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.
Click on a link below to jump straight to that section:
Cost component #1: The software license itself
Cost component #2: Hardware
Cost component #3: Implementation
Cost component #4: Training
Cost component #5: Support
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.
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.
Keep in mind:
Software vendors often offer the option to do either a monthly or annual subscription, with the annual option being cheaper overall to entice you into a longer contract. That lower cost is not a given, though. Do the math to see which payment schedule is cheaper for your situation.
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.
Keep in mind:
It’s important to understand the difference between named user pricing and concurrent user pricing. With named user pricing, each user has their own login and all users can use the software simultaneously. With concurrent user pricing, you get a fixed number of logins that anyone can use, but only that fixed number can be logged in at the same time.
If you have a team of 20 people who will need to use the software all at once, you should go with named user pricing for 20 users. If, however, only five of your 20 need to use the software at once, it may be cheaper to select concurrent user pricing for five users.
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.
uAttend sells time clocks compatible with their software on their website (Source)
Some vendors may require you to use their associated hardware with their software, or you may have the freedom to shop around.
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.
Odoo’s implementation options (Source)
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.
In some cases, you could spend as much (if not more) on implementation than the actual software license. Ask vendors about the details of their implementation options and fees to budget accordingly.
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.
A list of Salesforce administrator certifications (Source)
Whatever training option you prefer, be sure to budget not only for initial users, but also new hires that will have to learn the system down the road.
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.
HubSpot’s consulting options (Source)
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.
Budgeting for software? Check out our total cost of ownership calculator here.
These final tips can lower your overall price tag even further:
- Always negotiate. Many vendors, especially those who publish their pricing publicly, won’t budge on their numbers. But some will offer discounts if you ask about it, especially if you purchase add-ons or additional services that increase your customer value (For more tips, check out “6 Steps for a Successful Software Contract Negotiation”).
- Separate your feature needs from your feature wants. Spending top dollar on software where you only use half of the functionality isn’t a wise investment. Hone in on your needs, purchase affordable software that meets those needs, then scale later as those needs grow.
- Monitor your pricing tier carefully. Vendors often offer different pricing tiers, where paying more nets you more users, more storage, more functionality, etc. If you exceed the limit of your current tier, you may be forced to pay the cost of the next, most expensive tier. So, if your tier allots “10 to 25 users,” the cost of going from 11 to 12 users is nothing, but the cost of moving from 25 to 26 users could be substantial.
- Carefully research free and open source systems. There are certainly viable free and open source software systems out there, but be careful. Many “free” systems are only free because they impose significant limits on storage, users, or capabilities. Open source software still requires IT personnel to set up, customize and maintain, which costs money. Read the fine print before you commit.
If you want to learn more about the software buying process, check out our guide on “How To Buy Business Software in 6 Steps.” If you’re ready to research pricing but tired of jumping through vendor hoops to get a cost figure, our category pages have starter pricing info on popular systems to get you started.
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.
FAQs
Why is it important to understand costs in a business? ›
Understanding your costs is vital for informed business decisions. It helps you determine the profitability of your operations and how to set prices. But proper costing is complex, and many businesses aren't doing a good job.
What is the true cost of doing business? ›The cost of doing business definition is any expense a business incurs while in the process of conducting business. A cost of doing business could be a direct cost, like raw materials, or an indirect cost, like building security.
What are the different costs that would be needed to develop your business? ›Startup costs are the expenses incurred during the process of creating a new business. Pre-opening startup costs include a business plan, research expenses, borrowing costs, and expenses for technology. Post-opening startup costs include advertising, promotion, and employee expenses.
What are 3 examples of start up costs of a business? ›What are examples of startup costs? Examples of startup costs include licensing and permits, insurance, office supplies, payroll, marketing costs, research expenses, and utilities.
How do you manage business costs? ›- Make a plan. You need to evaluate where your business is now and where you want to take it in the future. ...
- Track expenses diligently. ...
- Benchmark against your industry. ...
- Manage variable costs. ...
