the software industry: pricing benchmark results

The Software Industry: Pricing benchmark results

Technology Institute

August 2015

Table of contents

1. Introduction to the software industry pricing survey 3

2. Scope 4

3. Summary observations 5

4. Analysis and findings 6

4.1. Profile of participating companies 6

4.2. Pricing maturity 8

4.3. Pricing strategy 9

4.4. Price formulation 11

4.5. Transaction management 14

4.6. Performance management 16

5. Conclusion 19

PwC 3

1. Introduction to the software industry pricing survey

In 2014-2015 PwC conducted a pricing survey, which had participation from 32

leading companies across the software industry ranging from startups to Fortune 50

companies. The survey covered elements of pricing across strategy, price formulation,

transaction management, and performance management. The insights shared in this

document summarize the survey results and PwC’s extensive experience in advising

on pricing for software companies.

The table below shows the range of professionals who responded to the survey, by

business area.

Business area Position/ title

Finance CFO

VP, Finance

Pricing VP, Pricing & Licensing

Senior Director, Pricing

Director, Global Pricing

Senior Manager, Pricing

Marketing and Sales Ops VP, Marketing

VP, Product Management

VP, Sales Strategy & Operations

Director, Product Marketing

Director, Pricing Operations

Director, Strategy & Business Development

Senior Manager, Sales Ops

Product Manager, Monetization

We would like to extend our sincere thanks to all respondents for taking the time to

complete the survey. The survey was conducted online through a secure survey tool

which enabled confidentiality of all company specific data. All data was summarized,

aggregated, and anonymized in a manner that further protected confidentiality.

4 The Software Industry: Pricing benchmark results

2. Scope

The survey has been developed using PwC’s pricing framework, which covers all aspects of pricing in a holistic

manner. This framework includes four elements - pricing strategy, price formulation, transaction management, and

performance management. The survey also analyzes the maturity of participating companies’ pricing practices,

compared with leading practices in the software industry.

Chart 1: PwC’s pricing framework

PwC 5

3. Summary observations

Today’s software industry is characterized primarily by seven business models. Irrespective of the model used,

software companies are under increasing margin pressure primarily due to an inability to understand the true cost to

serve customers and the value perceived by customers.

Chart 2: Software companies business models

Key observations

1. Pricing strategy

Companies consider the market’s willingness to pay in developing a product’s pricing strategy but are unable to assign value and develop offerings that will capture the value.

2. Price formulation

Market-segment-based price books are not actively used; regional price books are based on local currencies, but a lack of rigor in updating local price books causes revenue leakage.

3. Transaction management

High discounting levels, ineffective rebates, and under-used deals desk highlight governance gaps in transaction management among participants.

4. Performance management

Performance management infrastructure and analysis do not adequately include customer lifetime value and cost to serve.


4. Analysis and findings

4.1. Profile of participating companies Thirty two companies participated in the first phase of the software industry pricing survey. These companies have

annual revenue ranging from $100 million to $86 billion, with a median of $3 billion. A majority of the companies

generate over 50% of their revenue from large enterprise customers.

Chart 3: Revenue profile of participating companies

Based on publicly available data sources or survey responses; data not available for all companies. Size of each bubble represents participating

company revenue.

On average, software and service offerings account for

over 77% of participating companies’ revenue.

Hardware offerings account for 12% of total revenue.

Chart 4: Revenue by offering type

On average, the America region accounts for over 64%

of revenue for participating companies. EMEA

accounts for 21% of revenue.

Chart 5: Revenue by region

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

55%

22%

12%

11%

Software Services

Hardware Others

64%

21%

12%

2%

AMS EMEA

APAC ROW

Rev

en

ue %

fro

m S

MB

cu

sto

mers

Revenue % from large enterprise

PwC 7

The service profiles of participating companies

indicate a mix of traditional and emerging (“as-a-

service”) models. We observed that an increasing

number of companies are providing “as-a-service”

offerings. 67% of participating companies offer both

hosted and on- premise solutions; 30% bundle on-

premise and “as-a-service” offerings.

