It’s not just you—budgeting for business software is complicated. We’re here to break it down.
NOTE: This article is intended to inform our readers about business-related concerns in the United States. It is in no way intended to provide financial advice or to endorse a specific course of action. For advice on your specific situation, consult your accountant or financial consultant.
In an ideal world, buying software would be as straightforward as buying almost everything else. There’s a set price, you pay it, and that’s it—you own software!
If you’ve started researching different software options for your business, though, you already know it’s not that simple. Not only do software vendors employ drastically different pricing models, they also bury additional costs inherent in owning and operating their system.
According to a 2019 Capterra survey on software-buying trends at small businesses, the fear that costs will exceed budget is the top internal barrier to investing in business software. Unless you know the true cost of owning software, the risk of going over budget is very real.
(To keep from going over budget, check out our total cost of ownership calculator here.)
Here, we’ll break down the five major components that make up the total cost of owning business software. The goal? To clarify software costs so you can feel confident in your software purchase decision.
Cost component #1: The software license itself
The software license—the cost to actually own and use the software—has the dual honor of being a significant chunk of the software price and a hard cost to pin down definitively because of how drastically it can vary over time as you scale your business.
There are two major software license pricing models you’ll run into: perpetual pricing and subscription pricing.
With perpetual pricing, you pay one price upfront to own the software indefinitely (i.e., in perpetuity, hence the name). This pricing model has been around the longest and is typically used for software that is deployed “on-premise,” which means it’s downloaded and stored on a local computer or server at your business.
H&R Block is an example of perpetual pricing. You can purchase this small business tax preparation software for a one-time fee of $89.95.
With subscription pricing, you pay a monthly or annual subscription fee to use the software. If you stop paying or don’t renew your contract, you lose the ability to use the software. This pricing model is more recent, more popular, and often used for software deployed through the cloud (this deployment model is also called “Software-as-a-Service” or “SaaS”). That means it’s hosted on the software vendor’s own servers and accessed by customers through the internet.
Basecamp is an example of flat subscription pricing. You can purchase this project management system for $99/month.
There are three other types of subscription pricing you can run into as well, with fees that vary based on different factors: consumption-, size-, and user-based pricing.
- Consumption-based pricing ties your subscription fee to how much you actually use the software or its associated services. Cheddar, a billing platform, uses consumption-based pricing, charging $99/month plus a fee based on how many transactions are made through the system.
- Size-based pricing ties your subscription fee to the size of your organization, such as how many employees or customers you have. WebHR, a software platform for HR departments, uses size-based pricing. For a company with 150 employees, WebHR charges $1.85 per employee, per month.
- User-based pricing ties your subscription fee to how many people you have using the software. Onshape, engineering design software, uses user-based pricing; their “Professional” plan costs $2,100 per user, per year.
In most cases, your hands will be tied on what software pricing model you choose. It’s rare that software vendors will offer both perpetual and subscription options for their product.
Still, where you do have the choice, or if you’re comparing a perpetual product to a subscription product, weigh the pros and cons of each to determine which model is best for your business.
Cost component #2: Hardware
As obvious as it might be, it’s still important to account for the cost of hardware to run the software you purchase. This is especially important for on-premise deployments, which could not only require purchasing a server to host the software but also new devices that use the right operating system. In other words: if you use Macs but the software you want is Windows-only, that’s a significant cost to account for.
Because they are accessible through a web browser, SaaS deployments offer a lot more hardware flexibility. Computers, tablets, or smartphones will work. Companies can also save money on hardware by allowing employees to bring their own devices from home (though this should be paired with a comprehensive bring-your-own-device (BYOD) policy to reduce IT vulnerabilities).
Certain categories of software will require additional hardware purchases as well. Biometric attendance systems, for example, use a person’s fingerprint or other unique identifier to ensure someone is who they claim to be. These platforms require specialized hardware in order to register biometrics accurately.
Cost component #3: Implementation
Vendors can charge a one-time fee at your time of purchase to implement the software and get it up-and-running at your business. Besides basic installation and setup, implementation costs can also cover needs such as:
- Customizing the software
- Data migration from previous systems
- Integration with current systems
If you can handle implementing the software yourself, vendors may waive this cost. For example, Odoo, an enterprise resource planning (ERP) platform, offers a free self-service implementation option alongside paid options if you need assistance.
A general rule of thumb is that on-premise systems cost more to implement than cloud-based ones. More complex systems cost more to implement than basic apps, too.
Cost component #4: Training
Though a software license cost typically includes access to help guides and support forums, vendors may also charge a separate, optional fee for additional training. Depending on the complexity of your chosen software and how critical it is to your business, this training could be a worthwhile investment so your employees can quickly familiarize themselves with the platform.
Training can be delivered in a variety of formats, which range in cost:
- Sending employees to a vendor training site
- Bringing a trainer to your company
- Virtual webinar sessions
- Self-paced e-learning courses
High-profile software vendors may also offer certifications that users can earn to show they’re knowledgeable with the platform. Salesforce, for example, offers a variety of certifications that cost anywhere from $200 to $6,000.
Cost component #5: Support
Sometimes rolled into the cost of the license, ongoing support can also be a separate charge that covers maintenance, upgrades, and even premium forms of customer service.
For example, Adobe customers have the option to opt in to the Adobe Platinum Maintenance and Support Program, which offers prioritized 24/7 customer support for an annual fee of around 20% of the license cost.
Support may also include options for consulting, which pairs you with an account rep to meet with regularly to go over goals and how to get the most value out of the software. HubSpot, a marketing system, offers four different consulting options ranging from $400 to $1,600 per month.
Depending on the support services they offer, your vendor may be able to take on some significant administrative burdens that you can’t handle (e.g., some payroll software vendors can handle your company’s payroll needs for you).
Weigh the cost of completing these tasks internally against outsourcing them to a software vendor.
Final tips to saving on software
Software pricing is never as simple as it appears on a vendor’s website. Hidden costs are rampant, and unless you account for them, you’ll find yourself blowing past your software budget.
Understanding all of the elements that go into the true cost of business software will help you prepare and keep costs in check.
These final tips can lower your overall price tag even further:
Note: The software vendors mentioned in this article have been selected solely to illustrate various software pricing models and are not intended as endorsements or recommendations. These pricing strategies are not unique to these companies and are offered by numerous other software vendors.
Information on Capterra’s 2019 Small Business Software Buying Trends survey
Capterra conducted this survey from September to October 2019 among 129 U.S.-based small- and midsize-business leaders. Companies were screened by size for those with 2-249 employees and enterprise-wide annual revenue of less than $100 million. They were required to have purchased at least one software for USD $5,000 or more, in the immediate past twelve months. Respondents were also required to be at least office managers, influencing software purchase decisions in their organizations.