Personal tools
Document Actions
Home / Resources / Webinars / Pricing a SaaS Product – What’s the Big Deal?
Document Actions

Pricing a SaaS Product – What’s the Big Deal?

with Barbara Nelson and Jim Geisman

SaaS (Software as a Service) pricing is easy, right? Offer a low priced product, sell a ton, make money, and retire rich. Looks good on paper - as long as you’ve balanced the interaction between price levels, licensing metrics, packaging, and value delivered to your target market. Unfortunately, pricing a SaaS offering can be daunting for product managers, especially when they want their company to thrive and not just survive.

Pricing for SaaS doesn’t have to be so hard, provided you start with a solid foundation for pricing in the first place. Join pricing expert Jim Geisman and product management expert Barbara Nelson for this webinar to learn how to avoid common SaaS pricing mistakes.  Also, feel free to take the MarketShare/BPMA Software Pricing Survey. The survey contains eight questions and takes about five minutes to complete.


Watch Pricing a SaaS Product – What’s the Big Deal?





About the Presenters

barbara

With more than 20 years of experience in the software industry, and having launched several products following the Pragmatic Marketing Framework, Barbara Nelson is an evangelist of market-driven products. As an instructor for more than 8 years, Barbara teaches many of Pragmatic Marketing's top-rated seminars.

Prior to joining Pragmatic Marketing, Barbara served in several product management and marketing positions for enterprise accounting and finance software. As vice president of product marketing, she worked closely with product managers, marketers and developers, showing the value of using market facts over opinions. Barbara helped the company become a more market-driven organization instead of a development-driven organization by applying the principles she learned from Pragmatic Marketing. She attributes her success of building products people want to buy by actively listening to the market.


Jim GeismanJim Geisman is president and founder of MarketShare Inc. The firm was started in 1982 and, since 1987, has focused solely on software pricing. (See the firm’s website, www.SoftwarePricing.com.) MarketShare has helped emerging and established software companies solve some of their thorniest pricing problems including how to transition to the on-demand (SaaS) pricing model. Jim has written extensively on software pricing, is widely quoted in the trade press, is a frequent speaker at meetings and has consulted internationally on issues of software pricing and deal structuring. Jim has been a co-founder, director, advisor or mentor to early stage companies. He sits on the Board of the Professional Pricing Society and is an advisor to the Entrepreneurial Leadership Program at Tufts University. He holds degrees in electrical engineering from Tufts and a business degree from Harvard.


Hybrid Models

Posted by Jeff Berg at 2008-09-26 05:50 PM
Do you have an examples of hybrid models? Our customer base hit most of the "avoid SaaS" criteria: custom solutions, legacy integration and data migration, high level of data security and availabilty concerns. But they also are looking for many of the SaaS benefits: Low IT staff requirements, low cost of entry, don't want to maintain system?

Hybrid models

Posted by Jim Geisman at 2008-10-05 11:37 PM
The hybrid model is extremely difficult to pull off. Small to midsize companies can't afford it in terms of money and focus. So far, large companies like SAP and Oracle can't afford the "organizational cost" either.

If your customers have requirements that don't seem to fit the SaaS model I'd suggest doing more homework. Perhaps all they want is a different payment plan or the ability for you to offer a remote hosting option at an additional fee (which you should subcontract out ).

Pricing per project license

Posted by Howard Adam at 2008-09-26 05:50 PM
Is it acceptable to price SaaS (as a per project license), by charging an upfront set-up fee for this project and charge a per month fee? is it acceptable to chrage a lump sum amount annually rather than per month is this a per user price? per project

Pricing per project license

Posted by Jim Geisman at 2008-10-05 11:37 PM
Using a per project license metric makes a lot of sense if that is the way the customers derive value from using your application.

Getting customers to pay an upfront fee depends on how you describe it. As for charging a lump sum annually instead of monthly, you can do that but you may have to provide an economic incentive. For example, magazines promote the low price per day of a subscription but they only sell them on an annual or trial basis.

In a service bureau environment...