Chart 6: Service type

% of respondents that bundle hosted & on premise

% of respondents that offer freemium service

The subscription-based pricing model is supplanting

the perpetual license model among participating

companies. Eighty-four percent of participating

companies offer a subscription-based pricing

model for their products and services.

Chart 7: License type

Fifty percent of participating companies use a

freemium model for customer acquisition and

segmentation. Among companies offering a freemium

model, usage-based and feature-based models are the

most common.

Chart 8: Freemium model

Sixty-three percent of participating companies offer both hosted and

on-premise solutions.

19%

19%

63%

0% 20% 40% 60% 80%

On Premise

Hosted

Both

69%

84%

59%

0% 20% 40% 60% 80% 100%

Perpetual Licenses

Subscription Licenses

Multi-Year SubscriptionLicenses

93%

86%

64%

0% 20% 40% 60% 80% 100%

Limited by features

Limited by usage

Limited by time


4.2. Pricing maturity Using PwC’s pricing capability maturity model, the survey evaluated maturity of pricing practices across the pricing

organization, process, technology, and data analytics dimensions.

Chart 9: PwC’s Pricing maturity framework

Eighty-one percent of respondents rate their overall pricing function maturity (in terms of strategy,

process, organization, and tools) at transaction-based level or below. Deals and transaction management

is the most mature process area among participating companies. Seventy five percent of respondents have formal

and standardized deals and transaction management process. Approximately 75% of respondents practice value-based

price setting and price execution.

However, pricing systems and tools form the least mature category, with 75% of respondents using ad-hoc or

transaction-based analytics infrastructure and techniques. Most respondents are also lagging on stakeholder training

programs and cross-functional coordination for price development and execution.

Low

High

Ad Hoc

Transaction-Based

Price Management

Value-Based

Price Management

Holistic Price

Management

Pri

cin

g C

ap

ab

ilit

y

Organization Process Technology Data and

Analytics

Pricing

organization has

fully integrated

function to

optimize pricing

throughout the

value chain

Formal and

standardized

processes for

price optimization

throughout the

whole value chain

Complete pricing

platform

integrating price

setting, price

optimization,

management,

market and

customer data

On-going

management of

pricing based on

economic,

customer, and

sales data

Formal customer

analytics and

market intelligence

function

Formal and

standardized

processes for

price optimization

Pricing

optimisation

system integrated

with price

management

Monthly price

management

based on

customer and

sales data

Centralized price

setting and price

management

function

Formal and

standardized

processes for

price setting

and price

management

Price management

system has been

implemented

Quarterly price

management

based on market

and sales data

No centralized

price setting and

management

organization

No formal or

standardized

processes in place

Underutilization

of available

tools or Excel-

spreadsheet-

driven

Annual Price

management

based on sales

data

Pricing capability maturity model

PwC 9

Chart 10: Ratings of pricing function maturity

4.3. Pricing strategy Pricing strategy enables companies to capture the value created from their products and services. It requires

companies to understand the intrinsic and perceived value of their offerings, analyze the competition’s pricing, and

consider the cost drivers while aligning to overall corporate objectives and strategies.

We asked the participating software companies to identify their pricing approach, the level of business involvement in

setting pricing strategy, their discount and price maintenance policies, and the pricing meters used in developing

pricing structures.

Price-setting approaches and levels A majority of respondents price their products and

services based on the value perceived by customers

and on the price of competitors’ products. Eighty-eight

percent of respondents follow value-based pricing,

which indicates a high level of sophistication.

However, many respondents expressed concerns about

being able to capture the right value.

Chart 11: Price setting approach

PwC’ leading pricing practices recommend

setting pricing strategy at the Business Unit Level.

Approximately 63% of respondents set their pricing

strategy at this level.

Most companies have the foundational elements of a sound pricing strategy in place, yet they are not clear about the value captured.

