(Words 910: 3 minute read.)
The financial services software sector needs to move away from opaque pricing models. But what should we replace it with?
Pricing is a murky subject at the best of times, but in the financial services software sector, it’s often like a swamp. Lift the lid on software pricing in financial services in general and you find opaque models which offer clients no ability to manage
ownership costs in the long term. It’s time for a change. But, to what?
In this article, we’re going to look at traditional software pricing models and identify why they don’t work anymore. Then, we’ll explore solutions.
Opaque pricing in financial services software
When a potential customer that is interested in a piece of off-the-shelf financial services software, calls up the vendor and speaks to a salesperson,
price is usually the last thing they will talk about. The salesperson will spend time talking about how their product is the answer to the customer’s prayers, getting them excited
and hooking them in. Then, they talk price. It’s a classic sales technique – once you’ve sold it, stop selling and start negotiating. Why is this? It’s all because most vendors’ pricing models are balanced against the customer.
Many software companies operate opaque pricing models, charging customers variable amounts based on factors other than the services they buy. A popular way to calculate a price is Assets Under Management (AUM) where your rate is based on the size of your
business, even though what you’re paying for is the software.
Contracts are also stacked in favour of the vendor. You purchase a traditional (time-limited) perpetual license, typically for 4-5 years. But at the end of this contract, you find yourself in a powerless negotiating position because the systems are embedded
in your company. Switching providers would take too long and be too disruptive. Your reality is you have to renew, even if the vendors double the price!
Oh, and if after you have negotiated the contract, you find you need something outside of the standard offering, you better open that cheque book! You know you can’t walk away. You’re entirely dependent on the provider.
How do they get away with it?
There are several reasons why, at least up to now, financial services software companies have been able to operate opaque pricing models.
- There has been a lack of competition in the industry – providers do not fear being undercut by new entrants
- Because they are selling into big financial institutions with huge budgets, providers feel they can charge more than usual for their products
- Pricing your products is hard. Vendors want to charge as much as they can, without precise knowledge of what customers are willing to pay. Fear of underselling yourself leads to these traditional,
However, things are now beginning to change. Customers are starting to look for something different. They have more power than ever at all stages of the purchasing process – why not pricing as well? Also, startups with a more customer-centric approach are
entering the market.
We’ve taken inspiration from what happened last year at Crealogix, the digital banking software company from Switzerland. It caused a stir by
abandoning its old pricing model in favour of something more transparent, even though it knew it would lead to an initial drop in profitability before growing revenues overall.
Opaque pricing models in financial services software need to go, but what should replace them?
The future: SaaS
If I buy a piece of software from Microsoft, Amazon or any other modern provider using a
SaaS pricing model, I know exactly how much it is going to cost me today, tomorrow and in the future.
The vendor will communicate my annual subscription cost upfront – whether it’s a yearly fee for a level of support, or a per-user price. Later on, if I want to upgrade or downgrade my services, I know exactly how much it is going to cost me and I can plan
accordingly. Plus, as my company scales, I know I can add users for the same price – or lower, as many vendors have decreasing cost scale.
The customer now has control over their costs and more power in the relationship. Providers now have to concentrate on
building long-term relationships with their customers to ensure they renew their subscription every year. However, SaaS pricing also has its advantages for the vendor. It means they can build a
scalable, repeatable sales process, as well as position themselves against their competitors on value rather than price.
How do you overcome these challenges?
I’m keen to hear your stories about times you have come up against opaque pricing in the industry. I’d really like to know how you have overcome these obstacles in the past.
Get in touch or leave a comment to start the conversation.