Overview: Solution

Consideration for Pricing Strategy

Pricing SaaS offerings is different in today’s marketplace. Increasingly it is about return on value (ROV) —the added benefits (e.g., better per-unit price, improved service characteristics) an ISV’s customer gets by being a better customer (e.g., buying contracts with longer durations, making upfront payments, etc.). Customers will only pay as much as the value they estimate they will get from the offering. With SaaS, pricing presents a means for ISVs to closely align pricing to the value customers receive. Of the ISVs that changed pricing models, they reported an improved ability to capture net new revenue from heavy users that previously represented value left on the table in a traditional licensing model (Keystone: The Shift to SaaS, June 1, 2017).

Research shows over two-thirds SaaS ISVs utilize monthly subscriptions and tier pricing by user, using mostly two dimensions: the number of users or devices and the depth of features available.

72% of ISVs include support as part of their subscription price, with another 26% including it as an add-on. However, 80% consider customizations to be outside the scope of support and charge an extra fee on a project basis for customer-requested custom modifications.

FIXED PRICING

Pricing is the consequence of the product and aligns with the accepted industry/application standard. Think of this as reference pricing; as in customers have seen similar products sold for this amount, so you price your offer so that it is similar. What’s the standard price for a mobile phone application? $0.99. If you charge more, you are breaking from the industry-accepted, standard pricing. This is an old way to look at pricing. Buyers today will accept this model, but they do not prefer it and it provides minimal help in getting your offer purchased. Let’s look at the other options that you should consider for your SaaSpractice.

DIGRESSIVE PRICING

Virtuous pricing is about using the price as a sales weapon. The goal of virtuous pricing is to create a virtuous sales cycle within your customers, where each sale encourages the next sale within the customer organization. It fosters product adoption and proliferation. Let’s begin with a counter-example of what is not virtuous pricing —a fixed price per user. For your SaaSpractice, this could be pricing per client that consumes your SaaSweb service. Here, you have a simple pricing structure (which is important), but there is nothing to encourage more aggressive purchasing by the customer.

Enter digressive pricing, which drops the per-unit price with the purchase of more units. Your customers get a discount per unit price the more they buy. This can help create a virtuous sales cycle within the customer because now the customer is looking for a way to bring their cost per unit (e.g., user, client, etc.) down. For example, assume one line of business has already purchased 19 users from you at $49 per user for your SaaSweb service. Now, there are discussions within another line of business within the same customer organization to purchase a similar product from a competitor or to purchase yours. Your existing customer is incentivized to lobby on your behalf because if the other line of business purchases your product, their cost per user will drop to $39 per user. And the cycle can continue as each new group evaluates your solution offering.

STEP PRICING

This is one of the most powerful business pricing strategies. This is a way to adjust digressive pricing slightly to make it significantly more profitable. This method sets the price for each step as the top number of users in the range. Building on the example from digressive pricing, let’s say that the customer purchased 15 users. They would pay for the equivalent of 19 users since that is the price for this range of units. Why is this more profitable? Because your customer is effectively paying you for the 4 users they are not using (yet) —which goes straight into your profits. What’s more, is you have amplified the virtuous sales cycle because the customer wants to get as close to the maximum number of users for the step as possible to get the lowest possible cost per unit within the step.

FLAT RATE PRICING

The basic idea is that you provide a certain quantity of value for a set cost that all customers pay. Let’s say your SaaS practice built a custom SaaS web service that helps predict the outcome of a sale. Some customers may come close to (or even exceed) using the full value of what they pay -for example, they are the big box retailers who depend on your custom web service to customize the consumer’s experience. The rest (the smaller chains and boutique online stores) are nowhere close (they have smaller traffic, and as such, each individually is making fewer requests against your custom SaaSweb service). A well-crafted model identifies the average consumption across all your customers and creates a situation where over 80% of the customers are using less than what they are paying for (and ideally less than the average consumption) and fewer than 20% are using more.

You set your price to be above the average consumption. By doing so, clients in the 80% who use less than what they pay for (the smaller chains and boutique online stores) generate your profit. The further they are below the average consumption, the more profit they generate.

For the 20% who use more than they pay for (the big box stores), you might take a loss on them individually. However, in the aggregate, the long tail represented by the 80% of customers who do not fully use what they pay for more than covers the cost of your heavy consumers, and these heavy consumers are likely to be your biggest champions. So, there are tangential benefits to supporting their cost. Pricing models built around flat rate pricing have shown between 1.5 and 3 times as much profit as traditional models.

UPFRONT PAYMENT

Another consideration of your pricing strategy is whether to allow your customers to pay for a subscription period upfront, usually for a discount. Reasons for doing so, include providing some working capital to get resources going in the early days of your practice, mitigating the risk that a customer abandons a project without any payment, and ensuring the customer is as invested in a project as you are. It can also serve to minimize the financial impact on your practice when the customer has requested longer payment terms. A common approach is to offer discounted rates for annual pre-payments, where the customer pays for the whole year upfront and in return gets a discount over what it would otherwise cost for the year if paying monthly.