SaaS Pricing Guide: Your A to Z to Software-as-a-Service Pricing Models and Strategies 💻
What is your SaaS pricing guide? Do you have the right steps in setting your pricing correctly?
A great product combined with a great pricing scheme is key to a company’s success.
SaaS businesses show no sign of slowing down. According to BetterCloud, 73% of businesses indicated that in the next 5 years, nearly all their apps will be SaaS.
However, being a new industry segment, a lot of companies are still trying to understand SaaS pricing models and strategies. As a matter of fact, quite a few businesses and most especially startups are struggling with defining a successful pricing strategy. Seemingly, pricing appears to be a difficult task. For SaaS businesses, having the right SaaS pricing guide is one of their biggest challenges.
One study reveals that 10,342 blog posts from hundreds of SaaS businesses are about pricing being the most often overlooked way to drive growth. Further, a survey of more than 270 SaaS companies shows that only 17% defined their pricing strategy as a team. Input coming from four major departments (marketing, management, sales and product).
Many executives face difficulties with pricing because it is not a process that can be easily optimised using an out-the-box, generic process or system. It is a complex system with various different players making moves.
If you set the price too high, you’ll drive your customers away. If too low, you will lose money and cripple your business.
Thus, to make sure that people are always working on pricing, building a pricing committee from the four key departments (mentioned above) would greatly help.
In this article, we will discuss what Software as a Service is and who uses it. We will explore different pricing models and strategies. We will also provide you with the best SaaS pricing guide. Furthermore, we will share with you the challenges and benefits of SaaS. Including some real-world examples of successful companies using SaaS.
We assert that pricing shouldn’t be overlooked as its a key profit driver for SaaS businesses. What you need to do is to find the right balance between value and revenue. And that what will make or break your SaaS business is your capability to help customers and be justly compensated for that help.
Table of Contents:
SaaS Pricing Guide: Your A to Z to Software-as-a-Service Pricing Models and Strategies 💻
What is Software as a Service (SaaS) and who uses it?
SaaS is a new and modern method of software delivery that permits data to be accessed from any device through the internet via 3rd-party service providers. In this type of model, software vendors host and maintain the databases, servers, and the code for the application. Some big SaaS providers include Adobe (Creative Cloud), Microsoft, Box, Salesforce, Oracle and Amazon Web Services. Famous SaaS solutions are Microsoft Office 365, Dropbox, Adobe Creative Cloud, Slack, and Google G Suite.
SaaS applications are essentially leased software run in the cloud and hosted and maintained by the software vendors. SaaS applications, however, are still fairly limited compared to on-premise software. Concentrated in CRM, HRM, collaboration, sales, and communication. Although, cloud technology is quickly gaining speed and transforming IT.
Who uses SaaS applications? Mostly, IT professionals and business users, including C-suite executives. In fact, several small and medium businesses already obtained the benefits of cloud-based technology because of the low cost of entry.
Real-world examples of successful SaaS companies
Let’s take a look at 3 different companies that are successful with their SaaS pricing strategies. You’ll definitely get insights that you can use for your own pricing models and make it your own SaaS pricing guide.
Slack, a business communication platform, integrates two different pricing models. They charge per seat and also provide customers multiple plans to choose from. New customers have an option of three tiers, and each one opens up to an additional feature or functionality. These are the following:
- Free plan – it includes unlimited seats, however, there’s a limitation on message history and the number of integrations.
- Standard plan – it has no restrictions on message history and integrations but it doesn’t include enterprise services such as single sign-on.
- Plus plan – it provides enterprise customers with the whole features and functionalities for the highest price.
Interestingly, Slack’s pricing page shows how well these plans align with their value metric. For example, when a customer joins the Free plan and there’s a need to add team members, it makes Slack an important part of their communication. The capability to go back and search previous messages becomes crucial, thus, leading to upgrade to the Standard plan. In the same manner, Slack also knows that for bigger teams, like, 50-100 people, features such as single sign-on and compliance reports become critical. You can get this function through their Plus plan.
