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How to Build a Pricing Model
By Staff

January 10, 2002

Editor’s Note: From the ASPnews Disscussion Forum, a reader had this response to a question about how ASPs should set up pricing models:

Question: Does anyone know where I could find a pricing model for hosting applications?

Reply: A pricing model for hosted applications is not fundamentally different from a pricing model for any other business. Here are the components of cost and revenue for hosting applications.

1. Monthly Revenue: This is the revenue you collect per user, per month from your customer. Make sure you factor in any discounts offered.

2. One-time installation revenue: This covers the cost of installation, configuration and could also cover some professional services customization and migration of legacy data.

3. ISV one-time licenses: If your ISV partner sells you licenses for you to host, they you may have to pre-purchase the licenses and assume the risk that the customers will follow. This will enable you to take advantage of price breaks by buying in quantity and getting a discount (i.e. 100 users, 500 users and so on). You also need to include license costs for infrastructure software like DBMS, network monitoring, server monitoring tools, CRM software and billing software.

4. Partner monthly fee: If your partner hosts the application for you (i.e. you are an aggregator) then you will be billed a monthly rate per user. This includes the hosting fee, bandwidth, labor costs and some profit. This normally also includes the license fee for component software like Microsoft Exchange server, Outlook. In some cases, this license fee can be subtracted if the end-customer already has a site license for these products. The partner will want to know if you will take 1st level customer support calls and what percent of the calls will you route to its 2nd level support. This will have an impact on their price.

5. Your monthly hosting costs: If you are hosting the application, you need to include your hosting fee, which includes the colo cabinet/cage cost, depreciation of equipment, bandwidth and labor costs. If you are using a 24×7 monitoring service or an 800 number call receipt service, those monthly costs too should be included here.

6. Customer support: You have to make some assumption on how often your customer will call you. Based on this, you can prorate your costs. Typical per call rates will be about $50-75 per call. If you pass your call through to your partner, you must assume a reduced pass-thru cost to account for the 800 number and ACD/VRU call infrastructure.

7. 8×5 or 24×7 support: There is normally a significant cost differential to providing 24×7 support. You should make sure that you have some additional cost recovery if you are providing true 24×7 support since this at least 40-100 percent more expensive.

8. Installation cost: These are usually one-time costs, incurred at installation time and are usually built into the onetime installation fee. This results in an empty working system for the customer.

9. Professional services costs: Typically, a customer wants more than an empty working system. Usually they want some customization and migration of legacy data. They want their employee information setup and configured in the applications. Usually, this involved stripping the data from some legacy application and formatting it for a batch upload. It is important that these costs are estimated accurately before they are bid as part of the one-time installation fee. Also, it is important to use a time accounting system, to collect these actual costs by project to improve the estimation accuracy over time.

10. Sales & GA costs: This should cover prorated costs of sales, marketing, billing, engineering and other general administration functions.

11. Profit: Self-explanatory.

Hope this helps

Thanks, Naren

Read the original post in the ASPnews Discussion Forum.

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