Software-as-a-Service Pricing Strategies
I’d like to extent the discussion on pricing strategies for businesses that operate on a Software-as-a-Service (SaaS) basis.
What is SaaS?
Software that is rented rather than purchased. Instead of buying software and paying for periodic upgrades, SaaS is subscription based, and all upgrades are provided during the term of the subscription. When the subscription period expires, the software is no longer valid.
SaaS can be implemented with local applications that expire after a certain time, but it is ideally suited for cloud computing in the Internet and Web browser-based applications, which can run in any desktop or mobile device, no matter the operating system. In this model, the applications are maintained in the service provider’s datacenter, and every time users launch their browsers and log on, they get the latest version. In addition, the data can also be stored in the provider’s datacenter. (PCmag.com Encyclopedia)
Why does pricing matter?
As mentioned during the lecture, pricing matters not only because it creates the opportunity to differentiate your customer base based on their needs, but also because pricing has a certain psychological effect inherited in it. In the microwave example from our lecture the buyer decisions had significant differences when choosing from two options or three options. For SaaS companies this matters because they are able to deploy different types of products or possibilities based on their customer needs. For example, software can be licensed against a certain price depending on variables such as usage, users, products offered or (extra) services offered to name a few.
In a blog post from priceintelligently.com the pricing strategy of The New York Times. The NY Times has difficulties -as many newspapers do- in adjusting to the digital age. Although not exactly a SaaS company, the case does offer insights into the pricing difficulties of online subscription services. The NY Times has different pricing plans based on the type of subscription you prefer. Without even mentioning the specific prices, here’s an overview of their options:
Quite a lot of options, hey?
The main proposition that is being made in the priceintelligently article is simplicity:
“If consumers understand exactly what value they’re receiving at a given price, they’re more likely to make the purchase.”
Since there is no “one size fits all” strategy in SaaS due to the diversity of customers, a good step to eliminate complexity in pricing is a value-based pricing strategy. In order to do so, one can follow a set of steps that will help you define the right pricing for your products: (read the blog article for a more detailed description on how to achieve these steps)
- Identify the target customers
- Quantify the value the service provides for your target customers
- Determine willingness to pay
- Determine the operational costs to deliver value
So basically it all boils down to figure out what value you offer, and how much a customer is willing to pay for this.
Let’s look at a few different pricing strategies to see what this comes down to in practice (examples from Kissmetrics.com:
Salesforce has chosen to provide five options to its potential customers. All options offer a free trial and every option provides all features from the cheaper options + additional features.
HubSpot offers a two step pricing strategy. First, three packages are offered that are differentiated based on the type of client (from small businesses to marketing teams in large companies). The second step is to choose the amount of contacts you would like to manage in your CRM. These two together determine your monthly price.
HasOffers uses a three option pricing scheme, however the interesting part is that their third option is not a static price point but invites the potential customer to get in touch. This offers the advantage that in the price range above enterprise ($799/month) they can provide customised deals to customers that have high needs. This makes sense because (a) the value of these type of contracts is high enough to dedicate a sales person to make the deal (b) they can cater to specific needs that these enterprises have.
What do you all think? Any preferences for specific pricing models when buying subscriptions? Personally I’m a big fan of simplicity; not too many options but a clear vision on how the product offers value for its price. HasOffers’s extra option to get in touch can be very beneficial in markets where there’s opportunity for high value contracts on top of the standard options, but the decision on doing so should make sense in a business sense; Salesforce chose five options and feels like this is enough for their product range without offering customised deals.
Let me know what you all think about different pricing strategies!