Software Deal Structures

I am constantly exposed to some interesting deal structures in b2b software purchases.  I thought I would outline some...

The Traditional:

Software costs x (e.g. $100,000) and maintenance annually is y, which is a % of x (e.g. 20% or $20,000/yr).  Pricing is generally made up of some combination or variable form of usage, users or instances of the software.  This can vary widely - from paying for the base solution + number of seats, or paying a server license and including an annual maintenance and support contract to receive updates and have access to technical support. 

The SaaS model:

Pay x per month (e.g. $1000/month).  This often comes in a few options (standard, premium, enterprise) scaling up in price and providing more users, better support and advanced features.

The OEM model:

This one has the most negotiation and is a complex deal structure.  When it comes down to it - its all about risk and who assumes more/less.  This deal is usually comprised of a fixed pre-purchase amount and/or a royalty based upon sales revenue, expressed as a percentage or fixed unit cost.  It greatly depends on the motivation of each participant to how the deal is structured.  An example is a deal where an email designer software tool is going to be white labeled into a CRM package.  The email software provider in interested in receiving up front revenue and a percentage of sales.  Say they propose $50,000 + 3.5% of sales.  Now, the CRM folks want to minimize the cost of the variable impact of the deal, because they only are interested in reducing their cost of development and immediately improving their product.  They propose a $30,000 up front in exchange for 100 licenses and 2.5% percent of sales with a ceiling of $250,000 per year in variable payout - designed to minimize or flatten their upside.  Negotiations like this can take a long time and require patience. 

Hybrid model:

Pay a fixed server license x plus user licenses and other fees.  This one has a lot of moving parts - but often can be modified to be catered to the clients needs.  Each server license is determined by CPU.  Then the users are provisioned by named users or concurrent seats.  The other fees can include professional services and support.  This is the salad bar model that a lot of companies are beginning to use, mostly because it offers the customer the most access to the level of service, amount of software and type of support that suits their needs.  They only pay for what they need and often can reduce cost of ownership by having more moving parts. 

Whatever the model - don't be locked into it - use the model that your target customer prefers and the one that maximizes value for you.  Also, if you can't support complex models then don't copy Microsoft and keep it simple.

Happy Selling!