Software Pricing Partners help you figure out how to price your intellectual property and your services. We have one such partner onboard today to help you figure out how to charge what you’re worth. Chris Mele is a software pricing strategist and a co-founder of CompanionCabinet Software. In this episode, Chris discusses with Michael Zipursky how getting yourself off of the cost basis for your pricing is super crucial. You need to focus instead on the value you’re giving.
Do you want to know how to determine your value? Find out by tuning in to this episode!
In this episode, I’m with Chris Mele. Chris, welcome.
Thank you for having me.
Chris, you are a Software Pricing Strategist. You’re Managing Partner of Software Pricing Partners and your clients include companies like IBM, Oracle, GE, HP and many others. You were previously the CEO and Co-founder of CompanionCabinet Software which was the number one business management ERP solution in the remodeling industry. It’s great to have you on. Let’s start off and talk about your experience running your first company, CompanionCabinet Software, what was that all about?
When I was at Ernst & Young doing the consulting thing, they got me involved in engagement economics, which is code for you get to see the billable rates to the client, which is probably the worst thing that you can ever show to one of your team members. I concluded pretty early on that I was on the wrong side of the formula. A buddy of mine at Ernst & Young and I decided that we would start a software company. I remember the password to the database we were working on at the time at Visual Basic and I’m sacrificing all these summers building all this code. The password was a million in revenue by 2000, with an exclamation point because that makes it extra secure. This was the password, and little did I know it would be until 2006 when we would make that.
I went through a stage where I had really long hair that I can bite, not because I was going hippy, but I literally could not afford a haircut. Things were really tight and I think my parents were worried about me at the time, but we attracted investment capital around 2006, and then we made our way eventually to the cloud in 2008. We were largely what they call on-premise software at the time. That was the dominant stuff that you did in the software space. I stared bankruptcy in the face twice in my career. It was very scary. I think at one point before we took on investment capital, I had about $190,000 in credit card debt. That was the time when you could switch credit card offers and get 0% and keep extending the runway and get a little bit more credit. You can’t do that now, because they charge you the transfer fee but back then, you could build a whole business on a credit card and that’s what we did.
How did things turn out for that business?
That was wonderful. It was one of the best educational experiences of my life. In 2008, we were moving to the cloud and then we hired software pricing partners to help us figure out how to price our intellectual property and our services. That’s how I met the team here. Ultimately, I was driving to Charlotte, ready to accept another position at a software company to continue that journey. I talked to the founder at the time and he was upset that he couldn’t find a partner and out of my mouth came, “Should we be having that conversation?” That’s what it took. I did a very big right-hand turn on my career and I love it. It’s amazing to deal with the kind of technology and the founders and you get a real sense for all the tech that’s being brought to market for COVID. A lot of our clients are in healthcare. It’s a very fascinating world. There are some amazing stuff people are working on.
Take us back to that time when you were running CompanionCabinet Software, and people often say you learn more from your mistakes or failures or challenges from your successes. What advice would you offer someone who is going through their own entrepreneurial journey? Maybe they’ve encountered some of the downs, not just the ups, what lessons would you offer your daughter or son who is thinking about entrepreneurship from your experience?The amount of time that you will spend raising capital is on par with or greater than the time you'll spend attracting another customer. Click To Tweet
The first one I would say is the amount of time that you will spend raising capital is on par with or greater than the time you’ll spend attracting another customer. It’s funny, because I actually teach as a guest speaker down on some of the campuses for entrepreneurial programs, and one of the things always comes up as investors. Everybody’s on this ride to get the investors, build the company, have the unicorn in three years, and then retire in the Caribbean and built a wall around ourselves with a bunch of vaccines that nobody else can get into. I think that if we stretch that runway out a little bit and have what we would call reasonable growth. Healthy growth is key, and it’s your understanding of, “Your customers are superior to the competitors.”
The only way you can get that is to be on the phone with some form of your service or product, maybe in an early form and getting paid, not doing it for free. The mistake that I see a lot of times that happens is the entrepreneur gets enamored with pitch events and other things. They want to take capital in and forget that before you take capital in the investor is going to say, “Before I write the check, can you tell me what’s in the pipeline and who it is that’s about to buy,” and therein lies the trap. If you’re not careful, you can lose a year on that. We had a lot of managing investors, as a full-time job and it can be very distracting.
