Tuesday, July 29, 2014

Messaging Ripple: A Salesforce Price Increase

Pricing strategy is a deep and complicated topic. You can find volumes of information on the web about pricing strategy. One interesting breakdown that I came across was in a white paper from Bessemer Venture Partners that's available for download from this page. One thing that I found particularly on point was this quote in the preview text:
Although the “flinch test” (keep raising the price and constraining the terms until the customer flinches) may have been an effective pricing art in the era of enterprise software, much more thoughtful strategies are needed for the modern models.
The flinch test. It has an uncomfortably familiar feel to it.

Upsetting the Status Quo
Imagine that pricing is a balance, a point of equilibrium between what the vendor would like to take from the relationship and a contrasting force of what the customer would like to spend in the relationship and how much they need in terms of service. In this model, a sales contract is reached based on a balancing of those two interests in at a point where both parties are satisfied. However, what constitutes a balance is never fixed, it's usually more of a range -- sort of like being on a see-saw and staying in balance as long as neither end touches the ground. With flinch test pricing, there is that idea of attempting to adjust pricing in favor of the vendor who, as an incumbent, maintains some entrenched leverage as it's hard to disconnect from the see-saw.

But with Salesforce, there's another aspect to their pricing model. Salesforce prices on a tiered pricing model. Here's an interesting excerpt from the Bessemer white paper:
The mindset of maintaining a long relationship with the customer supports having a tiered model. As the customer grows, its needs evolve. Part of the sales process is demonstrating that the customer’s needs can be met both in the present and in the future through higher tiers that it can “graduate into” over time. This also implies that sales cycles may be longer in order to prove out this value proposition over time...
The perception of growth on the part of customers is an important part of psychological pricing that compares favorably to the perception of “being charged more for a service level that I barely need.”
A fundamental component of Salesforce.com's tiered pricing structure is that you are "paying for things that you don't need." Some of these functional elements may be capabilities that you hope to "grow" into, while others may be things that simply don't fit your business process. Either way, there is a wealth of functionality that most likely sits idle, regardless of your business.

For customers, unless you've defined some specific measurable metrics, ROI can be seen as a Glass Half Empty / Glass Half Full sort of thing. Am I experiencing Value? Do I see the utility? Do I think we're taking advantage of all of the capabilities that the software offers? Half empty or half full is an easy state to remain in when everything is at equilibrium. But changing the cost equation can reactivate a need to scrutinize and measure -- and if there is not objective metric, it's easy to harmonize with the unused utility aspects.

The Uneasy Influence of Power in the SaaS Relationship
One of the things that makes a price increase so much more uncomfortable when you're dealing with a company like Salesforce.com is that, if you've deployed, the software has probably become entrenched in your business processes. This means that, if you are unhappy with the change in the vendor-customer relationship, you don't have many avenues for change. In this paper that I came across on Price Fairness, that kind of power magnifies the negative impact of a price increase.
Power affects the impact of different industries on price fairness judgments. When an industry is more powerful, as in the case of healthcare insurance, consumers are sensitized to fairness concerns. They are, however, reluctant to react because the alternatives are not good. The result may be capitulation: purchasing the product despite being angry as indicated by the dotted arrow. The result however, may also be explosive anger.
As with healthcare insurance, some may claim that there are many alternatives, but the reality is that that there aren't really that many viable ones.

In that context, even the threat of a price increase for a SaaS product like Salesforce.com can seem more like extortion than an acceptable business practice. The implication of the message is, "how entrenched is this software in your business processes?" And, as customers, your take-away understanding is more likely to be, "let me think twice about how I leverage this software in my organization. Is this new feature worth enabling another hook into my business or should I instead be looking at disconnecting dependencies?"

Personally, I would consider it an epic messaging blunder.

To end on a positive note, here's a little something in honor of the arrogance of the message and crazy seat licensing, here's a Bob Dylan song being performed by Tom Petty.

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