Answer Geek

Answer geeks (and we use that term with great respect): Where would we be without them? They help guide us through the challenges of online learning, the Internet, courseware development, and those other intersections of learning and technology.

QUESTION

We’re developing a customized online reference tool for a client. Should we charge per user or just a flat fee?

ANSWER

If I understand what you’re building correctly, a flat-fee license is the typical model to go with rather than a per-user deal. But my first reaction is to wonder why you’re already developing the tool if you have no pricing agreement with the client and no idea of anticipated revenue. I assume you’ve decided to build the tool in the hope of selling it rather than being commissioned to develop it by the client. In that case, you must’ve done some analysis which tells you that the client needs your tool. Of course, if the client commissioned the tool, you’ll have to make do with the agreed-upon development fee.

Pricing is a matter of balancing the client’s perception of value against development costs, ongoing costs, your cash-flow needs, the pricing in the market, and your perception of risk. If you’re going to retain ownership or control of the tool, say by hosting it and providing direct end-user support, then you can go with a per-registered-user fee, either annual or multi-year. That’s your best bet if 1) you don’t need the front-loaded cash flow, 2) you have a streamlined administration system in place to track numbers, and 3) you’re sure of the number of people who will sign up for the tool. If you’ll get a healthy user volume, pay-per-user pricing usually produces significantly more revenue than licensing. It can also produce significantly more administrative burdens for you and the client.

If you intend to hand ownership or control of the tool over to the client, I would quote a flat license fee. You can step up the fee based on the number of seats that the client anticipates needing, and you can charge repeat fees every year if you sell an annual license (but then you must be prepared to do additional development and update the tool). A flat fee gives you the revenue up front and relieves you of the burden of micro-administering usage. That trade-off may be worth a lot to you. You can make the deal attractive to the client by setting the license’s per-user fee considerably lower than the price for individuals. You can also add value (and revenue) by making available different levels of maintenance agreements.

Finally, you can be creative with your pricing models and put together a proposal that combines a smaller up-front payment with an ongoing reduced per-user fee. If you’re developing specifically for a client, the up-front payment is a development or customization fee, and the ongoing rate is a per-user license fee to which you can also add per-user maintenance and support fees if you’ll be providing those services.

I think that more and more corporate buyers are looking for simplicity in pricing models and enough transparency and flexibility that they can work out the optimal deal. If a prospective client can’t understand the pricing or believes it to be inflexible, he or she may walk away from the deal without you ever knowing why. Talking about money early in a negotiation can bring up other issues such as timing, budget cycles, cash flow, scope, authority levels, and so on that, when discussed, can help you and the client structure a solid deal that both parties are happy with.

Published: May2003