Posted by Ryan Winkler at 2008-09-26 05:50 PM
Can you address some comments to those offering a solution in a service bureau environment. We have many customers using a single software source. Today we don't charge them. In our supply chain environment the supplier pays fees. We want to start charging our customers for using our service.

In a service bureau environment...

Posted by Jim Geisman at 2008-10-05 11:37 PM
Getting customers to pay may be tough if your service is a lot like Expedia, who charges vendors when customers make reservations. If you can provide value to the customers that is independent of just using the vendors that plug into your application, then you may be able to charge customers for access. The trick is figuring what that value is, how much they are willing to pay and the cost of keeping track of these customers. Make sure the returns warrant the effort.

Metric based adjustments

Posted by Mare McMinn at 2008-09-26 05:50 PM
But can you not set metric based adjustments to vary price?

Metric based adjustments

Posted by Jim Geisman at 2008-10-05 11:37 PM
I'm not sure I understand. If you are wondering about discounting, you can have a volume discount schedule.

I would think twice about giving volume discounts since the low prices that are a result of discounting will stay with you over the life of your relationship with the customer. Consider providing additional free services at no additional cost instead.

If you decide to discount SaaS-delivered products, you will need to decide whether customers who qualified for a discount at one time are entitled to that same price when they come back and buy less volume.

Price to customers

Posted by Kevin Overcash at 2008-09-26 05:50 PM
Does this not require further justification of the price to customers forcing longer sales cycle as you expound the benefits of SaaS? i think there is still a significant issue with positioning a SaaS product against other products that are perpetually licensed. Market value for SaaS is still a challenge. or a more security focused dev team and consequently more secure application a SaaS solution might have a more secure datacenter for instance if we are surprised by the higher price, imagine what the customers think?

Price to customers

Posted by Jim Geisman at 2008-10-05 11:37 PM
If you must justify a price make sure the focus is comparing the price to the value that you are delivering.

If you are encountering longer sales cycles, it is hard to separate the SaaS part of the sale and the new-product-from-new-vendor part of the sale. The sales cycle may stretch when you license products to customers that don't understand much about IT and the benefits of remote hosting.

Your point about off premise hosting being more expensive than you anticipated is probably correct, because most software development organizations -- especially smaller ones -- don't have very robust IT infrastructures and therefore don't understand what is involved. Prices are often a surprise when the information about costs (and benefits) you gather or are presented with is incomplete.

Question

Posted by Kevin Overcash at 2008-09-26 05:50 PM
Curious as to why security was listed as a drawback.

Question

Posted by Jim Geisman at 2008-10-05 11:37 PM
Security was listed as a drawback because there are a number of customers who are very sensitive to having their data stored remotely in another company's facility.

Subscrioption Model

Posted by Brian Kellner at 2008-09-26 05:50 PM
Is it wise or not to price a subscription model for premise based software as the same w/ an "X" year payback ?

Subscrioption Model

Posted by Jim Geisman at 2008-10-05 11:37 PM
You do need to understand the relationship between a premise-based subscription and the software part of a SaaS offering as suggested in the presentation (see the "Stair Step" slide).

When pricing a subscription model vs. the SW part of SaaS, you need to decide on the payback period based on the which product you want your customers to buy.

Pricing

Posted by Bob Stevenson at 2008-09-26 05:50 PM
10x your price is that per year or over the life?

Pricing

Posted by Jim Geisman at 2008-10-05 11:37 PM
That should be over the useful life of product. You can then slice it up into smaller chunks to find out the annual, quarterly, monthly value.

Multi Year Subscriptions

Posted by Mary Ann Fitzhugh at 2008-09-26 05:50 PM
How do you handle thru pricing the problem that customers into a multi-year subscription start realizing that they could have purchased a perpetual license by now? Do you create a significant delta between subscription & perpetual licenses? How much is too much?

Multi Year Subscriptions

Posted by Jim Geisman at 2008-10-05 11:37 PM
The cost difference should have been clear from the beginning. But if they want to "buyout" their subscription, like someone wanting to buy out a car lease and own the car, then you should think about doing that. The buyout price needs to be acceptable to you and not necessarily attractive to them. Don't negotiate against yourself.

Increasing My Price?

