My company sells software licenses, but for the majority of my career I’ve been on the buy side. For anyone who has spent time on both sides, the unique economic dynamics become apparent compared to transactions for other products and services: Software licenses have little to no marginal cost.
Economic theory teaches us that, in the short term, we should sell when marginal price is greater than marginal cost. In the long term, we should sell when price is greater than Average Total Cost. Therefore, for each marginal transaction in software, economics tells us to “take what we can get”; effectively, discount until the client is happy, when doing so would destroy the company over time.
In a competitive industry when the software is a commodity, price wins, so firms run the risk of discounting themselves out of business. As a buyer, I’ve learned what makes me pay more, and as a seller, I’ve learned that offering a product no one else can is the only way to survive.
Five best practices for supporting price integrity and differentiation are:
- Quote a price range early in the negotiation, even if the range is broad. It sets expectations and weeds out potential buyers who are using you as leverage for a current vendor, or treating your product as a commodity.
- Focus the negotiation on differentiation of value. Avoid making your value proposition “apples to apples” with a competing bid. That makes the decision to go with a cheap alternative foggier.
- Talk about risk. The purchasing manager wants to stay within budget, but usually he/she is most concerned with making a bad (and potentially embarrassing, career-damaging) decision. Make sure the buyer knows that your firm consistently helps peoples’ careers, and have an example ready.
- Keep giving the buyer “cover”. Remember, the buyer has to eventually make the case to a superior why your product was the best overall value. Provide him/her with a simple and concise argument to defend the decision when the time comes.
- Ideally, speak AT the buyer’s level of understanding, but always err toward speaking BELOW the buyer’s level of understanding. Never speak over the buyer’s head. Speaking over his/her head creates stress, because usually there’s someone technical at the buyer’s firm that will eventually scrutinize the purchase decision.
Most importantly, get to the point, and answer the customer’s questions first. Do not start a presentation with a history of your company, or by explaining your whole product line that the customer didn’t ask about. A large proportion of the customer’s decision is made in the first minute or two, so treat those minutes accordingly!