require a high level of
internal sales involvement.

Regardless of business model, however,

quoting and deal management policies for each
category are determined by the deals overall
value to the company relative to the effort
necessary to fulfill them.

Figure 5:Analytics:
Analytics highlight
price/volume
Sample
Price/Volume
Curveproblems and opportunities
Price/Volume: Product A; Industrial market
Price

Industrial market transactions are

primarily low-volumeis the
pricebook structure appropriate?

$10

Some mid-volume
deals are significantly
discountedis this
warranted?

$5

100%
Cumulative
revenue %
50%
50% of revenue is driven by three
high-volume, low-price purchases
is there a way to increase margins?

$1

10

100

1K

10K

25K

50K

100K
Volume

Transactions
Source: PwC

The future of software pricing excellence /7

Element IV: Performancemanagement

Even a consistent, formalised pricing model needs to be adjusted over time to identify and
close profitability leaks as market conditions change. This element of the pricing excellence
methodology focuses on post-sales analysis. It enables companies to keep the new pricing
programme aligned with overall corporate strategy, mission, goals, processes andresources.
Over the long term, pricing performance management includes answering an array of questions
designed to measure, enforce and refine pricing policies. This includes, but is not limited to,
answering questions such as these:
How consistent is our pricing within segments and customer groups?
Are our promotions working?
How are our channels and/or partnersperforming?
Are we capturing all of our logistics costs?
How does our commission structure impactmargins?
Do our price and margin targets accurately reflect all our costs?
The answers to these questions help to improve cross-functional alignment and make the pricing
model more accurate over time when based on relevant metrics. Performance management
powered by analytics identifies products with lagging gross margins, eroding prices (See Figure 5)
or with inconsistent volume breaks (See Figure 6).
Figure 6:Analytics:
Analytics highlight
average selling price (ASP) declines relative to cost reductions
Sample
Price Erosion
0

Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

-0.05

ASP performance (%)

-0.1

ASP is declining faster than cost

reductions are occurring which
is ruining gross margin (GM)
percentagewhy is this happening
and how can it be stopped?

-0.15

-0.02

-0.25

-0.3

-0.35
-0.4
ASP erosion
$250

80%

$200
60%
$150
40%
$100

GM (%)

ASP and cost ($)

Product A has seen

accelerated erosion in
recent monthswhat
is causing this?

20%
$50

80%
1

11
nJu

ay
-1

r-1
Ap

1
-1

ar
-1
M

Fe
b

10

11
nJa

De
c-

ov
-

ct

-1

10

ASP

p1
Se

g1

GM%

Au

l-1

nJu

Ju

10

$-

Cost

Source: PwC

The future of software pricing excellence /8

The right foundation for pricingexcellence

The pricing excellence framework described
above cannot function in a vacuum. It depends
on a foundation of organisational processes,
organisational structure, systems, data and
culture. As you can see from Figure 7, the
maturity of pricing capability increases as the
sophistication of the processes, organisation,
technology and data increases as well.
An organisation without standardised pricing
processes coordinated across functions has
little clarity on pricing strategy. Decentralised

pricing strategy and deal management become

further complicated when the sales team is
only minimally trained in product value and
negotiation skills.
Moreover, many organisations underutilise
available technology to automate and
streamline pricing. Worse yet, many
organisations depend on inadequate tools,
such as Excel spreadsheets. This dependency
on inappropriate tools generally also leaves
these organisations without the systems or

You
can
the maturity
framework
to assess
drive to the
Figure
7:use
The maturity
framework
can drive
thenextyour
level position
of pricingand
excellence
next level of pricing excellence
Pricing capability
maturity model
High

Pricing capability model

Strategic
pricing
management

Tactical
pricing
management

Informal
pricing
management

Low
Source: PwC

Process

Organisation

Technology

Well-defined,
fully integrated,
and standardised
pricing processes
including price
optimisation
Proactive pricing
strategy and
execution,
defined workflow
to manage price
exceptions
Systematic and
governed crossfunctional
coordination
in pricing

