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Ask HN: Advice on pricing software component of a hardware business?

10 points by throwawayprice ↗ HN
I am looking for advice on pricing the software component of my company's hardware product. This software is necessary for the hardware to function.

From what I've read, customers are used to somewhere between 10% and 20% of the original selling price as a recurring "maintenance contract". These typically include software updates as well as service/support contracts.

We are in the early stages of our product's lifecycle and I would expect significant feature upgrades to the software in the future.

I would love to hear from anyone who has experience in a situation like this, either as the service provider or as the customer. What works, what doesn't?

12 comments

[ 3.0 ms ] story [ 37.4 ms ] thread
matt_the_bass
Unfortunately, I think “it depends”. What is your real product, the hardware or the software? How expensive is the hardware? Is it a mass market product or a high end, low numbers thing? How good is your software?
throwawayprice
We are selling manufacturing equipment, and the software is the design tool needed to do anything useful with the equipment. The hardware is selling for around $200k to a limited number of customers.

The software is useful at this stage, but there is certainly more features we could add.

deadantenna
10-20%: This makes sense if you are Enterprise or Service provider vendor. We consistently deal with bigger vendors such as Cisco/Juniper, etc who charges these rates. If the equipment (with fully loaded Chassis) cost $1m after all the discounts, the maintenance contract runs $50-75K if you have many of them or $150K+ if you have only few. There is lot of good support, Warranty (free replacements), onsite support, that is provided with this.

However, if you are talking about pricing recurring $10-20 for a $100 Mass market Product (example, Smart Home product, residential Routers, etc), that seems like a BS especially with most of these companies provide pathetic outsourced support who have zero knowledge of how product works and have never touched the product. But saying this, I have seen some of the companies going this route and not sure if this has worked well. The whole industry is going down "recurring" revenue path after success (or rather percieved success) of some of the companies.

"significant upgrades" - how significant are these updates?

If you compare with IXIA, Spirent, R&S, Agilent, etc they charge 10%+ for yearly maintenance and it is for " network and RF testing" equipment. I know some of the new vendors such as litepoint may not charge that much.

Have you heard about fair.com and their model? Have you guys thought about "leasing" your equipment?

Most of the manufacturing equipment I have seen becomes obselete once the technology changes. For example, once 5G mmWave is out, a lot of 4G-LTE only equipment may be obselete

throwawayprice
Thanks for the detailed response. My company's product is around $200k and will be used by a limited audience, not a $100 mass market product.

Regarding the updates, how significant they are is hard for me to quantify, but we will be adding major new features.

We have thought about leasing, but the upfront capital could be a problem for us.

Do you have any links online to where these companies list their pricing including maintenance contracts? I am trying to compile a list I can share with my board to help us in making sure we are priced similarly to the market.

matt_the_bass
In my experience such pricing is not publicly listed. However you can often ask for a quote.

Also trade shows are a good place to ask these questions.

matt_the_bass
I work with a similar product in terms of cost, volume and hw/sw.

We’ve found that customer word of mouth is really important and we’d rather that everyone have the best user experience (hence latest software) than charge them for it. Officially, customers get 2 years of software updates free. Unofficially we give it to everyone for free. Maybe this will change in the future.

Good luck

throwawayprice
Even though you don't charge, what is the "official" price of the software on paper?
matt_the_bass
About 2% per year. That’s on par with many of the software only products (from other vendors and different type of product) that our customer base also uses.
AnimalMuppet
You can go two ways. You can either do maintenance, at 10-20%, as others have said. Or you can make certain features extra-cost options. To do that, though, they need to be clearly separate functionality that has clear value, and (probably) that not everyone needs.
throwawayprice
Do you have examples of companies that do the 10-20% maintenance? I am trying to collect a few concrete examples of companies doing this in the real world.
AnimalMuppet
You let customers pay 10% of the purchase price each year. For that, they get new releases as they become available (both bug fixes and new features). Those who don't pay get the version they were sold (with new releases and bug fixes for the first year).
_ah
For an enterprise client, I'll echo others and encourage you to lump the software charge in as "maintenance", and charge whatever the market will bear. If the standard pricing is 10-20%, then quote 20%, discount to 15%, and give 10% to your best strategic / volume customers.

From your description, it sounds like you are primarily in the hardware business. From this perspective, you just want to keep selling more devices to current and future customers. The added software charges are: A) Protection against long-term cost liability if nobody buys new devices. B) Because you can.

This means that you don't really expect anyone to replace your software, and you don't expect competitors to arise with similar software. In fact, I'd even recommend including a clause in the contract that any use of 3rd-party software voids the hardware warranty. When the software is required, it's not really a separate line item... just part of the "total cost of ownership", and your clients will evaluate it as such.

Your competitive position will significantly impact your ability to charge. Be wary of upstarts attacking you with similar hardware and free software. Have a plan to guard against this.

Another idea: Allow clients to move the dial back and forth between up-front and recurring costs, to meed the needs of your respective businesses. 10-yr up-front pricing would be better than 10 yrs of maintenance. All month-to-month (including hardware) is equivalent to "leased equipment".

* Assuming 200k up-front and 15% maintenance fee, you're looking at a cost of ownership of $350k for 5 years, or $500k for 10 years.

* I'll assume that the equipment is worth 20% of its sale value (loses 80%) at the end of 10 years. You can offer a buyback at 10%, and finance the remaining 90% @ 5% interest for ~$23k / yr. Add in the maintenance of $30-40k, and you have a nice easy pricepoint of $55k-$65k / yr, or $4500-$5500 / mo.

* If you retain ownership of the equipment you're in a higher-risk position, but may be able to further capture some of the depreciation against your taxes. I'm not an expert here: check with your favorite tax attorney.

* Full up-front pricing should include the time value of money. Again assuming a reasonable 5% return, 10-yr up front should run $200k + NPV($300k) = $430k. Include a 10% discount for offloading your risk and now you're selling for $390k with 10yrs support (unofficially, infinite support).