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Cost of opportunity - how much you pay for software

The cost of opportunity — working out how much you actually pay for software

May 22nd, 2019

Juuuuuuuuust a minute there! Before the mental roller door closes out of befuddlement over pricing, we’ve got a quick and gentle guide to the cost of software ownership. We sat down with Total Synergy’s founder and CEO, Scott Osborne, to ask him to explain to us (as slowly and simply as possible) how to work out how much you’re paying, and for what. In a dizzying new day of licences and hardware-free software, what do you actually get? And how much is it, really? Scott has a former professional life as an accountant, so he showed us where to carry the two and where to multiply the user.

What are my software payment options?

You probably already know this, but it helps to start with the fact that there are generally two ways software prices are structured these days. In the traditional way, you pay a larger lump sum up front and then an annual maintenance fee locked-in to a contract over time. Alternately, there’s the subscription model which “essentially means you pay incrementally, flexibly, and with no locked-in terms,” says Scott. The latter is the latest and it’s apparently more than a software trend. Subscription is service-industry wide, friends! Think, flexibly contracted arrangements for cars (Uber), staff (freelancers), education (Udemy), and so on.

Time and tide and your tech — the cost of contracts

While we get the “pay it now so it’s done” mentality of your traditional software purchase, it’s actually not that simple. Uh huh, big surprise there.

“The cost over a period of time is not just the actual software fees paid to the vendor, it’s also the hardware costs (like the server itself which might cost $10,000, and then a backup server at added expense), and the cost of IT managed services companies which might be $500-$1000 a month, and it’s the cost of upgrades” says Scott.

“We switched to offering subscription payment for a few reasons, and we took a very hard line with this” Scott says.

“We didn’t want to contract in a term. If you’re unhappy after two or three months, you can stop paying us; you can switch vendors, switch software. It’s very little risk, financially — the only investment cost is the implementation process of changing services and moving data. The same internal cost, no matter which system you go with. We’re a month-to-month contract — we grow when you grow, and we’ll constrict when you constrict. But if we don’t serve you as a customer, we know we’re going to lose you. It keeps things honest.”

Opportunity costs, my dear, even if it looks like savings

Everything that costs, costs something. Sounds simple enough. But every choice you make, including which software service you opt for, has what’s called an ‘opportunity cost’. Sounds accountant-y. We only have to vaguely grasp this, so grip on. In simple terms “the opportunity cost is the ‘cost’ incurred by not enjoying the benefit associated with the alternative choice”. So, if you’re plotting the cost of a software solution over time, you need to factor in the lost value of not using that money elsewhere. As Scott says, “the cost of the capital you pay out is — if you don’t have it in the bank, you have to borrow it, if you do have it in the bank you’re taking that cash away from other things you can use it for, such as increased head count, go-to-market campaigns, updating your website, updating your CAD software, training your team — then when you look at that cost, you have to increase it incrementally, exponentially.” In short, a dollar (or a pound) today, is not worth a dollar 10 years from now.

Present software isn’t future perfect

Here’s the other thing to think about when you’re weighing up your software options, folks: If you (like most of us) don’t have a 10-year plan for your business, should you really be investing in 10 years of software? How can you know there won’t be a completely new technology out there in that time? How do you know that the platform will still be relevant? Scott explained that in the old software pricing structure “the software you’re investing in today is still going to be the same value 10 years from now”. In other words, it will have depreciated. Probably a lot. However, with the software service subscription it “absolutely won’t be the same software in 10 years, because we’re bringing out a release every single month. And the exponential value of that, alone, in ten years will be astronomically different than buying a product today that will be a dinosaur in ten years.”

Wrap it up, I’ll take it

All told, your calculations when working out the actual cost of software ownership for your business have to include the following:

  • Contract length and flexibility
  • Cost of hardware
  • Cost of updates
  • Cost of administration
  • Capacity for agility (ability to maintain consistent and relevant innovation into the future)

Scott says that, “with Synergy, we provide free data migration templates to move to our product. On top of that, our product doesn’t stand still — with monthly, online updates, customers are getting a vastly different product experience in 10 years to what they were getting in year one. You’ve only got to look at the customers who signed up first time around — what they’ve got in the last eighteen months are some huge features at no additional cost.”

You can put a bow on that. We’ll take it.