Let’s touch on the importance of focus. Do you think that it’s a big challenge that a lot of people have in running their own businesses? That they’re focused or lax and they end up looking at a lot of different shiny objects and opportunities. Things that they could be doing with the hope of it having a big impact, but oftentimes, they overlook the basics of engaging with clients and customers and having more meaningful conversations?
I’ll never forget there was a customer early on in my journey and it was probably about a year or two after they bought. Here we are struggling with what it is we’re going to build next and trying to attract a new customer. I remember when I visited them, he said, “If you had just come back to me and offered me that inventory management module, I would have paid you $150,000 for that.” I scratched my head like, “Oh my God.” Sometimes it’s not a hundred customers that you need, it’s one or two. A real focus on the problem that they’re trying to solve in that and mastering getting paid fairly for that, is critical. A lot of our clients, especially if they don’t have customers yet or they’re pre-revenue or think about a larger company that’s doing the first launch into the marketplace with a new cloud offering because maybe they’re a little bit late to the party, you don’t need a lot of customers to put some big marks up on the wall.
If you were talking about potentially doing something very small like a $10,000 or $15,000 pilot, oftentimes, that can get reconstructed if you listen and you spend your time and focus on that customer. How that workflow works and what the problem is that you’re trying to solve for them. If they’re going to spend $15,000 with you, they’ll spend $50,000, they’ll spend potentially more depending on their size and that is often missed. When you’re on your service, the question is, “If I sell it at a $100 or $200 an hour, which don’t get me started on the hourly rate, but if we sell a fixed work product for $10,000, it’s a very different ball game if we can sell it for $25,000.” It means a heck of a lot fewer customers. That’s a lovely thing that happens when you don’t have to serve a million customers.
What things look like at your company CompanionCabinet Software before you engage your current firm that you’re now involved with? What were you guys doing wrong from a pricing perspective?
It’s looking at our costs.
Tell me about that. What do you mean?
Every time I think back to this time, there are some moments that make the hair on the back of my neck stand up. When you’re overly focused on costs, you’re going to kneecap the ability for you to get paid fairly. In the cloud or even on a service basis, you could be focused on, “That resource going to cost me $50 an hour and I’m going to charge him there for $60 or $75 an hour.” You factor in your 25 or 35% margin. This is consulting at its core. Consulting companies have very low margins compared to software companies probably by a factor of 2X or 3X sometimes. The issue that ends up happening is you forget about the value that you’re providing. You forget about the focus of that company that you’re serving that is going to take your recommendations, take your work products and wrap them into their workstream. They’re going to extract value from it and they’re going to drive revenue forward.
If the answer is that they’re spending $1,800 with you and they’re driving $5 million worth of revenue on the other side, you’re not getting paid very fairly for that. That’s the issue with consulting and time and material structures. Because time and material structures on an hourly rate, there’s an emotional limit. You’re not going to pay me $10,000 an hour. It’s just not going to happen. A highly trained intellectual property litigator might make $600, $700 an hour. If you’re working at some top–tier firm, maybe $900 or $1,000 but that’s it.
If you’re a top dog and you reach that top point at age 30 or 40, it’s going to be hard for you to push up against that upper ceiling. Time and materials are cost-based mindset because it’s saying, “I’m linking you to the hour that I put in,” which is in effect, linking me from the value that you receive. You could be receiving 1,000 times the value off of something I tell you. Getting yourself off of the cost basis is super crucial. Everybody falls into that trap because your number one concern is your cost because if the costs go up, your profitability goes down, you might be out of business. It’s a natural place to get spun upon. Getting out of that mindset is key. In services, the way you get out of that mindset is you move to work product structures. You don’t sell hours anymore, you sell an analysis, you sell an assessment, you sell some sort of defined output, and that has all kinds of implications.
What did that look like at your past company? It sounds like maybe you were thinking more about costs. When you embrace that new mindset of focusing on value and return on investment, the impact and outcome that is connected to the work that you were doing, what changes did you actually make to your pricing plans?
