Multi-axis Pricing: a key tool for increasing SaaS revenue

Scalable pricing is a powerful tool to grow revenue in a SaaS or software business. It allows you to capture more of the revenue that your customers are willing to pay, without putting off smaller customers that are not able to pay high prices. It also provides a great way to continue to grow revenue from your existing customers. This post looks at how to create scalable pricing using multiple pricing axes, and discusses the different types of axes that can be used.

Introduction

Many SaaS startups begin life with one product that has a simple pricing model. They might have initially only one version of the product to keep their lives simple, and use a single flat price for that version. To make that product as attractive as possible to a wide range of potential customers, it is not uncommon to see the founders set the price low, so price sensitive users are not put off. This is a smart strategy, as in the early days it is far more important to get lots of customers, than to it is to optimize profitability per customer.

However as time progresses, they may hear comments like:

  • “I would have been happy paying far more for your product as it provides such great value to me”
  • “I didn’t consider your product as it was too cheap, and didn’t look like a credible option to handle our more advanced needs”
  • “I only needed a subset of your functionality, and your product was too expensive”

These comments indicate that there are a variety of different user types in the market, with differing levels of value they can extract from use of your product, and as a result, differing willingness to pay. All of the above point to the limitations of a simple pricing scheme.

Let’s look at these to items separately:

Value extracted from use of the product

Here are some examples of how different customers can get differing levels of value from your product:

  • They are a larger company, and many more employees are using the product
  • They are using fewer, or more, of the features in the product
  • They have a greater number of items that are being processed by your software.
    • e.g. if it is email marketing software, they may have a very large mailing list
    • or if it is a backup service, they may have a very large dataset that they are backing up
    • etc.

Emotional Willingness to Pay

There is a very significant difference in the willingness to pay amongst various customer types. Car manufacturers have known this for a long time, and usually include a highly profitable model at the top of their range that appeals to the non-price conscious buyer, who likes to feel that they have bought the very best.  Take a look at the Mercedes Benz S-Class as an example: The base model S550 starts at $94k, but for those that aren’t price sensitive, they sell an S600 version for $160k, or an S65 AMG version for $211k.

 

image

 

The main difference is a slightly bigger engine. But if you look at the profit margins for these models, the margins increase greatly for the higher end models.

What’s important to recognize here is the mentality of the customer. In the business world of software buyers, the emotional thinking is slightly different. The driving emotions that can make them want/expect to pay a higher price are:

  • Their problems are so important to them that they are looking to make sure they have taken the best possible steps to address them
  • They want a serious commitment on behalf of their suppliers.
  • They have a status need to own the best

Those buyers will not feel comfortable buying a “cheap” solution.

Scalable pricing is the answer

The solution to this is to introduce pricing that scales up or down. If designed correctly, the pricing should scale down to allow you to capture the smallest/cheapest customers that are still profitable, up to the largest customers that are willing pay a great deal.

To architect scalable pricing, we will use one or more axes. Let’s take a look at some common axes for scaling pricing:

1. Product features

A very common way to differentiate pricing is to package up different versions of the sofware with more functionality available at a higher price:

image

 

2.  Number of Users

The theory here is pretty simple: as more people use the product, the customer derives more value.

image

 

 

3.  Depth of usage

By “depth of usage”, I mean some an indicator like the size of database used, the number of people on an email marketing list, the amount of storage used, etc. These all indicate that the customer is getting greater value from the product, and therefore is likely to be willing to pay more.

 

image

Other Axes that I have seen used

Some other examples of factors that can be used to scale pricing include:

  • Number of Websites created
  • Number of Servers/Virtual Machines (not applicable to SaaS)
  • Quality of Support
    • Response time – i.e. 2 hours versus 24 hours
    • Email support versus phone support
    • Number of support incidents
    • Dedicated support representatives
  • Number of sites where the software is installed
  • Number of named support contacts

Automatically increasing revenue from existing customers

As a SaaS business grows larger, it starts to accumulate a large customer base. An important factor to look for in selecting a pricing axis is to look for ways to automatically get more and more revenue from that customer base. A good example of this is pricing around storage usage. Companies find it hard to throw things away, and the amount of things that they want to store keeps increasing. As a result storage growth in a typical company is around 60% per annum. If you can tie your pricing to something like storage where there will continue to be annual growth, you have an excellent way to grow your business without having to do any more selling.

