Pricing SaaS Products

As the array of SaaS products broadens and more traditional software ISVs (who will continue to offer existing products) enter the market, pricintg SaaS products continues to be a puzzle.

There is a tension between the right price from a marketing perspective, one that will attract the optimum number of users, and the right price from a profitability perspective.

• The right marketing price for SaaS products is often thought, at least initially, to be "free."  This is done artificially through extended free betas, free trials, and free "basic" versions of the SaaS offering, all intended to remove price as a barrier to initial usage.  In every case, the ISV is hoping that as many users as possible (in some cases all users) will move on to a paid version.  Conversion rates vary, depending on the product, the type of customer, and the competition, from less than 1% to about 25%.  For a few business products they are higher.
• The right price from a profitability perspective is a calculated number, taking into account the cost of operations, including ongoing user support, further development, and marketing.  It is likely to be less than the price of a traditional software product (which makes for hard decisions for existing ISVs in rationalizing their new SaaS prices with their existing products). 

Of course, SaaS products aren't priced in a void.  They must be priced in an existing marketplace and compete with existing and potential products.  First entrants have the privilege of establishing the price point if they have a compelling product and it is sufficiently differentiated that products in other SaaS markets have not already set a pricing ceiling (or floor).

Often (too often) we see great products that have few SaaS competitors pricing their products way too low because they don't understand the value of their product to their customers.  If their is no SaaS competitor and your traditional SW competitor is charging $100,000, $10,000 is not a great price, it's a dumb price.  The customer would be happy to pay $25,000 or $35,000 for a well-featured and supported SaaS product.  Discussions with analysts and potential customers, testing for the appropriate price point in advance of product launch, can substantially affect what's available for the product price (and how soon the company might reach break-even).

On June 25th, I'll be speaking at a Webinar on Profitability:  SaaS Versus On-Premise Solutions, presented by Aspire Systems, an Indian firm that works with ISVs.  Please consider joining me.  Here's some more information.

SaaS is being increasingly adopted and is even considered a savior model in this economy due to the zero upfront CAPEX for buyers. Still the question remains if SaaS is a profitable model for solution providers? Regardless of the longer sales cycles, is the on-premise solution providing faster break-even?

Some of the topics being discussed are:

	Cost factors – developmental, operational and marketing costs
	Revenue factors – sales cycle, pricing models, etc.
	Benefits/drawbacks of both the business models
	Will a hybrid pricing/delivery model provide better benefits?

  Panelists:

Amy Wohl of Wohl Associates

Alex Ginger, Director of Active Operations Management International, a SaaS provider

at SaaS: Computing in the Cloud”. It is both an overview of the SaaS market and a series of recommendations for ISVs, platform vendors, and customers who want to participate in it. The centerpiece of the book is 22 interviews Amy conducted with these market participants, illustrating the state of the SaaS market and its direction.
Alex Ginger Product Development Director, Active Operations Management

Registration is FREE!

Space is limited
Reserve your Webinar seat

June 25 11 am ET:

Comments

[Baber]

Just came across your blog post. Would you be able to share your presentation or a recorded link if one exists. Would love to see it.
Cheers

[Javier]

Very interesting topic,

At TodoOnDemand we wrote two articles on SaaS pricing quite along time ago:

http://news.litebi.com/2008/07/on-saas-pricing-i.html

http://news.litebi.com/2008/07/on-saas-pricing-model-ii.html

Taking the now difunt coghead as an example (probably pricing was not the reason of their failure... :) )