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How does a company decrease the price of an enterprise product or service? I have written a few pieces on licensing enterprise software; Licensing Roundup might be useful background for this piece.

A public company (and most private companies) can’t down sell their existing customers. That means they can’t reduce the amount of money they’re taking from those organizations without feeling very significant pain. Vendors are capitalized and that means regular meetings with steely eyed individuals who will ask hard questions like “How come your per-customer revenue is declining? Do you think that’s a sign of health?” A pattern of those numbers will lead to reorgs, executive firings, and worse.

So, how do you deal with the product that’s lost value? Maybe it’s a victim of technology change or expectation change or whatever, but the product market fit is lost and you’re now selling DVDs-by-mail in a streaming world.

How do you deal with unit economics that are no longer competitive? Maybe an upstart competitor has found a way to underprice you, or maybe solar and wind are suddenly cheaper than your oil-burning generators, and now you’re locked into contracts that are less profitable or even underwater.

Disrupting or changing the company is effectively where we’re going, but let’s focus on just the product re-licensing part today. There are some classic plays that can be used to deal with this situation, so let’s review them.

Wait and See

As always, the easiest thing to do is nothing at all! Don’t touch pricing, let inflation do its thing, and eventually the invisible hand of economics will make things better for your product problem. Your price will be right-sized, or the customer base will evaporate, or someone else will inherit this problem after your company is sold or you’re re-organized to something else. In the long run the problem will go away, though of course in the long run we’re all dead. This is not an ideal answer.

Rebundle

The next play is the most powerful and common choice, though it can be difficult to execute outside of a large behemoth organization: bundle the problem with other stuff that is still non-problematic, then smear average discounting across the whole mess. A favorite move in companies like Microsoft, Cisco, Broadcom, IBM, and many more, this allows vendors to “reduce the price” of failing products that are losing product-market fit without reducing revenue per customer, because they just increase the margin on products that the customer still wants. If your portfolio is broad enough, the whole thing can even still appear like a deal to the customer, particularly if they’re not expert with the products being discussed. From enough altitude, DVDs-by-mail looks like “We’re getting movies for practically nothing, what’s to complain about!”

Unbundle

Bundling only works if you’re holding a large portfolio of products though, and if getting bought by Cisco isn’t in the cards… you might unbundle. This is rebundling in reverse: break the failing product up into parts, so that the one distasteful price is spread across multiple line items and looks like several smaller numbers. The idea is to structure it so that the customer can’t really reduce their costs because the line items are interrelated with things that they want. Ever look at your cell phone or cable bill and try to get rid of unwanted services? Then you’ll be familiar with this model. A cool thing you can do in this case is to drop the price of things you want used by hiding their cost in things that have to be used; two minutes searching found dozens of instances of AWS reducing costs on S3 and EC2 storage, and yet somehow they’re still doing okay. I’m not expert enough in the field of cloud economics to say where the costs moved, but I’m doubtful that they’re reflected in reduced profit margin.

Remarket

The next set of moves is interrelated: each can be done in isolation, but they’re usually done in combinations to keep outcomes and motivations pleasantly murky.

Change the Model

Changing the license model entirely from say “units of value” to “size of customer” is a very hard circle to square, so this is almost more theoretical than practical; but it’s technically a possibility. To execute en masse, you must

• make up a plausible mental model driving this conversion
• ensure that no (or at least, vanishingly few) conversions will actually lose the company any money
• make a conversion structure that prevents required renegotiation of all contracts
• establish a process for handling the customers that still need to be renegotiated

Luckily, this can be experimented with; you can launch a second model as a trial balloon for specific deals and see how they do. Furthermore, you’ve probably already done so! The Enterprise License Agreement (ELA) is a standard contract approach used with your largest customers to bypass whatever your model is and negotiate most favored nation pricing for them. “Would you rather have a protracted fight over how much that unit price is worth and how many units we have licensed… or this Cartoonishly Large Bag of Money?” Review those contracts and you’ll see what your e-staff, founders, and board are already comfortable with. It’s only a start towards a new model, but if you have to explore that path, it’s a start.

Change the Timeframe

The lowest impact tool in the shed is to alter the agreement timeframe. Shorten the time frame and increase the margin to reduce the upfront cost; lengthen the timeframe and decrease the margin to increase the total value of what the customer gets. Back in the pre-cloud days, most enterprise software was sold on permanent licenses (very long duration, very low margin), with a yearly support subscription. When customers complained about pricing, one of the options was to shorten their agreement from perpetual to term; yearly cost, smaller number, but high margin. The ASP (average sales price) probably didn’t change at all, just the term. Leasing a new car is the analogy to look at: instead of $X for however long the car lasts, you pay a fraction of $X plus margin for a year or three and return the car to be resold. These days, the same trick can be played in reverse by pre-selling the customer large chunks of credits to your service, which you can then turn into partnership opportunities by allowing those credits to purchase partner goods through your marketplace.

Change the Units

If your old pricing model is drawing curses and your marketplace reputation is “rapacious scum”… a quick answer might be to just change the unit! Now the Xs are free, and we charge by Ys instead. I can’t write a better takedown of this than Clint Sharp did… key to this approach is deciding if it’s presented as a change or an option. Do existing customers have to switch? Do new customers get to choose which model to use? Running two license models might mean that the vendor legitimately services multiple markets with multiple product fits and needs to be able to optimize sales for both; or it might mean that they need the old customer base to stay put as long as possible. That might not be a nefarious thing, to be clear; change is expensive, and new license models are full of unknown unknowns.

Change the Brand

While your account manager might, off the record, admit with an “aw shucks” that competition is tough or market change has caught the vendor by surprise… those aren’t ever official corporate policy at vendors. So, whatever gets changed, the marketing must change. “As a forward-looking and generally excellent vendor, we are making some changes to better serve our awesome community of good-looking and intelligent customers.” It’s pretty common practice: change the product’s name, maybe give it a new layer of front-end chrome, and restart marketing as if the product was brand-new. Niftily, customers of the original product have a discounted conversion path to the new product (carrot), and a short-term EOL deadline (stick).