Fully integrated
function to
optimise pricing
throughout the
value chain
Formal customer
analytics and
market
intelligence
function
Regular training
on product value
and negotiation
skills

Complete pricing Regularly

performed and
platform
integrating price
systems-based
setting, price
advanced
optimisation,
analytics
price
Systematic
management of
management,
market and
pricing
customer data
performance
Fully automated
against set targets
Regular tracking
pricing data
management
of metrics
covering strategic
and tactical
activities
Full understanding
of true costs
to serve

Data and analytics

Well-defined but
poorly integrated
pricing processes
Reactive pricing
strategy and
execution, price
exceptions are
managed ad hoc
Limited crossfunctional
coordination
in pricing

Centralised price
strategy and
execution
function
Centralised deal
management
Ad hoc training
on product value
and negotiation
skills

Price
management
system has been
implemented
Pricing
optimisation
system
integrated
with price
management
Limited
automation of
pricing data
management

Regularly
performed
standard analytics
using Excel
Sporadic
measurement
of pricing
performance
Regular tracking
of pricing metrics
focused on nonstrategic activities
Limited
understanding of
true costs to serve

No formal or
standardised
processes
in place
Lack of clarity on
pricing strategy
Lack of crossfunctional
coordination
in pricing

No centralised
price strategy
and execution
function
Decentralised
deal
management
Minimal training
on product value
and negotiation
skills

Excel-based
pricing data
management
Underutilisation
of available tools

Rudimentary and
ad hoc analytics
Limited tracking
of pricing metrics
Minimal
opportunities to
analyse
meaningful data
including true
costs to serve

The future of software pricing excellence /9

meaningful data to track and analyse pricing metrics. The resulting lack of insight prevents them
from understanding their true costs, to the ongoing detriment of strategic decision-making and the
bottom line.
As an organisation moves from informal to tactical pricing management, it begins to define pricing
strategies; centralise deal management; implement a system to automate, optimise and manage
pricing and pricing data; and track pricing metrics using simple analytic tools.
The next step in the process is progressing to strategic pricing management, the underpinning of
pricing excellence. The following chart shows the steps organisations must progress through to
achieve pricing excellence. (See Figure 8)
Figure 8: Steps on the path to pricing excellence
1. Ad hoc pricing
management

>

2. Transactionbased pricing
management

>

3. Valuebased pricing
management

>

4. Holistic
pricing
management

Process

No formal or
standardised
processes in
place

Formal and
standardised
processes for
price setting
and price
management

Formal and
standardised
processes
for price
optimisation

Formal and
standardised
processes
for price
optimisation
throughout the
whole value
chain

Organisation

No centralised
price setting and
management
organisation

Centralised
price setting
and price
management
function

Formal
customer
analytics
and market
intelligence
function

Pricing
organisation
has fully
integrated
function to
optimise pricing
throughout the
value chain

Technology

Underutilisation
of available
tools or Excel
spreadsheet
driven

Price
management
system
has been
implemented

Pricing
optimisation
system
integrated
with price
management

Complete
pricing platform
integrating price
setting, price
optimisation,
management,
market and
customer data

Data and
analytics

Annual price
management
based on sales
data

Quarterly price
management
based on
market and
sales data

Monthly price
management
based on
customer and
sales data

Ongoing
management of
pricing based
on economic,
customer and
salesdata

Source: PwC

A company can be said to have achieved pricing excellence when it meets all of the
followingcriteria:

Process

Organisation

Well-defined, fully integrated and

standardised pricing processes including
price optimisation

Fully integrated function to optimise

pricing throughout the value chain

Proactive pricing strategy and execution,

defined workflow to manage priceexceptions
Systematic and governed cross-functional
coordination in pricing

Formal customer analytics and market

intelligence function
R
egular training on product value
and negotiation skills

The future of software pricing excellence /10

Technology
C
omplete pricing platform integrating
price setting, price optimisation, price
management, market and customer data
Fully automated pricing data management

Data and analytics

R
egularly performed and systems-based
advanced analytics
S
ystematic management of pricing
performance against set targets
R
egular tracking of metrics covering
strategic and tactical activities
Full understanding of true costs to serve

