How to Price Subscription Software (Continued)
Copyright (c) 2004, SoftwareCEO Inc. Reprinted with permission
"Another way to do this is to decouple completely how much you charge on
subscriptions from what you charge on the perpetual model,"
Geisman says. "But to do that, you have to differentiate the
offering completely.
"For example, your subscription model may not give them the
ability to upgrade to certain modules. Of course, this separation
creates the difficulty of dealing with customers who might later
change their minds and want to switch from one to the other."
Price point #3: Ask whether subscription pricing makes sense for your company.
Pricing is never as simple as plucking a number out of the air because it "feels
right" to you, your sales guys, or a handful of customers.
"If you want to encourage people to buy a car, you can lower
the price of the car-and that drives you out of business,"
Geisman says.
"Or, you can offer them monthly payments-but then you have
to determine how much you want to collect upfront. You have to look
at your business objectives.
"And, you have to recognize the cash flow impact. If your perpetual
license fee is in the upper ranges, the hit you'll take by going
to subscriptions can be substantial.
"As with all pricing questions, it gets down to this: What
are you trying to achieve here? For example, it may be that you'll
make your money on add-ons, not the base product.
"With the perpetual model, you had to make your money up upfront,
because you didn't know what people were going to do downstream-you'd
depleted their budget with that initial purchase.
"Computer Associates
did a massive switch to the subscription model, but they were in
the enviable position that they had their customers over a barrel;
they had the clout that they could do it. And, I think they rigged
the numbers so that the change was perceived as neutral, financially
speaking.
"But when you're in a hotly contested arena, like CRM, it becomes
very tough. The subscription model is used as a lever against developers
who don't want to offer a pay-as-you-go-model. A customer will say,
'I really like your stuff, but with saleforce.com I can get this
and this and this for 30 percent less-so come on, give me a break.'
"I think you win with the subscription model by offering it
as one of several ways of doing business with you. At the end of
the day, the vendor is accumulating revenues, the customer is paying
out money; the issue is, what is the best way for you to accumulate
those revenues? A little upfront and a little over a long period
of time, or a lot up front and a little over time?
"None of them is good, none of them is bad; it depends on what
your organization is geared up for. You have to understand how you
can run your business, and once you know that, you can talk to your
customers about how they can fit into that model."
Price point #4: Consider contract terms rather than subscriptions.
"Financing the customer's purchase yourself or through a third party may
be a viable option for a lot of people," Geisman says. "You'll
take a bit of cash flow hit upfront, but that revenue month to month
is nice. It looks like a subscription model from a customer's perspective;
they still make regular payments.
Next
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The original article appeared on March 30, 2004 on SoftwareCEO.com.
To view it, click here.
Contents above Copyright (c) 2004, SoftwareCEO Inc. Reprinted
by permission. Other unauthorized reproduction prohibited.
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