How Much Should You Charge For Lifetime Access Of Your SAAS Software?

As I highlighted in my blog post titled SAAS – What’s In It For Vendors?, the total recurring costs of a SAAS software often exceeds the upfront cost of an equivalent onpremise software after 2-3 years from date of purchase of the software. Many buyers are cottoning on to this lately.

Charging SAAS subscriptions to credit cards and expensing them has become a thing of the past. According to Ben Horowitz, cofounder and general partner of the venture capital firm Andreessen Horowitz, the formerly rampant practice has actually become a firing offence in many companies nowadays. SAAS has become like any other item bought by a company and subject to the cumbersome invoice approval process.

The combination of these two factors is driving many prospects to demand a onetime fee for lifetime access of  SAAS software.

This in turn is making SAAS vendors wonder whether to agree to their prospect’s demand and, if yes, how much to charge for lifetime access. The OP of the following question on Quora is a case in point.

How much should I charge for a lifetime access to my SaaS that costs $100 per month?

The natural reaction of many SAAS vendors is to reject the prospect’s request: After all, who’d want to provide unlimited service for a limited fee?

Not surprisingly, many people have encouraged this reaction in their answers.

I’m going to go against the tide. In this post, I’ll be making the case for SAAS vendors – especially those in the growth phase – to accept their prospect’s demand.

Not only because it’s inevitable but also because, if you don’t, your prospect might find another vendor who does.

Ditto even if your existing customers make a similar demand. If you decline, you’d be running the risk that they’d churn out to a competitor once their contract with you ends at the end of the month, or at most, year.

Of course, in this same post, I’m also going to tell you how to make money by providing lifetime access for a onetime fee.

Before doing that, let me take you back in time and tell you a small story.

Many years ago, 3M used to sell floppy diskettes under the brand name IMATION. Its USP was that it carried a “lifetime warranty”. It was only when someone approached 3M with a warranty claim that they learned that “lifetime” meant the lifetime of the diskette! The first time the diskette failed, its lifetime was deemed to have ended. Ergo the warranty had expired. Quite often, this happened within the first year of purchase of the diskette. Effectively, 3M’s so-called lifetime warranty covered a shorter duration than the standard one-year warranty provided by its competitors.

While sourcing the picture you see on the right, I was shocked to find out that brand new 3M floppy diskettes are still available for sale! Some things never seem to go away!! But I digress.

I’m not advocating 3M’s strategy to you but I made this short trip down memory lane just to open your eyes to the alternative ways in which your competitor might interpret your prospect’s request for “lifetime access”.

With that out of the way, let’s assume that “lifetime” means the lifetime of your prospect’s company.

The real issue for you is, what if the prospect-turned-customer lives forever and uses your software forever? You’re stuck with a finite fee for an infinite service.

While this poses a big risk, there are many other possibilities:

  1. Your prospect-turned-customer might fold up
  2. Someone may acquire your prospect-turned-customer and not wish to use your software for the merged entity
  3. Your prospect-turned-customer may junk your SAAS at the end of the current contract for extraneous reasons.

In these days of VUCA, any of these alternative scenarios is just as likely or unlikely as the “live forever use software forever” primary scenario.

If any of these alternative events occurs, your customer would stop using your software.

If you’d agreed for a onetime fee for lifetime access, you could be in the money.

On the other hand, if you’d declined, your monthly billing would stop when any one of the above three events transpires. What you bill until then might not even cover your Customer Acquisition Cost (in the worst case scenario).

Business is all about taking calculated risks.

So, you should accept your prospect’s demand for a onetime fee for lifetime access of your SAAS software.

Next, we come to the question of how much you should charge for providing that lifetime access.

The figure should be big enough for you to make money on the deal and small enough to be attractive to the prospect.

I suggest the following formula to arrive at the optimal figure:

Onetime Fee for Lifetime Access = $X + $Y + $Z, where:

  • $X = 7 years of Annual SAAS Subscription Fees
  • $Y = 1.4X, to cover 7 years’ AMC @ 20% per annum
  • $Z = Miscellaneous Fees

Most companies depreciate their investments in software fully in 5-7 years. Since the book value of your software would become nil at the end of that period, your prospect-turned-customer might buy a new software. Which means, they’d stop using your software anyway at that point. Ergo the figure of 7 years in the above formula. (Modify the number suitably to suit different depreciation policies but anything below 5 could be detrimental to your company’s financial well-being).

While working out the Annual SAAS Subscription Fees, an important parameter to be considered is the number of users. This is rarely constant over the lifetime of a software. In most cases, it begins with a conservative figure and rises progressively over the years. The actual figure at any given point in time depends upon the size of the company, nature of the software, and many other factors. As the vendor, you’ll want to set this figure at the peak number of users during the lifetime of the software. On the other hand, your customer will want to peg it at the number of users at present. Some haggling will be involved but, in most cases, you should be able to settle for the average of the two figures.

Hosting charges is one item I can think of under Miscellaneous Fees. To fulfill your commitment of lifetime access, your product’s SAAS architecture might require you to ringfence the version of your software for this prospect. In that case, we’re talking “private cloud” and you might want to add hosting charges for seven years to your upfront price.

Specific customer situations might involve complications – in fixing the user count, for example – and call for customized pricing of the lifetime access charge. Please contact us if you need any assistance.

Happy Selling!

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