software, pricing, licensingSay a software is priced based on user licenses. i.e. The licenses are sold based on number of named users - i.e. say 5$ per user. Support is free for the first year and from 2nd year on, the annual support/maintenance contract is priced as 20% of license cost.
So let’s say a company buys a 1000 user license at 5000$. Then from 2nd year on they pay 20% of 5000$ = 1000$ as AMC.
Now in the middle of a particular year (say 6 months into the year) - customer buys 500 additional licenses - how do you handle it? They get support free for 500 licenses for 1 year. So charging 20% of 7500$ for next years renewal is not the correct thing. Ideally, you should charge 20% of 5000$ + 10% of 2500$ for next renewal. And 20% of 7500$ from the year after that.
However, this seems a little messy. How do startups tackle this? Is there a standard practice in the industry?
Now in the middle of a particular year (say 6 months into the year) - customer buys 500 additional licenses - how do you handle it?
Treat it as an extra contract:
As a convenience, you can offer to merge the contracts come the old contract’s renewal date. Basically extend to invoice 6-months worth of the new licenses’ support fee in advance (i.e. $1,250 total) so that they only need to worry about a single invoice per year.
I don’t know that there’s a standard practice in the industry per se. This can often be a marketing and customer service question.
It is typical to give larger customers discounts for volume licensing, so in your scenario, a customer who already has 1,000 user licenses is likely receiving a reasonable per-user discount on them, as well as for renewal of the AMC.
As a pure marketing question, I would say that your sales manager is going to be (or should be!) very flexible in how they price additional user licenses. To me, if one of my large customers were to come to me saying they’d like to look at buying 50% more licenses from me, I would probably waive as much of the fees as I could get away with as enticement to lock in the order.
There’s no set formula for this, of course. Much of it hinges on how large (and therefore important to your business) the customer is, which is even more critical when you’re just a startup, and what kind of relationship you have with that customer. If they’re easy to work with and historically have made few demands of your support and the maintenance contract then you should customize a deal for them which reflects that. And there’s nothing wrong with telling them what kind of special deal they’re getting just for being such a good customer. Everyone wants to feel like they’re getting the best deal, and that they’re special, right? (grin)
Again, this is something you’re going to have to get a feel for, and much of it depends on how important getting that additional 500 licenses is to your company’s financial health. And to reiterate, if the customer is not all that demanding of you for support and maintenance then the impact on your support team is going to be minimal, and more of the fees go to the bottom line anyway. If, on the other hand, the customer is difficult, demanding, or makes heavy use of support and maintenance then you shouldn’t be afraid to stick to your guns on pricing and politely explain to them the reason why – if they can find a way to be less dependent and demanding then perhaps you’ll be willing to give them a discount on future renewals.
I hope this helps.
Good luck!
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