This is another one of those mistakes. I probably spend an extra couple of years not making the money I should have because I was making zero. We were selling our software at a fabricated price that I had basically made up in a spreadsheet. There was a long spreadsheet where every time we ran the math of paying for the developers and everything else, what was leftover for my partner and I was, “Let’s see what happens next month,” which was code for, “You’re not getting paid.” I was having a hard time with this. I hired a sales coach and that was my first entree of how the other person might perceive all of this.
Our journey was very much selling for many years, software transactions probably in the $5,000 to maybe $18,000 and that was a mega–deal for us. We would round out our journeys, software engagements and services in $500,000, $600,000, $700,000. If you sell one of those, it’s a completely different business model at that point. It’s also hugely exciting because of the grind of moving that many transactions by the time you move it and you pay your folks, there’s nothing left for you as the owner.
We see a lot of this with many of our coaching clients in our program who do the exact same thing. In some cases, it’s just the mindset. It’s not necessarily a whole bunch that has to change in what you’re delivering. It’s the positioning, the focus and how you have that conversation. In your case, did you find that you had to do now a lot more work for that $500,000 engagement compared to the $15,000 engagement? Was it that you shifted the focus onto the value, onto the outcome, instead of thinking about costs and limiting your potential upside?
There is a shift in expectation when you get into what we considered purchases. When you move from $200 or $2,000 to $20,000, $30,000 or $200,000 or $1 million-plus, there are expectations. However, if you looked at the workstream of what you would do in both of those scenarios, if the price was ten times more than the work, it is not ten times as more and that’s the key. It’s super important at that level to have very specific dialogues with your clients about what is not in the scope. I think where things fall down as the transaction level rises is you get so excited, it’s like $500,000 and you’re like, “We’re going to revolutionize your business.” That’s in the proposal and now the client expects everything. That’s key.
I think that the skillset that you need to learn when you start getting into higher transactions is scoping. That’s an absolute must–have for mastering the art and the science behind sculpting words around the scope of what you’re going to do and what you’re not going to do. What activities are going to go through, and what work products are we producing. That is hugely important for buyers at that level, but none of that means you have to go reinvent a whole bunch necessarily, you have to describe what you’re doing better with better boundaries.
In your experience, is it as simple as being direct and clear from the get–go about what you’re going to do and what you won’t do? I think sometimes consultants feel like they have to almost walk on eggshells because they don’t want to pull back too much with the fear of, they might lose the deal if they’re saying, “We’re not going to do all of these things.” If they don’t do that, then later on, they will inevitably face scope creep. What are some of the best practices that you’ve used or that you find are important? Any advice that you can offer more specifically around how do you structure that scope so that you still are able to be successful in moving the project forward, but you’re not putting yourself in a position where you’re vulnerable to a scope creep.
This is the fundamental slice between on one side, we have time and materials, and if I get scope creep, I bill you more, which has its own issues. You can upset the bandwidth constraints that you have with other clients doing that. Scope creep sometimes brings in more revenue, but it usually creates more havoc because you’re going to have to try to plan the work products. On the other, we have this structure that says, “I’m not selling you Michael’s time or I’ll do anything. I’m selling you this process. I’m selling you this work product and here’s what it does. Here’s why it’s been structured that way.”
Most consultants have an angle or an eye on things that they do that are unique, that if encapsulated are described under an hourly rate, work against that uniqueness. If encapsulated in the other structure, a work product or a defined process is not only better profitability, but it affords you the opportunity to describe what you said, the boundaries around the box. When I’m selling you hours, it’s easy to break a box. It’s hard for me to be on an hourly call with you and say, “I’m not going to talk about some aspect of something.” Because that makes consultants feel very uncomfortable. It almost puts you in this mode of holding back and you don’t want to hold back.
Consultants start with the hourly rate, but at some point, you’re going to do a breadth of projects enough where you’re going to extract some method to the madness. It’s that method that I think most consultancies stop. They never codify the methodology. They never codify it in a way that can be bought differently. Until you make that transition from hours to that process or structured work products, which is hard, you’re never going to get paid fairly for that. When you make the transition to the work product, it implies that you’ve seen enough engagements that work product will be applicable across those engagements.
