Buying software doesn’t have to be complicated and confusing. Understanding software pricing and following these tips and saving strategies will help you cut down on your search time and make a confident decision for your business.
For years, we’ve helped guide business owners through the confusing and difficult task of how to select software and have learned a few tricks along the way about how to make the entire process smoother and, most importantly, cheaper.
You’ll learn how to:
Avoid these mistakes that can cost you big when selecting software
Before we talk about what you can do to save, let’s briefly talk about what not to do. Avoid these three costly mistakes during your software selection process:
Not involving your team early enough in the process
When you’re searching for software, make sure you get input from as many people who will be using the software as possible.
Step one in how to select software is to have a clear idea of what you need. Business owners often go into the process with just a vague idea about what they need software to do, and that leads to purchasing software that either doesn’t meet all their needs or that is too much (and too expensive) for what they need.
In order to avoid this mistake, put together a software selection team filled with key stakeholders from the teams that will be using the software. After all, you’re purchasing software to fix a problem; you want to make sure it’s fixing the right problem for the right people.
Once you’ve assembled your team, work together to develop a must-have list of features that are required for the software to meet the need you’re purchasing it for. This feature list will be invaluable during your search to help you narrow down the thousands of options into a shortlist. You might also discover there are a few good-to-have features as well. Hang onto those during your search because you might find a software company that offers them alongside your must-haves.
Not thinking long-term
A software contract can be a years-long commitment, so it’s important to consider how your business needs will change over time. If you don’t, you might make the mistake of choosing software that fits your immediate needs but isn’t scalable, leaving you in a similar position as you are right now, in just a few years.
You should also consider the trajectory of your teams—how many new people you’ll need to hire, what products and services you’re planning on developing, and what potential expansion you’ll have in the years to come. One of the truly great things about software is that it can help you scale your business more quickly, so make sure you know what your software can do for you now as well as in the future.
Imagine this: You choose a software plan that has a 1,000-subscriber threshold but you grow past that within a year. If you didn’t plan for that, you might be looking at a costly bump in price in order to get on a new plan that allows for more subscribers.
We’ll get more into pricing further down, but it’s important to take a look at not only how much the plan you opt for costs, but how much any future plans might cost when you upgrade. You’d be surprised how frequently an affordable plan can skyrocket just by adding a few more users or some more functionality.
Defaulting to the lowest-cost option
One of the most common mistakes made when choosing software is making a decision based entirely on which option is the cheapest. We’re not here to say that cost isn’t an important factor—it’s often the most important factor—but it’s just as important to think about and calculate the total cost of ownership (TCO) of your software over the entire time period you will use it.
Software costs can include anything from the hardware necessary for the software to run or subscription fees. It can also include implementation, maintenance, integration, and training costs. One of the sneakiest expenses when purchasing software is implementation costs—it’s expensive to migrate all your data to new software, train your employees, get company buy-in, and teach your team how to maintain it. Each time you switch to new software, you have to do all of this again.
When you’re selecting software based solely on which option is the cheapest, you’re inevitably going to lose out on key features your business needs to scale or succeed. It might cost more initially to go with a solution that will scale with your business, but it will save you money over time as you avoid future implementation and transition costs that come with any new software purchase.
Understand software pricing: Pricing model confusion cleared up
You now know what mistakes to avoid when beginning your search. Now let’s talk about software pricing and pricing models.
Two delivery methods: On-premise vs. Software-as-a-Service (SaaS)
There are two ways a software company can deliver its product: on-premise or SaaS. We’ll briefly explain the difference between them so you can decide which is right for your business.
On-premise model: On-premise software solutions are a more traditional method and are deployed using individual software downloads. You make one purchase, and then download and store all data on local computers and servers at your business.
SaaS model: The SaaS business model is a method of software delivery that allows your business to access data and applications from the cloud with any device with an internet connection and a web browser. Additionally, many SaaS solutions come with their own downloadable application.
With this web-based model, you don’t have to worry about hosting or maintaining servers because the provider will do that for you.
SaaS differs from traditional, on-premise software delivery models in two key ways:
- SaaS deployments don’t require extensive hardware. This means you won’t have to handle the IT responsibilities typically required to maintain and install in-house software because your SaaS provider can help troubleshoot.
- SaaS systems are typically priced using a subscription model. On-premise software is typically purchased through a one-time perpetual license. The annual or monthly subscription fee for a SaaS model usually includes the software license, support, and most other fees.
Two software pricing models: Perpetual vs. subscription
We briefly mentioned it above, but one of the key differences between SaaS models and on-premise models is their pricing.
With perpetual pricing, you pay one price upfront for your software and own it indefinitely. You’ll also be responsible for maintaining servers and will need to purchase new licenses for each computer.
With subscription pricing, you pay a monthly or annual subscription fee to use the software, and if you stop paying or don’t renew your contract, you lose the ability to use the software. It’s becoming more and more common to see this type of pricing model for software. It’s also frequently just called SaaS, so you might see them used interchangeably during your search.