Posted by Dan Marom at 2008-09-26 05:50 PM
I have a service that has a unique technologly but I need to educate the market. Can I increase the price with time or once I set the initial pricing I can only decrease it?

Increasing My Price

Posted by Jim Geisman at 2008-10-05 11:37 PM
A brief answer is very difficult. First, unique technology needs to be explained very carefully. "Make the strange familiar, and the familiar strange" is good advice since people like to buy things that make them feel comfortable or smart.

The price level for any product depends on the product roadmap. Absent an upsell path, then set the price to get the volume you need to meet your revenue goals. If there is an upsell path, then your initial price depends on its position relative to the other offerings that will be coming down the road.

(Of course the price level is set according to the customer economics and your business strategy tempered by the competition.)

Customer attrition rate

Posted by Norman Eldridge at 2008-09-26 05:50 PM
How may one factor a customer attrition rate over time for SaaS pricing?

Customer attrition rate

Posted by Jim Geisman at 2008-10-05 11:37 PM
Customer retention rates depend on "the stickiness" of the application and the level of service (application delivery and support) the vendor provides. Retention rates well above 90% are not unheard of in the SaaS world.

Question

Posted by Arthur Abrantes at 2008-09-26 05:50 PM
Does Pragmatic Marketing have a template for pricing (pricing model)?

Question

Posted by Jim Geisman at 2008-10-05 11:37 PM
I'll let Pragmatic Marketing answer the question. But I would be curious about what you think such a template would look like. Feel free to contact me off-line. My e-mail address is at the end of the webinar presentation.

pricing template

Posted by Barbara Nelson at 2008-10-13 12:02 PM
We do not have a template due to the widely varied pricing models and methods that are possible. Business Resource Software has a product ($229) called Plan Write that is useful for helping you with your pricing strategy. The URL is http://www.brs-inc.com/pricing_plan.asp. But you still need to do the things Jim talked about (and the product management work in understanding value, competitive landscape, business case, and so on) in order to use the tool effectively.

Value add

Posted by Michael Curving at 2008-09-26 06:13 PM
Can you introduce the value add to customers who are price senstivie? If saas is better for price sensitive how will they pay more for it?

Value add

Posted by Jim Geisman at 2008-10-05 11:37 PM
Introducing value-add to customers, whether they are price-sensitive or not, is part of the value proposition. An effective value proposition, whether it is delivered personally or on a website, should highlight valued delivered that support the price you ask.

The question you asked about price-sensitive customers and their willingness to pay depends on what your prices are being compared to. Over a period of time SaaS like any periodic payment will be more expensive than paying a lot up front.

Businesses, like consumers, are often attracted to low monthly payments or low annual payments if they are unwilling or unable to pay a large up front fee.

Compensation

Posted by David Daniels at 2008-09-26 06:13 PM
How should I compensate my sales guys when a SaaS revenue stream is perpectual?

Compensation

Posted by Jim Geisman at 2008-10-05 11:37 PM
Recurring revenue sales comp needs to be carefully thought out. Compensation schemes should keep salespeople selling and not give them an opportunity to make money without putting out substantial effort barring the occasional "bluebird".

Many SaaS companies compensate reps based on the first-year contract value plus add-ons sold to existing accounts. They may add a residual for some period of time to encourage account maintenance.

Question

Posted by Gareth Priest at 2008-09-26 06:13 PM
What experience do you have in converting existing customers from a perpetual & M&S model to a new Subscription model?

Question

Posted by Jim Geisman at 2008-10-05 11:37 PM
If you are trying to convert existing customers from a traditional model to a new subscription model -- it doesn't even have to SaaS -- this may be very difficult, unless customers see a significant benefit in doing so. One of the ways I've seen is to give the customer the same level of usage and product for the price of the annual maintenance and support. Over a period of time as the customer purchases more product they pay the then current (subscription) prices.

How do you Differentiate?

Posted by Elena Hesse at 2008-09-26 06:13 PM
If your current clients are the same as the new clients, there just was not a SaaS model for them until now, how do you differentiate?

How do you Differentiate?

