How to Price Subscription Software (Continued)
Copyright (c) 2004, SoftwareCEO Inc. Reprinted with permission
"If they are faced with three options-a lump sum for a traditional license,
versus financing for that license, versus a subscription model-how
do you differentiate? Other than the fact that the payments never
end [with the subscription plan], how do you make one model more
attractive than another?
"Maybe the fact of subscription payments never ending allows
the developer to lower the monthly fee, compared to a financing
arrangement, where the payments wouldn't normally go beyond three
years.
"But with the financing plan, it could be at a higher monthly
rate, which helps the developer because it's not as much of a cash
flow hit. It's a real honest-to-God commercial contract: Customers
make the commitment, and they do it or not. In general, people don't
default on those contracts.
"With a subscription model, it isn't as strong as commitment,
which is a real potential disadvantage to the ISV. Are customers
really going to commit more than a year?
"I think it's like a magazine: You're only committed to pay
it for the first year, and then you can blow it off. Now, I know
that with software it isn't that easy; it generally isn't like a
magazine. But, still, there is a value perception. It's a more casual
relationship.
"The real thing that swings this decision for all software
is switching costs. If switching costs are extremely high, then
it doesn't make sense to offer a financing option, because people
will be prepared to pay year after year for your subscription. However,
I think you have to be willing to convert some from monthly to quarterly
or annual payments."
Price point #5: You have to make the new model play with the old model.
"If you have a discount schedule for volume deals on your perpetual licenses,
how is that going to play out on the subscription side?"
Geisman asks.
"The numbers may be so small on a per-user, per-month basis,
that you don't want to nickel and dime people. If the price is
that low, should your discount schedule be adjusted?" For
example, it might make sense to offer a 10 percent discount when
someone buys 10 copies of your $5,000 product; you can still cut
an invoice for $45,000.
But if you're selling subscriptions at $50 per user per month,
do you want to rent to 10 users for $450 a month? Do you want
to deal with discounts, negotiations, and invoicing for a price
differential of $50?
Price point #6: Forget the ASP business; stick to software.
"In the early ASP days, there were a number of flaws," Geisman says.
"You've got all this infrastructure being given away for
free.
"It's like the ASP guys were saying, 'I hope that people
hang around long enough to pay for all the servers and people
and facilities, and hopefully their usage will go up.' When you're
entering an uncertain marketing you don't want to do that; you
want to keep fixed costs to a minimum."
Price point #7: Allow for added expenses on the support side.
"The subscription model encourages a wide and diverse base of users,"
Geisman says. "You have to think about the impact on your
support organization, especially as you have casual users coming
online and asking dumb questions. The traditional maintenance
and support fees need to be thought about differently."
Next
>>>
|
Contents above Copyright (c) SoftwareCEO Inc. Reprinted
by permission. Other unauthorized reproduction prohibited.
|
|
|
