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PragmaticMarketing

© 1993-2008 Pragmatic Marketing, Inc.

Pricing a SaaS Product What’s the Big Deal?

Barbara Nelson - [email protected] Jim Geisman - [email protected]

Conference call: (616) 883 - 8055Access code: 216 - 567 - 865

Slides and other resources available at www.pragmaticmarketing.com/request

Follow the discussion out on Twitter at #PMI926

What’s your role:Product ManagementM k tiMarketing Sales Executive Other

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Introduction

MarketShareUnique focus since 1987

Pricing software and systems

Address client problemsSlow sales cyclesMoney left on tableChaotic / confusing pricingEntry into new markets / segments

ResultsResultsImprove financial performanceStrengthen competitive positionFoundation for future growth

What is the current status of your SaaS offeringoffering:

Considering Under developmentEarly launch Established

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Introduction

License Landscape

Types of licensesUsage / transactionCapacityTime-based

Time-based licensePerpetualAnnual multi-yearAnnual, multi yearSubscription (less-than-annual)

On premiseHosted (“SaaScription”)

IntroductionWhere We’re Heading

SaaSV l

SWM&S

SubValueAdd

SWM&S

ValueAdd

SubValueAdd

SWM&S

Perpetual

SW

Subscription

SW

SaaScription

SW

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Topics

Value, Pricing and Payment

SaaS Value and PricingSaaS Value and Pricing

Pricing and the Product CEO


Product Functionality Delivers Value

Value ($)

CurrentFaster

Better

Time to Value

Current solutions

Cheaper

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Value and Payment Streams

Value Delivery “Stream”

Perpetual Payment Stream

0%

20%

40%60%

80%

100%

120%

1 2 3 4 5Year

% V

alue

0%

20%

40%60%

80%

100%

120%

1 2 3 4 5Year

Annu

al F

ee(%

Per

petu

al L

icen

se)

License / RTU

M & S

“When it comes to pricing, we think we do a pretty good job ”good job.”

Do you…Strongly AgreeAgreeNeither Agree nor DisagreeDisagreeDisagreeStrongly Disagree

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Some Assumptions

Pricing tied to customer value deliveredQuantify hard dollar valueValue impact on revenue, costUnderstand cost to realize value

Cost and risks fit with value to be delivered

Have done basic pricingMetric, packagingPrice structurePrice levels, discounts

Basic pricing is solid


Subscription vs. Perpetual

Perpetual license feesUp-front license + annual M&SPayment stream (example)

$1000 (license) + 4 x $250 (M&S @ 25%)5-year total = $2000

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Subscription vs. Perpetual

Perpetual license feesUp-front license + annual M&SPayment stream (example)

$1000 (license) + 4 x $250 (M&S @ 25%)5-year total = $2000

Subscription license feeAnnual fees includes license + M&SPayment stream

Equal payments 5-year total = ???


Subscription Value and Pricing

Subscription benefit / drawbackDrawback*Benefit

Put price on value-addAbsolute amountPercent of perpetual

Keep payingReduced riskMust upgradePayment flexibility

DrawbackBenefit

* Prospects disqualify themselves. Not a pricing consideration.

Percent of perpetual

Subscription license fee equivalentPerpetual license fees

5-year total = $2000

Plus subscription value-add

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Topics


SaaS Value and PricingSaaS Value and Pricing


SaaS Value & Pricing

SaaS vs. Subscription

Subscription license feePerpetual license feePlus subscription value-add

SaaS license fee equivalentSubscription license feePlus SaaS benefitsLess SaaS drawbacksLess SaaS drawbacks

How much is value-add worth?

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Added Value From SaaS

SaaS Benefits

No / low need for internal ITPay as you useMonthly paymentLow upfront costWeb-delivered application

SaaS Drawbacks

Security

Risk of downtime

Off-site data

The primary reason we’re considering SaaS isSaaS is:

Everyone else is doing it Management is requesting it We’re going after new markets We want to retain existing customersOther

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SaaS Benefits

No / low need for internal ITPay as you useMonthly paymentLow upfront costWeb-delivered application

SaaS Drawbacks

What are your objectives?More revenue?Retain customers?

Which customers benefit?

Security

Risk of downtime

Off-site dataWhich customers benefit?



SaaS Benefits Customer Types to Target

Low upfront costPay as you useMonthly paymentWeb-delivered application No / low need for internal IT

SaaS Drawbacks

No IT budget

Price sensitive

Rapid deployment

Uncertain usageCashflow sensitive

Customer Types to Avoid

Security

Integration

Flexibility

Legacy apps

Risk averse

Need custom solution

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SaaS Pricing


SaaS Pricing Example

Payment Stream5 Year Value*

$

$500/year$2500Subscription

$1000 + $250/year$2000Perpetual

y

$1200/year$100/month$6000SaaS

* Specific configuration. Numbers are illustrative

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SaaS Price LevelsNormalize payment streams

Configuration (e.g. # users)Time framevalue-add (subscription, SaaS delivery)

SaaS price levelSW + M&S + layers of value-addCalculate total annual or monthly priceCalculate total annual or monthly priceDetermine “quantity 1” price

Adjust to market

Develop discount scheduleUnit or dollar volume

Topics


SaaS Value & PricingSaaS Value & Pricing


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Pricing & the Product CEO

Pragmatic Marketing® Framework

Pricing

BusinessCase

SalesProcess

MarketSizing

MarketingPlan

Customer Acquisition

Distinctive Competence

Positioning Just another task?

