Play-By-Play: Revenue Model

May 22, 2010 by Craig

As I mentioned in the last post, almost all of the competitors are one-time purchases. I however am leaning strongly towards a pay-as-you-go model, probably on a monthly basis. This has some major advantages for the customer and for the seller (me):

  • The customer can start using the software without a major outlay of cash. (A startup already has plenty of initial major outlays, especially in equipment-heavy industries like a bakery.) This in turn is good for the seller as it gets customers in the door earlier. The key is to engage the customer as early and as easily as possible.
  • There’s much less risk to the customer. If they do not want to use the software any more, they simply do not pay. All they’ve lost is their current fees, which are bound to be much less than a one-time purchase price. Less risk means easier engagement and more sales.
  • It’s easier for the seller to offer free trials when there’s a recurring fee — basically, the seller just has to “not recur” the fee for a period of time. Again, this reduces customer risk and thus increases sales.
  • Both the customer and the seller can easily distribute the cost/income over time. For the customer, that means matching the cost of the software directly against sales for the subscription period — making the cost/benefit that much easier to calculate. For the seller, it means easier/smoother projection of sales.

On the other hand, my domain expert did say that it might be tough to sell a recurring-fee service to companies; she thought they’d prefer to buy it outright. It’s true that, over time, a single purchase could be cheaper than a monthly fee. Divide the purchase cost by the monthly fee and you have a “payoff period”, after which the one-time purchase price is cheaper. There’s several problems with this though:

  • The customer must remains in business for the entire payoff period for the one-time purchase to be cheaper. Depending on the pricing, that could be several years.
  • The customer must be getting benefit from the software for the entire payoff period. There’s no refunds if it stops working or gathers dust.
  • A lot of “one-time-purchase” software does, in fact, have ongoing charges. They usually take the form of “maintenance contracts”, support contracts, or additional fees for upgrades and bug fixes. The customer may be able to go without, but this often reduces the usability of the software.
  • The customer must factor in the opportunity cost of the money that they don’t spend up front.
  • The customer and/or their accountant must know how to properly amortize the price of the software for taxes. This isn’t terribly hard, but it is a bit esoteric, and it requires some planning for the future. I won’t go into details here (unless someone asks), but by and large it’s simpler and potentially more beneficial to write off a monthly fee rather than a one-time purchase.

The revenue model has a fair amount of influence on the technical architecture, which is what I’ll discuss next.


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