I'm along with a team of talented software developers starting a software company. I would like to know what's the best and most profitable approach to pricing software work while keeping clients happy and retained. We were thinking about providing an All-You-Can-Eat subscription option, where clients would pay in the range of $5000- $50,000/month and have access to a full house of highly talented developers 24/7! :)
Also, please let me know from your experience what's the current average market rate (per line, per hour...etc) for a high quality software firm. Thanks!
Great question! First, I’d like to offer a philosophical point: you should aim to price your services in a manner which the more you make, the more value your customer receives. First a counter example: a common approach is to price hourly. I think this could work if you could limit the work to small consulting fees. However, in a software project, you often want to maximize profits and thereby increase your hours. But, do you notice that you have no incentive to work more efficiently and getting things done faster? Because the more efficient you are, the less hours you work and thereby the less money you make. In a project, I almost always do a value based pricing which lets the other person control how much they spend and how much value they receive. I take a look at the project, and estimate it’s value IN THEIR EYES and price it accordingly. Again, great question - let me know if you need any more clarity!
Hi Sam, merry Christmas. For tons of resources on pricing for software companies, visit www.softwarepricing.com.
Avoid offering all you all you can eat plans of any type. Think instead of caps that everyone agrees is more than enough.If your buyer on average uses 10G of storage, give them 25G, for example. Something the buyer emotionally agrees is more than enough. This will protect you from the customers that come in and want storage in the exabytes—effectively gorging themselves on your all you can eat offer.
Johny has it right - think in terms of your customers perception of value and stay away from hourly rates or other commoditized offerings. Even if you provide tons of value, no one in their right mind is going to let you charge them thousands of dollars per hour. This is the legal professions problem — even if you have 20 years or 40 years of experience, your rate is effectively capped since emotionally people cannot rationalize hourly rates above a certain threshold.
Remember — value based pricing and charging what a customer can bear are two very different things. The former implies you know how you deliver value, how that value scales and you charge customers consistently and uniformly. The latter is, in essence, used car sales where you find out what the project is worth to a particular customer and charge them what they are willing to pay. The litmus test is this: if two customers buy the exact same thing from you then they should pay the same price. If not, then you‘re making things up and you don’t yet fully understand how you create value for customers.
Lots of companies do the latter. It doesn’t make it wrong, but it does make it ineffective over the long haul. Why? Because sales cycles with this approach are extended and defending your value will be different on a customer by customer basis. This means closing rates will also likely be down. Keep it it simple and shoot for deal velocity. Treating customers uniformly and fairly means you can close 5 deals while the competitor tries to close one.
See what our competition is doing and position yourself to get work, deliver and then adjust accordingly. You can offer low price service for less or high priced service for more, maybe both, I'm not sure. Do your home work of what happening in the market and fit in and give great service and value and you'll succeed.
What kind of software company? The answer to that question has a big impact on how you charge. The more business responsibilities that you take on, the more that you can charge, and the incremental money is more than the effort and time. Can you do ops? Can you do project management? And so on.