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Pricing SAAS vs. Buying license?

Does anyone have advice on how to price software to be sold as a service instead of a one time purchase?  The software currently sells for $395 each for the first five users, then drops to $295 each, and has a couple more price breaks.

What monthly price would you charge for software that sells for $395 - is there a magic formula?

Would you consider charging more the first year then dropping the price some?

Would you bill monthly or annually? 

Would you give people an option - subscribe to the software for $x a month or pay $395 to own it with an opportunity to pay a smaller amount annually for updates/support, ?

Background:
I have a software product I've been selling directly to businesses for some time that I am now planning to sell online.  My current market is medium to large established companies, but for online sales I'd like to target start ups and individual professionals.

I previously had an aversion to SAAS because I believed that if you paid for something, then you should own it.  But I'm warming to the idea.  I think my leads who are just starting their practice may prefer a small monthly payment to an initial large chunk.  And I like the idea of a steady flow of income.  I've noticed that new customers asks if the pricing  is  every year - people seem to expect SAAS now.
Emily Jones Send private email
Saturday, September 14, 2013
 
 
" is there a magic formula?"
Not really, but you have to balance two things.  One, the subscription has to look like a deal for the customer because they can't justify buying a time unlimited license (too expensive to purchase outright or they only plan to use your software for a limited time and this is a way to get just as much software for less money) and two, you have to make money even if your customers cancel their subscriptions after a limited amount of time.  No one* spends more money than they have to.

In spite of a lot of start-up advice, no one* wants to purchase incomplete software.  So to make the switch from free beta/evaluation software to paid software, you need to pay for all of your development costs up front before you start making money.  Subscription pricing is much riskier because every time your customers have to make another payment, there is the possibility of them cancelling the subscription.  Your breakeven point will come much, much sooner if you sell time unlimited licenses.

"target start ups and individual professionals. "
Start-ups are short-term customers who start out with more money than they finish with.  Reduce your price to what they can afford when they start out, cash that cheque immediately and go looking for the next start-up.  Individual professionals are long term customers (when they change jobs/clients they take their tools with them) who typically start out with cash flow problems and end up with more net worth than they started with.  You still don't need to sell subscriptions to professionals, but for a reduced initial price, they will be prime candidates for buying upgrades, add-ons, etc., as long as you keep them happy with your software.

"monthly or annually?  "
"opportunity to pay a smaller amount annually for updates/support"
Subscriptions are a bad idea, unless you are trying to move away from pay-as-you-use-it pricing.  Don't even offer it.  If you give your customers a choice between renting and buying, you will make less money overall, no matter how you structure your pricing.  You have a product that lends itself to after-the-sale income, come up with a pricing structure that leads to more initial sales, and happy customers will be much more likely to buy extras later on.  But you have to build a good customer base first.  If you can build that customer base without lowering your current prices, even better.

*No one is a small quantity, but not exactly zero.  The quality of software in the marketplace is not very good, and immature, incomplete software is still better than nothing/everything else in many situations.  Also, the cost of finding quality software is relatively high, so once you find software that is better than nothing/everything else, you are less likely to quibble over price.  So, you might survive with a pricing structure that doesn't provide better value to your customers long enough to correct your mistakes.  But why make life more difficult than it has to be?
Howard Ness Send private email
Saturday, September 14, 2013
 
 
Here are some good links which will help. The second one is invaluable:

http://insideintercom.io/four-pricing-principals-to-never-forget/

http://www.forentrepreneurs.com/saas-metrics-2/

Michael
MichaelQ Send private email
Saturday, September 14, 2013
 
 
Howard, thanks so much for your thorough and helpful (as always) response.  You've given me a lot to think about.

<<Howard said:
"You have a product that lends itself to after-the-sale income, come up with a pricing structure that leads to more initial sales, and happy customers will be much more likely to buy extras later on.  But you have to build a good customer base first.  If you can build that customer base without lowering your current prices, even better."
>>

That is a really good point.  Not only can I sell extras, but many of my customers want me to further customize their software for them once they buy it.    And once they've invested time and energy getting it customized they'll be loathe to go elsewhere.
Emily Jones Send private email
Saturday, September 14, 2013
 
 
There is no hard and fast rule. Take the total price of the software + any maintenance and divide by 24 months. Assuming you have no annual support charges and you're selling software for $395, in this model, you would be selling it for $16.46 per month.
jamieb22 Send private email
Sunday, September 15, 2013
 
 
MichaelQ those articles are great, thank you. 

We've been thinking about this more and are now leaning away from the SAAS but still on the fence.  So I remain interested to hear other opinions.
Emily Jones Send private email
Sunday, September 15, 2013
 
 
We once tried something that we thought would appeal to small businesses for which the upfront cost is a deal breaker: Lease-To-Own licenses.

The idea is that instead of charging $X upfront, you charge $X/N monthly for N months, and the customer does not own the license until it has made all N payments, i.e. if they stop paying, their license is terminated.

You may wish to multiply $X/N by a certain factor >1 to offset inflation and otherwise make this option less attractive compared to paying $X up front.

Our results however were bleak. Only a few people signed up, and of those few, some stopped paying after a few months. We had no license termination enforcement mechanism, so those customers still have working copies. (We intended to implement such mechanism should this purchase scheme prove popular.)

Please note that all the above took place like a decade ago, when SaaS was not so widespread and people were in general more hostile to the idea of not owning something they have paid for.

Anyway, we then had much better results with a discount program for startups and other small businesses:

http://www.excelsior-usa.com/blog/news/microbusiness-licensing-program-third-anniversary/

This program is still active, and we have since solved the renewal problem too, by extending the discounts on support contract renewals for as long as the customer remains qualified for the program.
Dmitry Leskov Send private email
Sunday, September 15, 2013
 
 
Microsoft offer Dmitry's lease-to-own idea as an option for MSDN subscriptions.

You pay a fee once a year for three years for your MSDN subscription, and as of the third payment you get a perpetual licence to continue using the software you obtained while you were paying.
Richie Hindle Send private email
Monday, September 16, 2013
 
 
1) Adobe divide desktop price on 36 month
2) Many vendors take payments every month and 2 month free for annualy payment.
Alex Vasilevsky Send private email
Wednesday, September 18, 2013
 
 

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