When Brad Powell, CEO of credit union compliance software, Redboard, was launching his new company, he had an important decision to make: what type of business model would he use for his startup? Should he use a pay-as-you-go model, an annual licensing and maintenance fee model, a subscription-based model, a freemium model? No doubt, there are a plethora of choices, he thought. But what model would work best for his product, his price point and his customers?
For more than 20 years, Powell has worked with credit unions as the founder and CEO of Axiaware. He knew when he created Redboard, there was a dire need for a solution to credit unions' auditing woes. Whenever a credit union went through an audit or regulatory examination, it caused stress and disruption to the organization's day-to-day operations. In creating Redboard, Powell set out to alleviate much of that stress and disruption.
In setting up his new venture, he knew he wanted a business model that was both profitable and made life easy for his customers, not generate more headaches.
"When credit unions respond to a regulatory examination, it can be a nightmare to get the right people involved, get the right answers and respond in a timely manner," Powell said. "If they overlook the slightest detail, it can make things worse rather than better."
Unfortunately, too many businesses overlook the customer's needs when setting up their models. In fact, most companies choose what they think is easiest for the company selling the software - not what makes sense for the customer making the purchase.
When setting up your business model, below are some common choices. This list is by no means exhaustive, but they are some of the most well-known. The best way to evaluate your choices is to consider where you add value to your customer?
SaaS (software as a service)
One-time license fee with fees for maintenance and upgrades
What's The Value To Your Customer?
It's easy to get caught up in your own notions of what business model is best and most lucrative. But if it's not adding value to your customer, it's likely to flop. Why? Because you're not keeping in mind the needs of your customers or how they buy. So, the first thing to ask yourself is: What problems are you solving for the customer, and what are those worth?
If you don't start by understanding what you solve for your clients, then you can't determine the best way to sell. If you charge where you add value, the model (in my mind) is simple. Ask yourself: what is the problem costing people and what is the return on investment they get from your solution? It comes down to impact and results. In the case of RedBoard, fines and PR nightmares can be huge, whereas the RedBoard offering is a trivial investment for credit unions.
How Customers Buy
Another thing to consider is how your customers buy things? You might have a group of customers who prefer to purchase software as a capital expenditure. They pay for an item or service in full, upfront and depreciate it as a capital purchase. On the other hand, another group might say they have a hard time getting a capital expenses approved. Instead, they can, for instance, fund up to $5,000 each month without getting any other approvals. But if they wanted to spend $25,000 at once, they'd have to go through a cumbersome purchase and procurement process.
How They Did It
In the case of RedBoard, Powell could have made the choice to charge a premium price for his software solution, but that would have made the sales cycle long and arduous. Instead, he chose to make his software affordable, and tier his prices based on the size of the credit union. He set up an annual subscription model with prices well below what it would cost a CU to hire a temp to manually try to manage the auditing process. By setting it up this way, he created value for his customer. He priced it so that the product paid for itself 20 times over in a year. The ROI is so dramatic, it makes for an easy purchase decision.
The small credit union, who arguably might perceive less risk pays less than the big credit union who realizes more value. The small guy gets great capabilities and the big guy gets access to everything they need to avoid risk.
In the end, RedBoard's decision to set up a SaaS model works for them and their customers.
It's Your Turn
What business models are you considering and where do you add value to your customers? Share your thoughts on Twitter, LinkedIn, or in the comments.