1. Pricing in the Software Industry Science, Art or Magic?
Simon Backer
October 2003
11/17/2019

2. Pricing in the Software Industry
Why is pricing of software different
How are software prices created
Pricing Models
Example
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3. Different Types of Software
Enterprise
ERP
Supply Chain
Billing
CRM
Sales Force Automation
Field Service Automation
Consumer
Home Computing
Productivity
Education
Entertainment
Video
Audio
Software
System
Operating Systems
UNIX
Windows
Custom Systems
Air Traffic Control
Government
“One-off”
Embedded
Industrial Controls
Controllers
HVAC
Telecom networks
Switches
Routers
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4. Software pricing – the challenge
Software costs a lot to initially create
Software is ‘soft’ ; intangible
It’s only software
Isn’t it just a bunch of 1’s and 0’s?
CD’s , tapes, DVD’s do not look / feel valuable
Relatively inexpensive to copy
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5. Why is Enterprise software purchased
Companies / organizations look for strategic advantage
Re-engineer business processes
Improve Customer Service
Improve Operational Efficiencies
Reduce Operational Costs
Software systems can be part of the new process
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6. Pricing Enterprise Software - Major Factors
Value
Cost
Competition
Software maturity
Prevailing conditions at time of Sale
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7. Factors that impact software value
Value is in the eye of the beholder...
Benefits
Cost savings
Revenue enhancement etc.
Total cost of ownership
Hardware costs, training etc.
What is the vendor doing to deserve to be paid
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8. Enterprise software lifecycle
Acquisition
Operation
Upgrade
Operation
Software Licenses
Configuration Services
Customization Service
Integration with other systems
Installation Service
Initial Data Conversion
Roll-Out Support
Training
Maintenance
Help Desk
Adding Users
Problem Resolution
Bug Fixes
Install New Software
Convert /Upgrade configuration
New feature training
Customers generally agree to pay for these items
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9. Know thy costs Sounds easy…often close to impossible Software costs
Development
Delivery
Support
Marketing - Brand
Big issue is how (and when) to assign those costs to the Software P&L
Should software development costs be capitalized?
High risk ; requires dependable forecast
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10. Competition There is always competition… Direct competition
Other software vendors
Internal development
Indirect competition
Other technologies
Doing nothing!
Competition affects and often drives the ultimate price
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11. Software maturity New software perceived as a big risk
Software in mid-life has most value…
New software perceived as a big risk
Software has a limited life
What was great 2 years ago is dated today
Always something new coming along
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12. Prevailing conditions at time of sale
Software pricing is flexible…
Importance of winning a strategic account to establish new product
End of quarter
Competitive positioning
Desperation of customer to catch up with their competitor
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13. Pricing Models Many models have evolved: License purchase
Purchase ‘right to use’
Software as a service
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14. License Purchase Model - Licenses
Licenses fees structured to match customer view of value
Services can be priced on a T&M or fixed price basis
Licenses can be discounted …but
Critical to establish what the ‘list price’ is
List prices drive a lot of customer perception on how the vendor values their software – this in turn influences customers’ perception of value
Services
Features
Server
Clients
(Users)
Initial License
Fees
and
Implementation
Services
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15. License Purchase Model-Maintenance
Services
Annual maintenance is typically priced as a percentage of the license fee
Often this is based on the list price
Annual inflation allowance
Maintenance is recurring annuity revenue stream
Clients
(Users)
Server
Features
X % of
licenses
X % of
licenses
X % of
licenses
Initial License
Fees
and
Implementation
Services
Annual Maintenance
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16. License Purchase Model - Upgrades
New software releases with significant functionality improvements yield
Additional license fees
Additional implementation services
Opportunity to increase maintenance fees
Services
Clients
(Users)
Services
Server
Features
License
Fees
X % of
licenses
X % of
licenses
X % of
licenses
Initial License
Fees
and
Implementation
Services
Annual Maintenance
Upgrade
Annual Maintenance
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17. License Purchase Model-lessons learned
Important to get the initial license fee right
Charge to much – risk losing the sale
Charge to little
Customer will forever expect all for nothing
Miss opportunity to collect full maintenance fees
When justifying price to customer focus on what it’s costing you as vendor to supply – rather than the value the customer will see in their own business
Features
Server
Clients
(Users)
Services
X % of
licenses
License
Fees
Annual Maintenance
Upgrade
Annual Maintenance
Initial License
Fees
and
Implementation
Services
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18. Application Service Model
Software is delivered as an application service
Per user per month fee
Term contract – typically 24 – 48 months
This works for both vendor and customer
Sometimes charge for integration services
Model is closer to that of cable TV
Services
Services
Initial
Fees
Monthly Service fee
Upgrade
Monthly Service fee
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19. Application Service Model – lessons learned
Still more in the future than today but starting to happen
Economic benefits for customer and vendor
Customers have issues with:
Security
Control
Because software is not ‘delivered’ to customer it is even more intangible
Risk is with vendor
Services
Services
Initial
Fees
Monthly Service fee
Upgrade
Monthly Service fee
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20. Case Study - MDSI ideligo
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21. Case Study - MDSI ideligo Pricing
Step 1: Determine total value to customer
Step 2: Estimate customer’s total cost of ownership
Step 3: Structure pricing plan that reflects customer view of value
Step 4: Sanity check versus alternate solutions
Step 5: Acid test – will the customers buy it
Steps 3, 4, 5 are definitely iterative
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22. MDSI ideligo Pricing – Step 1
Complete more work
Reduce Overtime
Accelerate billing cycles
Reduce wear and tear on vehicles
Calculate savings, revenue enhancements, efficiency improvements
How much can customer expect to benefit over 12 – 48 months
Determine total benefit and value to customer e.g.
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23. MDSI ideligo Pricing – Step 2
What other costs will customer encounter in deploying the solution
Hardware – server computers, laptops
Implementation costs
Training
Based on benefits determined in Step 1….
How much can customer afford to invest in software to get a month payback
Estimate customer’s total cost of ownership
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24. MDSI ideligo Pricing – Step 3
License fees that reflect software functionality
Server license
Client licenses
Wireless middleware licenses
Maintenance fees based on a percentage of the license fees
Structure pricing to reflect customer view of value
Features
Server
Clients
(Users)
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25. MDSI ideligo Pricing – Step 4
Sanity check versus alternate solutions
e.g. pagers, cell phones, desktop client software etc.
Price
MDSI ideligo
Perceived value
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26. MDSI ideligo Pricing – Step 5
Price Proposals to customer
Discounting – especially for early sales
Competitive offerings
Review and Iterate as required
Acid test – will the customers buy it
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27. Pricing overview Winning Pricing Customers Buy Don’t Buy
Not Profitable
Profitable
Winning
Pricing
Unsustainable
Not Applicable
Theoretical
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28. X Summary Pricing in the Software Industry Science, Art or Magic?
A methodology can be applied
The ultimate test is always….
Will the customer buy it at a price that can make you money
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