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SaaS pricing is more than "the number". The number does play an important role in an overall pricing MODEL. If the cloud pricing model / SaaS pricing model is broken, margins take a hit, costs are be …

SaaS pricing is more than "the number". The number does play an important role in an overall pricing MODEL. If the cloud pricing model / SaaS pricing model is broken, margins take a hit, costs are be higher and a company will not hit its full potential.

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  • 1. SaaS Pricing for the CloudPricing Strategies That Can Lead to SaaS Success Jim Geisman Software Pricing Partners, Inc. 27 January 2011 Sponsored by: 35 Main Street • Wayland, MA 01778 • (508) 647-0330
  • 2. Alice, the SaaS Entrepreneur "Would you tell me, please, which way I ought to go from here?" "That depends a good deal on where you want to get to," said the Cat. "I dont much care where---" said Alice. "Then it doesnt matter which way you go," said the Cat. "---So long as I get somewhere," Alice added as an explanation. "Oh youre sure to do that," said the Cat, "if you only walk long enough." … "But I dont want to go among mad people," Alice remarked. "Oh you cant help that," said the Cat: "were all mad here. Im mad, youre mad."© Software Pricing Partners, IncAll Rights Reserved -2-
  • 3. Topics  Price vs. Pricing Model  Shifting Expectations  Driving Revenues  Three Mistakes to Avoid  Missing Pieces© Software Pricing Partners, IncAll Rights Reserved -3-
  • 4. Takeaways  Price vs. Pricing Model  Five elements  Price level is only one element  Shifting Expectations  What matters is what matters to customers  Customer expectations are changing  Driving Revenues  Model the business carefully  Find the right growth model  Three Mistakes to Avoid  Avoid them… by thinking… carefully© Software Pricing Partners, IncAll Rights Reserved -4-
  • 5. Price vs. Pricing Model Many Pricing Models Full custom 99 cent app Flat rate Freemium Perpetual, subscription Multi-tier packages Per-user, per-click CPU power© Software Pricing Partners, IncAll Rights Reserved -5-
  • 6. Price vs. Pricing Model Many Pricing Models Elements X Full custom 99 cent app Flat rate Deal Pricing Price Freemium Details List Prices Perpetual, subscription Scheduled Discounts Packaging & Licensing Multi-tier packages Value Metric Per-user, per-click CPU power© Software Pricing Partners, IncAll Rights Reserved -6-
  • 7. Price vs. Pricing Model Pricing Model Deal Pricing Price Deal Pricing Price Details Details List Prices List Prices Scheduled Discounts Scheduled Discounts Packaging & Licensing Price Packaging & Licensing Structure Value Metric Value Metric© Software Pricing Partners, IncAll Rights Reserved -7-
  • 8. Topics  Price vs. Pricing Model  Shifting Expectations  Driving Revenues  Three Mistakes to Avoid  Missing Pieces© Software Pricing Partners, IncAll Rights Reserved -8-
  • 9. Shifting Expectations Major Industry Trends  Commoditization continues  Less costly technology  More competition  More me-too products  Rapid changes in features  Short product lives  Web is everywhere  B2C influencing B2B  More web and mobile apps  User experience more important  More self-service  Reliably “on-tap”© Software Pricing Partners, IncAll Rights Reserved -9-
  • 10. Shifting Expectations What Customers Are Looking For Smaller “chunks” Offering Timely, rapid delivery Low price alternatives Competition More features Economics, TCO Decision-making Perceived value Self-service options Buying Easy to order and track Online, immediate Channel Less outside sales© Software Pricing Partners, IncAll Rights Reserved - 10 -
  • 11. Shifting Expectations Impact on Pricing Model Smaller “chunks” Offering Timely, rapid delivery Low price alternatives Competition More features Pricing Model Requirements Decision-making Economics, TCO Perceived value  Link pricing to value Buying Self-service options  Keep things simple Easy to order and track Online, immediate  Make pricing transparent Channel Less outside sales  Address multiple segments by  Packaging & Licensing  Scheduled discounts  Multiple payment options© Software Pricing Partners, IncAll Rights Reserved - 11 -