We get into the concept of, “I had a couple of clients that are odd ducks and they did this one-off analysis,” and we get into this discussion of, “Maybe that wasn’t the ideal match for you,” which is the other problem with consultancies. You have to be brutal on what is a match and what isn’t. I think what customers appreciate the most when you’re sculpting and saying, “No, this is out of scope and we don’t do that, I know you want to boil the ocean, but that’s a bad idea.” What they appreciate the most is that you have a perspective and that you have those boundaries and that you know whether or not it’s a match.When you're overly focused on costs, you're going to kneecap the ability for you to get paid fairly. Click To Tweet
If upfront in the sales, like you’re saying, “I don’t know if there’s a match for you, but here’s how we do our work product.” That’s a very different dialogue than if I say, “I have a bunch of hours over here. What do you need? Because I’m getting dragged by how they want to do it.” I have a couple of friends that own consultancies, and at that transition point, it’s super difficult, but prior to that transition point, it’s a mess. It’s chaotic, nothing’s really standardized, everything seems to be a one-off and it can be super frustrating in that stage.
We had John Warrillow, the author of Built to Sell, come and talk with some of our clarity program clients at an event that we ran. We had a whole session on this exact topic because it’s such a source of value creation in a company. It can be a little bit messy for a period of time as you cross that bridge, but once you get to the other side, it allows you to move forward with a lot more growth and a lot more opportunity. I want to talk about your current role. You work with Software Pricing Partners and your focus is on pricing software as the name implies.
What can you take from the software pricing that you guys help in terms of how to price software, the strategy, and the positioning behind that? How do you apply that to your own firm? You aren’t a software company. You’re providing advisory and consulting and things of that nature to work with your clients on how to price their software. Tell me a little bit more about how you take any best practices, anything that you see working really well in software that you’ve been able to embed into how you guys are price working with clients.
We monetize intellectual property and this is an important distinction because intellectual property can be encapsulated in many different ways. It can be created inside of a feature in a software product. It can be created inside of service and it can be also created inside of an insight. Some of our customers will analyze a bunch of environments and they’ll determine with their AI algorithm that they’ve noticed some pattern that nobody else knows. They’ll use that to enrich either their consultant or their professional services arm or the actual software itself. Monetizing intellectual property and capabilities is actually no different if you’re a services organization. In fact, we have clients like Booz Allen, ZS Associates, and other purebred software firms who want to get into intellectual property, want to get into the software and its form of intellectual property and are about to launch their next big product.
Once a year, we turn all of that know-how back on ourselves. We ask ourselves, “Are there any enhancements to our work products that we might want to add in?” This year, we did round out some of our analysis on the customer research side. Those are very targeted and may address a specific need that some of our clients have asked for in prior lives or prior engagements and we didn’t have. That’s where that’s coming from. Secondly, when we go through and look from services to software, we ask ourselves the question of, “What makes our customers ideal? What are the engagements that have been problematic, why were they problematic, what were the ones that were successful, and why were they so successful?” That refines our gauge of who makes it in and who doesn’t.
We’ve always enjoyed many clients being interested and we do say no. It’s a wonderful thing to be able to say no. You asked about mistakes. Having said, “Yes,” early on and getting that one or two clients that suck all the bandwidth out of you emotionally, physically and on the support lines forever. It’s nice when you have the confidence to know, “I can see that pattern. That’s a mess and that’s never going to work on the sales floor. You’re not ready.” To tell people that and clients love that by the way. Who does that? Who would say no? They’ll come back when they’re ready when you’re transparent with them.
We ask ourselves is the lineup of our offerings, what we’re putting out in the marketplace for different industry verticals, etc. Are those aligned, and ultimately, look at our price points. Understanding pricing is less about the fee that you charge, it’s more about what that offer is like. What are those work products going to be, why were they selected, what is this process that I’m buying, and why am I selecting you versus any other Tom, Dick, or Harry that’s out there? The other important decision says, “On what basis am I going to charge you, hourly or is there some other way?” Some customers these days will ask for contingency fees or are free to put some fees at risk. “Would you entertain that? Would you not entertain that? Under what circumstances might that look like?”
