Software Pricing Strategy Part II

The Top Three Software Pricing Strategies

With the recent shift to value-based pricing models and digital distribution, there are three pricing strategies dominating software sales. Let’s explore them one at a time with some of the data collected by PricewaterhouseCoopers:

SaaS Cloud Computing

SaaS, or “software-as-a-service,” pricing model delivers software to customers on a subscription basis. The software is centrally hosted on the Cloud and clients subscribe to a per-use or per-user license. SaaS is a great option for software with commoditized functionality and it is quickly becoming the preferred pricing model for many software providers. Customers benefit from greater accessibility and lower initial costs. The downside for vendors is that the costs for this delivery platform may be prohibitive and usage may not match expectation. However, these risks may seem like nothing compared with the reward of high renewal rates, steady revenues, and simplified maintenance processes.

Popular Software Examples: Oracle, Workday, Salesforce, Basecamp, and Adobe Creative software.

Commercial Open Source

Commercial Open Source (also known as Open Core) software is made available for use without licensing fees or paid subscription. In this model, revenue is generated by fees for professional services and support features. Commercial Open Source strategy is a particular favorite for web-based application platforms with strong community adoption possibilities. Customers enjoy control over the code and the ability to choose service with no upfront licensing fees. This can sometimes translate into uneven cashflow for vendors as there is less opportunity to build direct relationships with clients and the model tends to attract clients with less spending potential. However, these drawbacks are far outweighed by the benefits: Commercial Open Source generates an overall higher margin of revenue than license sales for generic tech and costs less to produce in R&D and sales.

*Note: this model may be considered similar to, but is not to be confused with, Sponsored Open Source or Freemium pricing models.

Popular Software Examples: Microsoft's .NET, MySQL Community, Kaltura, Java, Cloudify GigaSpaces, and Websphere Apache.

Term Licensing

Term Licensed software allows usage or redistribution of the software for a fixed period of time. Typically, companies offering Term Licensing will offer support options and provide customers with an opportunity for renewal. At its core, Term Licensing is software leasing. It is the antithesis of the classic Perpetual License, which allows customers to continue using the software indefinitely in exchange for one, high up-front payment. The Term Licensing pricing strategy is best for software providers whose primary consumer base are companies in need of comprehensive software solutions on a tight-budget. Like the other strategies, one of the key customer benefits is that there is no up-front licensing fee with Term Licensing. Customers also enjoy the overall savings on software that they only need for short-term use. The challenge for vendors is that renewal rates may vary. Though there is a potential for an overall increase in per-customer income through Term Licensing, this is dependent on maintaining high renewal rates. But don’t let this discourage you, Term Licensing does provide a great opportunity for a more predictable revenue stream.

Popular Software Examples: Solidworks 2017 and IBM offer “fixed term” licensing on select software

Which Pricing Strategy Is Right For You?

When deciding which pricing strategy is the best fit for your company, it is important to gather and analyze the data. You need a complete understanding of how your customers will be using your software and what benefits are most important to them.

Discrete choice and technology conjoint analysis can help determine how people value different features that make up an individual product or service. It is important to identify which segments are price sensitive or if there is a particular interest in certain “killer features.” You will want detailed qualitative insights to ensure that the value message is properly conveyed and customer objections are properly mapped. Only once you have a comprehensive understanding of your end-users experience will you know which pricing strategy is best for your software.

The takeaway here is this: know your product, know your customers, and the right pricing strategy will present itself.

See Part I of our Software Pricing Strategy series for more information! 

For more insight on pricing trends we highly recommend the 2007 report by PricewaterhouseCoopers, Software Pricing Trends. This 10-year-old report is still very relevant in today's market and is well worth reading. 

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