Various aspects of pricing SAAS product

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Deciding pricing can be very difficult at early stage of your product/starup. There are various things to care about.

Profitability aspect:

This is very subjective. As a good SAAS business you are supposed to be making at least 30% profit. But you cannot decide pricing by how much profit you want. Because that way you may possibly price the product which is not affordable by your target customer base. So in my opinion pricing cannot be determined by taking percentage of profit into calculation.

Look at Competitor pricing:

This is one nice way to price your product. You can find out similar product as yours. And then compare with feature and advantage or disadvantage and the price accordingly. You can create your subscription plan considering you disadvantages and turn it into advantage. Ie. If you are missing core feature, you can define low-end subscription which is cheaper than competitors subscription plan which doesn’t include that feature.
If your product in unique and you don’t have competitor having very similar looking product, you can look for product providing similar lines of benefits to the same target customer base. I.e. If your product helps in digital marketing to online businesses, and you don’t have direct competitor, you can look for products that helps with online businesses in any other sales/marketing areas. In that way you will be able to get insight about actual value of your product for your target customer base.

Be lean on pricing changes

In my opinion it’s no big deal if you have to change pricing too many times in your early days. This happens and it should happen. You should keep getting feedback from different customer segments and keep tweaking the price. But at the same time you should also try to find out the right price as soon as possible. When you have to increase price, you can keep customer who you have already sold at lesser price to same price as long as they maintain account with your product. Or if you have sold them at higher price, you can apply new lower price to them.

Increase perceived value

Sometime despite the fact that product is worth x amount rationally ( because for example it saves x amount in operations or human resource for customer) , customer might not be able to really see that. Because not everyone will be able to calculate and judge that. There are two things you can do, increase the actual worth of product by adding more features or functionality that adds more value for customer or you increase perceived value.

Perceived value is something customer perceives when they listen, see or read about your product from your marketing material, your website, you demo vide or call. Here, it helps to create that brand image and improve your marketing material. You can polish marketing material to give it be top class brand image, highlight high level unique advantages, show customer testimonials etc.

Keep one very premium looking subscription which has very high pricing. This is not to earn premium profit but it is to increase perceived value of product to customer.

Show customers future potential

When your SAAS product is targeting SMEs and is long term need for them, chances are customer will feel your price to be high. This true especially in India where people are accustomed to one off payment rather than ongoing services payment. In early stage, you might have priced the product considering long term prospect of features and usefulness of product. Because you know there will be lots of things that will be added in product in couple years down the line. But customer can’t see that value at the time of purchase.

So what might help is to create subscription plans with futuristic features. And that way you have subscription with currently available feature and subscription with futuristic features. And that way you won’t lose customer who want product which you have but don’t want to pay for the product which you will have in future.

Long term value assessment

There are few product for which the scale is more valuable than short term (2-4 years) revenues. Especially for startups whose product can transform into platform which can form its own ecosystems around various solutions. In such scenario I think it’s not wrong to price the product lower if it is visible that you can get more customers on your product/platform. For example for startups which is aggregating some sort of data can consider the data collection by means of sale as a value in addition to monetary value they gained by sales transaction. In such case you will need to put in more capital but then you are creating more value for long term.

While there’s no standard formula to price the SAAS product, I tried to discuss about various aspects of pricing at early stage of SAAS startup.

Looking beyond RR and LTV

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SAAS had emerged as very huge phenomenon in software industry around ten years ago. Most web, cloud and mobile software businesses are operating on SAAS model. Performance indicators related to startup growth are centered around Recurring Revenues, Life Time Value of customer etc.

Recurring revenue along with life time value is seen as a kind of assurance on long term opportunity of revenues and profitability for a software company. Of course we have to consider market size and share there. But most SAAS businesses evaluate themselves using these parameters. According to me, these needs rethinking.

Paradigm shift can change the dynamics of lifetime values and recurring revenue. The way digital technology and information technology is evolving, we are coming across big paradigm shift every 5-8 years (Internet, Mobile, Cloud, BigData, IoT, AI etc ).

Such paradigm shifts in world of IT and digital technoloy makes and breaks many enterprises. SAAS companies which are considered to have very attractive LTVs and RRs might not be relevant even in few years. So the other way to look at startup growth and sucess metrics is startup’s ability to stay relevant.

There are companies which are decades old and are still selling desktop based software on one time license purchase model where they dont have RRs. They are still huge and successful (Companies like Adobe or Autodesk and many more). They still are leader in their space. One reason why they were successful was they stayed relevant throughout decades. They innovated. That is obviously biggest quality to look at in order to measure the company in my opinion.

Opportunity of revenue and profit always relates to how much value a companies/products are providing to customers and markets overall. RR doesn’t ensure revenues forever obviously. If you stay relevant and keep offering new things to customers, you will keep making money. It is that simple. Because a business In general will always earn fair profits if they are providing fair values to customer in exchange of what they are charging for it.

Since we have seen early ten years of SAAS revolution, we have seen many software startups become million dollar companies and few even went public, becuse of these SAAS metrics dynamics that enables huge profit margins. I am talking about products which were just SAAS alternatives traditional software. Earning huge profits can’t continue forever though. So as in every business, there will be more compeition. And probably in next five to ten years SAAS market will become competitive in all categories of products overall. There will be multiple similar products from different companies fighting for market share by competitive pricing. And margins will have to go down. Ultimately the companies which will really stay relevant for longer and make it big will be the ones which can keep up with paradigm shift of technology. Those who can continue to innovate and excell in the product. Those who can provide the best to customer.

Ultimately, companies which innovates continuously, excels in product and stays relevant over tech paradigm shifts should be valued more, instead of looking at just “glamor” of SAAS with fancy RRs and LTVs.