Pricing Software as a Service

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

Comments

[Christine]

The rules of thumb above (at least as of the time of this old post) would still apply in calculating appropriate amounts for subscription pricing. Of course, I'd always do some market tests to validate pricing before marketing a service widely.

[Satyakam Das]

I am curious to know if this software-as-a-service model pricing can be applied to on-demand CRM pricing such as salesforce.com. How would such a company charge their subscription at a certain price such as $29.99/subscription/month?
Thanks!