- Get tough on fixed costs. ...
- Invest in technology. ...
- Offer incentives to staff.
Inaccurate information about your company's expenditure can greatly inhibit your capacity to make and maintain a successful business. Accurate costing information enables managers to measure profit, so that they can make the best decisions for the company's future.
What is true cost example? ›The Theory of True Cost Economics
An example is the cost which taxpayers and government health care facilities pay for taking care of drug consumers (drug addicts). The companies which create such drugs are not required to pay for the damages dealt, and so the societal cost is not implemented into the market price.
The real cost is a cost as measured by the physical labor and materials consumed in production. For example, real costs would include, but not be limited to, production, market analysis, distribution, and advertising.
What does the true cost mean? ›True cost economics is most often applied to the production of commodities and represents the difference between the market price of a commodity and total societal cost of that commodity, such as how it may negatively affect the environment or public health (negative externalities).
Why is it important to know your start up costs? ›Knowing your costs is essential for determining when you can afford to develop new products, hire a bigger team or open a new location. Apply for funding. Whether you want to set up a line of credit or get a Small Business Administration (SBA) loan, most lenders will ask about your costs.
Why do we need to estimate our start up business cost How does it affect your planning? ›
Like your business plan, estimating your startup costs is part of building a roadmap for your business. Having even a rough estimate can help you avoid unnecessary risks and stay on track during more volatile months.
What elements of costing would you consider for starting the business? ›- Direct Material.
- Indirect Material.
- Direct Labour.
- Indirect Labour.
- Direct Expenses.
- Indirect Expenses.
- Overhead.
- Factory Overhead.
- Calculate your business startup costs before you launch.
- Identify your startup expenses.
- Estimate how much your expenses will cost.
- Add up your expenses for a full financial picture.
- Use your startup cost calculations to get startup funding.
- Outsource tasks. You might have considered hiring an employee to help you get your business idea off the ground. ...
- Market with social media. ...
- Go paperless. ...
- Use small business discounts. ...
- Power down. ...
- Review your vendor terms. ...
- Buy used equipment.
A lower initial start up cost enables you to achieve profitability much faster, if not right away. Large-scale businesses require such enormous investments that it can take years – sometimes a lifetime – to make back that money, even if the business is profitable on a month-to-month basis. pockets.
What are the biggest costs for businesses? ›As any company leader knows, one of the biggest costs of doing business is labor. Labor, which can account for as much as 70% of total business costs, include employee wages, benefits, payroll and other related taxes.
How do you control cost in service and sales? ›- Mine your existing customer base first. ...
- Make sure your sales team is following up on leads. ...
- Calculate how much to spend on acquiring customers. ...
- Invest in sales tools, not more travel. ...
- Stop creating brochures.
- Monitor spend at a macro and micro level. Ideally, you need to have both a macro and micro vantage point of your spend. ...
- Use instant reconciliation & receipt matching. ...
- Integrate spend management & accounting software. ...
- Automatically categorize expenses. ...
- Give employees a corporate card.
Understanding how much it costs to produce something and how costs are structured is fundamental to any business and farming is no exception. Doing so drives efficiency and improves financial performance, by highlighting areas to improve and allowing more proactive crop marketing.
Why do you think it is important for a company to cut costs during periods of low sales? ›Reducing costs increases profitability, but only if sales prices and number of sales remain constant. If cost reductions result in a lowering of the quality of the company's products, then the company may be forced to reduce prices to maintain the same level of sales.
Why is it important to have an accurate and correct costing in food business? ›
Understanding the basics of recipe costing is important so that you can: Know how much food cost is incurred on each recipe. This gives you a clear view of how much you can earn per dish. Understand how to correctly price your dishes to achieve a target profit.
How do you calculate true cost? ›Divide your total annual cost by your billable hours to find out how much you need to charge per hour to cover expenses. Now multiply the above number by your profit margin to get your hourly service rate. This rate will allow you to cover all expenses while still making your desired profit.
