Subscription Pricing for ISV’s

Subscription Pricing for ISV’s

If you’re an ISV in the Microsoft Dynamics community you probably don’t like subscription pricing. You probably feel that under a subscription pricing licensing agreement you are not being adequately compensated for your significant investment and continuing operating expenses.

But you’re also a decent business person and you realize the market is changing. The customers in your market like subscription pricing for Dynamics hosting. It’s attractive to them for a number of reasons. I refer to this as a paradigm shift. To you, it’s a change in your business model. You’re being pressured to change from licensing your software for perpetuity and being paid for that all up front, to licensing on a monthly basis; month after month, after month. It’s a big change.

There are a number of issues with the change. One of the biggest is pricing. How do you properly price your software to make it attractive in the market and also make it worthwhile to continue developing and supporting your product.

This approach to pricing is based primarily on the fact that you’re changing from a perpetual license, to a monthly license, and based on my observations of what’s happening in the Dynamics community.

I have observed some minimum pricing and maximum pricing practices. Let’s take a look at an example:

Assumptions:

The ISV product used to be sold with a perpetual license for $5,000, plus an annual enhancement fee of 20%. And this pricing represented a fair price for your product.

The minimum pricing I see in this scenario is based on a three year payback:

Initial Purchase

$        5,000

1st Year Enhancement

1,000

2nd Year Enhancement

1,000

3rd Year Enhancement

1,000

Total

$        8,000

Monthly (36 months)

$           222

The maximum pricing I see in this scenario is based on a payback of 18 months:

Initial Purchase

$        5,000

1st Year Enhancement

1,000

2nd Year Enhancement (1/2 year)

500

Total

$        6,500

Monthly (18 months)

$           361

In this case, if you’re asking less than $222/month, I think you’re underpricing your product. If you’re asking more than $361/month, I think you’re overpricing your product.

Pricing in any situation is a difficult business exercise, requiring many considerations about your costs, your competition, your product, and your company’s market position.

If you are not already offering subscription pricing, you probably will be in the near future.

If you are already offering subscription pricing, don’t be afraid to change your pricing. It’s a new business model for you, and you can change your mind.

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