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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.
6 The Software Industry: Pricing benchmark results
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
8 The Software Industry: Pricing benchmark results
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
10 The Software Industry: Pricing benchmark results
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
12 The Software Industry: Pricing benchmark results
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
14 The Software Industry: Pricing benchmark results
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%
16 The Software Industry: Pricing benchmark results
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
18 The Software Industry: Pricing benchmark results
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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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
Let’s talk
Please reach out to any of our technology leaders to discuss this or other challenges. We’re here to help.
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US Technology Assurance Leader
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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
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