Uncovering the Hidden Costs of Business Software
Allen Quay
I provide white-label reputation management software that's AI-driven, empowering agencies and entrepreneurs to boost profits, reduce client churn, and broaden their range of services.
With so many different pricing models and hidden costs, it's no wonder that the fear of costs exceeding budget is the top internal barrier to investing in business software, according to a 2019 Capterra survey on software-buying trends at small businesses.
But fear not!
We're here to help you understand the different components that make up the total cost of business software ownership.
By breaking down the costs and giving you some tips on how to make informed decisions, we aim to help you feel confident in your software purchase.
So, let's get started!
Cost component #1: The software license
The software license – the cost to actually own and use the software – is often a significant chunk of the overall price.
However, it can be difficult to pin down definitively because it can vary over time as your business grows.
There are two major software license pricing models you're likely to encounter: perpetual pricing and subscription pricing.
Perpetual pricing
Perpetual pricing has been around the longest and is typically used for software that is downloaded and stored on a local computer or server at your business, also known as "on-premise" deployment.
With this pricing model, you pay a one-time fee upfront to own the software indefinitely (hence the name "perpetual").
An example of perpetual pricing is H&R Block's small business tax preparation software, which can be purchased for a one-time fee of $89.95.
Subscription pricing
Subscription pricing, on the other hand, is a more recent model that is often used for software deployed through the cloud, also known as "Software-as-a-Service" or "SaaS".
With this model, you pay a monthly or annual subscription fee to use the software. If you stop paying or don't renew your contract, you lose the ability to use the software.
Basecamp's project management system is an example of flat subscription pricing, with a monthly cost of $99.
Types of subscription pricing
In addition to the basic monthly or annual subscription fee, you may also encounter three other types of subscription pricing: consumption-based, size-based, and user-based.
Consumption-based pricing
With consumption-based pricing, your subscription fee is tied to how much you actually use the software or its associated services.
Cheddar, a billing platform, uses this model, charging $99 per month plus a fee based on the number of transactions made through the system.
Size-based pricing
Size-based pricing ties your subscription fee to the size of your organization, such as the number of employees or customers you have.
WebHR, a software platform for HR departments, uses this model, charging $1.85 per employee, per month for a company with 150 employees.
User-based pricing
User-based pricing links your subscription fee to the number of people using the software.
Onshape, an engineering design software, uses this model, with their "Professional" plan costing $2,100 per user, per year.
Important considerations for subscription pricing
It's important to understand the difference between named user pricing and concurrent user pricing.
With named-user pricing, each user has their own login and all users can use the software at the same time.?
Concurrent user pricing, on the other hand, allows a certain number of users to access the software at the same time, with additional users incurring additional fees.
Additionally, software vendors often offer the option to do either a monthly or annual subscription, with the annual option, usually being cheaper overall to entice you into a longer contract.
However, it's important to do the math to see which payment schedule is cheaper for your situation.
Cost component #2: Maintenance and support
Software vendors often charge a fee for ongoing maintenance and support, which can be a significant cost for businesses.
This fee can be a percentage of the initial purchase price or a separate fee altogether, and it can vary greatly from vendor to vendor.
Maintenance refers to the process of keeping the software up-to-date and functioning properly. This can include bug fixes, security patches, and updates to the software.
Maintenance is important for ensuring that the software is reliable and secure, but it can also add to the overall costs of business software ownership.
Support refers to the level of assistance and resources provided by the vendor to help users troubleshoot issues and get the most out of the software.
Support can take many forms, such as email, phone, or chat support, and it can vary in terms of response time and the number of support tickets allowed.
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It's important to understand what is included in the maintenance and support fee and to consider the level of support that is right for your business.
Some vendors may offer different levels of maintenance and support for an additional fee, so it's important to weigh the costs of business software and the benefits of each level to determine which is the best fit for your business.
It's also worth considering the long-term costs of maintenance and support, as these fees can add up over time.
By understanding the details of the maintenance and support offering and considering the needs of your business, you can make an informed decision about the best software option for your needs.
Cost component #3: Customization and integration
Customization and integration are important considerations when looking at the costs of business software, as they can greatly impact the functionality and usefulness of the software for your business.
However, they can also be expensive, with costs ranging from a one-time fee to ongoing expenses.
Customization refers to adapting the software to fit your specific business needs or processes.
This can include adding custom features or functions, modifying the user interface, or integrating the software with other systems or tools.
Customization can be especially important if you have unique business processes or use specialized tools that the software needs to work with.
Integration refers to the process of connecting the software to other systems or tools, such as your customer relationship management (CRM) system or accounting software.
Integration can help streamline processes and improve efficiency by eliminating the need to manually transfer data between systems.
It's important to understand the scope of the customization or integration and get a detailed estimate from the vendor.
This will help you budget accurately and avoid any surprise costs of business software down the line.
It's also a good idea to speak with the vendor about their customization and integration capabilities and whether they have any pre-built integrations that may meet your needs.
Don't stop now: Access the full article!
If you would like to finish reading this article about the Hidden Costs of Business Software, please follow the link in the comments to access my full blog post where I cover the last 2 cost components.
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