31%

13%

7%

19%

16%

25%

50%

13%

18%

45%

55%

50%

0%

50%

29%

19%

26%

19%

19%

25%

46%

16%

3%

6%

0% 20% 40% 60% 80% 100% 120%

Overall pricing strategy, processes, tools, and organization

Price setting and execution

Deals and transaction management

Cross-functional coordination in price development & execution

Stakeholder training program

Pricing systems and tools

Ad-hoc Transaction based Value based Holistic based

88%78%

38%

0%

50%

100%

Value-Basedpricing

Competitorpricing

Cost Pluspricing


Chart 12: Pricing strategy setting level

Most respondents indicate that they struggle with the

enforcement of discount policies and practices. Fifty

eight percent of respondents indicate that they strictly

follow discounting and pricing policies, however,

deeper analysis reveals average discounts of 40% off

the list price, which raises questions about the

effectiveness of the discounting process.

Chart 13: Corporate-level discount and price maintenance policies

Chart 14: Bundle pricing approach

Sixty percent of respondents either use a value-based

bundling strategy or distribute discounts intelligently,

which indicates a good understanding of the bundling

value proposition. However, bundling is a challenge to

24% of respondents, who distribute discounts evenly.

Pricing meters There is wide variability in the number and types of

pricing meters used by respondents. Sixty-one percent

of respondents use three or more pricing meters,

which increases the complexity of downstream price

maintenance and billing processes. The increased

number of pricing meters also has negative

implications the customer experience.

Lack of standardization of pricing meters is contributing to overall process complexity.

44%

63%69% 66%

0%

20%

40%

60%

80%

Corporatelevel

Business Unitlevel

Product Linelevel

IndividualProduct level

23%

3%

16%

58%

No, BU defined

No, At regional level

Yes, corporate level,loosely defined

Yes, strictly followed

23%

40%

20%

17%

Discount evenlydistributed

Discount intelligentlyallocated

Value-based discountallocation

Others

PwC 11

Chart 15: Number of pricing meters used per product

“Per License” and “Per User” are the most widely used

pricing meters. However, these meters are product-

specific and vary widely across companies.

Chart 16: Typical pricing meters

*Others: Per CPU, Per Virtual Machine, Per Visitor, Per Profile, etc.

4.4. Price formulation Price formulation facilitates an understanding of the

factors considered by companies in setting the pricing

structure and price points. We asked the participating

companies to describe the factors considered in setting

and distributing price lists. We also asked the

companies about their multi-currency pricing

approaches and practices.

Factors considered in price setting 69% of respondents cite market demand as the most

frequently used factor for setting prices. Fifty-three

percent of respondents use process optimization for

setting prices.

Chart 17: Factors considered in setting prices

However, 53% of respondents do not set price lists by

market segment, which indicates disconnect between

price setting and value capture for different market

segments.

Price setting based on market and channel demand presents improvement opportunities.

35%

3%

19%

43%

0% 20% 40% 60%

One

Two

Three

Four or More

53%

50%

53%

72%

75%

0% 20% 40% 60% 80%

Others

Per GB

Per Device

Per User

Per License

* 19%

13%

19%

25%

34%

38%

53%

69%

0% 20% 40% 60% 80%

Others

Yield Improvement

Projected Capacity

Negotiation with suppliers

Cost Projections

Sales Pipeline

Process Optimization

Market Demand


Chart 18: Price setting by market setting

Only 21% of respondents customize prices for channel

partners, while 55% use “generic” price lists for all

channel partners. These findings indicate a potential

opportunity to improve channel engagement and

profitability through better pricing.

Chart 19: Distribution of price list to channel partners

Regional price setting Eighty-one percent of respondents use regional price

lists to customize prices based on regional customer

needs and market dynamics. However, 81% of

respondents derive their regional price lists from a

global price list, indicating a “top-down” approach to

regional price setting.

Chart 20: Regional price list formulation

Forty-five percent of respondents update their regional

price book every month or every quarter. However, the

remaining respondents are at a competitive

disadvantage due to out-of-date pricing and inability to

capture value due to changing regional trends.

