Pricing Teardown: Responsive Software
Friday, November 14, 2014
This article is part of a series of pricing teardowns for companies and their products. I have no private information about their profitability, no knowledge of their business goals and (possibly) no particular background in their industries. I intentionally avoid performing research on what others have said as well as writing in the companies' blog posts and twitter feeds. I do this so as to ensure that my evaluation is based entirely upon their websites. As such, this analysis may contain invalid assumptions and plenty of guesswork. Fortunately, this makes the resulting analysis much more fun.
Responsive Software is a small software firm in New Zealand. The company appears to earn its money by selling custom software development services.
As it happens, I'm very interested in pricing out custom software development, so this company should prove to be an excellent candidate for a pricing teardown.
Let's take a look at the pricing strategy and see what we can learn.
The Search for Prices (and Offerings)
The first item to note is that its website demonstrates a trending technique in modern website design. The company has gone to the trouble of providing estimated price lists, but hid the pricing structure on a difficult to find corner of the website. The about page says We do not sell computer software. Instead we sell software development services, but the main page (the most visible page on the entire site) is devoted to a free accounting software package.
By hiding the product description and pricing, the company lost control of the narrative. I started clicking randomly and found myself on the support page. It clued me into the type of pricing strategy that the company was pursuing: low cost. Anyone who has read my pricing book knows that I'm not a fan of competing on price. In almost all circumstances it portends a financial disaster.
How did I know that the firm was competing on price? Well, the fixed-fee support charge of US$35 is roughly three times the minimum wage in New Zealand. To put it another way, the site is saying that the staff costs just a bit more than the lowest wage legally allowed to be paid to the least skilled, least desirable worker in the country. Not only that, but the low price includes all of the requisite overhead required to keep staff ready to perform this one-off task and assure a profit margin for the firm. Would a successful company really shop around by price when looking for a critical fix? Before you answer, keep in mind that even Geek Squad, a mass-market that deals with consumers (not businesses), charges $50 just to do a simple tune up, with no programming or custom work required.
Yet another hint at the low-price strategy is the appearance of a donation button. It actually made me cringe just to see it. For those not in the know, the donation button is a feature lacking on the websites of many successful companies (examples: Microsoft, Google and Oracle). Asking for money to be donated voluntarily on a corporate website does not instill a sense of financial viability or pricing power. It tells potential customers who you'll work for whatever pittance they are willing to part with. Not only that, but (with few exceptions) donation buttons have historically led to minimal returns. They just aren't worth the hit to a firm's credibility.
Pricing at Last!
Enough with the preliminaries. I eventually found the price list. A link to the price list and offerings was buried in the middle of the left-hand column of most pages, excluding the prominently displayed about, contact, and support pages. Note to readers: when you want people to buy your services, make it easy for them to see what you're selling (even if you're not ready to talk prices just yet).
So how does the pricing page look? Let's start with the product description.
The very first line Customized Software for Under $20,000! confirmed my suspicion that this firm competes primarily on price. Not only did the webpage's author start by talking about low prices, but he added an exclamation point and made the sentence a different color than most of the text. The low price was clearly an important piece of information for potential customers to understand!In fact, the sales page is chock-full of hints that the firm is going after folks without much cash to spend. Here's another pair of callouts:
- Customized software may be more affordable than you think
- Total price = $15,600 ($150 per week over 24 months)
So as a potential customer, I'm excited! I can get software cheaply. Unfortunately, the pricing strategy isn't consistent. The very next line - the very next one after the first sentence opening informs us that prices can vary significantly. Now, as a customer, I'm confused. I've just started reading, but I feel like a bait-and-switch might be coming my way. Is this service cheap or not? If it is, the site better present some evidence to allay my fears. If it isn't, the company better be bringing something else to the bargaining table.
Image Is Everything
I continued on. It didn't take long for me to stop again. Still in the first paragraph, the author began extolling the virtues of his generic framework. Adjectives can be very useful in selling software (or anything for that matter), but adjectives only work when they describe desirable characteristics.
If there's one thing I know, it's that no one pays a premium for generic goods (quite the opposite, in fact). People pay more for products described with words like interoperable, extensible and modular. These words imply greater utility to the end-user. But generic? Have you noticed that generic drugs, sodas, foods, mechanical parts, clothing and, well basically EVERYTHING else is cheaper than named-brand ones? There's a reason for that. People don't pay premiums for generic items. Even if your products are the most generic there are, you can only lose by reminding the customer of that fact. If you doubt that statement, go to a supermarket and look for the word generic. I'll be genuinely surprised if you can find any item labeled as such.
