Pricing in the Tech Industry: Pricing Model Migration

Migration to the cloud is creating the need for business model transformation in the tech industry—transformation that must include new pricing models. Although successful pricing model migration is hard to achieve, it can create substantial value for investors, increasing price-to-revenue ratios from the 1–2x typical of mature tech firms to greater than 4x for those that successfully navigate the transition.

Cloud computing has become a hurricane testing the strength of many tech companies’ business models. Companies in some infrastructure and software categories are rapidly moving to off-premise, cloud-based offers. Others are not yet moving “off-prem” even though the adoption of cloud workloads is prompting many buyers to demand cloud-like pricing models for their on-premise technologies.

Over the next five years, BCG estimates, over 90% of revenue growth in the hardware and software sectors is going to come from either on-prem or off-prem offerings sold with cloudlike pricing models. In these conditions, rethinking industry pricing models is no longer optional. Successful pricing model migration is hard to accomplish. The journey typically takes at least three years (often five or more), and getting it wrong can mean capturing only a fraction of the potential benefits and being stuck with sluggish growth. Not attempting it at all, however—or waiting too long to do so—is going to be a recipe for disaster.

Pricing model migrations often fail due to lack of clear, deliberate pricing and packaging decisions and misaligned incentives. Yet BCG has worked with many companies that have successfully navigated the transition to cloud and new consumption models. Those that do so reignite growth and dramatically improve their price-to-revenue multiples.

Six Requirements for a Successful Pricing Model Migration

Our experience shows that there are six things a company must do to get the maximum value from a pricing model migration:

  1. Have a clear vision for the transition. It is crucial to begin by looking ahead five to ten years and deciding from the outset how far your company wants to go. For example, do you want to become a cloud-only company, cloud-centric, or a cloud company in certain segments? How fast do you want to get there? Where do your customers need you to be more “cloudlike”?
  2. Rethink the monetization strategy and profit pools. In addition to having the right products, you may need to completely rethink how you monetize innovation. Many technology leaders have built large businesses that thrive on complexity and “big bang” deployment models that frustrate the typical cloud adopter. A cloud-first monetization strategy might instead include maintenance and implementation services with the baseline offer, charging extra only to support the most complex adoption plans. Such a model may force cloud adopters to reevaluate their existing business units and target margins.
  3. Have a clear packaging and pricing story tailored for new consumption models. Cloud offers need to be packaged and priced in a way that facilitates trial, adoption, and growth over time better than on-prem offers do. Freemium and clear and simple tiering, for example, can be used to promote adoption and upsell. Offer packaging must include a simple adoption plan, steering clear of complex language and intricate strategies.
  4. Revisit go-to-market models and programs. The way cloud offers are often packaged and sold forces a company to rethink its customer-facing functions. Customer success is a critical capability that applies to many different areas. In the cloud environment, customer success may not fit cleanly into existing sales or services functions. The role of the channel partner changes as well—as do the pricing programs that support the channel strategy. Lastly, what and how offers are sold can shift from “big elephant” hunting approaches to more patient “farming” strategies that focus on retention and more gradual, organic growth.
  5. Create alignment to support the new pricing model. Everything from metrics and incentives to marketing communications and culture must be aligned in order to make a successful transition to the new model.
  6. Operate like a cloud company. The new consumption model requires that several internal processes and systems be remodeled to support the foundational elements of cloud offers (for example, telemetry, billing, and terms and conditions).

Partnering with BCG for Pricing Model Migration

Companies undertaking pricing model migration face a number of important decisions that go well beyond pricing. They must have clarity on broader issues of strategy and business model. How should they package cloud offerings differently from on-premise solutions? How can they compete with low-cost and free offerings? Or balance simplicity of metrics with value capture? BCG’s experience and expertise can help tech companies answer such questions. Our guidance—which makes use of proprietary pricing questions—can help you make the right tradeoffs, at the right pace, to migrate to pricing models that enable new ways of creating value.

Because making the right pricing decisions is only one part of a successful pricing model migration, companies must also understand the implications of their pricing model decisions across functions and manage the dependencies between these decisions and other functions in the organization. BCG partners with clients to strengthen functions such as product development, go-to-market, and operations that allow companies to actually capture new pricing opportunities in the marketplace.

By connecting pricing strategy to the broader business, BCG’s comprehensive approach to cloud migration helps companies execute the necessary changes across the business, enabling pricing model migration that leads to growth and increased shareholder return.