Tuesday, May 3, 2011

IT Solutions Pricings

Putting a price tag to an IT solution is a pretty tough task. Unlike consumer products where the unit cost is clearly established and the price is publicly available, custom IT system pricing are much more complex. One approach used to establish the price point is a three step procedure,

Step 1: Establish the cost of the Internal cost of the solution
Step 2 : Establish the Business Value of the solution to the customer
Step 3: Analyse the numbers and other information at hand

Step 1: Establishing the Internal Cost of the Solution
This should be established by doing an estimation for the proposed scope of work. Many techniques are available for this, some based on historical data, some based on expert judgement, some techniques are somewhere between both of those. Its a matter of finding the most appropriate technique and establishing the effort estimation (Man years/Man Months/Man Days/ Man hours) and the level of resourcing required for the tasks. Here we need to also establish the rates for the resources, so that we can calculate the total effort by

Total Internal Cost of Solution = Efforti * Ratei

Step 2: Establish the Business Value to the customer
For this calculation we need to think from the customer perceptive and build a business model which will project the possible benefit to the customer. Benefit includes both, the directly attributable revenue and the savings to the customer minus the other attributable cost of the solution to the customer. The trickiest part here is to establish the ROI period expected by the customer. This is basically a subjective expert judgement made based on the customer or alternatively in the built business model different simulations can be made to establish what will be the ROI period for given solution pricing.

Step 3: Analyse the numbers and other information at hand
Step one and step two will help to establish the minimum and the maximum possible prices. If the cost is above business value to the customer, usual rule is to walk away unless its a penetration strategy. Then using these guidelines. The factors like competitor pricing, business strategy, etc should be considered to set the price point.

Theory sounds very easy but practically its a nightmare! If you had done this let me know your thoughts on this.

No comments:

Post a Comment