Setting prices on emerging technology is difficult, and can be a head-scratcher for the most experienced marketers. Emerging technology poses a challenge to pricing because 1) competitor data is not available and analyst reports are expensive, and 2) early adopters are taking risks on the technology, meaning you’re asking someone to pay you for something that might fail.
Current emerging technology in B2B includes artificial intelligence (AI,) machine learning, and augmented and virtual reality (AR & VR.) Early adopters of this technology typically work with a partner to build a custom solution, which means variable pricing. Yet startups in these technologies are racing to build off-the-shelf services to gain attention, and ultimately market share. And even with custom solutions, the client expects you to give them a price.
Now where do you start? With emerging technologies, merging two pricing models, while considering the variable of client risk will lead to a number that can either 1) create an anchor price to negotiate or 2) set unit pricing for off-the-shelf services. This isn’t a magic-bullet method, but it’s a starting point.
Target-Return and Perceived Value Pricing
For this to work, you must have a minimum viable product (MVP) –there must be something to sell. If you are purely selling services and any intellectual property (IP) created is owned by the customer, this is not for you, as you simply charge an hourly rate or fulfill a contract via a statement of work.
Selling your IP allows you to unitize the product via licensing or packaging the IP with standardized services. You will also need to make some additional decisions.
- License or package the IP as a subscription or will it be a one-time sale? How will licenses or “units” be defined?
- What is the estimated invested capital? To determine this, you must set a value to the time the developers used to create the MVP. You can also add any additional expense, like software tools required to develop, or other services leading to the MVP.
- Will there be any additional support costs (if the IP is subscription based, then there will be new-version costs.)
- What is the desired return on investment?
- How many “units” do you expect to sell in a period of time or with this version of the software?
Here’s how this would work. Note, that while unit cost is traditionally part of this formula, I have removed it, as a unit cost typically determined with physical goods (while you can unitize costs with software-based products, the R&D invested in emerging technologies is the simplest starting point and the formula can be adjusted when unit costs become apparent as the technology matures.)
Target-return price = (desired return x invested capital)/unit sales
So, if my team spent $250,000 worth of coding hours and R&D, we’d like to make a 40% return, and we expect to sell 1,000 licenses this year, the cost per license should be $350. Or the subscription cost could be $30 per license per month.
Fusing perceived-value with the target-return price addresses the client’s risk to new technology, while compensating your company for servicing the client. However, you must be ready to deliver
on the value promised. Several variables can go into perceived-value and you’re asking for a 40% return –what does the customer get for that price?
- Updates and features to the software (subscription)
- Technical support and service
- Client ROI analysis, analytics, and reporting
- Modern design and functionality
Much of the perceived value must be communicated through the sales process, helping the customer understand that one of your goals is to reduce the risk in their investment in your product.
The last step in setting a price is to add any additional custom services, like implementation, into a quote or a contract. This will vary depending on the scope of the work.
It isn’t going to be simple.
This isn’t as simple as the example and there are definitely more variables and questions to ask. Like, what if you don’t sell 1,000 units? My goal is to get the thinking started. If you need help, let us know!