David Cummings on Startups

Software Pricing Proportionate to Sales Cycle

Written by

David Cummings

in

,

Two days ago I had the opportunity to meet with a local entrepreneur who’s working on a SaaS product geared towards pharmaceutical sales reps. The gentleman and his co-founder are working on the business part-time while outsourcing the engineering to a contractor in NY. After the usual chit chat, he drilled into the area that he was struggling with the most: pricing.

His product is currently priced at $99/month/user, and has one add-on with a per usage cost. Having a medical sales background, he’s enlisted several independent, commission-only reps to help sell the product, but with no luck. I asked him about the sales cycle and he said it usually takes a couple weeks for a rep to sell the product once the prospect is in the buying cycle. What’s the problem with this situation? A product that sells for $99/month, and requires a trained sales rep, isn’t going to work unless it can be done in a call center and is a mass market application (think cell phones or cable TV). Software needs to be priced in direct, proportionate relation to the sales cycle.

My advice to him was to either make the web application more self-service with a price point that is in the $10 – $30/month range, or to go much more up-market and sell a $1,000/month product to departments. At $99/month, his product is too expensive to sell without an inside sales team, and not expensive enough to compensate trained sales reps. It requires selling, not order taking.

Pricing is difficult and should not be under estimated. For more software pricing thoughts, please visit Joel Spolsky’s post from 2004.

Comments

3 responses to “Software Pricing Proportionate to Sales Cycle”

  1. Josh Sweeney Avatar
    Josh Sweeney

    Great post. I have also struggled with setting a price point on my current venture and this is one thing that I had not thought of. Any other price point recommendations?

    Reply
  2. Jim Geisman Avatar
    Jim Geisman

    Yes pricing is difficult (having done it for a lo-o-ong time).

    When pricing a SaaS product people overweight the importance of price level and ignore what is being paid for.

    First, per-user is not a panacea but it is widespread. You can use whatever metric you want as long as the customer will understand how the metric aligns with the economic value of your application. Sure CRM’s value may scale according to the number of reps but is that as important as the number of active accounts, leads, size of pipeline? (My point is per user is one metric and there may be better choices.)

    Second, price is related to what the customer is getting i.e. the package of product functionality and, in the case of SaaS, the services. Having low entry prices and a clear upgrade path is a must in SaaS. And there is nothing wrong with having some hugely expensive options that are not publicized except to existing customers who might be interested.

    Finally, high price points are indeed harder to sell. But if your objective is to have a long term relationship with your customer, think in terms of getting paid over time (providing you can withstand the cashflow drought). Sure, we’d like to have more money sooner than later. But sometimes the value of a continuous payment stream is higher than the value of a company that lives off a large individual transactions.

    Reply
  3. Midwest IT Survival » Vendor Management – Part 13 – Sales Cycle and Pricing Cont.

    […] There are a number of good sales cycle and pricing articles out there that help give some context as to how technology products are priced to the customer keeping the sales cycle in mind.  I recommend Joel Spolsky’s article “Camels and Rubber Duckies” or for a brief specific example, David Cummings’s article “Software Pricing Proportionate to Sales Cycle”. […]

    Reply

Leave a comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

More posts