AP Automation – Subscription Price Illusions
I was recently speaking with a prospective client about transactional pricing. They said that it was a little complicated and wondered if I could propose pricing similar to some of our competitors. They stated that some offered a simple subscription based pricing model that was a three year contract, where they pay a single lump sum every year, making it easier for them to budget their costs.
I was able to come in at a lower price than my competitors, with an electronic invoicing application that includes dynamic discounting. Subscription based pricing is great for the vendor, as they get money guaranteed for three years, however; profit margins are reduced from every electronic invoice that comes through the system. Personally I think this is a bad way to price out an electronic invoicing application.
Besides the reasons stated above, to price AP automation with subscription pricing you have to figure out what the customer’s maximum potential cost is and develop a price based on that cost. The problem with this method is, the customer will usually pay more for this pricing and will draw the aversion of the electronic invoicing provider for every little thing that they need help with. This type of pricing method will literally eat into the profit dollars that have already been collected. Thus, subscription pricing lacks the elements of profitability and functionality.
Transactional pricing, which we prefer, is a pricing model that aligns the customer’s AP automation goals and is the preferred method by most organizations. It works by charging the customer a nominal implementation fee, a monthly maintenance fee and a per-invoice fee. The more invoices that go through the application, the more customers save money with their efficiency gains, and the more revenue is generated. Everybody is happy, goals are aligned and a triple digit ROI can be obtained in the first year!
Like the cliché statement “don’t judge a book by its cover,” you can’t judge a pricing method by how the numbers appear on the surface. Just because subscription pricing may look like it’s less expensive, once you uncover all the fluff, it’s just an illusion. After having explained all of this to my prospective client and telling them I would honor the initial pricing that I gave them, they were pleased and signed with us.