Price point #10: Don't try to convert your perpetual licenses to subscription.

If a developer wants to move wholly in the direction of subscription, is it possible to force perpetual license owners into subscribers? I.e., can you convert those annual maintenance fees to license fees?

"No, I don't think so," Geisman says. "With saleforce.com, I think the issue there is that CRM is a bitch to implement, and lots of organizations spend lots of money and get no results.

"In that market, it's a way for the camel to stick its nose under the tent: 'Okay, we'll try it with 10 people, and see what happens.' It's the big bang theory in small whimpers."

Price point #11: Use subscriptions to win over skeptics, procrastinators, and small spenders.

"I think that's what the subscription model has going for it: It's easier to deal with in small chunks," Geisman says. "You can aim lower in the corporation, which means you have more candidates, and you reduce the perceived financial risk.

"The fact that they're on a pay-as-you-go basis, well, that's nice too, but there's more to it. Remember, salesforce.com started from zero; they are a great example of a business being built to match the model."

Thus, if you have lower-price, entry-level product, or a constrained of "Lite" version of your flagship software, that may be your best candidate for subscription pricing.

Price point #12: Even the big guys haven't figured out how to make the transition.

It's a much more interesting challenge, Geisman suggests, to consider how traditional companies are going to make the transition from perpetual licenses to subscriptions.

For example, Microsoft and Oracle have both announced, with differing degrees of fervor over the past four years, that they'll move to subscriptions. An Oracle VP, in fact, declared at the company's annual user conference in 2000 that "software is dead," long before salesforce.com made "No Software" its marketing mantra.

"Oracle really does rely on software, not the upgrade cycle," Geisman says. "They are counting on sales of software and sales of new licenses for their revenues. But customers are saying they're tired of upgrades, and I think the subscription model for them is a way around the upgrade problem.

"It's similar to the problem that CA faced, but CA made a conscious decision to go all subscription, all at once. I don't think Oracle will go all subscription, and that means they face the question of how much of their base will move to subscriptions, and when.

"Microsoft may get into subscriptions at the server level, but I can't see it at the desktop. The desktop has such a strong history of perpetual licenses; I think it will be hard to break that.

"I think Microsoft is trying, with their software registration procedures. When you go online to register, they know who you are, and they could, at that point, just as easily attach a 'right to use' to the 'who you are.'

"But the desktop is so mature. I don't use most of the stuff on my desktop, so why do I want to pay a subscription for a suite? So I can continue to not use it? If it's a minor toll, I may not complain about it, but if it's a minor toll I don't think Microsoft will do it, because the revenues aren't there."

Price point #13: Mixed models will work, but not without a dominant plan.

"Back when CA did it, analysts didn't get it, and CA's stock got clobbered," Geisman says. "Now, I think analysts do get it, but they still have difficulty with a software company that's got a mixed model.

"I can't think of anyone who's doing it successfully on a 50/50 basis; I think one model has got to dominate, by a sizable share.

"If you have two models, what does your sales force sell? What do they lead with? If you're neutral to both, you can take your chances, but I don't think the world plays out that way. If you do it right, I think you'll end up with an 80/20 or 70/30 mix-though which model becomes dominant is a decision each company will make on its own."

Price point #14: Don't limit yourself to standard subscriptions.

Because it is so new to software, many approach the task of creating subscription pricing by looking for clues and imitable models from other subscription businesses: magazines, cable providers, and the like.

But there may be other ways to get people into the tent, Geisman suggests. "It has never failed to amaze me that software companies offer 90-day demos, but they don't want to offer 90-day paid licenses," he says.

"What's the difference? In my book, the difference is the money you collect. I understand the logic of giving away a free demo or trial version, but when the customer comes back and says, 'I can't afford the whole thing,' why don't you say, 'Remember that 90-day trial? We'll sell you another one.'

"Or, there's another way of putting this: 'We'll sell you a one-year license, and if you cancel within the first 90 days, we'll give you all your money back. Most people don't want to sign up for a one-year license, however, without a trial.

"But if you can license someone for 90 days, and if you can charge for it, that ends up being a one-year term. It surprises me that so many developers can't get their heads wrapped around that concept."

Price point #15: Pay-as-you-go is a convenience, and convenience is worth a premium.

Geisman draws an analogy to buying a car: You can pay upfront, or you can finance, or you can lease it, or you can rent a car, or, if you don't like any of those options, you can take a cab.

"If you were paying your day rate on a car rental over the course of five years, it would be about four times more expensive than a purchase," he says.

"The freedom and convenience that you give someone for a rental arrangement is a premium; people will pay a premium to use it in a small chunk. But, they won't see it as a premium, because it's a good deal for them within a small period of time.

"The failure has always been that people ascribe no value to the convenience. When you buy pizza by the slice, you're always paying more than you would for the whole pizza. And, by the way, there comes a point when it makes more sense to buy the whole pizza and throw away what you don't want.

"But if you want to buy my software for a short time, I have some risk, and you have to pay me for that risk. I have to deliver it in small time chunks, and you're going to require more support, because with the traditional model support is delivered upfront, not at the backend.

"If you want to charge a low subscription price, hey, go ahead, but you'd better know what you're doing, because you don't often make it up on volume.

