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Software % Pricing

Is it common for software vendors to charge users a % of the total business done?

Take an example of an inventory management software.
You (the buyer) and all your vendors have the software installed, and if your buy say stuff worth 20 million in a year, you need to pay the software vendor 2 million (10%).

Is this scenario common, Thoughts?

Prakash S
Tuesday, December 09, 2003

Let me add this: Do you know any software vendor who does this kind of pricing?

Prakash S
Tuesday, December 09, 2003

I don't think it is particularly common. It seems to fit better where the software is sold as a "service".

I have seen it used in service industries. For example, I worked for a global telecoms company and they were being "romanced" by a big telecom software provider who would give them the software and charge them based on a "per call processed" basis.

Also works for insurance systems, where you charge a percentage of written premium.

It can be very useful for companies where they are not sure how much business they will write, or where their business is seasonal.

Many companies want to capitalize their expenses (to look good in the market), so this would not be a good model for them.

Steve Jones (UK)
Tuesday, December 09, 2003

Yeah, I've seen this done, but I think this is only typical with particularly large systems.

I guess it's supposed to be a win-win situation, where the client doesn't have to fork XXXX dollars up front to own the product. Plus, the vendor gets a stream of continuous revenue.

'course, it doesn't look that great to add a new continuous expense to your bottom line.

Shodan
Tuesday, December 09, 2003

It's very common in "software as a service".

When people use eBay, they don't think about buying a copy of the eBay software. They use the eBay service. It's all powered by custom software, of course, and eBay takes a piece of every transaction. That's your price for using the software.

In fact, this is "win-win". Just ask anybody making a living off of eBay whether they think it's terrible that they're paying "per transaction" for eBay's software, vs. not having eBay at all. :)

Brad Wilson (dotnetguy.techieswithcats.com)
Tuesday, December 09, 2003

Brad is right. Most ASPs charge per transaction, which is pretty much the same thing.

Tapiwa
Tuesday, December 09, 2003

Something else to consider when you use the ASP-model pricing system.

We are an ASP-model business. We use server side software that is extremely expensive, because we can amortize it across all our uses. If you were to set up a server for your own use, the server side software alone would set you back probably $25k. That's clearly pretty price prohibitive.

But, with an ASP-model, we can charge people a small amount on a monthly basis. It covers not only the software we wrote, but the software we bought. It covers support. It covers server upgrades. It covers hosting. IT people aren't free. :)

Brad Wilson (dotnetguy.techieswithcats.com)
Tuesday, December 09, 2003

"'course, it doesn't look that great to add a new continuous expense to your bottom line. "

Depends on the industry and your cash flow.  For instance, one of our products is sold as a service for the small airline industry (http://www.webrez.ca/).  Running an airline of any size is extremely capital intensive, with the result that most operators are extremely cash poor.  Especially the small operators. 

We've found that businesses in this sector are extremely unlikely to pay an upfront cost that comes even close to the actual cost of the software.  Shall we buy software, or shall we pay for the compulsory maintenance of our aircraft?  Hmmm..  Furthermore, this particular software must be accessible in order for the pilots to take off - meaning that redundant servers at multiple locations that are continuously synced, backup power and redundant internet connections are basically required.  Not cheap to set up and maintain either.

Anyway, the upshot of it all is that our clients love the inevitable "risk-sharing" arrangement that a "software as service" model becomes.  Rather than having to take a huge start-up hit (very unpopular with the shareholders, even if they had the money), they much prefer to spread it out over several years.  Especially if they are a start up, since odds are that they will not last long enough to pay even close to the upfront cost.

Furthermore, even outside special industries like the small air operators, many small businesses prefer to add a small continuous expense over a large upfront cost.  Yes, paying all at once might cost less over the long haul, but if you don't have the money...  Also, the upfront cost often shows up as a comparable expense anyway, since unless you want to show a huge loss for the period in which you make the purchase, you would be amortizing it over a certain period.  Your balance sheet would show the asset, but it would also show a lot less cash :)

My 2c

Phibian
Tuesday, December 09, 2003

It's very common in the transaction processing game.

For example, eSellerate charges 10% of gross per transaction, until a certain level, then 15%.  Further deductions follow down the road.

NC
Tuesday, December 09, 2003

How does going from 10% to 15% count as a deduction?

Tapiwa
Tuesday, December 09, 2003

Cool, thanks everyone

Prakash S
Tuesday, December 09, 2003

Tapiwa, I don't know the actual steps off the top of my head, but the rates follow the pattern 10 -> 15 -> 14 -> 13 -> 12 -> 11 -> 10.

This seems to give early starters a leg up, and still give discounts (after the 15%) for larger volume sellers.

NC
Wednesday, December 10, 2003

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