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.

Startup Hiring: Rethinking Rockstar Employee

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When you are running early stage startup, hiring or finding people to start with is one big thing you do. Everyone wants rock-star startup employee as early employee. This is how I define such “Rockstar Startup Employee”.

  • Person who is well aware of risk and opportunity associated with early stage startup.
  • Person who would prefer challenging roles vs roles with better pay and not-so-challenging role.
  • Person who is very much connected to starup ecosystem or at least reads about startups and trends frequently.
  • Person who probably have experience in startup or may be someone who had been founder himself
  • Add up usual things like smart, intelligent, don’t care attitude etc.

To earn something, you pay something

All startup want to have an unique culture and smart employees who are not usual employees. Hiring such Rockstar Startup Employee is great for your startup. But it’s very difficult. Sometime you might run into many problems. Following are few :

  • You waste lot of time finding them. Some tasks/initiatives which you have left for such employee may get delayed due to that.
  • Those kind of employees can create power issues in the company. There are chances of conflict in defining strategies or managent as an overall.
  • There’s risk that expectations from both side might not have mapped correctly.
  • There are also chances of issue related to culture-fit and ego problems.
  • They are expensive (salary or equity wise)
  • Chances of such employees leaving company are higher.

So while its always great if one can find such rockstar employee with whom you think issues like above will not happen, one should also think about the alternatives.

What if you can hire someone who can just do the job

If you think more about this, you might find that you don’t absolutely need that kind of rockstar startup employee for given role. And instead You might get the task/role done from a person who is equipped with required skilled, is decently smart and very much motivated for job.

I have seen in my experience as an entrepreneur that instead of those rockstar startup employee type qualities, what is more important is that the employee be highly motivated to do the job.

Well, even those “Rockstars” were made someday

Everyone learns. While person’s learning capability is directly related to qualities like intelligence, smartness, it is not very difficult to add some knowledge or develope some qualities in a person. If you can create some process within your office, you can make your team awesome out of not-so-awesome. For example you can try following things :

  • Taking team member to startup events.
  • Keep very frank and open culture and sharing everything with the team including mainly the vision, opportunity etc.
  • Encouraging team to read about startups (by setting up internal website which streams posts and news from curated source).
  • Weekend evening sessions where you organize talks, watch inspiring documentaries and movies etc.

There’s big world out there

Millions of people are working in hundreds of thousands of big companies and big businesses which are contributing in much larger share compared to startup ecosystem. There are capable people out there. It is just that they aren’t seen as fit for startup. In fact many of them aren’t really fit for startup because all they look for is fat salaries and easy jobs. But there’s always something in between. You can find people who are reasonably good from skills/smartness perspective, who can be trained to be startup-types and who are willing to work in startup.

I might sound being against hiring Rockstar startup employee. But intention of this post is just to point to the other side. Rockstar startup employee are always good for startup but it shouldn’t turn into hiring obsession for startup.

How techie founders should un-innovate

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Lot has been written about innovation. But this is about kind of un-innovation. How as a techie-turned-founder you can un-innovate your product for to help your startup.

It is perceived that startup founders, especially who are techie, are innovator and they build their products innovatively. Founders and entrepreneurs in their life have read lot about how to think out of box and how to innovate and all. Stories about Pages, Zuckerbergs , Bezos of world you know. All of these leads relatively less-experienced or first time techie entrepreneur to unknowingly put more focus on product innovation and dreaming big the very idea of their product they are building or want to build. This becomes real problem in order to build a real business. Let’s explore how.

Founders come up with idea. And most of the time they think their idea is unique, smart, innovative and big. They keep doing lot of brainstorming on idea. This process is more or less related to dreaming. Like we dream about how we want to visit places or about perfect life partner we want. In dream we tends to be optimistic and more or less unrealistic. Same thing happens with thinking about idea and products. Founders make some wrong assumptions with such favorable thinking. They miss viewing things from from “real business” perspective. Instead they end up thinking about making grand product of their which will change the world.

You want to create Company not product

Founder should keep reminding themselves that they are out to create a company and not product. They should always think about and work on real business problems instead of focusing too much on product design ideas. Business problems like issues related to capital, product adoption challenges, resources , delivery etc. It’s widely known that ideas don’t matter , execution does. Before Zuckerberg built facebook , social network wasn’t new. Before Bill Gates built PC , home computers wasn’t new thing.

Be flexible when it comes to product path

If you think you are smart and visionary and build features in advance , you are mistaken. One person can not predict product path however great visionary she might be. If you dont be too open and flexible to think over what you has been dreaming then there are chances your product will fail some day. When you go on and run the actual business for months you will get lot of different perspectives on what actually your target market needs that was never part of your dream product path and what your dream product path has that people don’t need at all.

Also lets not confuse this with doing feasibility check or market study or achieving product-market fit. That is obvious and must have already been done if they are building product, even if they are first-timers. This is about how you shape product further with your innovative-natured mind. Its about small feature or sub product or a product-business model.

Prioritize sales before product

When you are techie founder with that innovative natured brain, another thing you most likely will do is to be desperate about releasing that next great feature. You think if this feature is there my product will sell like cupcake. No. It never ends there. It will become continous process rather than one instance. Ultimately you are loosing focus from sales. Which is inwardly affecting how you think about product because you lack critical data (feedback from sales ) which can help you in taking product in right direction. This should never happen. If specific feature isn’t there yet, qualify your leads accordingly. But keep working hard for sales. First, its good for business. Second you it will help in deciding right path for product.

Think business

When you think about product as a techie founder with innovative-natured mind, its very different from let’s say what someone like IIM grad investment banker would do. I understand great companies are built by innovative techie geek type guys and only those can have that grand vision. But grand vision for tech product needs solid execution. And this is something all techie-turned-CEO regrets about, that if they would’ve thought about certain things from certain perspective it would have been better today. You need to start changing the way you naturally think about product and company overall, in order to be able to understand different perspectives. One way to make this easy is just think about numbers always. How much days a feature will take ? How many prospects requested it ? How much investment will be required ? How much revenue growth can be achieved with this ? By asking bottom line questions like VC-types and Banker-types would ask.