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Different pricing models

Here is another pricing question; this one is about different pricing models.

I have a product that I believe can bring value to small-medium companies. I'm contemplating different pricing schemes. Since it's a server-based software I have three different approaches that I could think of:

1. Sell the software – I can price it per server/user etc. This is somewhat of a heads on competition with other software packages already in the space.

2. Sell a server (with the software installed). A rack-mount box with the required hardware is relatively cheap, and it will allow increasing the price significantly. I believe that it's reasonable for a bundled solution. It can also be more appealing to businesses that don't have IT personnel to put the hardware themselves, install the software etc.

3. Sell a service (lease/rent?). For a monthly fee  I'll provide the server (as in #2), install it, and provide any maintenance needed through the year.

If you have any experience with the latter two models, I would be thankful to hear regarding relevant pricing practices you are familiar with and how they were accepted in the market.

I'm also thinking that with the latter two models I can (should?) open-source the software.

Do you think I'm correct in the following assessments:
- Service model might be too odd for the market to swallow.
- An open-source software, can worry a prospective client, even if we all agree it shouldn't.
- Whatever I decide, I should really choose only a single pricing model, because giving a user a choice is usually a deterrent for a customer.

Thanks,
Owlen

Owlen
Sunday, June 06, 2004

Consider carefully what type of support you will need to offer, and whether you're capable of it.  If you sell a server then your customers will probably expect you to handle any problems the server may have (patch management, crashes, and even hardware failures). From the tone of your post it seems that you're an individual developer, so this level of support is out of the question.

Selling a service is probably your best option. Use severs hosted at a premium hosting service (such as RackSpace); this will make fixing problems and other management issues much easier than if you host the server in your own office, because RackSpace will take care of many tasks for you, day or night.

Open-sourcing your software is an orthogonal question to the pricing issue, but as usual if you do so then you'll have to work harder to generate revenues.

Why do you think multiple pricing models is a deterrent? On the contrary; a combination of the ASP and software-only options may be your best bet.

Oren
Sunday, June 06, 2004

I've worked at two ASP-model businesses so far.  It's been very rewarding, getting to work with some very smart & dedicated people.

The bad parts about being an ASP are:

1) Customers are always demanding you add features "just for them".  If you agree to this, you're in trouble when it comes time to migrate to a new version.
2) Revenue is very slow at the beginning -- until you make enough sales, you'll be deep in the red.
3) Some customers are control freaks and never quite trust you to manage their data reliably, so even though they sign with you, they're always demanding full data dumps "just in case".
4) When things break, they usually break in a big way.  As a result, you've got all your customers yelling at you, not just one or two.

The good parts are:

1) One code base means terrific economy of scale (the economics of software means that the 2nd copy you sell costs you next to nothing, and is almost all profit).
2) Recurring revenue (minimum length of a contract should be 12 months) means you can weather temporary downturns.

The things you must do right in order to succeed:

1) Change management.  You must plan what features will be released over the next 6 months -- and deliver them on time.  They don't have to be large sweeping changes -- incremental change is what you want.
2) Customer contact.  You need to stay in touch with them to find out what they need from you.  Otherwise you'll find it's difficult to do your change management correctly.
3) Reliability.  If you go down, nasty tricksy SLA clauses kick in, making you refund part of each month's revenue.
4) Data protection.  It's not your data.  Better make sure your app doesn't corrupt it.  Also -- make sure your backups work (does your backup tool do online databases?  In-use files?)
5) Integration.  The customers are going to want to integrate it with their 3rd party applications, as if it were hosted in their data center.  Better make sure you can do this.
6) Automate as much as possible.  Adding/dropping a customer shouldn't take more than a couple of hours, apart from loading/unloading their existing data.

Best of luck!


Sunday, June 06, 2004

The model really depends on what kind of software it is.  You said it's server based, but what kinds of loads will it need to handle?  What kinds of communication does it use?  Will it need to integrated with the customer's existing user-management directory (ie, Active Directory or the like)?  What security concerns are there if it's accessed over the open net?

If you deem that your software is capable of running outside the firewall, then the ASP route is a good one, for all the reasons listed above.  But only if you can handle the data-management side of things.

Keep in mind that all your options except the first one (selling just the software directly to the customer) have fairly high initial costs that you'll have to front.  Rack space isn't exactly cheap if you're a one-man shop, and neither are servers.

If you do decide to sell servers with your software, don't force the customer to buy one.  They may already have existing servers they'd like to use.  Choices are good...  Also, plan for the event where a customer places an order for a server/software bundle, and then backs out.  Can you afford to swallow that cost, at least until you can resell it to someone else?

Joe
Sunday, June 06, 2004

One more thought on this...your pricing model can change as your new company grows. 

If you're a one-man shop with 0 clients and 0 funding now, it's probably best just to sell a copy of the sofware -- lowest overhead.  If someone needs a server, provide your services to help them select and purchase one, but make it clear that it's their responsibility to maintain it, unless they want to pay you for that too.

When you start to approach the critical mass of being unable to support the number of installations you've sold, you should be making enough profit to rent some rack space without going in the hole financially.  Sign up all new customers with the new hosted solution.  Do some research w/ your existing customers and see how willing they are to switch to the new business model.  Encourage them to switch, but don't leave them out in the cold.  If you've sold them a server just for your software, offer to buy it off them -- you'll need a couple servers for your ASP model anyway, and they won't feel like you conned them into buying something they didn't need.

Joe
Sunday, June 06, 2004

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