When setting your pricing, you should also align your pricing tiers with your target customers. This is something that Hubspot, a software company, nails with their pricing strategy.
HubSpot gives three specific packages for its all-in-one marketing software. Each is aligned to a particular type of customer or buyer persona. Each package is unique, making it quick and easy for prospects to find which plan is right for them. Also, it makes the job of HubSpot’s pricing and sales team simpler because they have a clear structure to its pricing plans. In addition, sales and pricing teams can quickly filter potential customers into the right packages for them, consequently, increasing their chances of converting.
Zendesk’s chamber of customer experience products provides a scope of challenges on all sides of pricing. Zendesk, a customer service software company, offers a large scale of products, each with its own pricing tiers and per-seat prices.
Zendesk are good at pricing. They align pricing to their customer base. They measure their customers’ willingness to pay in all of their products and calibrate prices accordingly. To get pricing that close, you must know your customers very well. Also, setting up on the suite model provides Zendesk with a big opportunity to optimise their product from mid to high-end market.
Choosing the right SaaS pricing guide is vital
For SaaS, it is not as simple as finding the right per unit price to optimise sales and profits as opposed to traditional software sales. There are several SaaS pricing guide, strategies and, perhaps even more significantly, various strategies behind them.
Pricing is often an overlooked factor which is the key to building a successful product. However, there are some things that you need to know first before deciding a SaaS pricing guide. It may help to answer some crucial questions such as below:
- How are you going to position your product?
- How much value does your product offer?
- Who do you think is your perfect customer?
- Which pricing model suits well your target market?
Mostly, SaaS businesses don’t pay attention to the above questions and they immediately start to celebrate their “Eureka” moment after creating their product.
There are two things to consider when setting the right pricing for a SaaS product. Make this as part of your SaaS pricing guide:
- Understanding the value that you provide to your customers. Bear in mind that your customers pay for the perceived value that you provide to them. What customers really care about is the WIIFM (“What’s in it for me?”) of your product.
- Knowing how your rivals set their prices. Know your direct and indirect competitors. Therefore, before creating your pricing strategy, you need to do an exhaustive competitive analysis of your competitors to know what they are doing and why.
Undercharging will destroy your business with unpaid development and delivery costs. Overcharging, on the other hand, will suppress your growth and drive away potential customers.
What is the secret to good pricing, then? Don’t view pricing as a zero-sum game, where one player’s gain is equal to another player’s loss. Consider good pricing as a positive-sum game, you create a win-win condition for you and your customer by focusing on value and positioning the price with value.
Certainly, winning feels good. But let’s face it, some customers are better off being served by your rivals. In the long run, you win through creating value for a logical set of customers where you are the most powerful supplier.
SaaS Pricing Models
There’s no silver bullet when it comes to choosing the best SaaS pricing guide. You will only know the best pricing model for your business when you analyse customer data and follow your pricing process.
There are a lot of ways to price your SaaS product, however, many companies follow some of the famous pricing models. Let’s take a look at 5 major frequently used SaaS pricing models and help you choose which one is best for your company.
1. The per-user pricing model
The de-facto pricing model for the majority of SaaS companies. Companies ask for a fixed rate per month for every user on an account. For instance, G Suite charges a flat fee of $6 per user, thus, it would cost $60 per month for 10 users.
Since the per-user pricing model always scales directly, it’s not difficult for both customers and companies to understand and manage what they’re paying (customers) or getting paid (companies) every month. However, in this pricing model, more seats mean more cost. Thus, customers often avoid adding more seats as much as possible. They sometimes even “cheat” the system by sharing licenses. Per-user pricing prevents growth and sets you up for failure in the long-term. Do not consider per-user pricing to be the ultimate model of your pricing strategy.
2. The usage-based pricing model
It’s a model that is not very common in SaaS companies. Used more massively for platforms charging for API requests performed or bandwidth. Like for example, in cell phone data, prices depend on the usage. The more data you use, the more you pay.
