How to price your product or service is one of the bigger challenges companies face when bringing a new product or service to market. The scenario goes something like this:
Produce a great product or service (software, app or some other product or service that you hope others will pay you for), make it publicly available for license or purchase and, upon receiving a strong expression of interest from a potential customer, scramble to arrive at a pricing model that is lucrative enough to reward you for your hard work and enable you to build a business and, at the same time, attractive enough to your customer that they agree to make the purchase.
In a nut shell, you should “price your product to maximize your revenue”. Put another way, your pricing will be the highest possible price the market, i.e. your OEM customers, will pay and still purchase or license your product or service for resale to their customers. For the purposes of this post, let us call this optimal price the “Perfect Price”. Unfortunately, there is no formula for arriving at the Perfect Price. Rather, the Perfect Price will depend upon your OEM customer (including but not limited to it’s pricing model), the risk, warranty and ongoing support your OEM will demand from you and the value added to the OEM product or service by your product or service. We recommend you investigate the following:
Know Your OEM Customer
- Who are your OEM customer’s customers?
- How does the OEM price its product or service? i.e. Is the fee based on named users, seats, site or other basis? Does the OEM sell SAAS, term or perpetual licenses?
- What are your OEM customer’s prices?
- Is the OEM’s market strong? When times are good, sometimes there is more to go around.
- What are your OEM customer’s cost of goods (COGS)?
- Does the OEM include support in its offering to its customers?
- Does the OEM sell maintenance (i.e. an ongoing right to receive updates and upgrades) to its customers and what are your ongoing obligations in this regard?
- Does the OEM have the administrative framework to be able to track and issue detailed reports? You want to make the administrative overhead of administering your contract as minimal as possible for your customer.
Risk, Warranty and Support
- What function does your OEM customer’s product or service serve for its customers and how does your product or service integrate with that offering? The risk associated with payment processing software or aircraft operating system software is considerably greater than the risk associated with a mobile game app.
- Does the OEM include very strong liability exclusion and liability cap provisions in its agreements with its customers and, if so, does it extend coverage to third party suppliers like you?
- What sort of warranty is the OEM asking you to provide? What sort of warranty does the OEM provide its customers?
- What level of support is the OEM requiring of you? 24/7/365? What are your on-going support obligations? For example, are you required to maintain the compatibility of your software with operating system upgrades and updates? What are the expectations regarding bug fixes?
Value Add to OEM Product or Service
- What value are you bringing to the OEM by its inclusion of your product or service? For example, are you providing a “nice to have” feature or a critical piece of the product or service?
- Is your product or service what the OEM’s customer wants and is paying for?
- Does the OEM have a choice regarding whether or not to include your product or service in its offering? For example, do you have competitors the OEM could source similar functionality from? Is the customer asking for the inclusion of your product or service?
Ultimately, the Perfect Price is a moving target and pricing is not a “solve it and move on” exercise. As your business evolves, as your customers’ businesses evolve, as you establish relationships with new customers and as you enter new markets, your pricing strategy will need to be continually revisited and, likely, revised.