There has been some buzz recently about a service offering a True Cost of home ownership and it made me think that software companies also need to know their True Cost to effectively price their services for profitability. I’m still amazed at how simple math is ignored and uber-aggressive entrepreneurs run their companies into the ground under the guise they can make money later and their investors will always keep pumping cash into their money pit. The truth is, that is rare.
I’m fortunate to have built an established, profitable company that continues to grow, but learned many lessons along the way on that True Cost. Demand for our native Mobile MLS apps and services continue to increase nationwide, and we’re closing new markets consistently. During this process, the pricing and term discussions arise and as I educate my clients about the economics, they are often surprised and very supportive of which I’m grateful. I in turn am surprised that more companies fail to effectively communicate/justify their pricing and quantify the value they deliver to their customers, so I thought I’d take a stab at simplifying the understanding of MLS software sales pricing.
The bottom line is relationships must be profitable and agreements must contain mutual consideration to be valid. This should be the cornerstone of every deal. Profit means you earn more than you spend. There are other less tangible measurements of a “profitable relationship” but for simplicity we look at inputs and outputs in terms of money. Companies must compute the total cost of their product or service, then add desired markup. Most fail to know their True Cost, and this is where things go south.
Costs for SaaS businesses:
- Technical Support & Hosting (COGS)
- Sales & Marketing (S&M)
- Research & Development (R&D)
- General & Administrative (G&A)
If I employ 2 people dedicated to sell solutions to MLSs/Boards, attend 5-6 annual tradeshows, some with sponsorships and a little advertising, etc., I can easily spend $300,000 per year in S&M. If I average 2-3 MLS deals per quarter or approximately 10 new MLSs per year, each one cost $30,000 just to sell. If an MLS is smaller than 1,000 users (most of the 850 are), then even at $1/user/mo for an 800-user market yields $28,800 after 36 months. Ignoring COGS, R&D, G&A we would still run at a loss after 3 years, especially considering present value (PV) of that money.
I believe there is a long-term solution if MLS/Board staff be allowed to make purchasing decisions below a certain price point and term length without going through their typical committee/board/finance/legal process. Perhaps if a company/service is “vetted” by the Council of MLS, it qualified for the fast lane (like TSA Pre Check). MLS systems understandably need a long-term drawn out process with many stakeholders having a voice, but there should be a discretionary budget that execs can utilize for additional tools & services. If companies could average 30 deals per year, the cost per deal drops, and the necessity for longer term contracts to recoup expenses drops, and could be a win-win all around. I hope this is useful information, and something to ponder as new leadership is elected this time of year.
I wish everyone a very Happy Holiday season!
– Mike Sparr, CEO and founder