Contributed by
David Mullens
Much has been written about Software As A Service (SaaS) as a delivery mechanism for business functionality. The purpose of this paper is to focus on the less covered area of Pricing, showing how both customers and suppliers can benefit from the use of a SaaS pricing model, to describe the various approaches that can be used and point out a few pitfalls.
This paper is written with the INET4HUB service in mind, a service designed for the manufacturing industry; however, its applicability is much wider.
Benefits
So what are the key benefits for customers?
1. Fixed and defined deliverables with easy measuring
2. Clearly defined pricing
3. Pricing that is volume / usage related.
4. Relatively low entry point costs
5. Supplier directly incentivised for customer success
6. Easier for the customer to relate value to cost
And the advantage for suppliers?
7. Reinforces a single delivery methodology with consequent reduced delivery costs
8. Shared success criteria
9. Increased usage generates more revenue
1. Fixed and defined deliverables with easy measures
By having a menu based pricing model, it is easy to see what the service being provided consists of and to model growth scenarios. The customer is in control, in that in his business planning and budgeting process he can estimate with great accuracy the costs (be they increases or reductions) as his business changes. Typically, as SaaS pricing relies upon supplier economy of scale, there are no step changes when it is necessary to purchase additional hardware or network bandwidth, all is smoothed out.
2. Clearly defined pricing
The supplier will have an agreed pricing formula which will usually consist of a one-off entry/subscription fee (sometimes waived), a period fixed/base charge and usage charges. The agreement is clear and simple and automatically provides for almost infinite growth or contraction.
3. Pricing that is volume / usage related
Just like the electric mains, you pay for what you use; the supplier is left with the capacity issues. Obviously a close relationship between supplier and customer is desirable, especially if there is to be sudden variability in usage which may place demands on the supplier infrastructure.
4. Relative low entry point costs
A bespoke service would almost invariably involve the customer in considerably increased costs. By taking an off-the-shelf SaaS service the customer gains the benefit of modern and updated software at very much contained cost of delivery to the end user.
5. Supplier directly incentivised for customer success
This is an area little talked about but there is a synergy in the supplier relationship often not present in traditional pricing models. Joint success is built in by default, incentivising the supplier to further develop his platform to gain extra volume and at the same time increasing value to the customer, value delivered in the form of extra functionality which may decrease his process operating costs or increase his revenue earning potential.
6. Easier for customer to relate value to cost
One of the perennial problems is where to account for cost. IT is very typically budgeted and seen as a central overhead. While this may work well for simple environments, as the accounting costs are low, it can mean that the profitability of a particular service or product provided is very difficult to judge. By buying software as a service the customer can directly relate cost either to the business unit or to the individual product line enabling a true value of profitability to be determined.
7. Reinforces a single delivery methodology
Suppliers are always looking to standardise as a way of containing costs and thus delivering more benefit to the business but also more benefit to the customer. The very much cheaper SaaS pricing model reduces the temptation to go down the bespoke applications path, reducing risk for suppliers and reducing the tendency for software to fragment into numerous different versions each slightly different – the absolute bane of the software world.
8. Shared success criteria
The supplier will typically like the SaaS pricing model as it provides for automatic upgrades in revenue as his customer's business grows. This has the considerable advantage that he is completely aligned with his customer's success.
9. Increased Usage generates more revenue
This is important as it is possible for the supplier to be certain that increased usage equates to increased revenue to cover increased server/cloud costs thus de-risking his business and allowing him to plan ahead.
Pricing Model types
Typically there will be a fixed charge per annum – which might be expressed as a minimum number of users and perhaps a registration charge to cover set up costs.
The Business to Business (B2B) SaaS market typically would deliver the following pricing models
1. Subscription per user
2. Subscription per application area used
3. By transaction pricing
4. Entity / Data
At a more extreme level, pricing may be grouped together as Gold, Silver, Bronze levels, though this may be a little too prescriptive for higher levels of business value. Whenever I see such mechanisms, my first question is if either a) the supplier really understands the business of the clients, b) the service being provided is really too simplistic with low business value.
1. Subscription per user
This is a very simple mechanism, equivalent to an unrestricted use licence for the whole or parts of the SaaS application.
There may well be a differing price structure according to user type (and thus functionality available), so for instance in a dealer network, a central administrative or marketing user would be more expensive than a remote dealer user, though for a larger customer, suppliers might be prepared to have free central users so that costs can be passed out to the network where value is generated.
Options for out of hours support would obviously attract a premium price.
As in all things the small print is worth checking to see if the charge is “per user” or “per concurrent user”.
2. Subscription per application area
In the case of Automotive applications this might allow the use of the vehicle registration module but not the spare parts module. Obviously modules will have differing levels of complexity and so differing levels of cost. Almost invariably subscription per application area will be combined with subscription per user as a means of ensuring data volume is kept under control and so levels of performance are maintained.
3. By transaction pricing
This is where an individual transaction will have a value and price attached to it. Thus for instance a single registration or a sale will attract a charge, or the sending out of a letter to a dealer network would attract a (different) charge.
4. Entity/Data Charge
With this pricing option, a discrete product line managed might be charged, thus a charge would be made by major product type, so for instance a vehicle type might be classified as a discrete chargeable item. This is of importance to the supplier as adding major product lines adds significant volumes of data. A variation of this would be a simple count of Megabytes used, though to the customer this is of less value as it is divorced from the business need.
Beware
The temptation for cost centre holders is to try to establish a fixed budget for the year or the term of the agreement. This is dangerous.
While it may demonstrate a lack of business planning on the part of the customer, it certainly forces the supplier to look harder at the type of business the customer is running so that he can be certain of data volumes, types and consequent costs.
Invariably the business will take much longer to contract, and in operation there may be tensions between supplier and customer, as variances to what was expected occur. I can think of no better way to set up the agreement to fail.
Choosing
When agreeing a pricing model for your SaaS service, do take into account the issues that ensure that you build a relationship with your supplier that encourages both towards successful business, there are ways to work together than maximise benefits for all.
Nevertheless what is most important of all is to assess the value delivered by the individual parts of the application in terms of your own revenue earned or costs saved, or even just hassle reduced/quality enhanced.