The advantage of this model is that upfront costs are low for new users since they are using less of the product. On the contrary, existing or heavy users are charged for the services they’re utilising accordingly. The disadvantage, though, is that more usage doesn’t always correspond to more value for customers. Also, usage-based pricing makes predicting costs and revenue tougher because usage can change significantly every month.
3. The tiered pricing model
This is the best pricing model for many SaaS businesses and the one that’s most often recommended. It’s the same strategy used by HubSpot and Slack (as discussed above).
Tiered pricing allows SaaS firms to offer two or more tiers or fixed sets of features/functions for a specific price. Each tier can be customised to meet the needs of a specific target market. For example, new users versus an organization, tier prices rising as you offer more value.
Tiered pricing is effective because better persona targeting will lead to bigger conversions and maximum profit. If your tiers are structured right, upselling also becomes easy because customers can just choose the next package when they don’t like their current tier anymore. However, avoid offering too many tiers or packages as this can confuse customers and diminish conversions.
4. The flat-rate pricing model
This is the most fundamental pricing model for SaaS companies. All customers are on the exact same plan – one product, one price, one set of features. Only a limited number of SaaS companies used this pricing model. For example, Basecamp as being one of them. It offers $99 per month and you get unlimited access and for unlimited users.
Flat-rate pricing is easy to sell but it isn’t used by a lot of SaaS companies. They prefer tiered pricing because catering to the needs of different customers are more lucrative.
5. The per-feature pricing model
Per-feature pricing is a bit similar to tiered pricing. In this model, instead of charging by users, companies charge for different features within each package. As package prices increase, so does the functionality and feature you provide with your product.
This model is easy for customers to understand. It’s also easy for companies to charge more or less for specific features according to customers’ willingness to pay. The disadvantage though is that there are various different possibilities for packages. Without a lot of data, it’s tough to find a pricing model that works well.
SaaS businesses can lure new customers and keep them over the long-term if they have the right SaaS pricing guide.
SaaS Pricing Strategies
The right SaaS pricing strategy should be based on the long and short-term goals of the business. Whether a company is looking for quick penetration and adoption, a steady growth, or a distinction as a quality product, implementing the correct pricing strategy is very important.
The correct pricing strategy, coupled with the best pricing model and SaaS pricing guide provides the most essential opportunity to achieve sales, profit, and growth goals ahead of time and in the future. Below listed are 5 types of SaaS pricing strategies:
This type of pricing strategy typically pays no attention to the costs related to the product. It chooses a price point designed so as the SaaS product reach to many target market users as quickly as possible. Initial prices may start from little to no profit or even a loss, just to attract as many customers as possible. Profits are only achieved later when the product becomes famous. During that time, you can increase as the company implements another pricing strategy.
This type of pricing is the opposite approach to market penetration pricing. In this strategy, the price is set intentionally high for the new SaaS product. This is based on the assumption that the longer the product is available, demand decreases. The price is then slowly reduced, as a result, making the SaaS more appealing to different target markets over time.
This pricing strategy disregards the costs related to creating and maintaining a product. This is also called the prestige pricing and is based on the concept that higher prices may provide an impression or sense of higher quality. Some customers want to have excellent and high-quality products and may only be available with companies that can afford them.
However, this may lead to a lesser but more loyal customer base with margin coming from higher pricing. Premium pricing can also be used in tier-based pricing models as a feature. For example, offering a “premium tier” with special benefits only accessible to those willing to pay a “premium price”.
4. Captive Product Pricing
This is a complex pricing strategy. In this strategy, the SaaS company provides its main or “core” product and a highly appealing price, same as the market penetration pricing strategy. The initial cost may be little to no profit and the margin is increased by charging extra for the additional features or services needed to gain full access to the functionalities of the product. The term “captive” derives from the notion of getting the customers hooked on the service first before revealing the additional costs.