How many Pricing Axes is optimal?

If you are going to build a low cost sales model, it will be useful to have a very simple pricing model that the customer can immediately understand. I would argue that this means no more than 3 pricing axes, and perhaps 2 is the optimal.  (I’d be interested to see what readers think, so please add your comments to this blog post on this topic.)

Cross-sell Axes

Another very important way that one can sell more into an existing customer base is to cross-sell them. By cross-selling, I mean selling them on an additional product or service. For a SaaS business, there are a few interesting ways one can do this:

  • Buy or build additional products that are closely related to existing products
  • Sell add-on modules that integrate nicely with the existing product
  • Create an AppStore, and sell third party products, taking a cut of the profits
  • Create a services marketplace where you connect partners that provide services offerings around your products and take a cut of the transaction fees
  • Look for other fees that are created around the usage of your product (e.g. payment transaction fees in eCommerce, advertising revenue, etc.), and ask yourself if it is possible for you to extract a portion of that revenue.

These ideas are important as they essentially allows you to go beyond the two or three axis pricing that we thought was optimal in the section above.

The beauty of all of these ideas is that they provide more and more value to your customers, and wherever you are able to this, you can increase customer satisfaction and loyalty, as well as getting paid more.

Getting to Negative Revenue Churn

All SaaS businesses will see some level of ‘customer churn’. i.e. you will lose some customers. However if one looks at ‘revenue churn’, which is the amount of revenue coming out of the installed base of customers, it is possible to get negative revenue churn. The way to do this is get enough additional revenue from the customers that stay with you to more than offset the loss of revenue from the customers that have churned.

image

The key to achieving this is additional pricing axes, as described above.

How this relates to Freemium Business Models

This topic is very relevant to entrepreneurs who are thinking about using Freemium business models. To make the Freemium model work well, you need to achieve two things:

  1. Design something that you can give away free that still has very high value to the customer.
  2. Design an upgrade from that initial product that is also extremely compelling. Compelling enough to get a significant portion of your free user base to pay.

If your free product is not valuable enough, it will not get adoption. And it most certainly won’t get viral adoption, which is the one of the most powerful things that can happen when you give things away for free. (For more on virality, see this blog post: The Science behind Viral Marketing.)

Step 2 is all about finding a way to introduce a pricing axis that scales from free to paying.

Open Source Software – Scalable Pricing is key

One of the toughest challenges at JBoss was finding a way to get customers who had downloaded a completely free Open Source product to pay. This was one of the key elements that helped drive revenue growth at JBoss. That story is described here: Lessons from Leaders: How JBoss did it

Value-based Pricing

You might have noticed how I have tried to link pricing to the value that a customer derives from using the product. I believe this is a key concept, and one that is sometimes forgotten.

As the CEO of my own startups, I used to spend a lot of time in front of customers selling. As any salesperson will tell you, one of the hard parts of the sales job is justifying to the customer why they should pay you so much money. I found myself wanting to be able to answer that question with ease and comfort. And the only way that I could do that, was to make sure that my pricing was clearly aligned with the value that the customer would derive from using my product.

Once you have come up with a pricing scheme, test it against this simple question:  How comfortable will you feel when talking to your customer about your price versus the value you generate?

Conclusion

If you are running a SaaS busines (or any other kind of software business), it pays to spend some time thinking about your pricing axes. This represents one of the very powerful levers that are available to you to grow your business.  (I am surprised by how often I find this has been ignored.)

As always, I would love to hear your feedback as to how this has applied in your own businesses. This is also very valuable for other readers. So please add your views below.

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  • Jonstevenson

    In SaaS it’s also important to avoid pricing models that unintentionally drive negative customer behavior.  It’s good to have pricing that encourages utilization and consumption rather than hoarding of the “tokens” that a customer is entitled to.

  • http://twitter.com/HerdGuy Darryl Stewart

    I have been following several great web based SaaS companies like 37signals, Freshbooks and TribeHR lately, all with a mind to get our company to that level. All have multi-axis pricing.  Look for multi-axis pricing at IBEX Payroll soon http://www.ibexpayroll.com.

  • http://www.salesoperationsblog.com Brian Geery

    This is a relevant, insightful, fact based, easy to follow, and valuable post as always. Thanks.

