An interesting email thread on ASP pricing models developed among Stanford alums recently. There's a complicated intersection of dynamics that include:
- Minimizing cannibalization between the hosted and boxed versions of your software
- Keeping your boxed software priced competitively, relative to boxed competitors
- Keeping your software-as-service priced competitively, relative to ASP competitors
- Maintaining a fair ratio between initial setup/installation/customization fees and monthly (or annual) hosting/maintenance/licensing fees
The recent online discussion had some great business models that would have helped me to address this situation in past roles. I worked up a blended model below that applies reasonably across the board, given differences in industry, company scale, etc.
Revenue Model
- Three-year revenue total from an ASP customer is 35% higher than revenue total under a license sale model
- Three-year breakdown of revenue total is 40% in Year One, 30% in Year Two, 30% in Year Three
- Minimum commitment of one year
- Auto-renewal for five years
Pricing Model
- Setup and implementation billed at typical custom development project basis, or by hourly fees
- Licensing fees based on one of these options, or varied combinations
of these options: number of seats, amount of database storage, and
level of functionality
- Year One pricing breakdown as follows:
57% Subscription Fees (including Support)
28% Initial Software License
9% Implementation/Configuration
6% Training
Other Influences
- Competitive pricing (how much three years of an alternative solution would cost)
- What the client can afford
- Underlying economics of your hosted solution, compared to that of the
company buying your packaged product and hosting it themselves
- Underlying operating costs to you
While this template isn't a definitive guide, it provides a reliable framework for working through business model issues.
Tags: christine herron spacejockeys best practices technology