Posted by Jim Geisman at 2008-10-05 11:37 PM
As I mentioned in the webinar, some clients may find the unique features of the SaaS model more attractive than the traditional model (on-premise, paid up front or annual subscription). If these clients are different from your existing clients, you are home free and won't cannibalize your revenues. If not, find a way to make the differences clearer with packaging or pricing.

Question

Posted by Nupur Thakur at 2008-09-26 06:13 PM
How effective is a model where there is an intial fee (initiation) and a SaaS fee based on number of users and time or others.

Question

Posted by Jim Geisman at 2008-10-05 11:37 PM
Initiation fees can be effective if customers accept them which means how they are explained is critical. Make sure there is something in it for the customer.

If the explanation is too difficult, then fold this into the price of the service and get a minimum commitment to cover your costs if cashflow timing is an issue.

Pricing Models

Posted by Michael Wagner at 2008-09-26 06:13 PM
How do you price offering that has 2, both per seat and usage, variables? Is there a model you suggest looking at?

Pricing Models

Posted by Jim Geisman at 2008-10-05 11:37 PM
Above all, if you have two metrics make it easy for the customer to figure out how much they will be charged using some sort of a interactive calculator. While there is nothing wrong with having two metrics, see if you can collapse them to a single one. Choose which of the metrics will be where you expect to make most of your revenue. For example if user fees will be where you make your money, then you may want to fold in usage/other fees into the per user charge based on estimated usage or whatever the other metric is.

Question

Posted by David Sturrock at 2008-09-26 06:13 PM
Running our product is very processor intensive. It seems like an Saas version of our software might put us more into the server farm business than in our core competency. Is this an appropriate business model to even consider?

Question

Posted by Jim Geisman at 2008-10-05 11:37 PM
The processor intensity could be a problem if it also requires extremely high-bandwidth or results in an unacceptable response time. As for getting into the server farm business: Don't. Software companies are hard pressed to deliver reliable software so they should subcontract hosting to people who know how to deliver reliable service involving complex configurations of hardware and software.

Key Questions

Posted by Santhosh Siruvole at 2008-09-26 06:13 PM
What key questions should I ask to assess how much my customers are willing to pay for SaaScription?

Key Questions

Posted by Jim Geisman at 2008-10-05 11:37 PM
The key questions to ask need to help you understand the financial impact of your application on your customers businesses. Questions concerning the current situation and how it would change the customer's economics are helpful. Hypothetical questions about how much they would think about valuing the product or even what they think someone else might pay can be useful. Overall, be very careful in asking about price points directly.

Comparing Pricing Models

Posted by Irvin Lustig at 2008-09-26 06:13 PM
How can you compare the pricing models of perpetual and SaaS, when the metrics are different?

Comparing Pricing Models

Posted by Jim Geisman at 2008-10-05 11:37 PM
The broader issue is comparing prices when products have different metrics regardless of how they are delivered. Doing any comparison means making assumptions about configurations. When comparing SaaS to software-only products make sure to back out the hosted component or add the on-premise support costs with the software-only product price so you can make an apples to apples comparison.

Charging More?

Posted by Scott Petoff at 2008-09-26 06:13 PM
Our SaaS competition charges LESS than our on-premise offering. You are suggesting charging MORE for SaaS so how do I deal with this current reality?

Charging More?

Posted by Jim Geisman at 2008-10-05 11:37 PM
Everyone should anticipate SaaS offerings being less costly on an annual basis than on-premise (and maybe higher than maintenance and support.)

Competitor pricing will relate to their business plan if prices are set rationally. Too often competitors don't know what they are doing and their pricing may drive them out of business. Don't let them take you along.

Try and understand how long the breakeven time is for their SaaS offering -- excluding hosting -- relative to your perpetual plus, M&S offering. If the time to breakeven is very long e.g. 5 years, then they may have underpriced their offering and the pricing may be unsustainable unless they are well funded. If the breakeven is fairly short e.g. less than 3 years, your offering may be overpriced and need adjusting.

