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?
Pricing Software Strategy Enterprise
You requested reasons not to do it: I love to be the devil-advocate (purely metaphorically)
Here are my top five:
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.
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.
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?"