How to price subscription software - and how salesforce.com does it

by Bruce Hadley, SoftwareCEO
Copyright (c) 2004, SoftwareCEO Inc. Reprinted with permission

Introduction

We think it's pretty much a foregone conclusion that if software companies aren't already offering a subscription-based version of their applications, they need to be looking at it.

That isn't to say it's the "right" or "best" way to go about licensing software; far from it. In fact, it may be entirely wrong for some vendors and some situations.

Still, it is on nearly every customer's mind, at least as a checkbox on their software evaluation form. (I.e., they may opt for a traditional perpetual license, but they want to know that you offer a subscription alternative.)

When and if you start down the subscription path, one of the first forks in the road is price. How much? How often? If you've been successfully selling perpetual licenses for $500, or $5,000, or $50,000, how do those numbers translate to subscription pricing?

To explore this subject, we went to the two most authoritative sources we could think of: Jim Geisman, founder of Marketshare, in
Wayland, Mass., who has spent more than 20 years in the software industry focused on pricing and licensing issues.

Second, we called on the single software company that has probably done more to pave the way for the subscription model, and profitably so: salesforce.com.

Here's what they taught us.

Price point #1: First, review your non-subscription pricing.

"There are subtleties and nuances to subscription pricing that a lot of people don't think about," Geisman says. "You can't do a good job of subscription pricing if you do a bad job on pricing your product fundamentally."

Price point #2: Ask whether subscription pricing makes sense for your customers.

"If you have existing products, you have to think through whether you want to offer subscription sales as an option," Geisman says. "If you do, you have to think about whether people want to buy a perpetual license or a subscription."

The best way to find out: research. Don't rely on prospects who merely have checkboxes on their RFPs; talk to the people behind deals you've recently won. More important: Talk to some you've recently lost; would a subscription option have made a difference?

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Contents above Copyright (c) SoftwareCEO Inc. Reprinted by permission. Other unauthorized reproduction prohibited.