Ask HN: Advice on pricing software component of a hardware business?
I am looking for advice on pricing the software component of my company's hardware product. This software is necessary for the hardware to function.
From what I've read, customers are used to somewhere between 10% and 20% of the original selling price as a recurring "maintenance contract". These typically include software updates as well as service/support contracts.
We are in the early stages of our product's lifecycle and I would expect significant feature upgrades to the software in the future.
I would love to hear from anyone who has experience in a situation like this, either as the service provider or as the customer. What works, what doesn't?
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For an enterprise client, I'll echo others and encourage you to lump the software charge in as "maintenance", and charge whatever the market will bear. If the standard pricing is 10-20%, then quote 20%, discount to 15%, and give 10% to your best strategic / volume customers.
From your description, it sounds like you are primarily in the hardware business. From this perspective, you just want to keep selling more devices to current and future customers. The added software charges are: A) Protection against long-term cost liability if nobody buys new devices. B) Because you can.
This means that you don't really expect anyone to replace your software, and you don't expect competitors to arise with similar software. In fact, I'd even recommend including a clause in the contract that any use of 3rd-party software voids the hardware warranty. When the software is required, it's not really a separate line item... just part of the "total cost of ownership", and your clients will evaluate it as such.
Your competitive position will significantly impact your ability to charge. Be wary of upstarts attacking you with similar hardware and free software. Have a plan to guard against this.
Another idea: Allow clients to move the dial back and forth between up-front and recurring costs, to meed the needs of your respective businesses. 10-yr up-front pricing would be better than 10 yrs of maintenance. All month-to-month (including hardware) is equivalent to "leased equipment".
* Assuming 200k up-front and 15% maintenance fee, you're looking at a cost of ownership of $350k for 5 years, or $500k for 10 years.
* I'll assume that the equipment is worth 20% of its sale value (loses 80%) at the end of 10 years. You can offer a buyback at 10%, and finance the remaining 90% @ 5% interest for ~$23k / yr. Add in the maintenance of $30-40k, and you have a nice easy pricepoint of $55k-$65k / yr, or $4500-$5500 / mo.
* If you retain ownership of the equipment you're in a higher-risk position, but may be able to further capture some of the depreciation against your taxes. I'm not an expert here: check with your favorite tax attorney.
* Full up-front pricing should include the time value of money. Again assuming a reasonable 5% return, 10-yr up front should run $200k + NPV($300k) = $430k. Include a 10% discount for offloading your risk and now you're selling for $390k with 10yrs support (unofficially, infinite support).
You can go two ways. You can either do maintenance, at 10-20%, as others have said. Or you can make certain features extra-cost options. To do that, though, they need to be clearly separate functionality that has clear value, and (probably) that not everyone needs.
Unfortunately, I think “it depends”. What is your real product, the hardware or the software? How expensive is the hardware? Is it a mass market product or a high end, low numbers thing? How good is your software?