Cost Perspective

Posted by Asad Jobanputra at 2008-09-26 06:13 PM
Can we really know what the cost perspective is for each component of the value add, rather than the percieved value

Cost Perspective

Posted by Jim Geisman at 2008-10-05 11:37 PM
Some of the value added elements I referred to in the webinar do have a cost associated with them like the cost of money or the cost of hosting. I recommend focusing on understanding why the customer values your application and then make sure that you can deliver what they want at a cost that is acceptable to you. If you have deep pockets from raising a lot of capital, you may be able to withstand losses for a while but it is probably better to repackage the product or rethink the business.

Question

Posted by Asad Jobanputra at 2008-09-26 06:13 PM
How do you price SaaS offering when you want other people to extend its capabilities. i.e. Salesforce.com has other 'vendors' who have built add-on products. is there a difference between how saas purchases are reflected on the balace sheet?

Question

Posted by Jim Geisman at 2008-10-05 11:37 PM
If you want to turn your SaaS offering into a platform, build sales volume as fast as you can and architect the product so that others can extend it. Pricing will affect volume but it is probably more important to make sure your product is attractive to the market you are addressing. THe market should be broad enough and diverse enough so that people will want to add onto your product.

Software purchases arfe reflected on a customer's balance sheet if they are capitalized (the traditional model). SaaS license purchases often wind up being expensed.

'what will the market bear'

Posted by Nalini Natarajan at 2008-09-26 06:13 PM
In the SaaS pricing proposed in this session, how/where are you considering the 'what will the market bear' element to the pricing equation?

'what will the market bear'

Posted by Jim Geisman at 2008-10-05 11:37 PM
I wasn't explicitly considering what the market will bear, because I assumed that most of the people in the audience knew how to price a perpetual product, which takes that into account. In general, you want your prices to reflect the customers economics, the competitive environment, your offering and your marketing objectives. If you have no competition including substitutes, you can set your price closer to the economic value the customer gets from using your application.

Question

Posted by Ravi Duddukuru at 2008-09-26 06:13 PM
In SaaS model, customers will take advantage of the flexibility and will pay for the months in which they use the product. That means manufactuers won't get paid for all 5 years. How do we take that into pricing consideration?

Question

Posted by Jim Geisman at 2008-10-05 11:37 PM
I am interpreting the question to mean that the usage rate can fluctuate up as well as down. If your "won't get paid for all five years" you mean that your product has a 5 year amortization period, then maybe you should consider a shorter timeframe. Alternatively, consider what the average usage would be over that period of time. You should consider these fluctuations in pricing and may want to model different scenarios or even do a Monte Carlo simulation.

Question

Posted by Marius Militaru at 2008-09-26 06:19 PM
Are there any accepted intervals for the difference of the SAAS monthly price when compared with the yearly price divided by 12? something like, usually the SAAS monthly price is between xx% and xx% higher than the monthly calculated price of a yearly license.

Question

Posted by Jim Geisman at 2008-10-05 11:37 PM
No there aren't any standards. You are on the right track, though, looking for a premium above the "standard term" offering. For example, if a 3-year term is 100, how much above 100/3 should a 1-year license be prices (or 100/36 for a monthly license.)

If an annual license is the norm, then the issue is how much of a discount should a customer get for a longer commitment.

Sales Commision

Posted by Susan Raisanen at 2008-09-27 11:11 PM
How do you pay sales commissions on SaaS? Perhaps you have a webinar on this?

Sales Commision

Posted by Jim Geisman at 2008-10-05 11:37 PM
Very carefully... See "Compensation" post above.

Overview Remarks

Posted by Jim Geisman at 2008-10-05 11:37 PM
Based on comments of people who attended the webinar, I'd like to clarify that the presentation was intended to make two points. First, payments customers make for a traditional perpetual license, a subscription license, or a SaaS offering are all related to each other. Second pricing any one of these offering can be done systematically.

That's why the presentation was **SaaS Pricing: What's the Big Deal**. SaaS pricing per se isn't a big deal because it's just like any other product pricing task -- which is a big deal (important)...

The presentations assumed people were already comfortable pricing products using a perpetual model so we started there and built on it. Because of time limitations, we didn't get into many details about how to do pricing. Instead,we provided a framework for building on top of a perpetual license price to develop prices for the same software product provided on a Subscription and SaaS basis.