Value-based pricing strategy uses the perceived value of the product as the benchmark for price setting, not costs, target margins or competitors. It encourages SaaS businesses to look at their pricing strategy as a product of the value they provide. Companies focus on improving the service and value they provide by using vast research to determine how customers actually value a product. However, value-based pricing doesn’t provide rapid progress because it’s a long-term change to how prices are viewed fundamentally.
Nailing your pricing strategy is crucial
Nearly all SaaS businesses commit the same mistake that puts their organisation at risk – they often guess what the price should be rather than know what the optimal price is. Most of them don’t know their worth to their customers or how to communicate value the best possible way.
Consequently, if your SaaS business doesn’t have the right pricing strategy, and you don’t have the correct SaaS pricing guide, you’re leaving enormous profits on the table. You don’t know your customers, and you don’t know if you’re driving them away with poor pricing tactics or missing the chance to succeed by charging or demanding more for your products or services.
Right, nailing your pricing strategy is vital to SaaS success. However, it doesn’t have to be that tough. The reason why most SaaS companies are not successful is that they either set their prices on gut feel and then forget to ever revisit it. Or, they’re simply too scared to make the necessary changes to keep the business profitable because they’re afraid of driving away prospective customers.
The gains you get from nailing your SaaS pricing are worthwhile if you can get over the fear of failure. Aside from gaining a valuable advantage over your rivals, who even themselves are scared to manage their own pricing, you will also discover new sustainability and growth for your business.
Benefits and Challenges of SaaS
SaaS provides great advantages for many companies, essentially in costs and flexibility. However, there are also some disadvantages such as lack of control and should not be disregarded. Let’s take a closer look at the benefits and challenges of SaaS model:
- Quick deployment and No Maintenance: Businesses need not worry about maintenance, support and licensing stuff. The cloud provider delivers all the necessary processing power so that companies can stay focused on providing quality services and stop worrying about the technical stuff. As soon as a subscription is confirmed, the apps are ready to use since they are already installed and configured in the cloud. In other words, deployment is quick and easy.
- Lesser initial cost: Generally, SaaS has lesser initial costs because generally, it is subscription-based and it has no upfront licence fees. The SaaS provider handles the IT infrastructure that is running the software, lowering down the maintenance costs for hardware and software.
- Flexibility and Scalability: Businesses can choose the features and only pay for the ones that they need. SaaS apps are very scalable, letting companies to access more functions, features and services as they expand. Like for instance when your company grows and your business needs more users to access the app.
- Convenience and Accessibility: SaaS solutions can be accessed using a web browser and an internet connection on a wide range of devices. Thus, making SaaS more convenient and accessible compared to the traditional business software installation. Additionally, it will improve productivity and efficiency.
- Easy Automatic upgrades: The service provider is responsible for automatic updates because everything is hosted in the cloud, thus, there are no local updates. SaaS update is rolled out to all clients at the same time rather than manually updating each machine just like the traditional delivery methods. Consequently, removing this workload and responsibility from you which will help you save a lot of time and resources.
- Restricted Control: Control resides with a third party for SaaS models. Therefore, users cannot defer upgrades or changes in the features as everyone has to use the latest version of the software application. When the provider moves on to a new version of an app, customers/clients can do nothing about it even though they’re not ready yet or not willing to pay for the costs related to upgrading and training.
- Security Infringement: Privacy of delicate information and access management is the major consideration in the cloud and hosted services. If the service provider experiences a security breach, enterprise data safety and integrity can be compromised. This can result in huge financial loss.
- Performance Issues: SaaS may likely run at slower speeds as opposed to on-premise client or server applications. Thus, keep performance in mind that your software is not served on a local machine. Businesses that acquire SaaS apps without proper consultation and or broad cloud strategy might end up losing money and not managing data properly.
- Connectivity requirement: Since the SaaS model is web-based, you will not have access to your software or data if you lose internet connection.
