Pricing as a sector transitions: the case of Digital Asset Management (DAM)
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Software categories go through phase transitions that require pricing transformations. The companies that fail to execute these pricing transformations fade away to irrelevance. One of the jobs of the CEO and the board is to see these phase transitions coming and to prepare the company to come out the other side stronger and better positioned.
The Digital Asset Management (DAM) market is one category that is going through a phase shift and needs to rethink its pricing.
Phase transitions across the technology adoption lifecycle and pricing
Perhaps the best known phase transition in software is the shift from a conventional market dynamic to a tornado market and then on to a mainstream market. This progression was popularized by Geoffrey Moore in seminal books like Crossing the Chasm and Inside the Tornado. The basic insight is that the reason people buy changes as a technology is adopted and these changes in buyer motivation mean that pricing has to change as well.
In the early market, the techies (innovators) adopt new technologies because they want to be on the cutting edge. It is part of their self image and part of their job. Visionaries (early adopters) buy to get a business advantage. They buy because their competitors have not yet adopted. They are willing to pay for this competitive advantage.
What happens next is the first challenge. Pragmatists, in the early mainstream, buy because other people who are similar to them are buying. Value drivers have to be narrowly defined and prices tailored to target segments (the bowling pins). In pricing work, we refer to these segment specific value drivers as ‘vertical value drivers.’ Vertical because they are most impactful when relevant to a narrow group.
The phase transition from bowling alley to tornado is a big one. In the tornado phase, people buy because the solution is part of doing business. Can you imagine running your business without a CRM, or accounting software, or marketing automation if you are one of the many companies that drives revenues through content marketing? These are all software categories what have passed through the tornado.
During the tornado phase speed is life. The most important value drivers are horizontal, they appeal to the largest variety of buyers as possible. As pricing metrics should track value metrics pricing needs to change as well. The best pricing is simple, frictionless, and scalable.
Eventually the tornado subsides, and the category enters mainstreet. Here vertical value drivers return and pricing becomes segment specific again. The difference is the segments tend to be larger, much larger, and buyers very well informed. Pricing needs to reflect the actual value delivered, and not just the value promised.
The phase transition from enterprise software to SaaS
Another recent example of a phase transition is the shift from on premise enterprise software to SaaS.
This transformation is now largely complete and best practices are moving on to pricing metrics that better track value to customer, like usage-based pricing. But it did take some time for this phase transition to work through the market (about 20 years from 2001 to 2020) and it triggered many changes.
Customer support became customer success
Content marketing become more important
Development and release cycles were accelerated
Integrations become standardized
More and more data became available
Pricing shifted to subscription models
The full implications of all this change is still unfolding.
Customer success is becoming customer value
Configurations are becoming value driven (what configuration delivers the most value)
Pricing is getting connected to value through usage-based pricing and other mechanisms
Where is the Digital Asset Management (DAM) market?
The digital asset management (DAM) category was largely born in the period where the world was moving to the SaaS model. The changes in marketing noted above, especially digital content marketing, led to an explosion in digital content and the need for systems to manage it. This gave rise to the market for DAM software.
The category grew rapidly from 2005 to 2015 as standard functionality and value propositions became widely understood, industry conference were established, and DAM became a line in many budgets. Large companies, notably Adobe and OpenText, established positions at the top end of the market and there were many new entrants, some highly innovative, others occupying the bottom right of the value map, with low prices and relatively low value.
At this point, the DAM category is well into its commodification phase.
What does this mean? First, it is a sign of success. Only important things become commodities. A commodity is so important that there is a standard way of buying it, using it and understanding its value. Only successful categories get commoditized.
Second, as the above figure suggests, commodification follows a well understood path in which products get complimented by services as commoditization sets in. Product led growth will only take one so far, eventually services become an important part of how value is added.
This pattern is not unique to software. In fact. the above figure comes from the specialty chemical industry. The article is worth reading for its insights. Consolidation and Commoditization of Chemicals and Technology.
What the figure does not show is that every commodity becomes the base layer for whole new categories. Think about databases. Back in the 1970s, databases were one of the breakthrough new technologies and fortunes were made by the early innovators. Today databases have faded into the background. Almost all applications have a database of some form behind them. DAM itself is, at one level, a database for digital assets with workflows, data analytics and presentations. Once a software category becomes a commodity it becomes the foundation for new innovations.
This is where the DAM category finds itself at the beginning of 2022. It is a commodity from which new categories are emerging.
As a commodity, DAM prices will come down towards the variable cost of delivery.
There will be continuing downward price pressure on core DAM functionality. Some vendors will target this, offering core DAM and nothing else at very low prices.
New categories will emerge from DAM.
Some of these will be connected with marketing. Brand asset management and brand management are examples. Others will focus more on omnichannel publishing. Applications in these new categories will command premium prices.
Specialist analytics and workflow solutions will emerge from the DAM category.
Digital assets are created, managed and delivered across multiple platforms. This creates opportunities for new solutions that work across multiple applications. The obvious candidates here are data analytics, leveraging advances in deep learning and other forms of AI and cross platform workflow apps.
Services will become a more important part of DAM revenues.
Expect the main DAM vendors to place more emphasis on providing services and that these services will be around assuring the value to the customer. Companies staying in the DAM space will need to either go to the bottom of the market with a bare bones low price offer or establish significant additional value through services. These cannot just be the services needed to setup and configure the DAM. They need to include ways to use DAM and its extensions to deliver and document the promised value.
For more on this theme, see Is Your SaaS Business Being Commoditized? Here are Your Options.