Chart 21: Frequency of price-book updates

53%

47%

40% 45% 50% 55%

Market segments don'tinfluences price setting

Market segmentsinfluences price setting

38%

21%

17%

17%

Generic price list in multiple formats

Custom partner price list in multiple formats

Generic price list through B2B gateway

Others

81%

19%

0% 20% 40% 60% 80% 100%

Set regional price list

Don't set regional price list

26%

19%

10%

13%

32%

0%

20%

40%

60%

80%

100%

Price books update

Monthly Quarterly Semi-Annually Annually Others

PwC 13

Multi-currency pricing A vast majority of respondents have multi-currency

pricing to meet customer demand globally and align

pricing based on customers’ willingness to pay. Eighty-

seven percent of respondents support four or more

currencies.

Chart 22: Number of currencies supported

However, only 31% of respondents indicate that they

have well-defined strategies, policies, and structures in

place to support multi-currency pricing.

Approximately 52% of respondents have a reactive

approach to multi-currency pricing, and 17% do not

offer multi-currency pricing for various reasons.

Chart 23: Multi-currency pricing maturity

While most companies support multiple currencies, few have mature and rigorous strategies and practices.

13%

87%

Pricing in 1 currency Pricing in 4 or more currencies

17%

21%

31%

31%

0% 5% 10%15%20%25%30%35%

No multicurrency pricing

Sporadically change pricing

Some policies in place

Well defined strategy, policy& structure in place


4.5. Transaction management

Transaction management allows companies to better

understand the willingness to pay across different

customer segments and allows acquisition of marginal

customers through appropriate discount and

promotion strategies. It demands that organizations

analyze “real” costs to create reasonable discounting

thresholds and floors, bundling strategies, and deals-

desk functions. We asked the participating companies

about typical discounting levers, deals-desk

organization, and level of departmental involvement

Discount management Volume and term discounts are the most common

transaction-management levers, as over 75% of

respondents cite using one of them. Approximately

50% of respondents use bundle discounts and/or

promotional discounts to exploit the willingness-to-

pay variation across customer segments.

Chart 24: Typical discounts associated with products

Backend rebates are also common, with 62% of

respondents using these rebates. Fifty two

percent offer rebates to channel partners, and 38%

offer rebates to both customers and channel partners.

Although discounts and rebates are used extensively, the effectiveness of these techniques is unclear.

However, most respondents indicate that the backend

rebates are ineffective, because partners often discount

upfront prices in anticipation of financial

compensation for hitting volume targets.

Chart 25:Backend rebate used

Fifty-eight percent of respondents indicate that they

rigorously follow a well-documented pricing-approval

process, yet the underlying data indicates deep

discounting; on average, 45% of respondents discount

over 40% off the list price. This indicates a disconnect

between discounting policies and execution.

Chart 26: Discount off list price

25%

25%

31%

44%

53%

75%

88%

0% 20% 40% 60% 80% 100%

Billing type discounts

Payment terms discount

Promotional discounts (oninvoice)

Bundle discounts

Promotional discounts (offinvoice)

Term/ multi-year discounts

Volume discounts

10%

52%

38%

0% 20% 40% 60%

Customers

Channel Partners

Both

30%

25% 25%

20%

0%

20%

40%

0-20% 20-40% 40-60% > 60%

Discount % off list price

PwC 15

Seventy-two percent of companies claim to frequently

approve pricing at the sales-director level and below.

When combined with observed deep discounting, this

finding implies that many deeply discounted quotes

are not being approved at the VP level, as intended.

Chart 27: Discount approval levels

Deals desk For most respondents, the deals desk is aligned to one

or two functions. Fifty percent have deals desk aligned

to sales or sales ops, 22% have it aligned to the pricing

function, and 28% to the finance function.

Chart 28: Deals desk alignment

Industry-leading practices recommend that deals

desks act as an organizational hub for all major

corporate functions to ensure involvement and buy-in

from all stakeholder groups. However, this is not

observed for most respondents.

Chart 29: Deals desk acts as an “organizational hub”

44% of respondents use their deals desk for more than

60% of quotes. An additional 25% use it for 40-60% of

quotes. Low deals-desk usage typically indicates a lack

of governance and rigorous analysis of deals by

size/opportunity.