In general, the future of cloud computing, specifically SaaS, seems good and we are now well beyond early trial execution. If implemented properly and with the right SaaS pricing guide, companies can achieve higher and sustainable margins and achieve their requirements as they grow. And not having to worry about nearly all of the technical stuff and IT investments.
- If your SaaS business doesn’t have a pricing strategy in place, and the proper SaaS pricing guide, you’re leaving big revenues on the table. You don’t know who your customers are, and you have no idea if you’re driving them away with poor pricing techniques. Or missing the chance to elevate your growth by setting super high prices more for your products or services.
- Finding an appropriate SaaS pricing guide or model is only one part of getting a SaaS product to market. After finding the right model, developed an effective pricing strategy to set the appropriate price points.
- The right SaaS pricing strategy should be based on the long and short-term goals of the business. Whether a company is looking for quick penetration and adoption, a steady growth, or a distinction as a quality product, implementing the correct pricing strategy is very important.
Businesses often overlooked pricing which is a key factor in building a successful product. Some things that they need to know first before deciding a pricing model are: how to position the product, the value it offers, the ideal customer and the pricing model that complements the target market.
The correct pricing strategy, coupled with the best SaaS pricing guide or model provides the most essential opportunity to achieve sales, profit, and growth goals upfront, and in the future.
There’s no silver bullet when it comes to choosing the best SaaS pricing guide or model. You will only know the best pricing model for your business when you analyse customer data and follow your pricing process.
The New Playbook for Value-based SaaS Pricing
Software-as-a-Service (SaaS) pricing, also called cloud-based software subscription pricing is fast becoming the software pricing model of the future. In fact, according to the latest studies, by the end of 2018 SaaS represented 28% of the total enterprise software market. What’s more, it’s expected to reach 45% by 2023—a significant milestone to achieve in such a short period of time.
Yet, despite the accelerating success of SaaS distribution and pricing models, many firms do not have the pricing expertise in-house to update their existing cost-plus pricing to a more sophisticated and value-based SaaS model. A recent study shows that c.60% of IT firms are currently under-pricing their offerings because they lack the right strategy, people and systems for updating pricing as quickly as they’re increasing value for their customers. And, nearly one in five SaaS companies set their pricing by guessing what the right price might be. Which means millions of hard-earned revenue and margin dollars down the drain every year.
In this article, then, we’ll discuss what good SaaS pricing looks like using a real-world case study from Hubspot – an IT marketing firm that successfully updated their pricing strategy, culture and analytics to the SaaS model. We’ll also show you how to integrate SaaS pricing in your business in 6 simple steps.
Software as a Service (SaaS) defined
Software as a service (SaaS) is a new model of software distribution wherein a third-party service provider hosts applications and allows data to be available to clients through the Internet.
SaaS pricing is the pricing revenue model that enables an IT firm to capitalise on their new SaaS model. In simple terms, SaaS pricing lets users pay for different levels of service on a subscription basis. It is closely related to “tiered pricing”, “packaging” and “plans” and offers different versions of usage at optimised price points. In this model, product or services’ marketing strategy, revenue objectives, and target markets influence prices.
Customers like SaaS pricing because it offers them increased flexibility and lower total cost of ownership. Vendors like SaaS because they can win more profitable deals. And, investors like SaaS because they can get two to three times higher ROI from SaaS than from their on-premise equivalents.
Successful SaaS company: HubSpot
Hubspot, for example, is a software marketing company which has nailed SaaS pricing.
Unlike most IT vendors, Hubspot is really good at aligning its pricing tiers with its target customers – a key foundational element of SaaS pricing.
HubSpot gives three specific packages for its all-in-one marketing software, each aligned with a particular type of customer. Each package is unique, making it quick and easy for prospects to find which plan is right for them.
Hubspot’s price for its services cost from $50 to $180 per month per user. A team (say, 10 people) will be charged approximately between $500 and $59,400 for an annual plan including a one-time setup and onboarding fees. They also offer a freemium version for price-sensitive customers or sceptics who need to try before they buy. All versions lead to up-sell and cross-sell opportunities and each version offers a different customer experience.
