License Managers: An Opportunity to Charge a Premium Price

When vendors respond to customer demands for flexible licensing, many vendors introduce license manager control by stating their business objective is staying "revenue neutral," where they neither gain nor lose revenues.

Why do this when customers will pay a premium for meaningful product features?

What we have here is a failure to communicate

Early results from many vendors indicate customers are willing to pay more for the new functionality and flexibility when linked with a new pricing methodology. Furthermore, most customers don't care about their vendors' revenues as much as they care about whether their company is paying fairly for the software they license.

If your customers demand flexible licensing, don't resist these customer requests as being unreasonable. Instead, treat these requests like any other request for a new product feature that adds value: look at this as an opportunity to charge a premium for a meaningful product feature.

In previous client research and actual experience by companies using license manager technology, we find most customers appreciate the flexibility and improved access of a license manager-based product. In focus group research and analyzing end-user purchases, we also find companies expect to pay a 10%-30% premium for network licensing, based on increased flexibility.

Major changes in pricing strategy are less risky when they accompany major changes in perceived product value. In general, a major shift in pricing strategy may be more noticeable with a minor release where you have not changed the customers perception of the value of an application.

Therefore, if you want to play it safe, then charge a premium for flexible licensing when you come out with a major new release that significantly extends functionality.

Find Customers That Will Accept Premium Prices

Even though licensing flexibility has value to most customers, you will need to help them understand the value of network licensing. Build your case based on improved access and increased usage of software.

Therefore, look for companies that move people around according to project requirements or companies where new projects must start quickly and easily. These are very likely to pay a premium for network licensing.

Other factors affecting the price premium include: type of application, frequency of use, sales technique employed by a vendor, and the software vendor's overall company strategy.

Case In Point

For example, customers licensing expensive software that is used in short bursts (e.g., 4 hours per day, one day per week) are often willing to pay a premium. One of our clients was able to charge 10% of the full license fee for a monthly use license. New users were attracted to the low entry price of this option even though the monthly license fee would annualize to a 20% premium over an annual license fee.

Another company we know challenged conventional wisdom that says software must be available 24 hours a day, 7 days a week, 52 weeks a year. The company offered an "annual subscription" version of their application.

The subscription consisted of 12 monthly licenses worth of application use. In this case, whenever an end-user invoked the application, it was "owned" by that person for a 30- day period. (Since most customers needed this application for a couple of weeks, the 30- day minimum was generally no problem.)

The vendor did not restrict customers in how they used the monthly licenses. Some customers used them one month at a time; others took down three licenses in one month and used the remaining 9 months of their subscription on an as needed basis.

Sales hated the idea. Customers liked the idea. The investors loved the results. (Revenues increased by 30%.)

License Managers Can Make New Product Options Available

Using license manager technology to control a networked or client/server application can give a vendor additional licensing options (and potentially new sources of revenues). Vendors can also present these options as a "new" variation of the product. We have found that offering these new pricing options may increase revenues if they are in line with customers' thinking.

Here are just a few of the pricing options vendors can use when license manager technology controls a networked or client/server application. These options can be offered at the initial sale or as a follow-on sale for higher incremental income.

With network license managers and the right pricing strategy, client/server vendors may further penetrate their account base or generate new customers by lowering the entry price point for their applications. This may help vendors generate revenues from new accounts or areas within existing accounts that, until now, were unable to justify the software acquisition costs.

Don't forget, however, the objective is not to confuse the customer with options but to have options available that make sense in a large number of sales situations.

This information is copyrighted material prepared by Software Pricing Partners, Inc. Reproduction without permission prohibited.
These materials also appear in a report prepared by the firm entitled: "A Vendor's Guide to Software Pricing and Licensing for Client/Server and Networked Applications."