How to Price Software
I recently had to do a B2B pricing exercise for a company. Here’s how I went about it – I triangulated based on three factors.
Competition: I picked as many direct competitors or closest competitors or nearest substitutes or things my customer would compare us to as a frame of reference. I then picked where I wanted to price my product relative to the constellation of data points. I tried to do this for a 5 year cost of ownership. This gave me one data point (high-low range) for the top corner of my triangle.
Cost Plus: I considered my development costs and how many customers I wanted to get to recover my development costs. I then added my cost of sales and my company overhead to calculate my total cost (R&D + sales & marketing + finance & administration + profit). This gave me the lower right corner data point.
Customer ROI: I considered how much money the customer would save if they purchased my product. I tried to structure it so the customer would see a 9 month return on investment.
The above gave me 3 points on the triangle to consider. Surprisingly, they were not very far apart. In the end, I weighed the ROI calculation quite heavily in my analysis.
I did the above as a total cost over 5 years. Then I considered if I’d like this to be priced as an enterprise software (capital expense) or a recurring license (operating expense).
Good luck with yours!