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I am about to give an offer for software to a large enterprise. I know that it is normal to say that there is an upfront price for software and a yearly maintenance fee of around 18% of the upfront price.

What I would like to do is to say that there is no upfront price, and solely a quarterly license/maintenance fee. To compensate for my upfront investment, I want to say that the enterprise needs to pay the fee for the first two quarters upfront. I have calculated that this will cover all my risk.

I do have some arguments why there will be more maintenance on my software compared to usual types of software, but these are technical arguments, which may or may not be understood by the decision makers.

My specific questions is: Why should I NOT do this, apart from the risk perspective, which I have already covered?

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Some of our competitors charge yearly + maintenance. You buy a one year license. That's the model I want to work with :) – Sean May 9 '11 at 15:27

3 Answers

up vote 4 down vote accepted

You requested reasons not to do it: I love to be the devil-advocate (purely metaphorically)

Here are my top five:

  1. Why not design a different billing model that what is usaully done:

-It doesn't match how enterprise companies traditionally purchase software. Anything different from normal may add an unnecessary barrier to the closing on your product.

  1. Why to not minimize your upfront cost recovery:

-Enterprise customers always cost more to deploy onto a software than you think. Beyond just the desired configuration and customization-- their processes are just so s l o w. Building into the pricing structure a way to recover this is important. You say that having the first two quarters paid upfront will "compensate for your upfront investment." I would trust that for yourself until you have actually done it a couple times.

  1. Why not compete on price with an enterprise customer:

Compete on ROI and value. "No money down" marketing ploys are most often associated with the cheap low cost provider. This is probably not the market positing you want in selling a new solution to enterprise customers.

  1. Why not charge for the first two months before the service and the rest after the service:

It feels like you aren't committed. If I am going to pay quarterly -- let me pay quarterly. Paying the first two quarters means that you get an extra quarter payment? Whooptee do. Are you so "weak' as a com[pany that my extra quarterly payment gives you the cash flow you need, well then are you the right vendor for my enterprise?

If this is to cover your exposure then it means not only are you billing quarterly but you are providing them the option to cut-n-run each quarter as well? Raises questions for me about your confidence and commitment -- and if it raises those questions for me . . .what will it do for the person looking for reasons to purchase the software solution form their friend that they play golf with?

And my number 1 reason not to do it:

Every time a customer receives an invoice which needs to be approved and signed someone things -- do we like this product, do we need this product, do we need to pay this bill? This is usually the CFO characters who asks the CTO characters to justify the cost.

More periodic billing requires a 're-sell" more often. Rather than "re-selling" the customer on the fact that they made the right choice every year-- you will be doing it every quarter. Include after they have had the product only 6 months. Wow, I have rarely had an enterprise client successfully adopt and integrate anything in 6 month -- and I would hate to have to 'resell" the product to them at the six month mark.

Even if you have no problem re-closing each time you send the invoice -- it will add to your costs. (time with enterprise customers is sucked into an endless vortex where everyone but you is paid a salary and now one cares about how much of your time they consume. In fact, the more they consume -- the more they justify the corporate survival)

I am sure that you are putting together your own list of "why to do it" to compare and contrast with the list of "why not to do it"

Thoughts

Based on your initial comments it seems as you might be trying to remove a perceived barrier to purchase which is a significant down-stroke cost. This is a barrier that is rarely experienced in a B2B enterprise sale. The enterprise customer assess the total cost of ownership. My experience with B2B enterprise sales is that a lower downstroke doesn't help the purchasing agent secure support (unless it is highly experimental software that they are simply testing -- and are of setting the risk with very small ongoing commitment).

A review of what perceived problem you are trying to address and reconfirming it is based in actual data might be helpful.

Recommend

In the end I recommend that you do not make it an either/or situation. Make the license and SLA distinct and offer three billing models which allow the customer to chose the one that works for them. Over time you will be able to recomend the customer's prefered option. Charge more for your risk -- your risk is having less money in your bank account and more costs associated with reselling them every time you send an invoice.

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I'll second that for most of my larger B2B clients it's not the $$, it's the TCO and ROI that they're most concerned with. The little guys nickle and dime me, but not the larger ones. And it takes a different mentality to sell to the larger ones in my experience. – Sean May 9 '11 at 15:29
Fair point about the resale questions, we are lucky that the IT department scare the hell out of finance for the most part. The only time the pattern above changes is when you can fly under the radar, there is a minimum sign off threshold (say $10,000) if you know this and can stay under this per month on service or break up invoices between SLA and extra cases etc. – Robin Vessey May 9 '11 at 23:27
I just wanted to say that your answer had direct influence on my offer. I ended up with providing two pricing models, one as described in this question and one traditional with a fee upfront. Early indications say that they found the offer reasonable. Thanks! – David May 10 '11 at 15:38
Fantastic David. Thank you so much for the feedback! It is so good to actually find out how "advice" is taken -- and learn the results. I have my fingers crossed that you close. – Joseph Barisonzi May 10 '11 at 15:49
up vote 1 down vote

Well its a double edged sword.

Really large companies work at a scale of 100s or 1000s of people earning $100K+ per year where the cost savings through reducing time and reduced risks running software mean the price tag you put on the software itself is a small fraction of the overall business cost when aggragated over time. Their bigger actual risk is the software vendor going out of business which means they can't get the support ... thus they need to pay enough to ensure this risk doesn't occur.

During the purchasing phase this is seldom their perspective unless they are the technial director who has lived through the absolute pain and chaos which follows a key vendor closing its doors.

Large companies worry about the price tag and depending on their arguement and perspective on the day too cheap is "why are we riding a bicycle not driving a racing car", "if its too good to be true it usually isn't".

So to answer your question, your strategy will make it easier to sell during the purchasing phase but, if not managed properly, your brand image may be "the cheapest option".

Also, cost cutters within their business may smell blood and push harder ... you have removed one of your negotiating points ... our 18% SLA is always on the list price, not the final negotiated sale price. We can discount one without impacting the long term cashflow.

THe other issue you may face is that a cost cutter within their company will review your system in a few months/years and cut your additional fee out from under you but threatening to go elsewhere.

Overall though, if you can get 23-25% per year instead of 18% then in the long run (year 3-5+) you are much better off. If you can have a list of "additional services" you provide to justify the increase then it is the strategy I would probably follow.

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up vote 1 down vote

As Rob mentioned in his last sentence... I believe most people will pay more annually if they can skip the setup fee (lower risk) - thus you wind up with a higher yearly subscription fee for hopefully many years.

I also suggest you bill the fee annually. If they insist on quarterly billing, add an upcharge. If they want monthly billing, add a bigger upcharge. It takes a lot of work to send out invoices and handle the phone calls and emails involved with lost invoices, discount requests, terms requests, etc... Besides, eventually, if you don't build the upcharges in, the customer is still likely to come to you and say "Dave, can you give us 10% off if we pay for the whole year right now?"

Take care...

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The annual thing is good BUT its big, and it comes up on the radar of "things to review" easier. If you have monthly, its a startand thing that everyone gets used to ... depends on the client and the circumstace. – Robin Vessey May 9 '11 at 23:17

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