Turning those back on ourselves is hugely important because the frameworks work in that regard, but also having the space to breathe as a consultancy and being able to say, maybe no, and maybe going as far if you’re okay in the COVID sense and not suffering on the business front to say, “If I can fit 20 or 50 projects this year, I’m going to take one project of that 50, and it’s going to be me. It’s going to be my consultancy. It’s going to be me going through this analysis or whatever that looks like.” It is hugely important. Otherwise, we tend to do the same thing.
That’s a good point. I have a question for you on this. The company is Software Pricing Partners. Clearly, it says what the focus is, yet many of your well-known clients aren’t software companies, by nature. They didn’t start off necessarily being a software company. I think some people might look at that name and go, “It does not limit you. If you’re Software Pricing Partners, that means that a manufacturing company is not going to come to you for help or a consulting firm will come to you for help or somebody else in professional services won’t come to you for help, because they’re not software companies yet.”
I don’t know if you guys work with any manufacturing companies, but it sounds like you certainly work with these companies that aren’t pure play. They don’t necessarily think of themselves or wouldn’t be labeled as a software company. What are your thoughts on the strategy or just the power behind that name? How has it served you and the lessons or anything that you could speak to in terms of, even though the name is software, you’re still able to attract companies that aren’t software?
That name exists for a reason because we are focused on B2B software companies. You might come to us as a services organization, but if you don’t have some software or designs around being in software, it’s not an ideal match for us. That doesn’t mean that an industrial company that wants to monetize its cardboard instead of selling you $2 million equipment, they’ll charge you every time you pull the lever and stamp out some corrugated cardboard. They want recurring revenue models too. That doesn’t mean we won’t entertain those, but that means that there are differences for us. Just because they’re not ideal, doesn’t mean you can’t bring them in. It means that we focus and put all of our energy in a singular direction which has B2B software companies.
How important do you think that is for you guys, from a marketing perspective and a branding and authority building perspective, just planting your flag in the sand and being known specifically for that. Has that been a big part of the company‘s success?
We don’t try to do everything. We beat all of the name brand firms, not all the time, but we have a nice hit rate with going toe to toe with 2,000, 3,000, 5,000 person consultancies. Why? It’s because of that singular focus. We didn’t water down with all this other stuff. You’ll never hear us on the phone mixing and matching and saying, “We’re going to do a willingness to pay survey. No, that’s a B2C. We’re going to do a conjoint analysis. We do B2B.” When you peg that stake in the ground and you have those marching orders, it gets rid of all those superfluous noises on the perimeter. Your message that you deliver to the customers that you want to attract, the ones that you’ve chosen to focus on is light years ahead of the watered-down competitors.
It’s a huge insight that you’re hinting into here, which is we know that name carries with it a con software pricing, but it still works. People still seek us out because they’re considering software and they’re not a software company yet, so we’re happy with attracting them. Other people will seek us out, but if they’re on the sales line and they’ve got some B2C needs, we do not want to go there right now. There is plenty of growth and plenty of places to move within our focus. Later, we might do that, but if we do that, what we’re going to do? We’re going to come up with another singular message and put a stake in the ground. We’re probably not going to knock the software pricing partners brand in that regard. We’re very careful with that messaging and that focus. It’s crucial to our win rate.
There’s a reason why we have consulting success with our brand name and everything that we do with The Consulting Success Podcast. We focus on consulting. It doesn’t mean that we can’t help people who are maybe in other areas of life coaching or relationship coaching. Some of our materials and our practices or different programs could certainly benefit those people. Our 100% focus is on those who are providing consulting and advisory services. They might be doing some strategic coaching, but it’s typically with organizations and they might be nonprofits or multi-billion-dollar organizations, but there’s some form of organization.
Yes, it might mean that for some people, it doesn’t necessarily resonate, but for the ones that we want to attract, it resonates very well with them. I’m completely aligned with you on that. Before we wrap up, I want to hear about what you’re doing from a marketing perspective right now. What is working best at your firm to attract new clients to build out the pipeline? Are there one or two things that you would say, “Hands down, these are definitely key drivers for our growth?”