Back end-user experience
Sales and pricing teams can quickly filter potential customers into packages that are right for them; consequently, increasing their chances of converting them into paying customers.
Hubspot has done huge amounts of marketing to ensure that they offer more than a subscription-pricing model on a product hosted in the cloud. Essentially, they have done what very few have done in SaaS and matched the streamlined, customer-friendly as-a-service product-delivery experience with a similarly streamlined and customer-friendly end-to-end journey.
How to do SaaS pricing properly
To understand how IT firms such as Hubspot transitioned to value based pricing SaaS, below listed are 6 steps that help IT firms set customer invoice prices correctly:
Recognise relevant customer groups
It’s important to customise pricing according to the customer group. How much do your customers spend? What problems do they want to solve? Do they need answers/solutions urgently? What’s their burning platform? What is their line of business? Then, dive deeper into each segment; model options and undertake price analytics.
Interview the identified customers in each group
Keep in mind the 3 key goals for the interviews: to know why customers value the product/service, to gain an insight on the best mechanism to charge for that value creation, and to know which products and processes customers use that can be expanded or replaced by your product.
Identify key customer value drivers and translate into figures
Ask yourself why your customers buy from you? Is it the speed of execution or indeed the cost savings brought about by the efficiency of execution that brings them to you versus your competitors? Do they fear product failure and need a sophisticated solution that only you sell? Can you perform well in areas that mitigate the fears and concerns of your customers? If yes, these are your customer value drivers. Identify them. Then test if they really are valuable to your customers. A customer value is, in effect, where you start to find additional price premiums. What’s more, they help you build out your price ladder from merely a cost-based price ladder to a value-based ladder.
Create packages that match what the customer needs and will motivate up-sell
A bundle or package should meet what the customer needs at the same time balancing two important ideas. These are: making sure that customers have a great experience using the bundle and give customers a reason to upgrade to higher and more valuable packages.
Carefully check all costs involved
Know what your cost base is as best you can. But don’t labour the point. Yes, it’s important to know your costs of production, cost of acquisition and cost to serve. But as explained above, it’s also important to understand your price ceilings to gauge customer willingness to pay overtime. Testing, monitoring and optimising is best-in-class SaaS pricing. Cost-plus is rudimentary and leaves you open to price gouging or underselling your offers.
Regularly test by adjusting pricing to see the impact on sales
Once you’ve determined a price, it’s then vital to develop a process to frequently test new prices. Handle pricing effectively. Treat it as a continuing business process that shows regular changes in the marketplace, the value and scope of offerings, the competitive landscape, and the size and sophistication of customers.
Choose your revenue model carefully – make this into the final step about SaaS Revenue Subscription Models
There’s no silver bullet to choosing the best revenue model. But you need a revenue model that suits your business and also how your customers like to buy from you. The 5 major SaaS revenue models to know about are:
- The per-user pricing model – In this model, companies ask for a fixed rate per month for every user on an account.
- The usage-based pricing model – Used more massively for platforms charging for API requests performed or bandwidth.
- The tiered pricing model – Tiered pricing allows SaaS firms to offer two or more tiers or fixed sets of features/functions for a specific price.
- The flat-rate pricing model – All customers are on the exact same plan – one product, one price, one set of features.
- The per-feature pricing model – In this model, instead of charging by users, companies charge for different features within each package (a bit similar to tiered pricing).
Discussion: SaaS is more than subscription pricing
Right now, the customer experience of many SaaS vendors often feels disjointed. All too frequently, for instance, legacy billing processes and order forms riddled with confusing product terminology make it hard for customers to know what they’re paying for.
Leading players address these inconsistencies by evaluating the whole business in the as-a-service context and redesigning core processes to make them more intuitive and responsive.