Let’s use Basecamp as an example of flat subscription pricing. You can purchase this project management system for $99 per month and unlock all features for that flat fee.
It’s not always that easy though. There are three other types of subscription pricing that you can run into, with fees that vary based on different factors: consumption, size, and number of users.
- Consumption-based pricing ties your subscription fee to how much you actually use the software or its associated services. Mailgun, an email verification tool, uses consumption-based pricing, charging a monthly fee plus a fee based on how many emails are sent past the allotted number for the month.
- Size-based pricing is based on the size of your business. This model looks at how many employees or customers you have and bases the price on that. WebHR, a software platform for HR departments, uses size-based pricing. For a company with 150 employees, WebHR charges $1.85 per employee, per month.
- User-based pricing looks at how many people you have using the software and ties your subscription fee to that. Monday.com, a project management software solution, uses user-based pricing; their “Standard” plan costs $10 per user, per month.
For example, if your team has 15 people who all need to use the software at once, you should probably go with named-user pricing for 15 people. However, if only a few of those 15 people need to use the software at any given time, it’s probably cheaper to go with concurrent-user pricing for five users. And remember, when planning your software purchase, think about the future and look at what kinds of cost jumps come with adding more people down the line.
Schedule software demos so you know you’re getting what your business really needs
You have a shortlist of features that will help improve and scale your business. You’ve consulted your team and have figured out what you need the software to do for you both now and in the future. You have a rough idea about the TCO of new software. You understand the different types of software models and how they’re priced. It’s finally time to start talking to software providers.
We’ve said it before, but it’s worth repeating: Switching software takes time and money, so by taking the time to demo the tools you’re considering, you’re ensuring your selection best suits your business. The last thing you want is to choose software, use it for a couple months, then have to repeat the entire process over again.
This is your chance to ask specific questions about the software in regards to your business’ challenges and what functionality is best suited to meet those challenges.
Here are a few tips and tricks to help you whenever you get a provider to sit down and demo their product for you.
- Request two demos. One for your leadership team and one for your IT representative if you have one.
- Customize the demos. Provide two to three realistic use cases you want the software to accomplish, request a walkthrough from a customer’s point of view if applicable, and ask what can be customized based on your specific needs.
- Review the strengths. Ask the providers to show off their most popular features. It’s also a good idea to ask about any upcoming features they have planned.
Additionally, you might want to ask them a few questions to help you better understand what you’re looking at during the demo.
- Can I see what this would look like on the mobile app? If the system includes a mobile version, review the interface on the smaller screen and ask how much functionality is available on-the-go.
- Is there an alternate way to perform this function? Sometimes your team is used to performing a task a certain way, but providers may offer a new, more efficient method.
- Of the features I’ve asked for so far, what is custom code? It’s important to understand what the provider needs to custom create to meet your business needs. These custom tweaks could lead to extra costs and complications when it’s time to upgrade or renew a contract.
Negotiate your software contract to guarantee you stay within budget and get your must-have features
You’ve finally settled on the software you think will be the best fit for your business. Here are a few things to consider when negotiating your software contract. Using these tips might help you lower your contract price or snag a few extra features you might not get otherwise.
Read your contract: It’s important to know areas of flexibility, what might be considered a breach of contract, and any terms of early-out clauses that you might be able to use in the future if things don’t work out.
By reading the contract, you can see where your business has room for negotiation and use it to your advantage. If you find it difficult to understand the legalese of your software contract, consider consulting an attorney.
Know what you want out of the contract: You have a list of must-have features, but you might also have some features that are nice-to-have or optional. Come into the negotiation with every feature being a must-have, but be prepared to drop anything nonessential during the negotiation. It will show you’re willing to compromise, but you’ll still get the crucial features you need to succeed.
Have a backup plan in case things fall apart: This is where talking to multiple providers comes in handy. You might get to the point where a provider just isn’t willing to budge on pricing points that you can’t afford. Even if that provider was your first choice, it’s important to know when to walk away from the negotiation.
If you’ve talked to multiple providers and had several demos, you can even use that information in the negotiation. Mentioning that you have other options ready to go will put some pressure on the rep you’re talking.
It’s important to remember that the company rep you’re talking to likely gets compensated based on the number of deals they close, so they’re often willing to compromise. Treat them with respect and come into the negotiation with empathy, and you’ll see a lot more success than if you’re trying to hardball.
Need more help? Schedule a free, one-on-one chat with our advisors
We went over a lot in this guide, but if you avoid costly mistakes during planning, understand pricing models and choose the right one for your business, schedule demos with multiple providers, and negotiate well, you’ll be able to get the right software for the right price.
At Software Advice, we guide you to the right software with real advice from real people—our advisors have helped hundreds of professionals in your industry. We’re here to help you find solutions that meet your needs and budget.