When you’ve sold desktop software for over 20 years, you feel like you have the pricing down fairly well. You understand all the variables and can predict cash flow based on sales because you know your numbers. If you want to move to a monthly pricing model similar to the software-as-a-service (SAAS) model, how do you come up with the pricing?
That’s what we’re in the process of figuring out right now. With the downturn in the oil & gas industry over the last year, (oil prices have fallen over 75%), not many of our potential customers are wanting to let go of a large chunk of cash to purchase software. We’re thinking that if we offer a monthly pricing model with no commitment, we’ll be able to make more sales to those types of customers.
Software Pricing Methods – Pros and Cons
Why would a monthly subscription be appealing to prospective customers more than a perpetual license?
- Perpetual licenses require a large cash outlay to acquire the license. – Monthly subscriptions require a much smaller outlay.
- Perpetual licenses usually require a yearly charge for support and software updates. – Monthly subscriptions have the support and updates built-in.
- Perpetual licenses are usually considered a capital acquisition. – Monthly subscriptions are considered an operating expense.
- Capital purchasing decisions are usually subjected to stringent reviews. – Operating expense decisions usually don’t have as many bureaucratic reviews.
- Monthly subscriptions have a lower initial cost and there is less cost for changing technology in the future.
We are currently working on web versions of our desktop software. We’re just not there yet. So what we’re trying to do is to figure out how to come up with a monthly price for our desktop software licenses. How do you take a lump sum license and extrapolate that to a monthly charge? You also have to figure in the yearly support and updates that are normally charged each year. Here’s our thinking…
For purposes of discussion, let’s assume the following costs for the current perpetual license:
- Basic license cost – $8,000
- Yearly support and updates cost – $1,600 (20% of license cost)
- Premium license cost – $14,000 (includes extra modules)
- Premium support and updates cost – $2,800 (20% of license cost)
The first decision is how many years you divide the cost over. This means that it will take you x amount of years to realize the same cash that you would have gotten had you sold a perpetual license. The most common method is to take the cost over three years. So here’s how it breaks down for our two sample products:
- $8,000 + ($1,600 * 3) = $12,800/36 = $356/month.
- $14,000 + ($2,800 * 3) = $22,400/36 = $622/month
Here are the next questions we have to consider:
- Is this a cost per user or # of users?
- Since this is still desktop software, how do you handle termination?
- What are customers willing to pay per month? Is this within their range?
- How do we manage the monthly billing?
Let’s go through each of these questions in detail.
How many users does the monthly fee cover?
If we decide that this is a one user fee, how does this stack up against our current per user licensing? In our case the current perpetual license includes two users out of the box. Additional users are charged at $500 per additional user. If we keep this at a per user monthly fee, adding additional users will become very cost prohibitive for potential customers needing multiple users.
Answer: – We’ll make this an unlimited user fee. We don’t have to worry about storage fees and CPU usage since the software is still installed on the customer’s hardware.
How do you handle subscription termination?
Since the software is installed on the customer’s hardware, how do you police subscription terminations? Do you have the software call home each time it’s started to see what the current status of the subscription is? If the subscription has expired what is the customer allowed to do?
Answer: – We’ll have the software contact our server each time it is started to check the subscription status. We’ll allow seven consecutive contact failures before locking down the software. If the subscription has expired we’ll notify the customer that they have one week to correct their payment method before the software is locked down. When the software is locked, it will allow them to start it up and access the backup feature so they can still access their data if they want to take it to other software.
What are customers willing to pay per month?
As little as possible. Those are the customers you don’t want. We’ve always found that the customers that bicker about cost and pay the least cause us the most headaches. Now is not the time to take on more headaches.
Answer: – We still have to keep in mind that we need to at least recoup the cost of a permanent license by the end of year three. If the prospective customer balks at the cost, they have the option to purchase the perpetual license.
How do we manage the monthly billing?
Keeping track of billing is always a pain, especially for small companies. We don’t want to create another full-time position just to keep track of this.
Answer: – All subscriptions will require a credit card or checking account. We’ll set this up to automatically charge the payment method each month. We’ll still have to manually handle terminations, but hopefully these will be few and far between.
Now to get busy on the structure for having the software detect monthly subscriptions and a site that will allow the customer to update their payment information themselves. What do you think? Are we headed down the correct path and have our assumptions correct?