Image Has To Be Consistent
I was feeling fairly comfortable envisioning this company as a low cost producer until I remembered that the about page clearly states several areas of expertise, including financial software - a marketspace with customers that are not at all price-sensitive. Why would a firm with high-paying areas of specialty and expert domain knowledge compete primarily on price? My image of the firm became even more muddied when I remembered that the founder's resume listed two decades of experience and titles such as Enterprise Software Architect. Just as I would be confused if someone pitched a Yugo (a cheap eastern European car) by talking about its horsepower, I'm confused by this site. If price is your primary advantage, you need to present evidence that you can build software cheaply, either by listing examples of prior work (with associated price tags), talking about unique rapid development technologies or describing your offshore team that works for pennies on the dollar. If you're focusing on the word cheap, you really need to own that word.
One Expensive Feature
As a former project manager, I had goose bumps when I saw the guarantee of total satisfaction. Many will point out that I offer a similar guarantee for my software pricing book, but there is one key difference. If a customer decides to return a copy of my book (note: none have so far), my out-of-pocket expense is quite literally zero. The book was already written prior to the customer's purchase and my expenses for its creation remain the same whether anyone buys my book or not.
Life is very different in the world of custom software. It's exceedingly dangerous to provide a total guarantee of satisfaction. Few customers are completely satisfied with any product (after all, what software has ever been released but never updated?). Even if only one in ten customers is not totally satisfied with the company's work (remember, totally satisfied isn't the same thing as content), the firm's prices would have to be raised to cover the cost of following through with the guarantee. Increasing one's cost basis is a very bad idea, if one intends to compete on price.
It's one thing to promise to go above and beyond when dealing with people for whom money is no object. In this case, the firm is actively courting the cheapskates - the ones for whom price is the most important feature. The company is basically looking for the worst clients around and saying "We'll throw in as much labor as you want for no additional cost, as long as you agree to our fixed price up front." This is not an optimum pricing strategy.
Trying Too Hard...
Enough with the text, let's take a look at some numbers.
I really applaud the firm's attempt to create a pricing table for custom software. Unfortunately, custom software is just that - custom. Trying to use a formula for pricing is problematic for many real reasons, not the least of which are:
- It's very hard to guarantee a cost up-front. Even expert software engineers have difficulty estimating product development costs after the design phase has been completed. No expert worth his salt would ever perform an estimate prior to knowing what he was building.
- It limits the ability of the company to charge more for companies that are willing to pay more.
- It does not take into account a host of requirements that could radically alter the cost of development, such as development speed, support for large numbers of users or system quality.
- It anchors the firm's bargaining position. The low-cost consumers who are being courted are exactly the types of folks who will try to negotiate even lower prices than those being advertised.
The sales page is rife with "weasel words" like "basic screen" that highlight the difficulty of estimation providing additional information. These words both undermine the validity of the message (you can get software cheap) and invite future discord with arguments about what constitutes a "basic" report or screen.
Knowing the Target Market
The pricing strategy is just too mysterious to have much effect for his target market. The fact that the firm is defining basic terms (like screen and report), makes me think that the customer segment being targeted is non-technical in nature. Combined with the message of low cost as a primary feature in the pricing structure makes me think that the targeted users are small businesses.
So, would non-technical folks running small businesses be able to predict how many reports and screens they will require? Probably not. The firm is thus throwing numbers out that won't make sense to most folks, but forcing them to think about those numbers anyway. As a general rule, it can only hurt to make a customer think about numbers that they don't understand.
Oddly, the company is selling analysis and design skills, yet the pricing estimation sheet is only relevant if the customers have the skills to analyze and design their own solutions (which the targeted group does not have). If the firm wants to demonstrate average costs for systems, it should list prices for previous systems that have been built. Such real-world examples would be more understandable to the non-technical customers and provide evidence of past successes
As an aside, in the world of software engineering, the biggest value added portion of software development is the analysis and design phase. If your average customer has already designed the software before you come into the picture, you're no longer selling consulting services. You're just a code monkey who won't be able to charge much at all.