Chart 30: Deals % through deals desk

3%

13%

23%

10%

30%24% 24% 24%

7% 10%

0%

5%

10%

15%

20%

25%

30%

35%

FieldService

DistrictSales

RegionalSales

Director

RegionalSales VP

VP WWSales

Level of pricing approval set

Frequently used approval level

50%

28%

9%

22%19%

0%

10%

20%

30%

40%

50%

60%

Sales/Sales Ops

Finance Marketing Pricing Others

Sales Ops Legal

Prod Mktg Services

Field SalesFinance

Deals Desk

25%

6%

25%

44%

0%

40%

80%

0-20% 20-40% 40-60% > 60%


4.6. Performance management

Performance management, a key the component of

pricing function, enables companies to measure

strategies and practices that are yielding desired

results. The companies should focus on developing

holistic and real-time processes for measuring pricing

performance and deriving meaningful insights to

inform the pricing strategy. We asked participating

companies to identify the data source they used for

performance measurement, the metrics they

measured, and the insights they drawn from the

analysis.

The performance management infrastructure is immature for most participating companies.

Seventy-seven percent of respondents use transaction

data for performance management. Only 40% use

opportunity data from their customer relationship

management (CRM) systems.

Chart 31: Data sources used

*Others: market research, competitive and partner feedback, line

optimization

Most respondents have rudimentary pricing analytics

capabilities. Eighty-six percent use ad-hoc and

spreadsheet-based analytics tools, which indicate

significant room for improvement, considering the

commercial availability and affordability of big-data

and analytics platforms.

Chart 32: Price analytics capabilities

Price volume, price band, and customer segmentation

are the top three price analytics used by respondents.

Waterfall analysis is used by only 30% of respondents,

highlighting a lack of understanding of the true cost to

serve among most respondents.

Chart 33: Price analytics executed

Most respondents execute “what-if” revenue analysis

and break-even analysis as the two main types of

pricing simulations; only 23% of the companies look at

customer churn, which is the key to understanding

customer lifetime value.

17%

20%

30%

33%

40%

77%

0% 50% 100%

Others

Entitlement data fromentitlement systems

Cost data

Usage data from provisioningsystems

Win-loss opportunity data fromCRM/quotes

Transaction data

3%

48%

38%

10%

0% 30% 60%

No analytics

Ad-hoc analytics

Regular analytics usingspreadsheet

Advanced analytics tools

7%

17%

17%

20%

23%

30%

33%

40%

47%

60%

0% 10% 20% 30% 40% 50% 60%

Waterfall benchmark

Cross segmentation

Pareto analysis

Revenue/Gross margin scatter

Time series

Waterfall analysis

Price variance

Customer segmentation

Price band

Price volume

PwC 17

Chart 34: Price simulations executed

Pricing metrics Only 37% of respondents use metrics for strategic

decision making, which is a prerequisite for a holistic

approach to setting pricing strategies. Fifty-five

percent of respondents do not have a set target

associated with the tracked pricing metrics, and 33%

use pricing metrics primarily to understand gross

margin at the end of the quarter.

Chart 35: Pricing metrics tracking maturity

The pricing metrics collected by companies are not well linked to strategic decision making.

The most commonly collected metrics are revenue by

customer and product, average selling price for

product or SKU, and price realization (% off the list

price). Only 13% of respondents indicated that they

analyze profitability at contribution margin level.

Chart 36: Key pricing metrics tracked

Seventy-five percent of respondents report difficulty in

developing and maintaining price waterfall models,

which is foundational to understanding actual

discounts off the list price.

Chart 37: Use of price waterfall

10%

23%

33%

37%

47%

63%

0% 20% 40% 60% 80%

Others

Customer churn impact

Price testing (control groupversus test group)

What-if probability impact

Break-even analysis

What-if revenue impacts

8%

22%

33%

37%

0% 10% 20% 30% 40%

No metrics tracking

Ad-hoc tracking

Regular tracking but not usedin decision making

Regular tracking and used indecision making

3%

13%

23%

23%

27%

37%

40%

43%

53%

60%

67%

0% 20% 40% 60% 80%

Volume compliance for VPA bycustomer

Contribution Margin byCustomer/Product

Average quote cycle time(standard vs non-standard…

Gross Margin byCustomer/Product

# of Deals Win/Loss withinguidelines and reasons

Revenue Change due toprice/volume

# of Deals Win/Loss for New/Existing Opportunity

Number of pricing exceptions

Price realization (% off the listprice)

Average Selling Price byProduct/SKU

Revenue by Customer/Product

25%

75%

0% 20% 40% 60% 80%

Yes

No


Only 13% of respondents measure customer

profitability at the pocket-margin level, which

highlights a blind spot with respect to understanding

net profitability.

