Software pricing and the Devil's Triangle

Conflicting and interlocking agendas between enterprise vendors and customers contribute to many failed projects. In an insightful blog post, long-time vendor executive, Dennis Moore, identifies an economic model to address this issue.

• Related: The Devil's Triangle concept

Dennis' model describes enterprise software pricing as a function of customer behavior. His initial post on the topic explains how software providers should view this aspect of the world:

Customers should also think about why vendors behave the way vendors do.... Is vendor behavior driven by customer behavior? 100 percent.

Still, many customers feel that they are being "taken advantage of" by vendors. From a vendor perspective, this is hard to understand.... Customers are able to network, demand references from vendors, and read industry news and analysis to understand what they're getting into. And no customer should make a major purchase without undertaking such efforts.

The model discusses four dimensions driving enterprise software pricing:

[T]he maximum price a customer is willing to pay is based on four key factors:

• The fraction of the customer's benefit that this particular customer is willing to pay to any vendor (aka whether the customer considers vendors to be opponents or partners)
• The customer's perception of the probability of success of the project to implement the solution
• The customer's perception of the competitive differentiation of the vendor's solution as compared to substitutes (including direct competitors, DIY, and "do nothing)
• The net benefit available to the customer as a result of implementing the vendor's solution (total benefit less implementation and evaluation costs).

Dennis goes on to describe the important value of non-financial benefits that customers can provide to vendors:

A vendor will often be willing to accept a lower price in exchange for help in closing more deals with other customers, faster, at a higher price. Any customer can help the vendor to accomplish this goal - by offering to provide some kind(s) of testimonial(s), case study(ies), sales reference(s), or even to help better understand the benefits of the vendor's solution(s). By providing this help, the customer helps the vendor to raise [pricing] in other deals. This kind of help can raise other customers' expected probability of success, their expectations about the net benefit available, and even the perceived competitive differentiation of the vendor's solution, thus raising the price other customers are willing to pay.

THE PROJECT FAILURES ANALYSIS

Upon first reading Dennis' model, I was skeptical and concerned he is writing a handbook intended to help vendors justify higher software prices. However, quite to the contrary, Dennis urges both customers and vendors to create shared value as the means to advance joint interests.

In an email to me, Dennis elaborated on this goal:

Customers and vendors should realize that a confrontational approach to negotiating a deal leads to hiding information, attempts to postpone disclosure to increase future benefits, suboptimal planning, and other behaviors that reduce mutual benefits, creating a lose-lose situation.

Collaboration can be achieved, and has the potential to create new benefits, leading to win-win scenarios.

From an IT failures perspective, the model is valuable for two reasons:

1. It explicitly acknowledges customer perception of project success as a critical driver for rational vendor pricing. 
2. The model forges collaboration, rather than division and conflict, between vendors and customers.