Cognos, the market leader for business intelligence software, found itself in an increasingly difficult competitive position. Its closes rival, Business Objects, was threatening the status quo with a new market approach and new list prices that were 50% lower – a level guaranteed to induce sticker shock to even the most loyal of Cognos’ customers.
Business Intelligence software takes the data that an organization collects and turns it into meaningful information that people can easily use. Cognos’ Business Intelligence Series provides all the necessary reporting and analysis capabilities accessible from one Web-based portal. Using the various software modules, users can select reports, customize them, analyze information, and share information with the same facility as using the Web.
Traditionally, BI software was sold much like the other software on a “fee per named-user” basis. However, with more clients moving towards a web environment, it was becoming almost impossible to count the number of users using the software, let alone name them. Business Objects decided that the traditional pricing formula was no longer applicable so it changed the way the game was played. It introduces a server-based pricing model that allowed customers to add an “unlimited” number of users to the server. Cognos, however, decide to stick with its fee-per-user policy, a move that not only reinforced the perception that the company’s software expensive but also made the company appear inflexible as well.
By early 2001, the economy was starting to soften and BI software found itself in fierce competition with other IT projects. Not only there was concern about the cost of Cognos’ products were acknowledged to be better than those of the competition, the market was looking for solid reporting and when it came to report-generation, Business Objects’ product was exceptionally strong.
Cognos knew, based on its analysis of its bid win-loss and from its experience on other software markets, that an installed base was the most important influence on future revenue. The initial introduction of BI software not only increased the likelihood of additional license sales in the future, it also generated additional support and service revenue. To gain back market share and to win those all-important initial contracts, Cognos recognized that it needs to lower its prices and that its traditional approach of building constraints into its license agreements and contracts was not going to be as effective as it had been in the past.
Cognos began to discount its products heavily, cutting list prices significantly to match competitive pricing and to win those all-important initial sales. This not only left significant amounts of money on the table, but it also had added the feeling of diluting the value of both its products and its brand.
If Cognos was going to preserve its brand image, maintain market share and preserve profitability, it needed to re-examine its customers and what they valued. The reality turned out to be more encouraging than they had first thought. Customers did appreciate the superior capabilities of the company’s software and were prepared to pay a premium, albeit not in the 80 to 90 percent bracket that Cognos had been charging.
Based on the grid that illustrated the relationship between the functionality and the number of users and given the premium quality image of its software, Cognos decided to focus on expanding the use of its software within existing accounts. Once accounts recognized the inherent value of the BI software, more users would come on board and with increased use; there would be an increased demand for functionality. The first step was to penetrate an account, then radiate the use of the software within the division or department and then saturate the organization.
Depending on the size of the user base, Cognos developed targeted “strategic thrust” based on the “effective cost per user”. The numbers of users was effectively limited by the handling capacity of the user. Smaller groups who only needed one or two servers would continue to prefer the “named-user” model. Clients with more extensive requirements that needed to add servers preferred to purchase their additional BI software requirements based on a lump sum price. What Cognos did, in effect, was to introduce a bundled approach to pricing that grouped its clients into one of the three categories – the Penetrate phase, Radiate phase or Saturate phase.
Cognos, like many other software organizations, had simply developing technology (even superior technology) was not enough. It also needed to develop a value proposition and a better understanding of just who it was that valued what they were offering. Once it understood its market and its customers, it was in a much better position to use consistent pricing policies to reinforce the inherent value of its products and achieve its market goals.