Software pricing excellence in action

The PwC software pricing excellence
methodology is not just a collection of
theories; its track record of solving chronic
industry pricing problems is proven. Here are
three examples of how the methodology has
delivered results to our clients.
I mproving deal discounting and
businessvisibility
A US$30 billion software company had
runaway pricing policies. In addition to
its 30 different licensing programmes for
its SMB and commercial customers, the
true cost to serve wasnt clear to many
of the people doing the deals, leading to
suboptimal margins. In part the lack of cost
clarity was due to siloed information and
other barriers to cross-functional dialogues.
Other challenges included a lack of data and
salesmetrics.
After implementation of the PwC software
pricing excellence methodology, the
company successfully introduced a single
relationship-based pricing programme
incorporating both perpetual and cloud
licensing models. The company saw a 5%
increase in volume licensing revenues in
oneyear.

Plugging revenue and margin leakage

due to channel mismanagement
A US$4 billion digital media software
company knew that wide pricing variations
by region and channel were hemorrhaging
revenues and net income. Highly manual,
time-consuming pricing and deal
development processes using incomplete
customer data were part of the problem.
The company lacked the analytics tools to
understand and leverage what little data
it had. In addition, the company had little
visibility into competitive pricing.
By adopting the PwC software pricing
excellence methodology, the company
increased revenues by US$90 million in one
year, while seeing measurable improvements
in cost of sales and customer satisfaction.
Furthermore, senior management gained
visibility into the status of its licenses in
a variety of dimensions: global, regional
orchannel.
V
alue-based pricing is real, not just
a wish list item
Executives at a US$1 billion provider of
application software knew they could
replace their obsolete pricing strategy with
a more lucrative value-based approach.
Their customers were experiencing dramatic
revenue and profit gains using their
applications and the software vendor could
see that they needed to revamp pricing to
accommodate their clients demand for
additional cloud-based solutions. Using
the PwC software pricing excellence
methodology, the company developed
and implemented a value-based pricing
programme that led to a US$25 million
increase in annual revenues.

Conclusion
New technology trends enable the creation of
new markets and business models for software
vendors that require new pricing strategies.
For companies ready to shed the old model
of undisciplined pricing, inconsistent or ad
hoc analytics, and decision-making without
insight into the competition, improving
pricing management is a critical factor in the
business model transitions now in playand
a significant tool for identifying opportunities
and driving better price decision-making.

The future of software pricing excellence /11

PwC can help

If youd like to discuss the challenge of software pricing in an ever-changing business environment,
please reach out to one of our technology industry leaders listed below.
Mark McCaffrey
Tom Archer
Global Software Leader
US Technology Leader
+1 408 817 4199
+1 408 817 3836
mark.mccaffrey@us.pwc.com thomas.archer@us.pwc.com
Pierre Marty
European Software Leader
+33 1 56 57 58 15
pierre.marty@fr.pwc.com

Kayvan Shahabi
US Technology Leader Advisory
+1 408 817 5724
kayvan.shahabi@us.pwc.com

Greg Unsworth
Asia Technology Leader
+65 6236 3738
greg.unsworth@sg.pwc.com
In addition to the above contacts, Amit Dhir, Director, Management Consulting, provided key
insights and clients real-world experiences for this report.

About PwCs Technology Institute

The Technology Institute is PwCs global research network that studies the business of technology
and the technology of business with the purpose of creating thought leadership that offers
both fact-based analysis and experience-based perspectives. Technology Institute insights and
viewpoints originate from active collaboration between our professionals across the globe and
their first-hand experiences working in and with the technology industry. For more information
please contact Raman Chitkara, Global Technology Industry Leader.

About PwC
PwC helps organisations and individuals create the value theyre looking for. Were a network of
firms in 158 countries with more than 180,000 people who are committed to delivering quality in
assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us
atwww.pwc.com.

2013 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each
of which is a separate legal entity. Please see http://www.pwc.com/structure for further details.
This content is for general information purposes only, and should not be used as a substitute for consultation
with professional advisors.
BS-13-0188.1212