The ASP market continues to be very dynamic, with segmentation changes,
the strong entry of ISV’s (independent software vendors) and
SP’s (service providers), and much consolidation.
Much of that movement is fueled by a search for profitability
that has so far proved to be illusive.
Smart pricing is the fuel that enables ASP’s to fund marketing, reach
customers, and incent partners.
We would like to suggest that the “smart pricing” that
leads to ASP profitability requires realistic
pricing, based on strong business models.
It is the lack of these underlying fundamentals (or, perhaps,
the attempt to reach appropriate ones) that has kept this market
from proceeding in the promising ways that were initially predicted.
Here is a market with plenty of potential customers and much customer
interest. As many as
75% of all customers surveyed (multiple studies, including our own)
either already are working with an ASP or plan to do so within the
next 12 to 24 months.
Pricing is very important because:
Pricing determines Positioning:
Pricing often determines
how customers and partners place you in a market.
This perception, once created, is difficult to change.
An ASP’s market role will be determined to a substantial
degree by whether his pricing seems appropriate for the Enterprise,
Small Business, or other role he claims to have selected.
A disconnect between the positioning message and pricing will
be confusing and often cause potential customers and partners to
select another ASP.
Moreover, pricing must be adequate to support the planned marketing
activities in the business model – which must be appropriate for
the desired positioning. The
wrong pricing (or an inadequate business model) will cripple the
ASP’s ability to execute his plan by robbing him of appropriate
plans and funds.
It’s important to note that the wrong initial price is a very
expensive mistake; repricing in a competitive market is a
difficult-to-impossible repositioning exercise that is rarely
successful.
Pricing determines who succeeds: Pricing
can, in some sense, determine who succeeds, not only because of its
power in positioning, but also because of how customers relate Price
and Value. This means
the lowest price may not be the “best” price. Customers, especially Enterprise customers, may dismiss
“too low” prices with products that are not serious, temporary
promotions, or high risk business models that they can’t afford to
depend upon.
Especially for new products, new businesses, or new concepts (an ASP
might be considered all three), being perceived as the Best Value
may be much more important than being the Best (e.g., lowest) Price.
Pricing is determined in existing product categories by the marketplace,
competitive products, alternative solutions, and customer
expectations (which are formed, of course, by the previous three).
In new product categories, pricing is harder.
It’s determined by a combination of the customer perception
of value, recognized alternative solutions, and the customer’s
knowledge of the new product or concept, enhanced by the vendor’s
ability to provide education. All
of these can take quite a while to develop and the Pricing selected
in the meantime may prove at odds with what the educated customer
would select later.
Some early help may be provided by looking at research data on what
customers actually buy and pay and how much an informed customer
believes he would pay for a not yet available product.
Prices can also be tested (as is done in the consumer goods
industry), but this is rarely done by computer software vendors.
Pricing determines Partnerships:
While other
considerations such as past relationships, competitive rivalries,
and product fit count, Positioning is the major issue in determining
partnerships, so Pricing plays an important role.
A partner who sells high ticket items to Enterprises won’t
even look at something he perceives as “cheap.”
On the other hand, a large scale, very successful vendor to
small businesses would be unlikely to look to a high-priced product
as a likely partner.
ASP’s are currently pricing to Demand as well as basing their pricing
on Supplier Issues (what they pay for software, hardware, and
services). Demand is a
reliable indicator when the customers who are already buying are a
good indication of the behavior of the main market and the products
that will be sold are the same (or very similar) to the products
whose pricing can be examined.
We’d claim that not much of this is really going on.
ASP’s are often basing their prices on how software is sold to users
for internal implementation rather than on how users might perceive
its value in a rental market. This
could make it too expense, in some instances, and leave considerable
sums of money on the table in others.
ASP’s need to look at what their real costs are, including that often
overlooked cost, Marketing. They must also leave room for multiple
levels of marketing paid for by commissions or continuing revenue
streams to marketers (such as aggregators) or resellers (such as
SP’s, consultants, Systems Integrators, and VAR’s).
They need to understand the issue of what represents a reasonable profit
in a highly competitive market. That is, one where they can be
satisfied with the profit but not attract so many competitors as to
destroy their market advantage.
For ASP’s, much of the profitability will be in providing
premium-priced services such as integration, customization, and
performance monitoring as well as extra levels of support where the
customer will not look as sharply at the pricing per server or per
seat.
This is a market still in its infancy.
For this infant to grow to a healthy adolescence and feed its
parents we need to educate this market in the benefits of the ASP
model and grow and change the model to suit customer needs.
