In-Depth

4 Smart Pricing Strategies for 2010

With customer expectations reset, businesses find themselves in uncharted territory as the economy improves. We canvassed experts for advice on setting your own pricing before the market sets it for you.

• By Joanna L. Krotz
• March 01, 2010

If you've been waiting for the economic pileup of 2009 to get cleared off the road, it looks like now's a good time to step on the gas. Employers nationwide are at least talking about hiring again in 2010, and technology spending seems to be on track for a modest recovery. All in all, business appears to be slowly pivoting from cost containment to growth.

At this unique time in the history of post-World War II business, the question of pricing becomes especially tricky. Customer expectations for what IT does and how much to spend on IT changed last year, but sales booked now, especially IT services on managed contracts, could reverberate for years to come. Set prices too high before businesses are really sure they're in spending mode and you won't get the business. Set prices too low, and your pricing will come back to haunt you.

"Enterprises can't be in hide-out mode forever, so there will be some kind of spending spree in 2010," says Adnan Raja, director of business development at Atlantic.Net, a managed services provider (MSP) and data center in Orlando, Fla., with such clients as the NBA's Orlando Magic. But that hardly signals a return to business as we knew it. Buyers remain skittish. Recovery varies by industry and geographic location. "Contrary to the last 20 years, where businesses invested in IT to cope with growth, companies now are looking for IT with value creation and cost savings," says Raja. "Pricing is going to be one of the major considerations for businesses in the future."

Success moving forward depends on taking a hard look at the value proposition of your products and services and at whether your pricing reflects the new realities and demands. You'll need to adjust accordingly. The key to reeling in business is flexibility around fees and customizable options.

Getting the Basics Right
Of course, even without tight times, pricing for IT services is thorny. "Many providers don't go through the necessary steps of figuring out real overhead and the cost structure of their business," says Matt Bolton, vice president of products at PacketTrap Networks Inc., a San Francisco-based MSP. The firm partners with IT pros to remotely manage their customers' networks and to help them build business. "Most IT providers price too low," says Bolton. "They don't take the cost of delivering the service into consideration and they think competitive pricing is something you get by doing a Google search to find out what the guy down the street is charging."

Instead, before any pitch, make sure you know exactly what the deliverables will cost you. Beyond immediate expenses, remember to calculate the cost of employee salaries, health and other benefits, sales commissions, the cost of buying remote management platforms, your own shop's infrastructure, operating costs -- everything, in fact, that trims your profit margin. Because when you do underbid, says Bolton, and cash flow dries up, you face three bad choices: "Go back to the customer and raise your price, cut your costs or lay people off." Pricing based on real costs goes a long way to staying profitable.

After that, you're ready to put offerings before the customer. To develop a solid value proposition, you need to "resonate, differentiate and substantiate," advises Michael Schultz, co-founder of Wellesley Hills Group, a Framingham, Mass., sales and marketing consultancy that focuses on services firms. First, offerings must resonate with the needs and demands of your buyers. If they don't, says Schultz, "what you offer won't make it to the top of the buyer's to-do list." Next, differentiate products and services from the competition and a customer's other options. "If buyers think they can get what you offer on every street corner, you'll always be pressured on price," he says. Last, substantiate your claims. Find ways to demonstrate that you will deliver at higher and more satisfying levels than the other bidders.

In addition, to fully leverage competitive advantages, figure out how the value of your offerings changes for different market segments. "Segmentation is the lifeblood of effective pricing," says Jim Saunders, partner at Pricing Solutions Ltd., a pricing optimization consultancy based in Toronto, Ontario, Canada.

Pricing Strategies for the Current Climate
After canvassing an array of pricing consultants, marketers and IT providers, we've identified four smart pricing formulas to help you capitalize on today's market trends. Which are best for you depends on your customers, the apps they use, their near-term goals and their level of technological sophistication.

1. Charge for Clearly Perceived Value
"We used to charge pretty significant up-front and configuration charges," says Larry Cecchini, COO at Secure Designs Inc. in Greensboro, N.C, which specializes in managed security solutions. "But once the recession hit, it was very difficult. Clients didn't want to part with cash." Eliminate up-front fees and you'll find customers more willing to have a conversation.

That resistance didn't start with the recession, of course. It's been building for some time as providers have increased the number and variety of their services. More often than not, customers don't understand how everything works or why they need so many different offerings. But the recession greatly accelerated opposition. "Up-front charges became a real hurdle," says Cecchini.

In response, Secure Designs began contracting only for monthly services, no matter the configuration requirements. "We now look at profit as a stream earned over time by building the relationship rather than an immediate payoff," says Cecchini. With a market target of small companies, five to 500 employees, Secure Designs charges as little as $50 a month for businesses with five or fewer users, going up to $100 or so a month for the bigger firms.

The new model is working: Secure Designs now manages 2,500 firewalls across 29 states and five countries.

2. Adjust to the Altered Market
In case you hadn't noticed, everyone now demands more but insists on paying less. You may need to tweak not only your pricing but also your expectations and mindset. "Freemium is key," says Steve Kolbe, founder of Analysys Enterprises Inc., an IT provider in Baltimore, Md., that targets small businesses. Before prospecting, consider what you can afford to package or bundle that will make you a must-hire hero.

