Adobe Pricing Spineometer: 4 of 5 Vertebrae
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Adobe, a visual creativity software-as-a-service company, had a positive Q2 2024. Revenue rose 10 % to $5.3 billion and earnings before interest and taxes rose 16 % to $1.9 billion over the same period last year.
A review of Adobe’s 13 June 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.
Price did come up across various discussions during the earnings call and pricing, discounting, and price management are all clearly important to Adobe’s financial performance, yet pricing was not the main focus of discussion.
Adobe is operating in a fast-evolving industry where greater pricing rigor has been proven to improve business profitability and resiliency.
- Their business is, in and of itself, growing quickly with 11% growth in Digital Media, 10% growth in Creative Cloud, 19% growth in Document Cloud, and 9% growth in Digital Experience
- Adobe’s growth and product strategy calls for rapid innovation to attract new customers, compete against numerous alternatives, and move customers up the experience ladder toward higher paying offers and subscriptions.
- Generative AI has been woven into Adobe products and continues to improve the productivity of their clients. Multimodal large language models helped customers manage text, image, and video content.
Adobe’s business model is itself complex which calls for heightened pricing diligence.
- Adobe sells to SMBs (small and medium size businesses) as well as Enterprise (large companies and government agencies). The variety of customer segments enables a high degree of price segmentation as well as different approaches to pricing for different segments.
- Sales to large enterprises tend to be the result of multiple customer negotiations, an area with pricing intelligence can be useful for providing salespeople with useful price negotiation guidance.
- Some of Adobe’s offerings rely on a credit system wherein, presumably, customers purchase credits (in effect, exchange fiat currency for Adobe currency) which they then spend on consuming or utilizing specific modules and capabilities. Other offerings, sometimes versions of the same offering, rely on a subscription model alone.
- A high level of offering innovation benefits from a standardized process for pricing innovation, generally starting with a model of the Economic Value to Customer and perhaps expanding into primary market research.
Much of the customer journey at Adobe is focused on free or trials converting to paid subscriptions followed by upgraded offerings.
- This can cause organizational conflict between the desire to retain and upgrade customers and the need to capture a price proportionate to the value delivered and align customer purchase decisions to the value they need.
- David Wadhawani, President of Digital Media, said “More people are moving to the higher-priced, higher-value plans because of the Firefly capabilities. We’re even seeing this in enterprises where people are moving up to the highest versions of Creative Cloud, which is what we call it, Creative Cloud Enterprise 4, because they get more access to features beyond just generation.”
While Adobe executives do not believe the macroeconomic environment is impacting their business, it is easy to imagine scenarios wherein geopolitical conflicts impair market access and competitive dynamics and the competition set varies between different geographies. (Adobe halted sales in Russia in 2022. India alone offers a number of competing alternatives.)
All of these factors suggest that Adobe should be operating upper end of the industry benchmark of 40 to 200 professionals dedicated to pricing.
Research into the investment by Adobe in pricing yielded encouraging results.
- The pricing team numbered well into the benchmark range. Though it did not appear to be at the high end, well over 50 people could be identified as focused on pricing.
- The pricing professionals were dominantly in the United States, as Adobe is headquartered in San Jose. Pricing professionals could also be identified in other geographies including Sidney, Tokyo, Delhi, and Ottawa.
- Titles of pricing professionals at Adobe ranged from analyst and manager (dominantly managers) to director and vice president.
- Responsibilities of pricing professionals spanned from operational issues such as deal desk, deal pricing, and deal analytics, to product strategy challenges in packaging, competitive intelligence, and monetization.
- From reviewing the team at Adobe, it is clear that product strategy is deeply engaged with pricing strategy. While product and pricing strategy are distinct fields with different skill sets, it is normal to see a high engagement and cross-over between these two professions.
Given the importance and capability of pricing at Adobe as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of July 2024.
Adobe Pricing Spineometer: 4 out of 5 Vertebrae. Overall, a very strong pricing capability was identified at Adobe yet I suspect there is an opportunity for improvement based on comparisons to other companies.
ADBE (Adobe Inc.) rose from 460 the day prior to their earnings call to 533 one week later. FY 2023 revenue of $19.4 billion with a 34% operating margin and P/E ratio hovering around 50.
For FY 2023, a 1% improvement in price would yield a 3% improvement in operating profits holding all else constant at Adobe.
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