    You also brought up an important next step with your simple question about pricing models, “How comfortable will you feel when talking to your customer about your price versus the value you generate?”

    The next step to capitalize on this important lever is enabling your sales professionals to have meaningful conversations with prospective customers about your pricing options.  As a prospective customer inquiring about software options and prices I have often felt confused and ended the conversation without clarity on what option was best for my needs.  So, once a multi-axis pricing model is established, I recommend making sure it is “sales ready” through training followed by ongoing coaching from sales managers.

  • http://www.cosential.com Dan Cornish

    An interesting issue is when negotiating with a large company, they expect a substantial discount if they buy a large quantity of seats. Not only do they expect us to provide them more service, but they expect to pay less per seat than other companies. As we have grown we have begun to get back pricing power over this, but price is always an issue when in a competitive deal.

    We have two pricing tiers, a full user and a casual user. What we have done is price the casual user very low so that it i easy for the customer to roll out the application across the company. Then what happens is that we hope to have upgrades to full users. This sometimes bites us because what might have been full users ends up being casual user only. I justify this since the customer is really buying what they need so they will feel better about the value they are getting and will more likely over time add more users. This is a longer term view. The knock I hear against other software companies is that the customer is forced to buy more than they need or buy shelfware which does not create a warm fuzzy feeling.

    We will be trying to add a freemium product in the near future with an easy upgrade path. 

  • Graham Ridgway

    Very interesting article David.  One thing I have found from experience is that pricing always gets over-complicated with too many variables.  So a lot of disciplined thinking is required to keep it simple and scalable.

    On another topic, traditional perpetual licence+maintenance vendors can get negative churn in their recurring maintenance revenues with index based price increases.  What do SAAS vendors do with their ongoing pricing?

  • http://twitter.com/kmamas Kostis Mamassis

    Exactly Jon! I personally believe that we should not confuse our saaS users with a multi-axis model. There has to be a single -optimally designed- axis only.

  • http://twitter.com/paulhigginz Paul Higgins

    This is a great article.

    I agree that value based pricing is a key concept, and the way you’ve put it – ‘How comfortable will you feel when talking to your customer about your price versus the value you generate?’ – is a nice way to explain it to people.

    I think you have to be careful about value-based pricing because sticking blindly to it can hinder a sale.

    Whilst it
    is important to understand the value to a sales prospect, if they start
    to get the impression that with every benefit they reveal you are going
    to increase the price accordingly, you are less likely to be able to
    have the open discussion about their business that would facilitate a
    closer working relationship through the sales process.

    On a similar note, your customers want to feel that if their
    circumstances are in some way exceptional then they should be able to
    get exceptional value. From your customers’ point of view, they purchase
    a product or service in order to improve their service to their customers. If your other customers – their competition – can derive the same relative value as they do then you lose the bargaining chip of selling competitive advantage.

    Value-based pricing on its own assumes your pricing objective is to
    derive a ‘fair’ value or a consistent ROI in every case. Your strategic
    pricing objective should be based on the number of customers you have,
    the state of the competition, your cash flow, the competence of your
    sales team, and many other factors.

    If you are trying to win your first customer in a new territory – or
    even your first customer entirely – you are not usually in a position of
    strength. By insisting that you take a fair price at that point, you
    risk losing a sale on price when your ultimate objective was nothing
    more than gaining a proof point in a new market.

    But as long as you feel comfortable that you are providing value then that’s the most important thing.

  • http://www.leveragepoint.com Steven Forth

    Great insight. SaaS businesses have many opportunities to innovate on pricing and to better tie their pricing to the value they generate for their customer (and that after all is the key to value-based pricing). For most companies I would try to keep to two axes, even three is hard to explain and manage. But more importantly, I would make sure that each axis can be linked to a dimension of how you create value for your customers. When designing your pricing model, one goal is to segment your market so that you can maximize your profit (margin x units). One way to fence segments is by getting creative in how you tie two (or if you need to three) pricing/value axes together.

    Companies that create new pricing metrics that link to value are able to dominate markets (think CPC and Google or how Amazon is charging compared to how Oracle charges).

  • http://twitter.com/cirrusinsight Cirrus Insight

    David, thank you. I found your blog only a couple weeks ago (where have I been?) and was immediately sucked in. Your “packaging” of this info puts it in immediate perspective.