How do you find the real cost? ›The formula below calculates the real value of past dollars in more recent dollars: Past dollars in terms of recent dollars = Dollar amount × Ending-period CPI ÷ Beginning-period CPI.
What is true cost analysis? ›The field of “true cost accounting” reflects an economic principle in which all the external costs (externalities) are considered when determining the full cost of production—and includes calculating the price tags of negative externalities.
What are the 4 types of cost? ›Costs are broadly classified into four types: fixed cost, variable cost, direct cost, and indirect cost.
Does true cost include opportunity cost? ›“The real cost of any purchase isn't the actual dollar cost. Rather, it's the opportunity cost—the value of the investment you didn't make, because you used your funds to buy something else.”
Where does The True Cost take place? ›The film, which opens May 29 in theaters, on video on demand and iTunes, was shot in 13 countries, from the slums of Dhaka, Bangladesh, to the cotton fields near Lubbock, Texas.
How long is The True Cost? › What is the message of The True Cost documentary? ›The True Cost is a groundbreaking documentary film that pulls back the curtain on the untold story and asks us to consider, who really pays the price for our clothing? This is a story about clothing. It's about the clothes we wear, the people who make those clothes and the impact it's having on our world.
Why is it important to manage costs? ›It makes it possible to reduce costs and increase the profit margin, as it allows identifying unnecessary expenses that are not generating return, as well as better investment opportunities.
Why is it important to know the cost of a product? ›
So, knowing product cost is crucial to their success because they have to manage their costs to be profitable. So many sales decisions have to be made based on COST. Occasionally you are faced with a sales opportunity for which only incremental costs and revenues for that one transaction are relevant.
Why do you think costing is important? ›Costing is important to ensure that all expenses are covered and the group fixes a price that ensures a profit. The first and most important step is to identify ALL the costs of a business: production, sales, administrative, overheads, etc. The next step is to classify costs into fixed and variable costs.
What is the role of cost management in business? ›Cost management is the process of estimating, allocating, and controlling project costs. The cost management process allows a business to predict future expenses to reduce the chances of budget overrun. Projected costs are calculated during the planning phase of a project and must be approved before work begins.
Which is the most important in managing costs? ›Cost Estimating
Cost estimating consists of assigning costs to the resources you need to execute your projects, such as labor, materials and equipment. Cost estimating is one of the most important steps in the cost management process because it lays out the base for your project budget.
- Understand your financial structure. Understanding the financial structure of your business is one of the vital cost management strategies. ...
- Proper budgeting. ...
- Rethink fixed costs. ...
- Lower variable costs. ...
- Upgrade to reliable software.
For an effective system of cost control, there should be effective budgetary control and there should be proper setting of standards. Budgets and standards should be fixed with realism.
What is the importance of product cost in decision making of a business? ›Product costing is more than just setting a normal price; determining the right price for a certain product can help the business to make data-driven decisions in the process. Knowing how much the company spends to produce a product is not enough when it comes to figuring out the product's sales price.
What is costing in simple words? ›Costing is any system for assigning costs to an element of a business. Costing is typically used to develop costs for customers, distribution channels, employees, geographic regions, products, product lines, processes, subsidiaries, and entire companies.
What are the benefits of costing to a business? ›Cost accounting helps zero in on your expenses and how they apply to each aspect of your business. Cost accounting focuses on the expenses involved with running your business. It is a common form of accounting for manufacturing businesses, as it allows them to break out costs for each product they produce.
What are the factors affecting software pricing? ›- Involving Business Stakeholders in the Software Estimation Process. ...
- Asking Why Do Most Software Estimation Projects Fail. ...
- Building the Right Team. ...
- Good Software Estimation Metrics Should Reveal Problems Sooner.
What is the impact of pricing to the business success? ›
The price you set affects your profit margin per unit sold, with higher prices giving you a higher profit per item if you don't lose sales. However, higher prices that lead to lower sales volumes can decrease, or wipe out, your profits, because your overhead costs per unit increase as you sell fewer units.