Software expert Josh Melick has written a fantastic piece on his personal blog about the array of mistakes which software providers are making when they set up their pricing structure. These companies are very often failing to recognize the rise in costs which they are making over time and this could in fact hamper their ability to succeed.
Software is used throughout the world of business and it powers just about every action which is involved in the day to day running of so many companies. As a result of this there is a lot of competition when it comes to which software provider to use, and this is why it is so critical to get pricing right. Here is how Josh breaks down the common errors which are being made.
All Inclusive Pricing
We often see all inclusive pricing used by startups who are desperate to get their product out there and start seeing some reviews. This may be a smart idea for the long term, with regards to generating interest in the product, but the reality is that it is not a good idea for making money. When you sell a product at an all inclusive price, you are losing the ability to upsell in the future and you are also losing any future revenue which you may be able to make from that client.
One Dimension Structure
Almost all that offer SaaS have a pricing structure, usually featuring three levels of price. The differential between these levels however is too often down to one feature. Josh says that the one dimension approach, which is usually based on number of users, causes a big issue regarding the amount of money which the company can bring in.
Two Dimension Structure
Some companies will also use a second dimension to split up these levels, which is focused on usage as well as users. This of course makes a lot more sense and allows for higher prices to be charged in order to cover costs. As Josh rightly points out however, there are still longer term problems which this in particular fails to address.
Failure to Include Time
The third dimension which Josh mentions, that all businesses should factor into their pricing structures, is time. Making these packages limited for a set number of months gives the company the chance to hike up those prices at the end of the plan. Better still, providers will be able o be fully transparent from the outset with their planned increase, and that ensures that customers know exactly what to expect once that plan is over. This is the ultimate way to make enough revenue to cover ever-rising costs for the software provider and it is also the way to do so and keep the customers happy at the same time.
If you provide software then always ensure that you are paying attention to the way that your pricing structure works, and that it supports potential rises in the future.