    I was especially excited to see you posted this article. We’re actually discussing this exact topic this week in our planning sessions for our new SaaS start-up. I’d like to get your (and the community’s) feedback on the question on the table now:

    We’re weeks away from our commercial launch. We have several hundred users using the service in a public “free beta”. We’ll launch with a “Free” version and a “Standard” version and give customers a 30 day free trial. It’s a simple enough service, so 30 days will be ample to get a feel for it.

    Coming closely on the heels of the commercial launch is the first of what will be several “add-on” features. What we’re questioning is whether or not to stick with a single paid edition (Standard) and offer “Feature Bundle Set A” and ”Feature Bundle Set B” as *individual* add-ons, or to create “Plus” and a “Super Plus” (names obviously not nailed down yet) editions that include “A” and “A+B” respectively…

    Any thoughts?

  • JamesHRH

    David – this is terrific. My favourite example of transparent pricing is no longer in existence. It was at a an airline – they raised the price as the plane got full. They basically said, ‘you are worth less to us now that the plane is past break-even/profit; so, you are going to pay more.”

    I loved it. Not the paying more part, but the treating me like I had a brain part.

    Disciplined communication is key and a multi-axis structure is not too complicated, I believe.

  • Johnfurrier

    Great to discover your blog David.  I just linked to it from our site SiliconANGLE.com and ServicesANGLE.com..  excellent advice for entrepreneurs and business line managers.

    thanks for sharing

    cheers
    John

  • Raphael Perez

    A greart article showing the excellent practice of David in software.
    Freemium is for me the key. It can be called free trial (even with reduced features) or Open Source version. Nothing better than using a software that can show a value to a user. And as David wrote this is the reason why the free (or first price level) version should be with a very appealing set of features.
    I completely agree with the rest, for bringing customer to pay more based of more value shown to users.

  • David MacLaren

    Great post David. As a cloud-based digital asset management provider we price our services based on packages of storage and bandwidth that customers require as well as the number of data centres they want to employ. MediaValet is built on Microsoft’s Windows Azure PaaS cloud offering so we have access to six data centres in NA, Europe and APAC as well as their content distribution network (CDN) that includes another 25 data centres. Each allows for an additional layer of pricing. Further to this, we provide additional modules (under a similar pricing structure) for companies that have more complex digital asset management needs.

  • http://www.leveragepoint.com Steven Forth

    Is that VRX’s David MacLaren?

  • http://www.leveragepoint.com Steven Forth

    I believe in most cases you can have two axes. For example, Number of Users x Standard – Pro – Enterprise is two axes. You could of course combine these into one axis by having different allowed numbers of users for Standard, Pro and Enterprise offers, but that will not always work.

  • http://www.forentrepreneurs.com David Skok

    Thanks John. I appreciate the support!

  • http://www.forentrepreneurs.com David Skok

    Paul, You make a number of great points that I strongly agree with. Particularly the point about entering a new market or territory. Thanks for adding your knowledge and experience to the discussion.

  • http://www.forentrepreneurs.com David Skok

    Good point Jon.

  • http://www.forentrepreneurs.com David Skok

    It’s hard to answer this well without knowing more about the specific features and how the customers are likely to react to them being bundled. If you can clearly see that customers of type A will want to have Bundle A, then the bundling approach will be most attractive to them. On the other hand, if every customer wants some custom configuration of modules then the individual approach is likely to be more appealing. The best advice I can give you here is to talk to a few prospective customers and ask for their thoughts.

  • http://www.mediavalet.co David MacLaren

    Hello Steven, it’s been ages. MediaValet grew out VRX’s need for a global digital asset management system to meet the needs of it’s 10,000 plus hotel clients. A year later and MediaValet is an enterprise class, 100% cloud based, DAMS and servicing the needs of companies in a variety of industries around the world. Check us out at http://www.mediavalet.co.

  • http://www.forentrepreneurs.com David Skok

    Great question. There are a few bad experiences that I am aware of (ZenDesk and Netflix) that tried to implement a price increase on the installed base and saw strong negative reactions. That would incline me to suggest that the best approach is to grandfather the old pricing for the installed base, and keep the price changes for new customers going forward.

