I have always been of a firm belief that getting the pricing model and strategy right for enterprise software makes more sense than just getting the pricing right. Having tried a few strategies myself (and failed miserably too) have learnt a few things which I would like to list down. I hope the pointers help more enterprise software founders in minimizing the goof-ups.
1. Avoid free POC: Since the POC comes free, the customer without a serious intent may want to try it out and you will end up spending serious time, efforts and money behind it. Also since it’s free the customer may not feel the same pressure to make it a success internally. A lot of times a POC fails without a mistake of the vendor, but due to internal reasons like non-priority etc. As a solution try and bill the customers with a refundable clause stating that if they go ahead and buy it, the POC cost will be adjusted in the final billing. It works!
2. Perpetual lifetime pricing: Sometimes with bigger customers, with exponential number of users, the customers demand a perpetual lifetime license. Try and push for a 3yr or a 5 yr license instead of a lifetime cost, and avoid killing the golden egg laying goose. In case the customers don’t budge, a 4 yr license cost with an upfront payment option works best since it will help strengthen your cashflows. At all times avoid lifetime license with a staggered payment term.
3. Have a standard price chart: At all times avoid pricing based on the customer and customer capacity. Decision makers hop jobs regularly and will leave have a negative impact on your brand if he knows about differential pricing. Solution to it is giving differential discounts for different customers with a standard pricing chart.
4. Slab based pricing: Try and have a slab based variable pricing model either dependant on number of users or linking it to usage or some variable component. This would ensure 2 things, the entry point pricing for the customer becomes less and as and when he creates value for himself he upgrades on the slab. Secondly if the product strikes a chord (am sure it will, if you are confident) the customer wont mind paying more.
5. Factor in cost of customer acquisition: With enterprise software the sales cycle is quite big which eventually boils down to sales investments. Try and find your cost of each customer acquired (commissions, phone calls, travel, and legal fees) and add it to the billing. Most entrepreneurs make the mistake of only considering the cost of development.
6. Maintenance costs: Generally 25-27% AMC is the general trend these days, and you might face some resistance from the buyer. The AMC cost should not only be calculated on the actual support cost but also any free upgrades and bug fixes. A way of convincing your customers is to give them a yearly upgrade plan which again ensures 2 things, gives them a comfort and also re-enforces the fact that you are here to stay.
7. Upfront pay-in option: It’s always a good option for start up companies to have cash in hand. You can try by introducing a discount system for multi year contracts for which the customer pays you upfront. Say for example: if your product costs 1000 Rs per user per year and for a 2 year contract you give them a 7% discount with a yearly payment option. Try and introduce a 12% discount if the customer can pay the amount upfront.
8. Set a date to increase your prices: Once you set in a trend of increasing your prices consistently over a period of time it will instill urgency in customers to adopt your products early. LMS (Learning Management Systems have this trend of prices increasing consistently)
9. Product license agreement: Beware about contracts you make for customers with a lifetime license. If the customer is a conglomerate make sure you make the contract in the name of the company which is buying it and not the whole group. Unethical practices in some companies are rampant where they buy a particular unlimited license in a company name and use it across the whole group. Be specific!
10. Negotiation and reseller margins: Keep some negotiating percentages factored in your cost. The supply chain or purchase guys will leave no stone unturned to pull you down (I can write another whole article on this) Also if tomorrow you start building a re-seller network, you wont be able to drastically change your market prices (re-sellers would take anywhere form 15-30%) so its always a good idea to have a good balance. DO NOT at any cost let the reseller put his margins and sell at his defined cost, always have a control over the end customer pricing.
These are a few important things I could think of while writing this article. Don’t consider this as a rule book, though I have tried to keep the pointers as generic as possible. With different industries or products the pricing model can be modeled accordingly and is quite an exhilarating experience to fine tune the same.