Few industries are more complex for B2B software providers than the financial services sector – especially for those competing to offer the front-end tech stack for core banking platforms.
Providing the foundation for ledgers, payment processing, risk management and fraud detection is fraught with high technical and organisational complexity, tight regulations, and long sales cycles. It’s also a highly competitive space for established players and challenger brands alike.
It is this unrelenting pressure, combined with the underlying high fixed / low marginal cost structure of software, that leads to systematic under-pricing in their products.
In many cases, this originates with from financial services software providers operating a complex revenue model that has evolved from a cost-plus starting point.
When you’re at the beginning of your growth journey this makes complete sense as the simplest way to ensure profitability on units sold as revenue is directly linked to the cost base. Then, once the product has been fully developed and gained traction, the need to drive revenue is more easily satisfied through discounts and volume growth than tough price increase conversations.
However, it is at this very point where you are becoming more established in the market that you begin developing a solid case to increase prices. This is because you can now gather empirical evidence of the magnitude of your product’s value creation for clients and better clarify what differentiates you from competitors.
It is at this point that you can begin to transition to value-based pricing, which offers the potential for a significant uplift in both revenues and margins while helping to change the perception of your products and services from cost-drain to value-driver.
Naturally, the need for volume and gaining traction with clients takes priority in the first stages of your growth journey. However, any under-pricing of your software directly impacts your company’s revenue and profitability both in the short and in the long-run.
Pricing also plays a key role in how potential clients perceive the value of your product. Just as too high a price can make your software seem less accessible or not offering a good return on investment, going too low may lead to perceptions of inferior quality.
Pricing also underpins your market positioning. It can differentiate your product from competitors and provide a clear signal as to its intended target market. By under-pricing your product, you may be inadvertently attracting the wrong type of customer.
Even with a slightly more evolved approach to cost-plus, you still risk limited revenue growth, poor value perception and a loss of competitiveness, leading to negative financial outcomes.
Many software providers are already at different stages in the journey towards value-based pricing. However, the first step is always an assessment of your cost structure. Before determining the value-based profit margin, it’s worth taking a close look at every salary, subscription fee and purchase in the business, from software development, operation and maintenance, to marketing, sales, compliance and security. In particular, consider the cost of any managed services which will tend to have a much higher marginal cost than the software.
Together these insights can establish a floor price which you cannot price below in the long-term.
The next step is to gain an in-depth understanding of how you compare with your closest competitors. Conduct market research to identify the competition, learn about their features, benefits and pricing models and evaluate their value proposition in comparison to your own. You can then identify the strengths in your offering that could command a premium and any weaknesses that may require more competitive pricing.
This is a multi-step strategic process that ensures your pricing reflects your software’s value to the customer, maximises profitability and aligns with market expectations.
Identify what your customers value most: How do financial service providers benefit most from your software? Increased efficiency? Improved compliance? Enhanced security? Identify the features that are most valued by your target audience. Where possible translate the qualitative benefit into a quantitative upside. For example, if a certain amount of the compliance’s team time is saved how does this translate into a pound value in saved resources.
Segment potential customers: Financial services providers are not a monolithic group and many of them have multiple business lines using different platforms. Instead, it is highly likely that the required features and willingness to pay varies significantly across customer segments. Segment your prospects based on their size, the services they offer, the markets they serve and their technological maturity, then tailor your pricing and value proposition to each segment. For example, customers can be supplied on a tiered basis depending on their size, with different corresponding feature sets such as the level of implementation support and customization.
Set prices according to value: Base your pricing on the value your product can provide, rather than as a percentage on top of your costs or charging based on the competitive landscape. If you know that your customer will be able to achieve a 10 x ROI on the budget you suggest, it becomes a simpler discussion as part of the sales process.
Understand each customer’s challenges: By taking a consultative selling approach to learn your prospect’s unique needs, you can then demonstrate the specific value of your software to each department in their organisation – helping to justify your pricing based on the direct benefits they will receive.
Offer flexible pricing models: Different clients will have varying budgets and value perceptions, so offer flexible terms that can accommodate more than one approach. That could include subscription models, pay-per-use or tiered pricing based on usage levels, feature access or organisation size.
Prove your value: Demonstrate the real-world success of your software with case studies, trial periods and ‘sandboxes’, and testimonials. One of the most successful recent examples of this includes one software provider who sources performance benchmarking data from existing clients, delivering quantitative proof of value that is then included in client proposals.
Of course, it remains true that any financial services software provider should have a healthy awareness of cost levels and competitor prices within their market. However, pricing by customer value offers the greatest opportunity to drive margin and revenue in the medium to long term.
The complexity of the financial services market means that the transition to value-based pricing requires a significant amount of resource to help adjust your market position and evolve client communications.
But the result is an approach to pricing that drives significant additional revenue from the clients who derive the most value from your products, which can then be reinvested into product development. This virtual circle of value capture and value creation can then become the bedrock for profitability for many years to come.
To learn how to implement value-based pricing for your business, contact our team today.
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