  • John Stewart

    We have a couple of SaaS products that we are now bringing to market.  Our clients expect a discount at certain tiers of user licenses.  My questions is how should we handle the transition areas between tiers without making our prcing model overly complicated.  It seems “off” that a company using 1001 seats is paying less than a client using 999 seats just because they crossed a threshold.  I was wondering if you had any suggestions for correcting this flaw in a tiered model. 

  • Guy Marion

    I have experimented with this threshold-based pricing “drop” at our SaaS company over recent years. One approach is to simply apply a standard user-based discounting model (10% at 25 users, 15% at 50 users, 20% at 100 users, etc.), then sell in packs of users. This has provided the best cost/benefit between minimizing customer pricing-related pushback, avoiding “nickel and dimer” customers, and overcoming the pricing drop that you mentioned above. For example, if you sell in bundles of 5 users, 105 users will be marginally more expensive than 100 users, even though they are paying a lower per user rate, being at the higher discount tier.  This scenario assumes that you want a set pricing menu that you can display on a website for easy self-service purchasing by users.

    The Enterprise option is to sell users incremental revenue licenses, and apply the discount tier only to those licenses that cross the threshold. So, seats 1-25 are at 100%, 26-50 are at 10% discount, 51-100 users are at 15% discount, etc. This can become a nightmare to manage as you scale though, if not fully automated in your billing system. 

  • http://twitter.com/IanDSmith IanDSmith

    A few points to make on this subject:

    1. Keep it simple, agreed 3 max pricing points with clear logic why it will cost more
    2. Watch the storage cost of data to ensure your price points are all profitable
    3. Churn can happen for many reasons but don’t forget to integrate your SaaS product into your customer’s other systems (workflow) as much as possible to ensure change costs are high. Oftn its far too easy for a customer to be trigger happy, switch you off with no chance of recovery.

  • Anonymous

    David, thank you for another very insightful post. 

    I would agree with you that 2 or perhaps even 3 axis pricing works best to extract the maximum value from your SaaS customer base, but sometimes these axis are not obvious.  If “seats” makes sense for your product, as it does for Salesforce.com, then that’s an easy one.  Same for storage.  Sometimes, though, it takes a while to determine the optimal multi-axis strategy and meanwhile you are stuck with a single axis (usually feature based, basic, pro, enterprise).

    I was wondering if you have any insights into how companies can make a transition from 1 to 2 axis pricing without upsetting their existing customer base too much.  For example, HubSpot recently went through that transition (we are a customer).  It turns out that we are pretty much paying the same as we were with the old model, but I can definitely see customer cases where making that transition would have a hit on short term revenue (assuming they let their legacy customers switch over).  Any thoughts/insights of how to make this transition smoother? 

    Thanks again for the great blog.  Your Viral Marketing Lessons Learned post is one of my all-time favorite posts and I have shared it with many entrepreneurs who think that viral marketing “just happens” if you have a good product.

  • http://www.forentrepreneurs.com David Skok

    Unfortunately I think it is extremely hard to pass on a price increase to an existing SaaS customer base. So I would recommend thinking about something like introducing the new pricing at the same time that you come out with some very significant new functionality. The new pricing applies to new customers, but the old customers get to keep paying the same price. However you don’t give them the new functionality unless they upgrade and add on a new module, or switch to the new pricing.
    But the two situations we have recently seen where ZenDesk and NetFlix changed pricing on existing customers did not end well. So that is the data that suggests not forcing a price rise on existing customers.

  • Graham Ridgway

    Thanks David that’s what I thought.  I also saw your later comment on increasing price for new modules/versions.  Are there any good industry examples of this happening?  Am i right in thinking that Netsuite started with really low pricing and then moved it up significantly?  Certainly the people I have spoken to think it’s now a pretty expensive product.

  • http://twitter.com/akibalogh Aki Balogh

    Great post, David. I enjoy reading your blog.

    I would add one more aspect to consider. You briefly touch on freemium. However, this topic is more nuanced as “free” is perceived differently than any named price. This can have significant implications on your business model.

    For example, if your company collects data on customer use, you can leverage the data asset to realize value even while providing a product for “free”. Or you can use “free” to wholly disrupt the marketplace and gain significant market share (ex: MySQL was “free” yet sold for $1B to Sun).

    Thus, you may find yourself in a position where the optimal price is “free” with very limited conversion options.

  • http://twitter.com/annatalerico Anna Talerico

    Best written analysis of Saas customer revenue metrics ever. Thank you.

