SaaS Pricing Models In Flux

At Forrester’s recent IT Forum in Las Vegas, we conducted a roundtable with several leading software and services firms focused on SaaS around the topic of SaaS pricing trends. Key takeaways:

  1. SaaS pricing is evolving toward true usage-based models. Most early examples of SaaS price on a fairly simplistic per-user per-month basis, sometimes with add-on costs for “extras” like mobile, storage, or advanced modules. However, today many buyers seek pricing options that more closely map to value, such as usage-based or transaction-based models. At the same time, many SaaS vendors are becoming more sophisticated with billing and provisioning (either themselves or through specialist partners like Zuora, eVapt, MetraTech, and Aria), which means that they can profitably offer more flexible pricing models (eliminating effort that formerly required manual intervention).
  2. Many SaaS vendors provide transparency into pricing and contract terms. SaaS vendors have typically had transparent pricing, often listed on their Web sites and/or shared by user communities. Additionally, some SaaS vendors publish their privacy and security policies and sometimes standard contracts for anyone to see. One challenge for some buyers who are stuck in a traditional on-premises purchasing mindset, however, is that SaaS vendors typically have limited transparency into breakdown of pricing (splitting out software, hosting, and support, for example).
  3. “Freemium” still remains common but approaches vary. Many SaaS vendors continue to offer various types of free trials or free low-end editions to allow potential customers to try the product before buying and to capitalize on the word-of-mouth marketing that is common across SaaS. Free versions are typically time limited, functionality limited, or capped at a certain number of users. Some remain ad-funded, but this is less common for SaaS solutions targeted at larger enterprises.

 Buying SaaS? Selling SaaS? Weigh in on your thoughts around SaaS pricing models.

 Follow me on Twitter @lizherbert.

 If I missed you at ITF Las Vegas, hope to see you soon at another upcoming Forrester event.

Comments

Flexibility vs Simplicity

Good post Liz.

The challenge for a vendor on point 1 is the trade off between simplicity and flexibility. Dont know anyone who likes dealing with all the options (and potential gotchas) of their mobile phone. Or for example the complexity of some of the major on-premise vendors where there are consultants and technology to help you understand what you should buy.

We've found that customers like choice, but in easily digestible, business related packaging, not a long Chinese menu.

Pricing models

The resilience of self-defeating model adoption has been rather amazing to witness over the past 15 years. We first experimented with SaaS in 1996, and had some success. We are finally seeing the model gain adoption, but curiously only after a few emerging disruptive independents became threatening-- imagine that?

The beauty of web-based SaaS is that tailored pricing is relatively easy in conjunction with adaptive systems. Of course cost should be substantially influenced by other issues -- value, functionality, crisis prevention, risk, lock-in, differentiality, maintenance fees -- and dare we suggest innovation?

Mark Montgomery
Founder & CEO
Kyield
http://www.kyield.com

I think just as much as the

I think just as much as the customer wants their pricing to be consistent with value, the business should also try to match pricing with cash flows. Sometimes one pricing model might make a lot of sense for the customer, but wouldn't be in the best interest of the business because they would run into cash flow problems. When pricing, you should always consider cost of customer acquisition (CAC) and lifetime value (LTV) of a customer as well as how your cash flows will align and what your customer would like. David Skok of Matrix Partners wrote a nice blog post on CAC, LTV, and monetization, which can be read at http://www.forentrepreneurs.com/startup-killer/.