Pros and Cons of SaaS
Here are the benefits and challenges that SaaS companies are facing:
- It’s easy to deploy and no maintenance
- Lesser upfront cost
- Flexibility in payments and scalability
- Convenient and accessible
- Easy automatic updates
- No control of the app
- Breach to data safety and integrity
- Performance issues – SaaS may run at slower speeds
- Connectivity issues
Choosing the right SaaS pricing model is very important. Best-in-class pricing is not as simple as finding the right per unit price to optimise sales and profits. Rather, derived from value-based principles. A good value based pricing SaaS involves:
- understanding the value that you provide to your customers
- understanding how your rivals set their prices
- Making pricing simple, customer-focused and easy to follow for better acquisition and cross-sell
Software vendors that embed an as-a-service focus in their pricing, marketing and innovation teams can improve total customer lifetime value by 25 per cent through reduced churn and increased upselling and cross-selling. They are also more likely to achieve almost a 100 per cent increase in stock price over an eight to ten quarters timeframe following a SaaS launch.
To set value-based pricing SaaS correctly, a company should: Find out the relevant customer segments, interview the customers in each customer group, create business cases to discover what the right price should be, create packages according to the customers’ needs, carefully check all costs involved and make it a habit to test by modifying pricing to know the effect on sales.
SaaS Pricing Transformation: Beyond Subscription-pricing Model
The growth of software-as-a-service (SaaS) has changed the enterprise-software industry for the past ten years. From 2011 to 2018, the worldwide software industry’s market cap increased double the rate of the total market.
Thus, as SaaS develops, there will also be a continued increase in customer’s expectations on the convenience of using the service and doing business. However, Platform as a service (PaaS) is earning share and commoditising software. Examples of which are the Big Three cloud vendors: Microsoft Azure, Amazon Web Services, and Google Cloud. With the recent global crisis that caused a staggering financial market, investors are carefully looking at bottom-line health. Therefore, software vendors should embrace a new playbook to deal with these demands. To do that, they should put more emphasis on profitable growth and a renewed strategic focus. Not only that but also a willingness to broaden “as-a-service” offerings beyond subscription pricing.
By doing so, the software industries will certainly achieve success. Take for instance one software vendor, as part of its move to a subscription product, it created a customer-success business. Additionally, it restructured its quote-to-cash processes to make customer purchases and renewals easier. This comprehensive technique led to an almost 100% rise in its stock price over the eight quarters after the SaaS launch. Microsoft did this with its Microsoft 365 suite and Adobe with its very successful Creative Cloud.
In this article, we will discuss how SaaS is gaining success in its pricing transformation. Also, we will provide you with a survey with all industries comparing SaaS vs. On-premise. In addition, we will share with you at the latter part of this article the SaaS pricing guide or playbook.
We will assert that software vendors that set an “as-a-service” focus in all key functions can boost total customer lifetime value by 25% through decreased churn and improved upselling and cross-selling.
SaaS becoming the default software-delivery model
The enterprise-software revenues of SaaS have seen growth in almost a decade. From 6% in 2010, it rose to 29% in 2018 or approximately $150 billion globally. But that number doesn’t really count the real size of the market. If revenues from businesses still transforming to SaaS are considered, the total share is about 75% or over $380 billion. Meaning, only a quarter of total industry revenues account for firms with no SaaS offerings.
Government software spending now goes to SaaS which is more than one-fifth. Companies should transition to SaaS now. The “next normal” (brought about by the pandemic) will rapidly increase SaaS, considering the rise of work-from-home setup, the quick deployment of the software, and the lesser up-front costs.
Based on a survey, SaaS became successful in recent years, with all industries getting at least 20% penetration. Below table is the enterprise-software share by industry of on-premises vs software-as-a-service products. The % is based on 2018 enterprise-software spending.
Industry SaaS % On-premises %
Professional service 38 62
Media 36 64
Retail 29 71
Telecom 29 71
Transportation 28 72
Banking and finance 28 72
Healthcare 26 74
Education 26 74
Manufacturing 25 75
Construction 25 75
Government 21 79
Beyond subscription-pricing model
To really be successful with SaaS, vendors should offer beyond a subscription-pricing model on their software products. They should complement the smooth, user-friendly as-a-service product-delivery experience with the same smooth and user-friendly back-to-back journey.