  • http://twitter.com/annatalerico Anna Talerico

    We base ours on a single axis (in our case, unique visitors per month), and it is dead simple. Some people still get confused, but I think it is as straightforward as it gets. Tiers based on traffic levels. http://www.ioninteractive.com/liveball-software-get-started/

  • http://twitter.com/annatalerico Anna Talerico

    Absolutely. We have always grandfathered in existing customers, so they don’t have their rates change. Why make your existing fans upset?

  • http://www.forentrepreneurs.com David Skok

    HubSpot is an example of a company that has introduced new functionality and changed their pricing to reflect the additional power. It wasn’t done by introducing a new module, but they did add a new Enterprise version, and usage-based variable pricing axis. They grandfathered the old pricing to existing customers.
    I don’t know the history of NetSuite – sorry!

  • Mitesh

    Excellent article! Thanks for sharing this David. The bigger challenge  is customization customers request (typically for enterprise products) on top of whatever versions/flavors you have and how do you factor in the price for that. If you can productize the customization, great, otherwise you need to deal with version and pricing nightmare. How do you manage & deal with this effectively?

  • Mitesh

    Excellent article! Thanks for sharing this David. The bigger challenge  is customization customers request (typically for enterprise products) on top of whatever versions/flavors you have and how do you factor in the price for that. If you can productize the customization, great, otherwise you need to deal with version and pricing nightmare. How do you manage & deal with this effectively?

  • Graham Ridgway

    According to received wisdom, customization is not feasible in the SAAS world.  By that I mean a market where the vendor is relying on repeatability, scale and critical mass.  Building a specific version for one customer is the antithesis of this model.

    I think you have two alternatives.  Firstly you will need to productize the customizations through your feature/product management PLM process.  This will restrict customizations and to some degree dumb them down to be applicable to all.

    The second course is if the customer has a huge RoI case and can pay the amount for you to build and provide a customer specific version.  My guess is the latter is very unlikely to be the case.  Don’t be tempted to do it without recouping the full cost.  You will (at best) destroy your margins that way.

    So I think it boils down to limiting customizations so that they can be productized.  As a word of warning though, don’t try to build customizations in so they can be configured out for all customers bar the one.  Been there before and got into a big muddle.

  • Mitesh

    Thanks for the insight Graham. As you rightly said, first option makes more sense and that is what we have tried to stick as far as possible. But it becomes difficult when you have a new product and you are trying to sell it to customers. You have to do a balancing act.

  • Mitesh

    Thanks for the insight Graham. As you rightly said, first option makes more sense and that is what we have tried to stick as far as possible. But it becomes difficult when you have a new product and you are trying to sell it to customers. You have to do a balancing act.

  • http://twitter.com/MargaretMolloy Margaret Molloy

     Powerful article. Thanks

  • http://www.openviewpartners.com Scott Maxwell

    David,
    You rock…thanks for another really thoughtful post about something that all companies struggle with!  Pricing is a complex issue and you organize the dimensions really well.

    Scott Maxwell
    OpenView Venture Partners

  • Brian Hachez

    This is my greatest worry on my pricing strategy. Going to offer customer acquisition software to banks. My idea is pay by the piece. When you have business, you pay. When you don’t, it’s less. Worry customers might pre-screen and reject customers outside the system (and not paying). Any other dangers? Suggestions on avoidance?

  • http://www.forentrepreneurs.com David Skok

    Brian, you may run into the unintended negative consequence that customers don’t want your product to succeed as that way they can reduce the amount that they pay you. Here’s another problem case: if the bank were to run a very successful campaign where they spent the money to create customer demand, is there a risk that you would get paid a lot more for something where you had little to do with the volume increase? If that is the case, as a prospective customer, I would not like that pricing scheme.
    Many customers also like to be able to budget a specific amount for a product, and not have to worry about it varying all the time.

  • Graham Ridgway

    I’m with David on this.  I learned from painful experience many years ago when a customer of mine insisted on paying for customer support per case logged.  They, like most people did not have the internal financial systems to deal with this.  As far as their Finance dept was concerned, they’d either bought something or they had to justify the buying of the item.  The net result was that the customer avoided making support calls, the software they had purchased stopped working and inevitably it was the vendor’s fault!

  • http://twitter.com/bcwright1217 bcwright1217

    You could also incorporate API access to your platform and make an intro to a services company that can add the customization.

