The psychology of percentage vs. fixed pricing

Quick, which is cheaper? Premium Support priced at 100k PLUS the 18% (of license) Standard Support or Premium Support priced at 21%  of license?

If you’re like most people, that 100k sounds big, doesn’t it, bigger than the measly 3%. But in fact, if the license exceeds 3.33 m (certainly a large amount!) you’re better off paying the 100K than the 3%.

What does it mean for pricing? You should be aware that a large fixed fee may frighten customers away, so consider using a pure percentage, or split the difference as in  “50k plus 20% of license”. At the same time, a high fixed fee is useful to set a minimum entry price so you could add a caveat, as in “21% of license with a 100k minimum” or “21% of license with a 150k minimum”.

Always run the computations using with several likely license price levels until you are satisfied that you can both get your minimum prices and an attractive scheme for the customer.

What do support partners want?

1. A good product (few bugs)

2. An opportunity to make revenue, both for selling and delivering support and for selling additional services

3. Easy process to get started, including a good training program & few bureaucratic hassles

4. Good ongoing support from you, the vendor, for escalations

Come to think of it, they are looking for pretty much the same thing we are!

Incentives for Support Partners

If you are using support partners the standard setup is to split the revenue with them (typical splits range from 25 to 50%) but a better idea would be to build a reward system based on performance. Say the partner usually gets 25% of the support revenue. What you may want to build is a system through which partners that escalate a smaller portion of their cases and/or achieve high levels of customer satisfaction get an extra “bonus” based on performance. The bonus would be a back-end (after the fact) payment, unlike the revenue split.

In most instances the issue will be measurement: how can you capture the escalation percentage, or customer satisfaction accurately? Focus on accurate measurements so that the incentives can work properly.