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The Subscription Pricing Model in Proptech

Early proptech founders- there comes a point in every startup’s life where you have to charge your customers money… for a profit. Yes, you’ll have to outgrow the comfortable warmth of your burn rate afforded by the cash you’ve raised and come up with a pricing strategy that actually generates enough cash to support the business.

Your investors, especially if they’re VC’s will care most about one metric- MRR, or Monthly Recurring Revenue. Which means you’ll be very tempted to introduce…

The Subscription Pricing Model

Your investors will love the subscription pricing model, because it’s a pricing strategy that creates predictable recurring revenue, which helps de-risk your business and increase your valuation. Growing Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) ultimately grows your valuation and makes you rich!

Except for one little problem..

Landlords Hate (Most) Subscription Pricing Models

Actually, a lot of people hate how SaaS has gone mainstream and everything is a on subscription model. Because most consumers don’t think much about spending 5-10 bucks a month here and there until they realize how many subscriptions they have.

But landlords are especially wary of the subscription pricing model because we don’t easily fall for the “oh it’s only a few bucks a month” trick.

Landlords live and die by cash flow. Rent is essentially a monthly subscription. Our property valuation is directly correlated to NOI. Every dollar of annual NOI is worth between 15 and 25 dollars of property value depending on the cap rate. And unlike your startup’s NOI, our NOI is very stable. You’re not going to grow a very large business by transferring our stability to your startup.

The Value Calculation

So when a brash new startup comes around and insists that they have a disruptive way to improve our operations, and then forces us to book a demo only to find out it’s a subscription pricing model, first we roll our eyes.

Then we do a very straightforward calculation in our heads:

(Annual Savings – Annual Subscription) / Cap Rate = Value of the product

If the value is negative, you’re doing something wrong with your pricing model.

Sometimes the incumbent solution is a one time capex charge. These are very hard to displace, because capex charges have the double benefit of not being classified as opex (which lowers our valuation) and works as a depreciable tax shelter. Here are some case studies in subscription models that work and don’t work.

Case Study 1: Security Cameras

The incumbent: Before IoT devices became mainstream, I could buy a security camera system with local storage for a few hundred bucks plus wiring. The hardware was clunky and the software was proprietary, but it could last well over 10 years with very little maintenance.

The Proptech Startup Solution: In the past five years a number of companies have emerged that offer security solutions with subscription pricing on a per-camera basis. Footage is stored in the cloud and pricing varies depending on resolution and how many days of footage you want to keep. You have to pay for the hardware up front and the subscription charges can be $5-15 per camera per month.

I won’t name names, but these companies are value destroyers. Here’s the real cost of a dozen cameras:

12 cameras x $100 = $1200
Electrician for wiring = $ thousands
(12 cameras x $15/month cloud subscription x 12 months) / 5% cap rate = $43,200 valuation hit

Being able to view footage in an app is nice but I’ll take the incumbent any day if it means my building value remains intact.

Subscription Cameras priced right: Google’s Nest introduced a no-brainer subscription pricing model a while back that blows away the competition. It’s $6/month no matter how many cameras you have on one internet connection. And it’s all wireless, so the installation cost is much lower.

Case Study 2: Maintenance Contracts

HVAC, water heaters, and boilers are all systems that you know have a high likelihood of breaking down, but when it happens, it’s an emergency.

Repair companies typically have two pricing models:

  1. An annual maintenance contract that covers a tune up and emergency calls. This normalizes their income and the landlord’s expenses.
  2. Pay per visit. Contractors usually see huge spikes in business at the start of each season or in the middle of snow storms or heat waves. If the landlord rolls the dice and doesn’t sign up for a contract, they could pay less than an annual contract if the weather’s good. But they could risk getting charged thousands of dollars during a storm.

This is a scenario where most landlords would prefer a set price. It stabilizes the price of something that’s inherently unpredictable, and aligns the cost with the low risk profile of real estate.

Case Study 3: Quickbooks

I used to buy Quickbooks Desktop once every 5 or 6 years for around $150. After the 3rd year, every time I opened it up, I got a notification to upgrade and that updates and support ended. I didn’t care and clicked it away every single time. I milked that $150 for every penny of its value.

The reason why landlords can do this is that our software needs don’t evolve drastically with technology. I could run accounting and leasing for a small building on a 20 year old version of quickbooks running Windows XP and Office 2000. (Right next to my 20 year old security camera system).

But I finally switched to Quickbooks Online this year for $25 a month for each of my development deals. I hate paying it, but I hit a tipping point- the price of my own time.

I stopped doing my own bookkeeping a while ago, but I don’t have an office space or a full time bookkeeper on staff. And each development project has different teams accessing Quickbooks. I reached a point where I couldn’t be passing around a Quickbooks file or even using an RDP service for everyone to share.

The SaaS pricing model at 25/month/company was multiples more expensive than just paying $150 once for six years. But letting go of the bookkeeping work has allowed me to focus my time on more high value tasks. Like generating leads through this article.

Grow Your Customer Base

Having trouble figuring out what the appropriate pricing strategy is for your proptech product? Read more of my Proptech Founder’s Guide articles, and reach out to me here or on LinkedIn for one on one consultation. I will help you clearly articulate your value prop to the right customer base so you can ramp up the j-curve faster.