  • http://twitter.com/bcwright1217 bcwright1217

    One comment: for many/most SaaS products, it requires a fair amount of user work to get value back. E.g. Salesforce requires customization and integration into your sales team’s workflow, etc.

    As a buyer of these services when the pricing model means the harder my team and I work to get value, the more expensive the product, it can feel like you are chasing ROI and never reaching a breakthrough.

    What you want is a product and pricing where even if the cost goes up, it’s slope is definitely lower than the value. I think SF has nailed this – adding one user license (say for legal) when all sales teams are on SF already is a trivial cost and only has to save one hour a month to break even.

  • http://twitter.com/bcwright1217 bcwright1217

    One thing about multi dimensional pricing for the service and also add on products: you need to make sure this is clear during the sales process, probably before going beyond the initial demo. A couple actual cases that have happened to me as a buyer:

    1. One rep talked about features generally “oh yeah we do that by integrating with salesforce” in response to specific questions, but in reality they couldn’t handle the use case I was drilling in on. As a buyer if you have specific questions about a use case, it’s your job to make sure they can be handled, but as a seller you need to be forth right about them.

    2. In another instance plugin was talked about as a way to deal with a use case, but only after the sale it came up that the plugin was paid.

    3. Finally a company with a pro version and enterprise version: while discussing the pro version they setup a demo and demo’d the enterprise functionality as well. It was awesome functionality – but my complaint is that they didn’t distinguish in advance.

    At SaaS price points vendors cannot afford the field rep approach of building a personal relationship that supercedes the professional one – and even being unclear about incremental charges will do that with SaaS. (Why? Because a big promise of SaaS is that you know what you are paying, if all of the sudden that becomes a variable expense, it undermines one of the SaaS advantages.)

  • http://www.forentrepreneurs.com David Skok

    Good points. You are really describing something very important for building trust and long term relationships: the need for good sales ethics, which means full transparency and disclosure around pricing with customers during the sales process.

  • http://twitter.com/bcwright1217 bcwright1217

    One thing about multi dimensional pricing for the service and also add on products: you need to make sure this is clear during the sales process, probably before going beyond the initial demo. A couple actual cases that have happened to me as a buyer:

    1. One rep talked about features generally “oh yeah we do that by integrating with salesforce” in response to specific questions, but in reality they couldn’t handle the use case I was drilling in on. As a buyer if you have specific questions about a use case, it’s your job to make sure they can be handled, but as a seller you need to be forth right about them.

    2. In another instance plugin was talked about as a way to deal with a use case, but only after the sale it came up that the plugin was paid.

    3. Finally a company with a pro version and enterprise version: while discussing the pro version they setup a demo and demo’d the enterprise functionality as well. It was awesome functionality – but my complaint is that they didn’t distinguish in advance.

    At SaaS price points vendors cannot afford the field rep approach of building a personal relationship that supercedes the professional one – and even being unclear about incremental charges will do that with SaaS. (Why? Because a big promise of SaaS is that you know what you are paying, if all of the sudden that becomes a variable expense, it undermines one of the SaaS advantages.)

  • Sport Hanwang

    Thanks for sharing the great article. I have a question:  Amazon EC2 is providing good service in a very low price. How can they do this? It seems that they are not worried about profit at all.

  • http://www.forentrepreneurs.com David Skok

    I believe they still have good profit margins. I just spoke with an enterprise customer who told me that using Amazon was 5x more expensive than adding resources to their own data centers. However they still like to use Amazon for spikes in workloads.

  • Kosta Kontos

    Thanks for the insightful article David.I have a question about another axis, namely customisation. We provide a customisable SaaS solution, and have adopted the
    classic billing model of a monthly user subscription fee. However some
    of our clients also require us to make customisations to their instances
    from time to time.

    Currently, if the customisation can be refactored into the main /
    shared codebase (thus allowing all of our clients to benefit from it),
    we do not bill for it. But the majority of customisations are
    client-specific, in which case we bill per hour (albeit at a significant
    discount to market-related hourly rates for software development).

    I know of some companies that don’t bill for their time at all, and
    others who bill for everything. What are your and your readers’ thoughts on these two
    strategies, and on the age-old problem of a SaaS vendor’s ability to provide customisations?Cheers from Cape Town :)