Currently, the customer experience of various SaaS vendors is somewhat disorganised. Like for instance, there are things that customers are having difficulties in knowing what they’re paying for such as legacy billing processes and order forms with confusing product terminology. Thus, to make them more instinctive and responsive, major players in the industry tackle these irregularities by analysing the whole business and restructuring core processes. In order to succeed in the industry, SaaS vendors should infuse the ‘as-a-service’ mindset in all functions.
However, with the disruption of many software companies in the 2020s, the progress of PaaS (Product as a service) followed.
In the years 2016-2018, PaaS margins increased almost double as the rate of SaaS at 44% a year compared to 26%, respectively. Now, The Big Three cloud vendors (Google Cloud, Microsoft Azure, and Amazon Web Services) have advanced PaaS services that compete for those major software vendors using their wide-scale and resources.
As PaaS services advance, SaaS vendors are having difficulties explaining a price premium for products capable of delivering with a thin user interface on top of generic PaaS services. With PaaS tools providing customers with the capability to develop new applications swiftly, software vendors will face higher risk especially those that do not innovate.
To differentiate themselves, software vendors should defend their margin share by examining the best and most sustainable opportunities. In order to achieve this, they should do the following:
1. Specialise and customise the needs of target markets and use cases instead of directly confronting the Big Three. In the early 2010s, this technique was successful when SaaS disruptors first came on the market. The legacy-software vendors were able to protect their market share and maintain their enterprise value-to-revenue multiples, however, customers that stressed differentiation based on their technology were put in jeopardy.
2. Offer customers a cloud-agnostic experience. Some software customers are looking for AD&D (Application development and delivery) and SIS (Systems infrastructure software) tools that can work with all their cloud deployments for fear of cloud lock-in. SaaS vendors that can provide this requirement to the customers could unlock a value pool immediately that the Big Three isn’t capable of. However, they will have to greatly invest to keep up with the Big Three’s pace of innovation to stay in this position.
3. Establish strategic partnerships. Like for example, when Nuance Communications created its Dragon Ambient eXperience (DAX) offering, it handpicked Microsoft to partner with them. Nuance knew that it could gain the advantage of investment at scale to sophisticated developments confronting clinician burnout.
4. Software vendors should also examine each function and determine areas where even small redesigning can improve effectiveness and customer experience. For instance, within sales, many software accounts previously covered by field sales could be changed to inside roles. One study reveals that 80% of software customers favour remote sales than face-to-face communications.
Over the past decade, the disruption showed that many legacy-software players are exceptionally tough. To weather the challenges ahead, software vendors should call on that resilience by reviewing their strategic playbooks, spending money on defensible and high-growth opportunities, and setting clever and more productive ways of working across the organisation. Consequently, software vendors will have a successful next decade.
Software vendors should consider the new playbook below:
- Businesses should move to SaaS models now, considering the SaaS vendors that account for 75% of all software revenues.
- Being successful with SaaS means reevaluating the end-to-end customer journey because subscription pricing and the cloud aren’t enough.
- Software vendors should defend their unique value propositions from the tech giants in order to compete in a PaaS world.
- To satisfy investors, SaaS leaders should level growth with bottom-line health as margins will be more important in the post-COVID world.
SaaS will rapidly increase in the “next normal” brought about by the COVID-19 pandemic. This is because of the growth of remote working, the easy deployment of the software, and the lower initial costs.
Software vendors should offer beyond a subscription-pricing model on their software products if they really want to be successful with SaaS.
In addition, SaaS vendors should infuse the ‘as-a-service’ mindset in all functions in order to succeed in the industry.
As PaaS services improve, SaaS businesses don’t find it easy to explain a price premium for products capable of delivering with a thin user interface on top of generic PaaS services.
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