Many times companies try to change prices to stabilize or increase revenues. The results, unfortunately, are often disastrous.

In the low end of the PC business, for example, several companies have tried cutting prices by more than 50% and found their customer base has expanded by 10% or less. Revenues drop off a cliff and the person responsible for the price cut often follows.

Although price is an obvious variable in the software business equation, it should not be the first thing to change. When companies feel the need for new prices, they are responding to various economic forces.

We suggest software companies should focus on how to increase cashflow and profitability before making a price change. People involved in pricing complex, differentiated products like software or engineered products can use the cashflow approach to identify other non-price methods for increasing cashflow. In addition, cashflow can be used to unify the activities in several departments thereby taking some of the heat off the role of pricing alone.

The first part of this article focuses on tactics companies have used to improve cash flow and profitability. Part two will cover ideas for improvements in unit margins and total contribution. (Vendors can learn more about pricing strategy at the 2008 Software Pricing Workshop , a two-day workshop in July. This year's theme will be "A Practical Approach to Pricing Enterprise and SaaS Software, Services and Systems." Click here to find out more.)

Look for Improvements Systematically
If you want to improve your company's operations without being overwhelmed by the options, there are two keys to success. First, search systematically for improvements to find the most effective ones. Then second, select a few of the most promising ideas, implement them carefully and apply them consistently. Good management is 1% inspiration and 99% execution.

One of the major reasons for searching systematically for improvements is simple: People are involved and people do not like to change without understanding why. If changes are imposed on people without their involvement, their resistance to change goes up as the number of available options goes down.

By systematically looking for ways to improve a company's operations, people have a chance to make contributions and adapt to change. Often one of the smarter (or more often outspoken) members of a team will have an "Ah-ha!" experience about how to improve profitability. If the team locks onto a "the solution" prematurely, regardless of whether the idea is good or bad, other people cannot easily accept or internalize the idea. Even if the new idea is a good idea, people will reject it outright, drag their feet, or give it little support.

However, by looking for improvements systematically, more people can participate in the process. As people participate in the search for improved cashflow, people have time to adjust to potential changes and feel a part of the process. Furthermore, there will be more "Ah-ha's" working from which management can choose the best.

But of course, systematic examination does not lead to improved (or any) cashflow. Action does.

What is the best way to proceed?
First, recognize that improvements take time and constant effort. For improvements to have the greatest long-term impact, they must be part of an ongoing process. Home run solutions are possible but most ball games are won on singles and doubles (and making fewer errors than your competition).

Here's an example. Suppose a company wants to increase customer loyalty which leads to predictable cashflow. One way to achieve this is increasing customer satisfaction among new customers and their existing base of customers. If the company has a base of five thousand customers and works 500 existing customers per month, it will take 10 months to work through the existing customer base -- in addition to the efforts spent on satisfying new customers.

Maybe the process can be accelerated but it will still take a while. Be patient.

Look for Cashflow Improvements
In these days of complex financial transactions and less-than-straightforwad accounting practices, the best way to ensure business success is to watch cashflow. If you understand the "cash cycle" (production, delivery collection and disbursement) and cashflow needs of the business, the business will never get out of hand. The "fishbone chart" below shows some of the components of cashflow.



First you'll notice overall profitability and timing of payments to your company or others will affect cash flow. Even if your sales bookings are strong with good margins and profitability, companies can still go broke if the collections are slow. If revenue levels are high enough but there isn't enough cash to pay current expenses, then get paid sooner (customer advances) or stretch out your payables (pay in installments).

One of the favorite bootstrapping tricks of entrepreneurs is to use this month's collections to pay some of this month's expenses and make product for next month. But beware: This balancing act will catch up to a company that is unprofitable.

Although the credit department will set credit terms, the person responsible for pricing can affect the timing and predictability of cashflow by encouraging the equivalent of layaway plans -- especially in industries with seasonal or cyclical demand.

A wonderfully practical book had a title that captured the essence of all cashflow improvement techniques: "Buy Low, Sell High, Collect Early and Pay Late".

Look for Profitability Improvements
Moving up the fishbone, there are two ways to increase profitability: Increase contribution (a.k.a. Gross Profit) or decrease costs. While there are many cost centers, start with the major overhead cost areas. For example in high tech companies, sales and marketing is the major cost element. Although most marketing and sales departments know how to increase their effectiveness, these adjustments take time -- a scarce commodity in fast moving markets especially. This is one of the reasons companies change prices instead of marketing and sales processes.

Here are some examples where sales and marketing changes alone can affect total contribution without changing prices. Note that these changes can take from six months to two years before the effect is felt.

• Find more effective promotional methods or more cost effective sales methods.
• Substitute a telemarketing and telesales front-end for expensive direct sales.
• Use sales reps instead of salaried sales people;
• Change sales compensation programs to increase rewards when higher sales and profit levels are achieved.

To be sure, these areas and programs are hard to change (and may be expensive). However, it may be possible to time these changes to coincide with a series of time-limited price deals whose increased revenues can offset the higher initial costs/lower initial sales of these programs.

Another alternative to a price change is to look at where money is being spent in the sales and marketing process. If it is in lead generation, find more effective methods of generating leads to less price sensitive customers. Often different mail lists, advertising copy, choice of trade show, or introductory offers will have the desired effect.

If sales are slowing down and closing deals are getting harder or happening later, find out why. Perhaps collaterals can be just as effective as a personal sales call in educating a customer about the value of high value added services? Maybe a sales training course or providing materials about handling price objections or creating a value proposition are in order...

For some time I have been a fan of "cycle time reduction" which is used to reduce time to market, expenses, etc. One of the premises of this method is the less time you spend in doing something, the less time (and hence expenses) can get burdened on the activity. This suggests looking more carefully at where in the sales and marketing process the sales organization spends most of its time. Saving time in the sales cycle, will save a company money.

Sales and marketing is but one area to look for profitability improvements. It goes without saying that there are ways to trim "G&A" (General and Administrative). Shift receptionists to telesales and use voice mail. Use part-time help instead of full-timers. Look at using a payroll or bookkeeping service. See if high cost credit lines can be replaced with low cost ones.

Look for changes anywhere monies are being spent -- even in the pricing process. One major area to save costs in the pricing process is to have fewer meetings and make the meetings more effective.

Learn more about pricing strategy at the 2008 Software Pricing Workshop , July 17-18 in Boston, Mass.


Jim Geisman is founder and president of MarketShare, Inc. where he provides senior management counsel and marketing and sales consulting services. He has led consulting engagements for a broad range of clients addressing fundamental issues affecting business success.