The Do's and Don'ts of Pricing Maintenance and Support
Many business-to-business (B2B) and business-to-government (B2G) software and software-enabled system vendors continue to manage a portfolio of on-premise solutions sold under perpetual or term-based licenses - a reality in a world where Software-as-a-Service (SaaS) dominates in the business-to-consumer (B2C) space.
Most clients under these two license models (perpetual and term-based) also pay what is called an annual recurring Maintenance and Support (M&S) fee. The maintenance component of this fee helps to ensure software systems seamlessly operate 24/7 and avoid failures that may cause severe problems or considerable economic loss for the client (IEEE, 2012). The support component includes activities that provide direct contact between the software vendors (or service provider) and the client. Both maintenance and support are closely tied to expectations outlined within the Service Level Agreements (SLAs).
Pricing 101: The Basics of Maintenance and Support Pricing
From a pricing perspective, maintenance and support for on-premise clients is historically calculated as a % of the one-time (perpetual) or lump-sum (term-based) licenses. Top selling software vendors including Oracle and IBM apply M&S percentages between 20% to 25% for their out-of-the-box on-premise perpetual licenses software. For example, for a $100,000 one-time perpetual license fee, M&S would be calculated as $25,000 per annum assuming a 25% M&S fee structure.
The Do’s and Don’ts of Pricing Software Maintenance and Support
However, in many cases software companies apply sub-optimal pricing practices when it comes to M&S – price structures and contractual inclusions that can also lead to margin leakage as well as unforeseen economic risks. Many firms have an opportunity to achieve quick wins as well as long-term gains with their M&S pricing strategy by applying these simple do’s and don’ts approaches:
Ensure your perpetual or term-based license fees are optimized first – an M&S percentage (%) calculation quickly become less relevant if these license fees are sub-optimal in pricing
Apply annual price increases alongside a cost-of-living-adjustment (COLA)
Consider a no-negotiation policy around M&S fees – and in those cases where M&S is negotiated, apply a higher-than-usual annual price increase accelerator over the term of the contract
Charge a higher M&S fee in those cases where there are a high number of client integrations with other systems above a standard baseline threshold – your company will be maintaining potential faults at each of these integration points going forward
Apply a separate services pricing model if support involves answering a high volume of calls or supporting high volume of online tickets (compare vs. standard support for technical IT personnel)
Optimize your M&S offer using a good-better-best tiering of support services to drive up-sell to current clients, and mix optimization to new clients (eg., 20%, 30%, 50% for a bronze, silver, and gold M&S package)
Increase M&S in those cases that involve software customization (in addition to any one-time consulting fee charges) -- or alternatively, add customization fees on top of the perpetual or term-based license fee. Your software support teams will be maintaining any customized code as an on-going basis.
Charge a higher M&S rate, or apply an annual price increase accelerator (eg., +8%), towards legacy or obsolete software versions
Increase your M&S rates to the minimum industry standard 20 - 25%(if you are selling at, say, 15% today)
Don’t apply a time and materials (T&M) cost-plus approach to determine M&S
Avoid selling below the industry standard 20% – 25%, especially if your solution involves customization, a complex architectural environment, and a high number of integrations
Don’t apply the same M&S on-premise pricing approach into your SaaS price structure – SaaS involves above-and-beyond activities when compared to on-premise M&S that includes hosting and application management (backup, restoration, etc); this is not a standard apples-to-apples comparison
Avoid reference to “free” upgrades within the M&S contract (instead, consider adding “minor upgrades” (eg., v3.3 > v3.4), or even exclude references to upgrades entirely
Avoid including guarantees for regulatory or industry standards compliance with M&S, and instead consider applying a separate annual user group fee that pools funds for days effort changes needed to address on-going industry changes that impacts all users
Don’t reference the M&S percentage (%) in procurement documents, just the respective dollar amount. Percentages (%) become easy targets to negotiate for procurement teams compared to dollars ($) (eg., “let’s go with 15% instead of 20%”)
If M&S is a sizable revenue stream for your organization, take the time to conduct deep-dive internal workshops to better understand the underlying activities, pricing opportunities, and potential risks. There are almost always untapped opportunities and quick wins with M&S pricing that can help deliver material top line growth for your organization.
(Have any other tips and tricks for Maintenance & Support? Send me an email!)
Scott Miller is the founder of Miller Advisors (www.miller-advisors.com), a pricing, monetization, and offer design consulting firm with a specialty in B2B and B2G software. Scott helps software companies address some of their most complex pricing and offer design needs using his unique Software Pricing Framework(TM). He is also a speaker and instructor on best pricing practices with the Professional Pricing Society (PPS) and International Software Product Management Association (ISPMA) bringing over 20 years of experience from a variety of consulting and global corporate pricing roles.