Software Is Different
There is another issue I have with the pricing table. It looks as if it was designed by a businessman from a non-software field. As the number of screens and reports increases, the additional costs to the customer decrease. This type of "bulk discount" makes sense when dealing with wheat or lumber, but makes little sense in the world of software engineering for two reasons:
- In most applications, a project becomes significantly more complex every time it gets a little bigger. Thus, adding the tenth screen to a piece of software is often more work than adding the third. But here, the firm is pricing work out in the opposite manner. Given a large enough number of screens and reports, the cost of the labor required to add an additional screen could far exceed the associated income from the firm's customer. I could easily envision a point at which the firm would begin losing money and another at which it would be bankrupted.
- Customers that need more complex software typically have larger amounts of money with which to pay. While the local pet walker might not be able to afford a $10,000 custom accounting package, a Fortune 500 firm wouldn't blink at spending ten times that amount.
The Value Proposition
Very few managers wake up and say "we need new software." Managers wake up and say things like:
- We need to make more income.
- We need to reduce our costs.
- We need to complete our work faster.
- We need to reduce training costs.
If a software engineering company were able to demonstrate that it could cut my labor costs by 20%, I'd hire it in an instant. If that very same software company were to say that it could write software for me, I'd be yawning and heading for the door. The company needs to remember that it is not in the business of selling software. It's in the business of solving customer problems. This is the secret between an unsuccessful company and a wildly successful one.
Interestingly, there is little mention of value. Can he list some examples of prior customers and how they saved money or achieved a business goal using his software? Can he suggest how a firm would be better off after having retained his services?
Even absent evidence, a few appeals to the self interest of its customers would do wonders for demonstrating a value proposition. Here are but a few that the firm might want to try:
- Are you spending tens of thousands of dollars on staff to fill out routine paperwork? Let us automate everything so you can save a lot of money.
- Are you missing deadlines? Thinking about hiring more staff? Don't! Custom software can perform all the work and doesn't need salary, doesn't take time off and will never ask for a raise.
- Are your business processes becoming too complex for your staff? Don't waste money on training. Automate everything! We can revolutionize your business processes for a lot less than you'd expect.
It's not clear what the product is. Does the company build web applications or not? Do its screens look pretty or are they functional? Are they secure? Do they handle a lot of traffic? Even though terms like secure or robust are technically meaningless, they provide a means of increasing interest (and willingness to pay) on the part of the buyer.
It is very difficult (read: impossible) to determine whether a price is acceptable when one does not know the product to which the price is attached. Even if a customer were able to use the pricing chart to come up with an estimate, he'd have no means of determining whether the price made any sense.
There were two missed opportunities on this website that jumped out immediately.
- The first was the offer for a free estimate at the bottom of the pricing page. As a call to action, it was nearly invisible, but more importantly it would best be labeled a free consultation. Consultations would require significantly less work than an estimate on the part of the firm, but also open the door for the company to demonstrate value as a partner, rather than a replaceable programming team.
- The more egregious mistake was that the pricing page packaged all its offerings into a single item (build software). A more effective approach would be to bundle up the most valuable portion of that (analysis) and offer a fixed-price consultation.
Imagine the following offer: For $1,000 I'll help you analyze your problem and come up with an approach to solve your problem. At that point, you can stick with me, or take what you've learned and go elsewhere.By bundling high-value tasks (like analysis) with low-value tasks (such as development), the firm is reducing its pricing power and forcing itself into providing solutions in the form of software (even when the ideal solution is not software-based). For instance, let's say that some software being used by a customer has a steep learning curve. The firm could rewrite it, which would require large amounts of money, or simply create an instruction booklet for all of the basic tasks that are conducted. Under the current pricing system, the software firm would have to opt for the first in order to get paid, whereas the latter would likely be in the customer's best interest.
Saving the Best for Last
Given the New Zealand domain name (.NZ), I assumed that all prices listed would be in New Zealand dollars. Imagine my surprise when I saw the fine print at the bottom of the page that said all price estimates are in US$. As of this article's writing, $1 in NZD is equal to a mere 78¢ in U.S. currency, thus all prices are roughly 30% more than I had first thought!
Even if I had been convinced by the firm's pitch and was ready to spend my company's money, finding this little bit of fine print would have severely tempered my enthusiasm. I have no idea if it's normal for firms in New Zealand to charge prices in US dollars, but even if much of its clientele is from the states, it would make sense to note the units of currency early on its pricing page.
Pricing software is hard, but defending your pricing to customers is even more difficult. If you'd like to learn more about how to price your software products properly, make sure to check out The Software Pricing Handbook. Either that, or consider hiring me for a pricing consultation!