There is no hard rule for charging the percentage of the software base on the value delivered to the client. The short answer is I usually charge between 5% to 20% (read further more the long answer). You want your client to feel like they are getting a good deal after all. At this percentage of the value delivered it is almost a no brainer for them to keep on renewing year after year. Remember that when you sell a SAAS product you want your Life Time Value of the customer to be as high as possible.

The exact way to price software is a bit more complicated than what I described in the earlier post so I am going to explain in greater detail. You always want to start by evaluating the value added of your product because this creates and anchoring effect to that number, raises their willingness to buy (After all everyone wants a great deal), and creates a sense of urgency (now that they know how much they can save, they want to do it right away). The higher the value added number the better the anchoring effect. By starting the anchor at a high number, the client might will still be happy to pay for the percentage of value that you demand even if it might seem absurdly high from a different perspective. Remember that selling is highly based on psychology and unlike physics, psychology is not path independent. The way that you frame the conversation and the path that you take can make a big difference.

Keep in mind that this only works if both you and the client agree on the methodology and the result of assess value. For best results, you want to have the client do some of the work on assessing the value that way they are "part" of the process. I generally just ask some questions to the client and subtly guide them through this process.

In terms of what you can charge for the software, you have to also consider the organizational dynamics and their current expectations. For example, if the software can save a company $100 million per year and is rather simple it may be difficult for the purchasing agent to part with $10 million per year even though that is legitimately only a portion of the value delivered. In this situation, the upper bound is based on how much the organization can stomach. So in this case, I might be able to get away with $1 million per year (just a hypothetical example) after showing them that this is only 1% of the total value that they are getting.

Another thing to consider about software these days is the cost that the company might incur by building their own custom solution. I usually raise this up if the bill for the software is around $100k to $500k. My talking point here is that since it would cost them ~$200K per developer and they would need to full-time Project manager and a part-time designer, it would be cheaper to have us build the product and service them. Another benefit for the company is that since we are focused on this product, we can innovate faster and gather ideas from other customers -- some of which may be their competitors. Overall they would get a better quality product and for much cheaper than building it in-house. Usually for SAAS solutions the client already knows that they do not want to build it themselves and probably have some horror stories to tell.

So to answer the second question about the competitors, I generally do not focus that much on the competition. The way I see business is that I build a product that delivers a certain value to my client and I sell it for a portion of that value. As long as I stick to this plan, the existence of competitors in the space is not really a big deal. One of the worst product strategy that you can do is to copy a competitor's features verbatim. By doing so you are essentially playing catch-up and creating a me too product instead of creating unique value with your product. If you look closely a software products for the enterprise, due to the specific needs of a company or an industry the "competitors" are actually quite different from each other. Some of the offering solve one or two pain points out of five and the client might have to mix and match 2 or 3 different solutions to solve their problem. To avoid direct competition and driving down prices, you want listen closely to the customer and build the product that solves all 5 of their pain points. If you can hit the sweet spot and create a holistic solution to one their software needs then there is not really a competitor. It is just the client and you and all that there is left to do is negotiate a price.

This is not part of your question but I like to think of the sales process as a spy mission. You are infiltrating the lair of your customer to understand their problems and then sending the intel to the engineering team to solve that problem. The best spies are usually the ones who were engineers themselves because they know what is feasible before making promises and send only the relevant intel to build the product.

There is a lot more say about pricing and I think that this is one of those areas where start-ups and even large companies can leave a lot of money on the table. One analogy that I like to think about is when you dine at a 5 star restaurant you are not only there for the food. You are there for the whole experience. Likewise the enterprise sales process needs to encompass the full experience from first contact through the follow-up sessions. Most companies forget this and think that a better product just like better food is all that is required for them to win the contract. I like to think your revenues are a function of your product and your sales strategy. A simplified equation might look like:

Revenue = Sales_Strategy X Product

A great product with a poor sales strategy leads to very low revenues. Likewise a good sales strategy and a bad product is a poor combination. The key takeaway is that your company's revenue depends as much on your product as how you sell it.

To answer your final question (wow this is quite long), I generally meet my clients at conference and industry events. I go to these events because there is a natural filtering mechanism at some of these high-end and rather expensive events. Usually on the upper management folks attend these events so I get access to the decision-maker or someone who has regular contact with the decision-maker. Every industry is different and surprisingly an easy way to find out about how to meet these people is to ask one yourself. Suppose that you have acquired a client with a certain profile (e.g., VP of .. in X industry). You can ask them, "If I did not meet you through ... how might have I found someone of your position and title? Is there an event or conference that people with a similar position to yourself attend often?" It is really that simple and you would be surprise to hear about events and meetings that you might not have thought about before. One thing the remember is that people high up in the organization tend to be strategic and they tend seek out new knowledge that can help them better manage their companies. Use this fact to your advantage.

When I approach a client about my software I usually don't talk about my software first. I usually ask them about a problem that I suspect that they have within their company. After the point of the software is solve an existing problem. I might ask them how they are currently dealing with it and strategies that I have tried to mitigate the problem. After they give a 5 to 10 minute speech about their "unique" problem, I might say: "well I heard from XYZ that this is a problem in your industry and we have actually tried to build a product to solve that problem. We think that to most effectively do this we should have the following features... " This is a sample dialogue but it really points back to a psychological principle of commitment bias. The person has already committed to your conversation by telling you their organization's problem and it is natural for them to be intrigued when you present a possible solution. They might actually be glad that someone else understands their problem and is working to fix it.

Another way to approach a client is to provide them a tip or information that would be useful to them. I usually talk to the speakers after their speech and give them some comments and suggestions that they might not have thought before. By giving free and good advice, you position yourself as an expert in the field which warms up the client to listen to what you have to say next. Although I mostly sell and build software, I have had a client hire me as a consultant based on a piece of advice that I gave him at a conference.

If you are interested in learning more about pricing, you should read into practice called "Target Costing". It was developed by the Japanese in the 1980s to ensure profitability in new product development. Dan Ariely has some good books on anchoring and framing for price setting.

There is a lot more to say about this topic and I think that it is an important one that is often not taught in school or discussed on HN. If people are still interested in hearing more, leave a message below and I will continue writing.

Likewise, you can shoot me an email at: doanh [at] paramountdecisions.com