Since I have been pretty forthcoming about our journey to build Microsoft I.P., I am now getting questions in my email. One question that seems to pop up frequently, is how to figure out what to charge for your I.P.. Guess what? I have opinions on that! What a surprise.
I.P. is Worth What Someone will Pay
This seems obvious, but I have talked to many who say “We worked really hard on this I.P. and we are need to get $X for it“. There are some high-value solutions, that were pretty easy to build, and there are some low-value solutions, that were very complicated to build. If you built the latter, you chose poorly. Nobody cares how much work you did to create this. What they are willing to pay, to start using your I.P., is completely based on their value expectation. Whether they renew, if your I.P. is recurring, will be based on their perception of actual value received, which may be quite different than what they expected. So, whatever you invested in time and money into building your I.P., whatever impossible technological challenges you overcame, whatever revolutionizing approach you took, actually have no bearing whatsoever on the price. I know, frustrating right?
Get to your Value Prop Fast and First
There are some high-value, low-cost, I.P. solutions that can lead with price. But for most, you are going to have to make a case for it, and you will want to make that case before you present your price. You could argue, that if you could guarantee a 2X ROI on your solution within 30 days, the higher the price, the better, but customers don’t look at it that way. Imagine that your state’s lotto commission offered a full refund for any tickets that did not win… I bet that there would still be people who limited their purchase to $5.
Before your prospective customer even reads the first word about what your solution actually does, they are scanning for a price. If you have analytics on your website, I am sure you can see, that the first click after landing, is your pricing page. At this point, your customer knows little more than the name of your solution, and without any more context than that, they will make a gut call when they see your price. They will immediately, and unfairly, conclude that your I.P. is worth your price, or not. If you have not made your case yet, too bad for you.
Be Wary of the Motives of Others
As many of you know, we developed some I.P. for low cost, and fast deployment and adoption of Dynamics CRM Online (in case you forgot, it’s RapidStart CRM). Microsoft has viewed our solution as a catalyst for CRM Online in SMB that could generate a large number of seats… for them. That’s good for us, but from Microsoft’s standpoint, we are a necessary evil. They do not have a path for SMB to succeed with CRM right now, and we do. So we sit between a large pool of potential customers and Microsoft’s sale of CRM Seats. Microsoft would prefer that we offer our solution for free, as that would help accelerate their seats sales significantly. However, I ran the numbers on free, and I can’t seem to make that work. If you have built I.P. that “enables” the products of others, like in our case, Dynamics CRM Online, be prepared to get continuously hammered by the provider of that product to lower your price. Just remember, free is not solved with volume.
Recurring I.P. is Re-valued Monthly
Our I.P. is not recurring, it is a one-time cost for a one-time start-up motion, but much of the I.P out there is designed for recurring revenue, most often a monthly cost. The good news is that this allows you to offer your I.P. at a lower price, knowing that you will make out on it over time. The bad news is that you have to prove your value every month when your customer looks at their statement of charges. Even if the cost is low, they will take a moment, look out the window, and then make a decision to continue or cancel. They will make this “continue” or “cancel” decision every single month for as long as they are a customer of yours. If you don’t continue to provide value, you are at continuous risk.
Is $1/Month/User Cheap?
Back when we were a customer-facing partner, we were also resellers of several products in addition to Microsoft Cloud Solutions. Most of these were add-ons to to the cloud solutions we offered. I distinctly remember one, that I won’t name, that only cost the customer a dollar per month per user. Now for a dollar, you would not expect this to do very much, and you would be right, but then again, it was only a dollar. The problem was, even at a dollar, the math didn’t work. For a small customer of say 10 users, they were only looking at a cost of $10/mo. The ISV was trying to motive us with a %50 commission! Wow, that is a high percentage commission. But on $10? For my potential $5 share, I could not bring myself to mention this solution at all. It was not worth my time to explain what it was. On a larger deal, say 500 seats, it was not doing enough to be worth $500/mo to the customer.
Plan to Pay the Peddlers
Selling your I.P. direct to customers will only get you so far. You simply cannot create the reach provided by a channel or distribution. If you decide to build a channel, then you also have to build in a margin for your resellers. If you decide to go through distribution, you not only have to build in margin for the resellers the distributor is reaching, but also the distributor will need a cut. You cannot simply add these costs to your price. Once you have established what an end customer will pay, you have your ceiling, your “Retail” price. Now you need to establish your reseller price, your “Wholesale” price. Reseller motivations are not hard to figure out; at one end there is the pile of money easily made, at the other end, is not much money that is difficult to make. Your “Wholesale” price needs to land as close to the front of that range as possible, the closer you are, the more motivated resellers will be. But remember, out of that Wholesale price will still come the distributor’s cut. If you fly too close to the sun you will get burned, if you play it too safe you will freeze.
My Top Secret I.P. Pricing Formula
Customer Price (Based on Value), less Your Operating Costs, less Your Development Cost Recovery, less Reseller Margin, less Distributor Margin, equals: [Hint, this number should be positive]