Three Keys to Pricing Deals

I was helping a portfolio CEO today design the pricing for an important software deal with a key new partner. I’ve negotiated a lot of software licenses over the years, and had occasion to think a lot about how to build good pricing models. My thinking boils down to three key rules:

Rule Number One

Think really really hard about which part of your solution is of real value to your buyer (licensee). What is the real essence of what they want from you? Zero in on that and come up with a pricing model that aligns: charge a ton for the key value, and give away lots of other window-dressing items cheaply.

Rule Number Two

Think about what your critical interests in the deal are, both now and down the road. Then think about the buyer’s. Where those interests align and overlap, you can afford to charge less and put in fewer controls, but where they diverge, you need to (i) charge more to compensate for the risk and (ii) think about controls to make sure the divergence doesn’t beget a disaster.

Rule Number Three

Look down the road and think about the buyer behaviors you most want to encourage and the buyer behaviors you fear most. Design a pricing model that incentivizes the behaviors you want (Ed: “Now I get the carrots!”), and disincentives the behaviors you dont what.

In short: align price and value, look for interest overlaps and gaps, and don’t design pricing that incentivizes bad behavior.

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