We were triggered today by an article in the Computable on the complexity of SaaS pricing models. The article argues that it is difficult for organizations to predict the long-term cost of using SaaS because SaaS pricing models are complex and it is hard to predict usage and uptake. Ultimately, the author says that a fixed price per user is not a fair pricing structure because not all SaaS users within an organization will have the same usage intensity. Increased future uptake usually entails more users and less usage per user. One single price for every user would not be fair in that case. On the other hand, which parameters should be used to price usage of SaaS? I suggest you read the article to find out.
Having been a telecoms analyst for quite some time at IDC, I have learned how telecom operators use pricing as a weapon to make direct comparison between their offerings and a competitor virtually impossible. Electricity and gas companies have adopted the same strategy, unfortunately. In these industries pricing is not used as a fair metering and charging mechanism but as a customer acquisition and retention tool. On a per user basis, telecom pricing bears no direct relation to the actual cost that the operator incurs in operating the infrastructure.
Now, we are not suggesting that SaaS vendors do the same. Telecom operators find it difficult to differentiate their services on value to the user and therefore use pricing and branding differentiation. SaaS vendors should use business value as differentiator primarily.
So what can SaaS vendors learn from the telecoms industry? Let’s have a look at what parameters are being used in telecoms pricing. Broadly, service pricing falls into three categories:
- Service activation (one-off): There is usually a one-off component to a telecoms contract, for instance a service “activation” fee, or the cost of buying equipment included in the contract.
- Service subscription (fixed): Then there is a fixed component, which usually includes bundles of usage of minutes, or data bytes, or sms.
- Service usage (variable): Last, there is a variable component, based on duration, time, size, distance, ownership, and location to name a few. Usually these will apply if usage exceeds the bundles.
We are not going into great detail of all the different permutations and possibilities you can get by mixing and matching the above. One look at the Dutch “belwijzer”, a website helping consumers to make a choice between operators, will be enough. We do want to highlight a few things that SaaS vendors can easily copy and adapt. Three come to mind immediately. First, the multiplay strategy, where a single operator sells Internet, digital TV, and voice for a discount. Second, the bundle phenomenon, where an operator includes monthly usage bundles in a contract. Last, friends & family, where a customer can make free or low-cost calls to friends and family. Here are the SaaS versions:
SaaS multiplay: a SaaS vendor offers discounts on using multiple software as a service packages, increasing customer retention and service stickiness. For instance salesforce.com selling both sales and customer service software.
SaaS bundles: a SaaS subscription comes with usage bundles (say, for instance, number of transactions) and any transaction out of the bundle will need to paid on a per-use basis. This way all users can get the same functionality but in different bundle sizes.
SaaS friends & family: a SaaS user (say an accountant) can give a discount to the accountant customers that are using the same SaaS as the accountant is using.
What else do you think SaaS vendors and the XaaS ecosystem can learn from the telecoms industry? Let us know!
(Previously published on bilderbeekconsulting.com)