When evaluating the proper fit supply chain or PLM software for your company, functionality is, of course, a key measure. Cost is an equally important determining factor. But it is not as simple as comparing two different systems based on the proposal’s dollar value. The pricing methodology used to arrive at the total is critical to assess before choosing the software purchase. In this week’s post, we will review the main types of pricing proposals.
While this is the old-world model of pricing, companies still sell software as perpetual licenses. You buy a version of the software that can be hosted on-premise or on the cloud and own the version. The costs are upfront, and implementation costs tend to be much higher. However, there are no recurring fees year after year. These costs are also typically recorded as a capital expense versus operating expense and could be a disadvantage for CFOs. The most significant disadvantage may be that you have one version of the software and likely have to pay for upgrades to future versions. So the lack of recurring fees is not a bonus, especially since some vendors make the yearly upgrade costs mandatory.
The conception of the product-led sales model gave birth to freemium pricing or essentially free usage of a limited product version. These products tend to have superior user experience and interfaces since they rely on the strength of the product to sell itself. This method is a popular choice for small businesses that are good with using lighter versions. It is also a good choice for smaller departments of larger companies with limited credit card budgets and wants to test out a system before recommending it across the company. The disadvantage to a freemium model is a limited amount of support or onboarding. So, if you want hands-on help and have many users that need onboarding right away, this may not be the best choice.
Models two through six are subscription-based pricing models, which means you are renting the most recent or most upgraded version of the software at recurring costs. With monthly recurring subscriptions, you may pay a higher fee per month. However, there are no binding annual contracts in this model. This model is typically a step up from freemium, where you are not ready to commit to a yearly contract and want to test the system but are willing to pay to get access to more features of the product. This path also means you do not need heavy configuration and onboarding and is a better alternative for smaller teams.
SaaS annual or multi-year
With an annual or multi-year subscription, you are committing to a longer-term contract. That can be the wise choice when you have a rollout across a large part of your company, requiring configurations, onboarding support, and integrations. Since the initial setup phase can run from a month to sometimes up to a year depending on the kind of software purchase and has a cost associated, this kind of rollout is better matched with multi-year subscriptions. The implementation and onboarding costs are one-time, so your recurring annual costs would be the software subscription cost.
User, product, or volume-based pricing
Subscription models can be priced on the number of users or seats, the number of products, or volume/usage. Many new-generation software companies have applied a usage-based model. Hence, buyers pay for what they consume versus an annual subscription amount based on the number of users or products. However, if a company is growing fast and is tough to forecast usage, the volume-based model can quickly become a bone of contention since there is no way to cap costs. Every company must understand the methodology used in pricing the software product to choose the model that best matches their growth stage and how they intend to use the software product.
Hybrid annual subscription plus volume-based
This method is my favorite of all the pricing models. There is a lowered fixed base subscription fee, and some part of the fixed cost is calculated based on usage. This provides a fixed number for both the vendor and buyer to use in budgets, while both sides also share in the benefit of costs tied to growth.
This graphic also summarizes the different features of each type of pricing model: