
Linking SaaS Software Pricing to Value - swombat
http://www.readwriteweb.com/archives/linking_saas_software_pricing_to_value.php
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jonas_b
From the comments:

"SaaS = Software as a Service. It's a subscription model. In a way it's like
going to the gym, instead of buying the equipment"

I never seen that analogy before, kind of says it all I'd say. It's good cause
Saas is tricky to explain to most non-tech people.

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swombat
I think the best way to price your software, if you can do it, is based on
what actually costs you money.

For instance, in our case, the thing that scales up as our users use the
service more is the storage they use. That costs us money every month, so
we'll be charging per gigabyte of storage per month.

Adding users, on the other hand, costs us nothing - and in fact increases the
spread of our app. Therefore, we have no interest in charging per user.

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jacquesm
That makes very good sense at first reading, but the exact reason _why_
software was such a successful product in the first place is because the real
profits are in decoupling that 'paying for what costs you money' relationship
and to focus on getting people to pay something for something that costs you
very little to nothing but has perceived value for them.

Otherwise you'll always be a marginal business at best.

To illustrate that with the software example, the costs were in the
development, but people ended up paying big time for the distribution media.

Real multipliers are not found in the 'pay for what you use' arena, they are
more likely to be found in exactly the opposite direction.

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swombat
That's a very good point. I guess it depends on a number of other factors.

In our case, we can see a much larger very-targeted, high value advertising
opportunity if we do manage to saturate our niche - so user spread is very
important, and if we could we would even offer it for free to grab the market
share (unfortunately, if we do that we'll run out of money before we get a
chance to bring in the advertising).

I can see how for many other kinds of businesses, this would change
dramatically.

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akeefer
I know everything is moving to SaaS for very good reasons (both for the
developers and for the customers), but one thing the old packaged software
business had going for it was that costs were totally decoupled from pricing:
your largest cost tended to be development, which meant that you could (in
theory) just sell the same thing to 10x the number of people without
substatially increasing your costs.

Ironically, at least in the enterprise space our experience is that companies
will pay much more for installed software than for SaaS, which seems totally
counter-intuitive. When you're selling them installed software, they look at
it as an investment, evaluate ROI, compare against the amount required to do
an internal build, etc. When you're selling them SaaS, they look at it as a
cost center to be minimized, and their interest is primarily in driving your
costs through the floor.

To put it another way, with installed software they realize they're paying
your development costs, and that even if 100 other people are as well they
know that it's still cheaper to buy from you than to build themselves. With
SaaS, they act like they're paying you for hosting and support and totally
ignore the development cost aspect of things, so their acceptable price is
much lower. Irrational? Sure. But when my company investigated doing a hosting
offering of our enterprise insurance products, we basically saw that it would
probably end up just lowering our margins significantly, as well as probably
lowering a potential future market valuation. Any sales we lose from not
having an official hosted offering (we have partners that will host our
software for them, but they're still paying us the full license fee) are ones
we're willing to live with.

My understanding is that public markets have tended to value companies with
that exponential profit growth ability at higher valuations than companies
with more linear, fixed margins. There aren't all that many SaaS business
public at this point, so it'll be interesting to see how the market values
them once they are; my impression is that equivalent installed-software and
SaaS businesses (same revenue stream and profit, say) will have wildly
different valuations, fair or not, due to the theory that the installed-
software vendor can much more easily turn the crank to increase revenue
without increasing costs.

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Timothee
Interesting discussion.

Unfortunately, there's no one-size-fits-all solution. I saw one comment (#16)
saying that SaaS vendors have the ability to charge by usage and should do so
because companies wants to see the link between what they pay and what they
use/get.

But that doesn't work for all products. Charging per usage can mean these two
things: 1\. The final cost might be hard to evaluate and can get out of hand.
Some companies don't want that and want to be able to know in advance exactly
how much it will cost. 2\. It might tend to limit the usage of the software
because you don't want to upgrade if you can get by with what you have.

But I'm not saying charging per usage is not good! I'm trying to point out
that you need to look at the problem from different points of view (value you
bring, your costs, etc.) and see what works best in your case.

Not everybody can charge depending on what costs them either. Many web-apps
don't cost much to operate (if it's mostly displaying pages), so bandwidth
costs wouldn't be enough.

Is it easy to give a price to the value you give to your customers? If you can
say "it saves you that much time vs. what you have right now", it's easier
than for "make your customers happier thanks to a better service". Is there a
metric that would make sense to charge for? Is that metric easy to grasp by
your customers? I'm thinking of how Apple markets the sizes for iPod: by
songs. 8GB might be obscure but 2000 songs is much easier: I know what a song
is (about 3 minutes) and I can easily know how many I already have.

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sh1mmer
I'm surprised nobody mentioned that services like Salesforce that charge per
user SaaS could easily not bill "idle" users that don't login, or possibly
operate below some threshold.

I think swombat's point about balancing adoption and profit is a good one. For
example the US pharmo-giants miss out on the market of millions of Africans
who need really cheap drugs because they are seemingly too afraid of cheap
imports. It's not the production cost it's their refusal to lower the "value
price" to an appropriate level in that market.

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anamax
It's not necessarily true that they'd make more money selling to more people
at a lower price.

Revenue = avg selling price * #sales Cost = avg cost * #sales Profit = (avg
selling price - avg production cost) * #sales

If they double #sales but the average price goes down by <50%, they're going
to lose revenue. If they triple the number of sales, they'll reduce profit if
the cost is >50% of the post-reduction sales price.

Yes, increased sales can result in reduced average production costs, through
both reduced marginal costs and spreading the fixed costs across more units.
(The latter can be a big deal for drugs.)

However, the actual numbers matter.

US drug companies try to do price discrimination to address these issues.
However, if selling low-priced pills to Africa reduces their average selling
price too much, they're not going to sell to Africa.

