Match Strategy for Software Product Pricing to Accounting Traditions
Design your product pricing strategy after you have a thorough understanding of the customer’s traditional accounting practices. When they license your software or contract for your services, they will evaluate the financial success of the relationship in the context of these practices. If your pricing strategy is out of step with your customer’s operational cost accounting, project valuation and capital cost accounting practices, an otherwise attractive business deal might not look attractive at all.
The answers depend on the target industry. Manufacturing has different traditions than Web 2.0 startups, publishing is different than restaurants. Some companies evaluate software solutions purchases by looking at total costs of owning a solution over the expected payback period. Some focus more attention on maintenance or contributions to COGS. Even those that look at total expenditures may not factor in the costs of internal resources, or may account for them in different ways.
Learn how the important target customers in the industry evaluate project success. Learn which accounting bucket maintenance charges go to and what part of the cost of your software or services will by included in COGS.
A company I recently worked with priced their ASP software services by the slice. Each slice has a wholesale cost of $2-3 to the customers, who in turn resold these services in bundles at $5-$100. There are no annual maintenance fees for the use of the software. Further, Company’s pricing includes many basic integration services, so there were very few professional services fees.
A competitor rapidly gained traction when they presented a pricing plan with a by-the-slice component at about 25% of Company’s fees. Obviously, the customers thought this was great because it reduced COGS and dropped this savings directly to the bottom line (at least for the team managing this product’s sales). In this organization, the IT budget was used for operational expenses such as integrations and periodic maintenance. No one bothered to calculate the total cost of each solution.
From a total cost perspective, Competitor’s pricing wasn’t nearly a clear win. Company’s price included basic integrations to 3rd-party products and services; Competitor charged extra for these. Because Company’s revenues depended on customer performance, they were eager to provide free training at the call center and in the field. Competitor charged extra for these services. Being an ASP and wanting to keep the pricing simple, Company didn’t charge periodic maintenance fees; Competitor did.
Because total cost wasn’t part of the industry standard for project evaluation, Competitor won key customers. Company failed to design a pricing package the fit that customer’s traditional accounting practices.