The PLM State: Pennywise Pound Foolish: Pricing and PLM

November 19, 2015 By:

There are various theories floating around that enterprise software is due for a shakeup based on historic trends. Obviously, cloud computing has generated a lot of attention with the success of companies like Salesforce, NetSuite and Workday. Other companies like Aras have tried to disrupt the market with freemium models that also lower the cost of entry. Having worked with a wide range of companies where pricing models vary in importance my experience is that while cost is certainly a consideration; buying product lifecycle management software purely on cost criteria can be a counterproductive strategy if the justification for purchase is driven by business value. This doesn’t mean you should blindly overpay for PLM software but it also doesn’t mean that all products are created equal and that the least expensive one is the best choice. This article will discuss the future outlook for traditional enterprise software vendors and how pricing models impact or should impact buyer’s decisions when it comes to selecting PLM.

I really enjoyed the prolific Oleg Shilovitsky’s article, “PLM, Viral Sales and Enterprise Old Schoolers”. I thought it was one of his better efforts. I also enjoyed the article he cited from Tech Crunch “Forget Virality, Selling Enterprise Software Is Still Old School.”. The premise of this article is that the viral/ freemium model really doesn’t work very well in the enterprise space. If you want to move enterprise software it must be sold. He points out that two of the newer kids on the block (at least by enterprise software standards), Salesforce and Splunk have very large direct sales forces. No one wants to have a large sales force (they are expensive) but in the enterprise software market they are a necessity. He goes on to list the six requirements for enterprise software sales success and his first point is to have a significant, monetizable value proposition. The tricky thing about value propositions in PLM is that they require some work to create and customers are not always able to do this on their own. This is where having a sales force and technical resources come in handy. Companies like Oracle and SAP are very skilled in providing this type of information to their customers and they encourage their partners to follow this approach as well. Typically, the smaller player’s value proposition tends to be that they are less expensive than the established products in the market. This may be true but if they are not linked to achieving some sort of value for the company beyond their cost why spend the money at all? The best quote from this article is this” If you want to sell your technology to the enterprise, you have to solve real problems for the enterprise, and you should expect to have a substantial sales and marketing operation. Fundamentally, the product has to make work easier, integrate better with other systems, and meet much more stringent requirements than a consumer product would.” Too many smaller companies are seduced by the marketing and messaging coming from consumer based products and miss the point that the enterprise market is different. Product development is a critical component for any company since it drives revenue. Economizing on the technology to optimize these operations without considering the impact to the outcomes can be perilous to a company’s overall health and margins. You could save in the short run but lose out in the end.

Another interesting article titled “With $1 Trillion at Stake, Enterprise Technology Gets Its Star Turn” was written by Michael Copeland in Wired. He discusses the historical trends in the enterprise market. He specifically focuses on the 1990-2000 time period when Oracle, SAP, Sybase and even Microsoft emerged as dominate forces. He sees similar trends occurring today with smaller companies like Netsuite, Splunk, Palo Alto Networks and others targeting these bigger companies. He specifically highlights Workday and their attempts to move HR to the cloud. He theorizes that Salesforce has made the cloud acceptable for enterprise applications and certainly with all the attention companies like Oracle are paying to this platform I think it is safe to say that the cloud will be part of any strategies going forward for most companies. One of the interesting points in the articles is that Workday only has about 350 customers compared with Oracle and SAP whose customers number in the tens of thousands. The conclusion of the author is that there is a big market up for grabs. It is an interesting perspective but I tend to interpret it as the jury is still out on whether the new wave of companies is going to be able to take market share away from the established market leaders. Moreover, given how quickly companies are snapped up these days will any of the dominant players allow a smaller organization to get any traction? What this means for today’s PLM buyer is that it is dangerous to be lured by the new companies without a proven track record. Just because something is in the cloud or has a interesting (cheap) pricing model doesn’t mean the company has the staying power to compete against multi-billion dollar companies. The cloud is just a place to put your data and run your application it is not a substitute for sound software design with robust capability. Any thin client application can take advantage of cloud based capability. The key is to truly understand your business needs and make sure whatever product you are evaluating has the features you need to optimize your business process without substantial customization. It also requires you to look down the road and anticipate the needs of the company into the future. Upgrading to a new PLM system can be very painful and disruptive so choosing a system you can grow with is also a wise move and will save time and money in the long run. The last overlooked element of PLM is integration. PLM does not typically exist in a company by itself. You should make sure whatever system you choose has a robust infrastructure to support communication with other enterprise tools. Examples of this would include Computer Aided Design tools (CAD), Enterprise Resource Planning (ERP), and Customer Relationship Management (CRM). Most companies will have at least one or two of these types of systems in addition to PLM and will benefit greatly from having them integrated.

The last article I came across was actually more targeted at companies setting up pricing models but I thought it made some good points for buyers of PLM to consider when looking at potential vendors. The article which was on Hubspot’s Marketing Blog, was written by Gregory Ciotti and titled, “7 Pricing Mistakes That Can Seriously Stifle Sales”. The author cites a book called Priceless where the author, William Poundstone claims that most companies don’t really have a pricing strategy. He claims that most companies just “wing it” when it comes to their pricing model and based on my observations of the PLM market I tend to agree. The key takeaways from the article are that comparative pricing is not that effective, emphasizing the quality and value of the product versus the cost is and selling your product in the proper context is critical. What this means from a PLM perspective is that just having a strategy based around being the least expensive will not lead to success. A product that can be highlighted for the positive user experience it provides and the value it delivers is going to be better received. I think the market bears this out. One other interesting point in the article is about price points. The article states that there needs to be different price points for different types of buyers. It refers to the super users as a group that recognizes quality and is willing to pay a premium for a higher level product. It also identifies the thriftier among us looking for a way to use the product at an entry level. Having multi-tiered pricing models is a smart way to gain access to both of these groups with the same products.

As we continue to be bombarded by messages that the PLM market and the technology is changing rapidly, it is important not to be distracted and focus on the important aspects of your decision. A PLM decision is typically a long term choice so make sure the vendor and partners have the staying power to grow with your company. Also make sure you are identifying the value drivers that are necessary for your company’s success and do not allow yourself to be swayed by the trendy short term technology fads. Smaller, newer companies can deliver unique value but make sure they will be able to provide you with the functionality and support you need. Talking with other companies about their experiences is a good way to really understand product capabilities and assessing your companies short term and long term needs is a key ingredient to making sure you are investing your companies hard earned money wisely.

[Edit: Repost from 2013]


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