Analysys is promoting regular discounts. "Much like Black Friday deals," says Kolbe, "we have seen tremendous excitement around one-day specials or additional discounts when we advertise our retainers." Yes, there's a slight hit on hourly rates, he says, but the tradeoff is "up-front money."

Likewise, in Buenos Aires, Argentina, Liquid Designers, an interactive design and marketing agency, serves U.S. customers by leveraging what it dubs "Amerisourcing." The small American expat staff relies on a handy New York phone number and cheaper local creative talent to deliver with all the customer comfort of a familiar culture, language and time zone. Last year was tough, allows Rebecca Peterhansen, a project manager, but adds, "we're in a good position to market services for 2010."

That translates into bundling and discounting services that take extra care of specific customer needs, such as search engine optimization and social networking marketing for an online gamer and content development for client Cramster Inc., an online student community. "Basically, we're maintaining excellent client contact and trying to keep the relationship strong by thinking of new ideas and adding services," says Peterhansen.

Don't wait to be asked. Move out of break-fix mode and hourly blocks. Start trying to manage as many services as possible for each customer. That will differentiate your services and help keep revenue flowing.

3. Risk Early Entry in the Next Big Thing
Unless you've been living under a rock, you've heard the loud buzz around cloud computing. Plugging into the cloud, along with virtualization and Software as a Service (SaaS), promises to eliminate the need for lots of on-site hardware, installed software, and disruptive and expensive upgrades. "Customers, especially SMB customers, do not want to manage IT, they want to manage their business," explains Simon Piff, a practice director for enterprise infrastructure at IDC, the global IT market researcher. Cloud apps also can support fast, scalable, incrementally priced growth.

Ultimately, cloud computing is expected to transform IT spending from capital expenditures to operating expenditures -- that is, from up-front lump sums to pay-per-use. No small matter. As Piff has it, "Cash flow is king for smaller organizations, plus the restrictions on credit that were in place at the height of the financial crisis in 2008-2009 were mostly felt in SMB markets."

Few disagree that cloud computing is poised to roll in. According to a survey by GlassHouse Technologies, a Framingham, Mass., managed services consultancy, six out of 10 of 100 North American IT executives polled last December plan to implement cloud technology in 2010. What's more, 72 of the CIOs said internal clouds were their highest priority.

The real questions are how much and how fast. We're still in extremely early days, with a host of challenges yet to be addressed, including security, archiving, data search, mobile access, reliable connections, pricing and more. "People will see cloud computing make changes to IT for the next 15 years," predicts Kevin Haar, CEO of Appistry Inc., a cloud services provider based in St. Louis, Mo.

In other words, jumping into cloud services offers significant opportunity as well as uncertainty. But if you make that early leap before many of your competitors, you're likely better positioned to land slices of new and ongoing business. The trick for the future is twofold: You'll need to stay nimble, alert to shifting needs and solutions; and you'll need to persuade customers to begin the transition now. Most cloud providers recommend offering a hybrid model for the time being -- moving certain services, such as storage or a few specific apps to the cloud while preparing for mission-critical shifts later.

The good news? Such a pitch carries a powerful motivator: "Moving to commodity processing power and larger servers can dramatically lower operating costs by as much as a factor of five to 10," says Haar.

4. Target 2010 Pain Points
As you well know, Microsoft is releasing a bunch of enterprise product upgrades, including Exchange Server 2010, Windows Server 2008 R2, the already mentioned Windows 7 and the upcoming Office SharePoint Server 2010.

"IT teams have a lot of work to do in order to plan their upgrade paths," says Randy DeMeno, chief Microsoft evangelist, at CommVault, a data management software firm based in Oceanport, N.J. Depending on your offerings, you can benefit by managing those needs for existing and new customers.

"Most companies make money on the service end of it, not inventory," points out Dawn Abbuhl, president of Repeat Business Systems, an office technology sales company in Albany, N.Y.

But if you really want to hold onto your pricing, consider packaging that support with higher-level services that help customers manage their ever growing new and archived content (see previous No. 2 strategy). "The amount of data and e-mail is exploding," says CommVault's DeMeno. "And everyone now is under some kind of legal compliance," from Sarbanes-Oxley and HIPAA to financial services and privacy requirements. "Users today don't even know the names of files they're working on and storing," says DeMeno, because of applications that share access and files that may be archived off-site or in the cloud. As a result, finding any particular file, even from only a few months ago, can be like looking for a needle in a haystack that's growing bigger by the minute.

What does this compelling need for upgrades and data management spell for IT providers? Yup, Opportunity. Plus, of course, the recently announced $250 million partnership between Hewlett-Packard Co. and Microsoft, which includes promotion of the Microsoft Windows Azure public cloud service, offers additional reasons to expand your offerings into one-stop technology support and services.

Customer Bond
Of course, no matter the prevailing market, the smart way to increase revenue continues to be strengthening the bond with your customer. "The focus of any B2B sale is to help your client do better than they would in the absence of the relationship," says Tim Smith, a professor of marketing at DePaul University. And the cure for today's all-too-common customer sticker shock is to better create and communicate the value of your offerings.

Advises Smith: "Not everyone will need your solution, but those that do should be willing to pay."