Geoff Anderson back for another installment for the Technology Marketing Center. Today I will be talking about the internal struggle and strife in a transition from a point sale of a product to a pure or hybrid service offering. As a Product Manager, pricing is critical. For a new product offering, getting it right is the difference between success, and failure. But with a product that has a long history, a deep set of competitors (and historical deal data to refer to) thus the error bars are much lower.
But what happens when you move from a point sale of a physical product, to a service, either a subscription, or pay as you go model? Things get tricker, and beyond identifying a price and business model, there is momentum within your organization that is wrapped up in the revenue that the outright sale generated. Getting the message across about the difference in value, and how that relates to the business can be an uphill slog.
Let's take a classic B2B application, traditionally esconced within the IT organization. In the past, this meant server software, licensed, with an annual maintenance charge. Here, you get people upgrading when hardware needs refreshing (4-5 years), and that is a good opportunity to sell them more product. But it also is a window of opportunity for a "forklift" replacement, and the competitors' all know this.
When you can move to a service, the business model changes. Instead of a big dollop of revenue every 4-5 years, and a drought between then (not really many reasons to keep in touch until next upgrade window), you forego the up front revenue (or charge a small-ish startup fee). You then collect a periodic payment based on usage/users connected/or number of transactions. This revenue stream is typically designed to replace the up front revenue in 9-15 months of service charges. Then, all the revenue is incremental. As a bonus, you get two intangibles. First, you are interacting with your customers frequently. You are billing them, and can provide opportunities to add services/capacity/users. Second, you make it much more difficult for a competitor to poach your customer. All good, right?
But, the transition can be fraught with landmines. Sales typically likes to close a deal, get their commission, then move on to the next deal. This is great in a classical business model, but breaks down in a service model. Furthermore, senior management also can take some convincing. Regardless of how often they claim to "get" the new business model, you can be expected to have multiple sessions explaining the revenue model, the crossover point, and this new concept, "Lifetime Customer Value". Still, it is worth all this effort. If you fail to adapt, someone else will swoop in, and you will see your revenue plummet.
It is hard enough to make the transition to a service model from a traditional point sale model. Many groups will be lobbying to maintain the status quo, or at least to protect their dollars. But, armed with pricing analyses, business models, and strong definition of "Lifetime Customer Value", the marketeer can overcome these objections.