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Figuring out how pricing for software and services is challenging.

Pricing in most companies and sectors is usually based on benchmarks, gut feelings, and a little black magic. At the risk of offending Professor Ken Jones at Babson College (my apologies Professor), I have to say that I’ve never worked at a company that had an economist on staff plotting demand curves and calculating the profit-maximizing price for their products.

SETTING PRICING

To complicate things, we are offering products and services that are unique so we don’t have many benchmarks to go by. And frankly, I’m not enamored with the pricing of some of the better known nonprofit service providers. Convio and Kintera still rely on contingency fees. Sooner or later nonprofits will realize that they shouldn’t pay $50,000 for every $1MM they make for software. That’s too expensive and frankly, it’s unfair. Much of that money should be allowed to go towards the mission. Other vendors, like Blackbaud, charge exorbitant licensing fees for software that, in 2005, is not that impressive anymore.

Here’s another wrench in the works. The nonprofit client is used to getting things donated to them. Simply put, they hate paying for stuff.

Nevertheless, more and more nonprofits are investing in technology and outsourcing services that add value and alleviate resource problems.

PRICING EVOLVES

Thus far our pricing for software has evolved as a series of trials, errors, and fixes. The errors consist of several clients where we grossly undercharged simply to get the business and a couple where I believe, in retrospect, we may have overcharged. Also, our pricing model has evolved. As a young company, we relied on low upfront fees and contingency pricing to convince folks to give us an opportunity. I’ve seen first-hand why contingency pricing will is the road to ruin for the nonprofit, the vendor, and the donor. So trial and error allowed us to learn that lesson. I really am not sure right now if there is a better way right now. With each new client and project, our pricing makes more sense. Soon we will hit that sweet spot that works for everyone.

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