  • 12. Link to Value What Is the Value of SaaS? ISV Perspective End-Customer Perspective  Remotely hosted  Lower IT costs / burden  Web-enabled  Widely available  Browser accessible  Shallow learning curve  Multi-tenant  Cost savings passed on  Single code base  Cost savings?  Must-take updates / upgrades  ???  Easy to try / buy / use  Fast time-to-value  PAYG or annual fee  Payment and value aligned  May integrate with other apps  Flexibility (maybe)  IaaS, PaaS  ???© Software Pricing Partners, IncAll Rights Reserved - 12 -
  • 13. Link to Value SaaS vs. On-Demand vs. Cloud  Does customer care about what “it” is called? Couldn’t Lock Onto a Useful Definition© Software Pricing Partners, IncAll Rights Reserved - 13 -
  • 14. Topics  Price vs. Pricing Model  Shifting Expectations  Driving Revenues  Three Mistakes to Avoid  Missing Pieces© Software Pricing Partners, IncAll Rights Reserved - 14 -
  • 15. Driving Revenue Get Paid More as Value Scales  Align metric with customer’s business  Scale metric with value delivered  Functionality  Entry point  Upgrade path  Deployment  Users / Usage  Accounts  Capacity / Limits  How much available  How much “consumed”© Software Pricing Partners, IncAll Rights Reserved - 15 -
  • 16. Driving Revenue Everything Is Connected Pricing Model Levers Order Size Price Levels Customer & Steps Growth Rate Functionality Upgrade & Packaging Rate Commitment Viral Unit Length Growth Rate Retention Rate© Software Pricing Partners, IncAll Rights Reserved - 16 -
  • 17. Driving Revenue Growth From Functionality Value Product line and pricing Product #1 Product #2 Product #3 List price per month $12.00 $18.00 $24.00 List price per quarter $36.00 $60.00 $72.00 List price per year $144.00 $240.00 $288.00 Net Revenue Customer Count 200.0 Number of Customers (K) $25.0 150.0 Revenue ($M) $20.0 $15.0 100.0 $10.0 50.0 $5.0 $0.0 0.0 1 2 3 4 5 1 2 3 4 5 -50.0 Year Year New Customer Revenue Defections New Custs Added During Year Installed Base Revenue Custs Retained to Start Yr Customer Acquisition Initial number of customers 1000 Annual growth rate in new customers 100% Retention rate 95% Net number of customers at end of 5 yrs 157,178© Software Pricing Partners, IncAll Rights Reserved - 17 -
  • 18. Driving Revenue Growth From Deployment Value Unit Upgrades and Growth Commitment length (in years) 1 Total percentage of units to upgrade 60% % units upgraded from… Qtrs until # Qtrs Must be Product 1 to Product 2 50% 1 1 and 4 qtrs Product 2 to Product 3 50% 2 1 and 3 qtrs Product 1 to Product 3 10% 2 1 and 4 qtrs Installed Base Revenue Detail Installed Base Revenue Detail $25.0 $25.0 $20.0 $20.0 +$6M Revenue ($M) Revenue ($M) $15.0 $15.0 $10.0 $10.0 $5.0 $5.0 +30% $0.0 $0.0 1 2 3 4 5 -$5.0 1 2 3 4 5 -$5.0 Year Year Current Customers Upgrades Current Customers Upgrades Viral Growth Defections Viral Growth Defections 0% Annual viral growth rate in all types of units 20%© Software Pricing Partners, IncAll Rights Reserved - 18 -
  • 19. Driving Revenue Growth From Capacity Value HR Management Product© Software Pricing Partners, IncAll Rights Reserved - 19 -
  • 20. Topics  Price vs. Pricing Model  Shifting Expectations  Driving Revenues  Three Mistakes to Avoid  Missing Pieces© Software Pricing Partners, IncAll Rights Reserved - 20 -
  • 21. Mistakes to Avoid - #1 Revenue Doesn’t Scale Well t Lis re atu Fe $5/emp/mo means $1M = 200,000 mos HR Management Product© Software Pricing Partners, IncAll Rights Reserved - 21 -
  • 22. Mistakes to Avoid - #2 Freemium-Driven Growth Product line and pricing Product #1 Product #2 Product #3 List price per month $0 $18.00 $24.00 List price per quarter Free $60.00 $72.00 List price per year Free $240.00 $288.00 Net Revenue Customer Count Number of Customers (K) 1000.0 $80.0 Revenue ($M) 800.0 $60.0 600.0 $40.0 400.0 $20.0 200.0 $0.0 0.0 1 2 3 4 5 -200.0 1 2 3 4 5 Year Year New Customer Revenue Defections Installed Base Revenue New Custs Added During Year Custs Retained to Start Yr 3X Revenues (= $75M) 5X No. of Customers (= 750K) 2X Customer growth (= 200%) 2X Viral growth (= 40%)© Software Pricing Partners, IncAll Rights Reserved - 22 -
  • 23. Freemium-Driven Growth Upgrades Cover Costs of Free… Unit Upgrades and Growth Commitment length (in years) 1 Total percentage of units to upgrade 60% % units upgraded from… Qtrs until # Qtrs Must be Product 1 to Product 2 50% 1 1 and 4 qtrs Product 2 to Product 3 50% 2 1 and 3 qtrs Product 1 to Product 3 10% 2 1 and 4 qtrs Product Mix At End of Year 1,200 Depends on Number of Units (K) 1,000 upgrade rate 800 600 400 Zero revenue 200 Non-zero cost 0 1 2 3 4 5 Year Product 1 Product 2 Product 3© Software Pricing Partners, IncAll Rights Reserved - 23 -
  • 24. Freemium-Driven Growth … But Don’t Count On Them Unit Upgrades and Growth Total percentage of units to upgrade 60% Total percentage of units to upgrade 30% % units upgraded from… % units upgraded from… Product 1 to Product 2 50% Product 1 to Product 2 25% Product 2 to Product 3 50% Product 2 to Product 3 50% Product 1 to Product 3 10% Product 1 to Product 3 5% Net Revenue Net Revenue $80.0 $80.0 Revenue ($M) Revenue ($M) $60.0 $60.0 $40.0 $40.0 $20.0 $20.0 $0.0 $0.0 1 2 3 4 5 1 2 3 4 5 Year Year New Customer Revenue New Customer Revenue Installed Base Revenue Installed Base Revenue© Software Pricing Partners, IncAll Rights Reserved - 24 -
  • 25. Mistakes to Avoid - #3 Are SaaS Prices Too Low? Perpetual Value $ Subscription Payments Value SaaS Payments $ Time Value $ Time Time© Software Pricing Partners, IncAll Rights Reserved - 25 -
  • 26. Mistakes to Avoid - #3 Make Correct Comparisons Subscription Application M&S Payment Stream Infrastructure Perpetual Hosting SaaS© Software Pricing Partners, IncAll Rights Reserved - 26 -
  • 27. Correct Comparisons SaaS vs. Subscription Cume Payments ($K) SaaS Software Payment & Hosting SaaS – Software ONLY Breakeven 0 4 8 12 16 20 # Quarters© Software Pricing Partners, IncAll Rights Reserved - 27 -
  • 28. Correct Comparisons Payment Streams Must Be Comparable SaaS Software PLUS Hosting Breakeven Perpetual Perp + M&S Fee Software Fee Cume Payments ($K) SaaS Software-Only Breakeven 0 4 8 12 16 20 # Quarters© Software Pricing Partners, IncAll Rights Reserved - 28 -
  • 29. Topics  Price vs. Pricing Model  Shifting Expectations  Driving Revenues  Three Mistakes to Avoid  Missing Pieces© Software Pricing Partners, IncAll Rights Reserved - 29 -
  • 30. Missing Pieces Deliver (and Get Paid for) Value  What measured / metered  Align with customer’s economics  Functionality  Entry point  Upgrade path  Deployment  Users / Usage  Accounts  Capacity / Limits  How much available  How much “consumed”© Software Pricing Partners, IncAll Rights Reserved - 30 -
  • 31. Missing Pieces Avoid Common Mistakes  Revenue that doesn’t scale  Too-low prices  Limited upgrade path  Freemium-driven growth  Model out assumptions  Not for everyone  Compare software-only to software-only  SaaS delivery is added value (and risk)© Software Pricing Partners, IncAll Rights Reserved - 31 -
  • 32. Missing Pieces Pricing Model More Than “How Much?”  Drives revenues and costs  Customers - acquisition  Units - delivery  Metric  Key to value delivery  Packaging & Licensing  Trials and upgrade path  Commitment term  Price levels  New customer acquisition  Upgrade rates Sometimes “Good Enough” pricing isn’t…© Software Pricing Partners, IncAll Rights Reserved - 32 -
  • 33. Missing Pieces Track Metrics, Leverage Pricing Model Pricing Model Levers Order Size Price Levels Customer & Steps Growth Rate Functionality Upgrade & Packaging Rate Commitment Viral Unit Length Growth Rate Retention Rate© Software Pricing Partners, IncAll Rights Reserved - 33 -
  • 34. Thanks! Jim Geisman 508-647-0330 jimg@softwarepricing.com Sponsored by:© Software Pricing Partners, IncAll Rights Reserved - 34 -