Buy, Build or Partner

Operational Metrics

Process

Product Portfolio

Market Requirements

Sizing

Product Roadmap

Acquisition

Market Research

Market Problems

Competence

Product Performance

Customer Retention

LaunchPlan

PresentationsWin/Loss ChannelUserTechnology Buyer

Market Analysis

Product Strategy

Program Strategy

Product Planning

Quantitative Analysis

Channel Support

SalesReadiness

Stra

tegi

c Tactical

Thought Leaders

Use Scenarios

Innovation

Success Stories

Presentations & Demos

Win/Loss Analysis

Competitive Write-Up

EventSupport

Channel Training

Collateral & Sales Tools

WhitePapers

User Personas

“Special”Calls

Release Milestones

AnswerDesk

Technology Assessment

Competitive Analysis

Lead Generation

Buyer Personas


Pricing Needs Market Facts

Pricing

BusinessCase

SalesProcess

MarketSizing

MarketingPlan

Customer Acquisition

Distinctive Competence

Positioning

Buy, Build or Partner

Operational Metrics

Process

Product Portfolio

Market Requirements

Sizing

Product Roadmap

Acquisition

Market Research

Market Problems

Competence

Product Performance

Customer Retention

LaunchPlan

PresentationsWin/Loss ChannelUserTechnology Buyer

Market Analysis

Product Strategy

Program Strategy

Product Planning

Quantitative Analysis

Channel Support

SalesReadiness

Stra

tegi

c Tactical

Thought Leaders

Use Scenarios

Innovation

Success Stories

Presentations & Demos

Win/Loss Analysis

Competitive Write-Up

EventSupport

Channel Training

Collateral & Sales Tools

WhitePapers

User Personas

“Special”Calls

Release Milestones

AnswerDesk

Technology Assessment

Competitive Analysis

Lead Generation

Buyer Personas

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Understand Customer View of ValueValue elements

Hard dollar (net)Revenue increases, cost savings

Soft dollarPrevent revenue erosion, cost avoidanceReduce risk

Pricing influencersElementsAmountTimingLikelihood / risk

Which metric does/will your SaaS offering se?use?

User Transaction Time Storage Other

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Pricing & the Product CEOScale Value With Customer

per loan +++per patient +++per user ++per user ++per user +++per property +++p p p yPer user +per student +++per user ++per customer +++per user +++per user +++per patient +++per employee +++per user +per user ++per claim +++per bill +++Per gallon of fuel +++per patient +++per shareholder +++per shareholder +++per user +++per employee +++per user +per ad +++per property +++per user +per reservation +++per employee +++per member ++per user +per user +per user +


per adper billper claimper customerper employeeper employee

per loan +++per patient +++per user ++per user ++per user +++per property +++ p p y

per employeePer gallon of fuelper loanper patientper patientper patientper propertyper propertyper reservationper shareholderper studentper memberper userper user

p p p yPer user +per student +++per user ++per customer +++per user +++per user +++per patient +++per employee +++per user +per user ++per claim +++per bill +++Per gallon of fuel +++per patient +++per shareholder +++ per user

per userper userper userper userper userper userper userPer userper userper userper userper user

per shareholder +++per user +++per employee +++per user +per ad +++per property +++per user +per reservation +++per employee +++per member ++per user +per user +per user +

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++++++++++++++++++

per loan +++per patient +++per user ++per user ++per user +++per property +++

per adper billper claimper customerper employeeper employee

+++++++++++++++++++++++++++++++++++

+++++++++

Vertical marketsAligned with customer’s business

p p p yPer user +per student +++per user ++per customer +++per user +++per user +++per patient +++per employee +++per user +per user ++per claim +++per bill +++Per gallon of fuel +++per patient +++per shareholder +++

p p yper employeePer gallon of fuelper loanper patientper patientper patientper propertyper propertyper reservationper shareholderper studentper memberper userper user

+++++++++++++++++++++

Horizontal and vertical marketsSometimes aligned

per shareholder +++per user +++per employee +++per user +per ad +++per property +++per user +per reservation +++per employee +++per member ++per user +per user +per user +

per userper userper userper userper userper userper userper userPer userper userper userper userper user

Pricing & the Product CEOPayment Streams Are Convertible

$40.0

$45.0

$15.0

$20.0

$25.0

$30.0

$35.0

Cum

e Pa

ymen

ts ($

K)

Perpetual Software Fee

Perp + M&S Fee

$-

$5.0

$10.0

0 4 8 12 16 20

# Quarters

C

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Pricing & the Product CEOPayment Streams Are Convertible

$40.0

$45.0

$15.0

$20.0

$25.0

$30.0

$35.0

Cum

e Pa

ymen

ts ($

K)


Perp + M&S Fee

SaaS SoftwareBreakeven

$-

$5.0

$10.0

0 4 8 12 16 20

# Quarters

C

Pricing & the Product CEOPayment Streams Must Be Comparable

$40.0

$45.0

$15.0

$20.0

$25.0

$30.0

$35.0

Cum

e Pa

ymen

ts ($

K)

S S S ft

SaaS SoftwareBreakeven


Perp + M&S Fee

$-

$5.0

$10.0

0 4 8 12 16 20

# Quarters

C SaaS SoftwarePLUS Hosting

Breakeven

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Include Value-Add in Price

Perpetual Payments

Time

$Value

$Value

$Value

SaaS Payments

Subscription Payments

Time

Time

$

Barbara Nelson [email protected]

Jim [email protected]

Slides and other resources: www.pragmaticmarketing.com/request

Follow the discussion out on Twitter at #PMI926