"I think the problem is that most developers assign value to the technology and product deliverable. Sometimes that's right, sometimes it is the bulk of the value; but if that's all you point to, I think you're losing sight of some levers.

"Is it convenient to buy, do you get immediate support, all those things that surround the core product? If you don't bring that out, then I think you're losing the opportunity to extract some additional money-and I don't mean extract unfairly. The subscription model is much more than a financing model."

Price point #16: Simple division isn't the answer.

"People tend to take their perpetual license prices and divide by 24 or 36," Geisman says. "Fundamentally there's nothing wrong with that, but you have to ask yourself, is that the right price for trading $100,000 in upfront money? Well, obviously, no.

"As you change your pricing or your pricing methodology, you're still going after the same customer-but with spread pricing you've got the ability to go after a whole new set of customers.

"Sure, you can be like salesforce.com: Start with no customers, get $60 million in venture funding, and rack up 90,000 customers. Yes, they're making money, after five years-but there's a really good example of what capital can do for you.

"This is a mature industry. Again, look at the car analogy: How can you start an automobile company without billions of dollars or incredibly cheap labor? You might be successful at a company that sells add-ons for cars, like navigation systems or a new style of headlights, but to sell cars, you're going to have enormous obstacles."

Price point #17: Unless you can undergo a major mind shift, you should perhaps forget about selling subscriptions.

OK, salesforce.com keeps coming up as the poster child for subscription pricing done right, so we decided to go to the source.
Founded in March 1999, salesforce.com got an initial investment of $17 million late in that year, and in May 2000 they got another $35 million; subsequent rounds brought the total to $61.1 million.

The company was cash flow positive in 2002, yet at the end of January 2004 their cash balance was $16 million-which means they burned through more than $45 million, supporting Geisman's observation that a lot of cash makes a lot of things possible.

This isn't to knock salesforce.com's accomplishments. On the contrary, we think they are a remarkable company, and have done more to redefine and revolutionize our industry than anything since the graphical interface.

The company supplies its CRM software via the Web to about 8,000 clients representing 110,000 users in some 70 countries, according to its pre-IPO prospectus. Tien Tzuo, salesforce.com's senior VP of marketing, who oversees all corporate and product marketing, says the number is now up to more than 10,000 clients.

Price point #18: Your best subscription models aren't in the software industry.

According to Tzuo, the subscription model works at salesforce.com largely because the company ignores software industry tradition.

"We look at a lot of different models when we set pricing," he says. "All of us in our normal lives are used to paying subscriptions: for our water, our cable systems, our phone service. We looked at those to figure out our pricing.

"There's something good and something bad about taking all the money upfront. If you take all the recognition upfront, you get that bump in revenue, but, long-term, it's not good for the relationship with the customers.

"With subscriptions, you have to pick what you think what is a reasonable amount of time for retaining the customer. We're fortunate in that we have five years of experience at this.

"It's not magic, but the model forces us to go deep into our relationships and make sure that those relationships are in fact successful. Software companies don't have that incentive. We all know that lots and lots of software is shelfware. If we had shelfware, we'd be out of business."

Salesforce.com sees see adoption rates of 95 percent or higher, Tzuo says. In other words, only five out of every 100 copies are not being actively used. With a universe of more than 110,000 users, that's a pretty incredible metric.

Price point #19: With subscription pricing, simplicity is key.

"When I was at Oracle, the joke was that the price list was as convoluted as possible so that the customer couldn't understand it," Tzuo says. "The sales guys had a couple of levers that they could manipulate to magically come up with the price that the customer wanted; that didn't create a good relationship."

At salesforce.com, it's about as simple as you can get: $65 per user per month, and there is no minimum; a business user can sign up one user or 100 at $65 per month. There's also a Personal Edition that's completely free; it can be converted to the Professional Edition or Enterprise Edition for the same $65 per month.

Price point #20: Raise prices only when you can prove value.

The company's subscription price started at $50 per user per month in 1999; in 2001 it was bumped to $65 per user per month, and has not increased since then.

"When we came to market we were a startup; our product was much lighter back then," Tzuo says. "We weren't yet in the CRM space. When you're dealing with the kind of size we've got now-after three years we had about 2,000 companies, and now it's 10,000-with that kind of market we have a lot of data, and can watch trends very carefully."

Price point #21: At the same time you slice up payments, slice up _{ROI claims.}

It's easier to sell subscriptions on a monthly rather than an annual basis, Tzuo says. "If you offer once-a-month as the basis, you don't have to ask for such a big leap of faith.

"If your solution can carve out a 5 percent increase in productivity, or a 5 percent reduction in collectables, or whatever your solution does, it's much easier to show that every month. With the subscription model you probably end up justifying a higher proportion of value, because you don't have to justify the risk involved."

In other words, customers are more likely to find your ROI projections palatable when you can break them down into tiny chunks. Not only are the claims more credible, it's easy to measure them quickly, with a minimum investment on the customer's part.

Price point #22: Sell monthly, but offer longer term options.

At the same time, Tzuo says that many salesforce.com customers opt for opt for quarterly or annual payments.

"The bigger the company you get into, the less they want to deal with payments and invoices, while the smaller companies can just put it on their credit card. Many try it out for a month or two, then come back and ask for a longer-term contract."

Price point #23: At the end of the day, it still comes down to value.