For us, word of mouth is huge. There are pockets of software companies whose executive teams, “I don’t care what eBook you produced, you‘ll never get into them,” unless they ask one of their buddies who happened to have done an engagement and you get that in. The first key piece to the puzzle is whatever product or service that you are creating, that goes back to that discussion about the focus on the customer and asking the questions and staying the course there has to deliver. There are people in our space, wonderful marketing, but when they go through the process and they experience the outcome, there’s not much of an outcome to speak of. Those engagements are terminated and the upside is not there, the success story is not there. You can tell the difference and its success story that’s generic. “I worked with Michael and it was amazing.” That’s very different than, “I worked with Michael, and within twelve months, I have three times the revenue.” You want the latter, not the former.
Word of mouth comes from outrageously great experiences where people feel it in themselves to go out of their way to recommend you. That’s the crucial piece. If you have that, then you have word of mouth. You don’t need to run the largest blog in the world from a marketing perspective. The second thing that we do for the marketing is podcasts like these to spread awareness. We’re lucky in that we don’t choose how they do the whole top of the funnel, middle funnel, bottom of the funnel and that whole game. We put out thought leadership. We’ve been around for almost 40 years, so there’s a huge amount of companies that come our way. The things that we do now are more about awareness and education.
What does that look like when you say awareness and education? I understand the word of mouth and the referrals and you do great work. There’s a big upside and benefit in that. You jump on shows like this from time to time. What else is, do the firm doing to grow a business?
Like a tactical item or are you talking about general strategy?
Is there anything else that you’re doing right now that you’d say, “This is moving the needle?”Word of mouth comes from outrageously great experiences where people feel it in themselves to go out of their way to recommend you. Click To Tweet
The thing that moves the needle the most for us is in our world, we have to dig very deep into the customer’s environment because what we’re doing frankly, can put them out of business if you do it wrong. The accuracy and the risk mitigation are crucial. We spend a lot of time inventing new processes, trying to be innovative on that front so that message is resonating with our customers, we’ve got that fine-tuned. Outside of that, our general approach is one more of education. This is a little bit related to the style of the executive team of the consultancy.
If you’re black box and super-duper stuff happening back here, but I can’t talk about it, that doesn’t resonate very well with buyers now. Educating people like for example in our world, people can do competitive intelligence. Competitive intelligence can happen in two ways. It can happen ethically and unethically. Some firms choose to go out and mystery shop their competitors. I would find out you compete with this firm, I as your service provider go call that firm, pretend like I’m a buyer, waste that sales person’s time, get a proposal from them, come back to you, and say, “Look at how they’re charging, and you should have a reaction to that.” That’s actually a violation of the US Espionage Act of 1996. We did this wonderful piece that we sent out over onto LinkedIn, which a lot of our audiences on. That thing went all over the place because it hints at what everybody does internally when they’re curious. It hits on ethics and on this idea of what is appropriate, what is not and we have a perspective on that.
From the reach of our blog, which is pretty big, we have very distinct perspectives and those perspectives diverged greatly from current dogma, but those perspectives have emerged from that focus. Because we have that focus, and because we have that depth of knowledge, we can have a perspective and say, “I understand that everybody else is doing it this way, but I wouldn’t do that.” Here’s why you’re opening up yourself to uncommon federal lawsuits.
Those kinds of pieces work really well for us and keep us top of mind and keep us relevant. That churning of perspective coming from our projects and our learnings, all that is fueling that engine that keeps cranking. I wish I could say it was one thing that we were doing, but I can tell you what we’re not doing. What we’re not doing is plowing out a crap ton of content, trying to have the biggest blog on the planet and trying to SEO game Google and all that. It doesn’t cut it anymore.
Chris, I want to thank you for coming on here and sharing a bit of your story and what you guys are up to. I also want to make sure people can learn more about you and your company’s work. What’s the best website address people could go to learn more and see what you guys are up to?
It’s SoftwarePricing.com. Michael, thank you for having me. I enjoyed it.