Skip to content

How to Price Software

October 4, 2013

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.

Untitled

 

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.

Untitled2

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!

Advertisements
Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: