Start up business challenges of ISVs - How do I define the right pricing stratetegy for my solution?
This time I will take you into the different pricing models. Pricing your SaaS offering is no longer determined simply by cost plus margin.
Deni Harrewijn, Intercept
This time I will take you into the different pricing models. Pricing your SaaS offering is no longer determined simply by cost plus margin. We have been inspired by Microsoft’s “Grow Your ISV Business with SaaS”<- must read!
Pricing SaaS offerings is different in today’s marketplace. The market is changing the mindset to Return on Value, this is resulting into the added benefits a customer gets. Obviously customers only pay as much as the value they estimate they will get. To understand how to define the price, let’s review the pricing strategies to see the benefit they bring to a solution offer.
Pricing is the consequence of the product and aligns to the accepted industry/application standard. As you will do your research to similar products and/or solutions you will find an average price based on a certain set of features. This average price is the willingness for customer to pay for the specific solution/services. You need to find the median here in order to translate your value proposition into your pricing and try to distinguish.
It is an old way of pricing your solution and buyers will accept this model. It takes almost no help in getting your offer purchased. Let’s look at the other options that you should consider for your SaaS practice.
The goal of virtuous pricing is to create a virtuous sales cycle within your customers, where each sale encourages the next sale within the customer organization. Starting with digressive pricing, you will start incentivizing your customer, because the price drops when they purchase more units. This can help create a virtuous sales cycle because the customer is now looking for a way to bring their cost per unit down.
This method sets the price for each step as the top number of users in the range. The idea behind this method is to encourage customers to buy more licenses in advance, they don’t need yet, to getter a better pricing. This is directly resulting in more profitability, because you are selling more than actual needed. This is one of the most powerful business pricing strategies. You have probably already experienced it, although you may not have realized. Example: you are paying a price for a certain amount of licenses within a specific domain, is this case up to 50 licenses, while you only need 40 licenses. If the price is more attractive when purchasing 50 licenses, it encourages you to buy 10 unneeded licenses, to get a better price.
Flat rate pricing
Flat rate pricing is a model where a business charges a fixed rate for a service instead of charging by the hour or for use of a service. There are no breakdowns of the offer and all customers pay the same amount and get the same offering. The idea behind flat rate pricing is to offer a lot of services customers in first place won’t need and will start paying for. As it has been bundled customers need to take them with the “basic” offer. This will create more profitability as the services already have been developed and will create a new touch point for the long run to address services your customer is not using. As some companies will use the full set of services, most of them will not.
A well-crafted model identifies the average consumption across all your customers and creates a situation where over 80% of the customers are using less than what they are paying for and fewer than 20% are using more. Pricing models built around flat rate pricing have shown between 1.5 and 3 times as much profit as traditional models.
Upfront payment leads normally to a discount. It will help you minimize the credit risk if a customer is financially challenged, and also for asking more commitment for specific customers. If a customer is still focused on capex and want to have a short “pain”, this can be a good offer. A common approach is to offer discounted rates for annual pre-payments, where the customer pays for the whole year upfront and in return gets a discount over what it would otherwise cost for the year if paying monthly.
4 examples of monetizing your solution
Let’s show some examples to increase the margin and better monetizing your solution.
1. Maximizing your revenue
One of the easiest monetizers is adding complementary services to your basic offering. Besides it will you find new customers, as explained in the value proposition article, it will also help you maintain current customers. Also think about bundling products, this will lead to more margin. If you bundle products that complete each other, or are used for the same task, consider selling them as a package.
2. Reduce costs
Create insights about the usage and implement automation to optimize your operations and drive down costs. Realize simplified application development with “build once” unified applications for cross platform deployment.
3. Scale easily
Auto-scale services according to the demands of your application and respond to customer demands and easily scale solutions.
4. Lower your risks
Rely on the trusted Clouds that offers comprehensive compliance coverage and secure your customer’s data with native services in the Cloud.
3 examples of technical support offerings
Let’s show some examples to increase the technical enablement to automate and use Cloud solutions in your benefit and optimize process to lower investments.
1. Focus on delivering value to customers
Build, manage and deliver your applications quickly and simply using the most advanced and deeply-integrated Cloud services and harness secure, intelligent Cloud services platform and tools to deliver differentiated applications to customers.
2. Build your apps, your way
Use an open and flexible platform that meets you where you are and adds value to your existing investments and modernize you applications across hybrid Cloud environments, balancing flexibility and control.
3. Rely on first class development tools and support
Use developer tools to create applications and rely on DevOps Projects and DevTest Labs. Get your support on your application development journey through the various partner offerings and trainings.
Interested to learn more?
This article should be a trigger for defining your pricing strategy. If you feel interested to learn more about these pricing and business strategies, we are hosting a 2-hour workshop with guest speakers from DigiQuery. We will cover several topics on defining your strategy and hi-perform. The workshop will be held on Monday 29th June – 10.00 – 12.00 CEST. Learn more here.