Chart 38: Measure of customer profitability

Only 14% of respondents have a full understanding of

the true cost to serve customers; 57% use intelligent

estimates and insights to derive these insights. Pocket

margin and cost to serve are significant areas of

improvement for most companies.

Chart 39: Understanding of cost to serve

Only 13% of companies measure pocket margin, which is a key metric to understand the true cost to serve.

53%

40%

13%

0% 20% 40% 60%

Gross margin

Contribution margin

Pocket margin

25%

57%

14%

0% 30% 60%

Guess-based estimate

Some insights and intelligentestimate

Have full understanding anddetails

PwC 19

5. Conclusion

PwC’s software pricing survey indicates that most software companies have sound pricing practices yet fail to capture

value. The table below summarizes three key reasons that contribute to the inability of companies to capture value.

Reasons Representative examples of contributing factors

Lack of communication and understanding of value at a customer/market level

A majority of companies do not set price lists by market segment.

Only a small fraction of companies measure pocket margin and understand the true cost to serve.

Pricing meters are product-specific and vary widely across companies.

Immature governance and policies Sixty-two percent of companies have ineffective backend rebate administration and tracking.

Pricing approval and discounting execution is out of sync with policies.

Low deals-desk usage and a lack of rigor in deal analysis are contributing to margin loss.

Underinvestment in analytics infrastructure

Use of ad-hoc and spreadsheet-based analytics tools is highly pervasive.

A majority of companies are using price analytics primarily for revenue impact and break-even analysis.

Pricing metrics collected by companies are not linked in a meaningful way to strategic decision making.

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PricewaterhouseCoopers has exercised reasonable care in the collecting, processing, and reporting of this information but has not independently verified, validated, or audited the data to verify the accuracy or completeness of the information. PricewaterhouseCoopers gives no express or implied warranties, including but not limited to any warranties of merchantability or fitness for a particular purpose or use and shall not be liable to any entity or person using this document, or have any liability with respect to this document. This report is intended for internal use only by the recipient and should not be provided in writing or otherwise to any other third party without PricewaterhouseCoopers express written consent

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PwC can help

In the wake of rapidly evolving business models, increased focus on customer experience and fierce competition,

software companies are faced with the challenge of developing an efficient and effective pricing strategy. For a deeper

discussion on PwC’s pricing management consulting services, please contact one of our leaders:

Joe Lo

US Technology Customer Leader

408 817 5040

[email protected]

Let’s talk

Please reach out to any of our technology leaders to discuss this or other challenges. We’re here to help.

Pierre-Alain Sur

US Technology Industry Leader

646 471 6973

[email protected]

Kayvan Shahabi

US Technology Advisory Leader

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[email protected]

Cory Starr

US Technology Assurance Leader

408 817 1215

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Diane Baylor

US Technology Tax Leader

408 817 5005

[email protected]

Acknowledgements

The following PwC professionals contributed their experience and knowledge to produce this paper.

Amit Dhir Neha Garg Chittur Narayan

Customer Pricing Consultant Customer Pricing Consultant Customer Pricing Consultant

408 893 8373 408 808 2952 214 754 7502

[email protected] [email protected] [email protected]

About PwC’s Technology Institute

The Technology Institute is PwC’s global research network that studies the business of technology and the technology

of business with the purpose of creating thought leadership that offers both fact-based analysis and experience-based

perspectives. Technology Institute insights and viewpoints originate from active collaboration between our

professionals across the globe and their first-hand experiences working in and with the technology industry.

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the software industry: pricing benchmark results

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