I’ve been having a variety of SaaS/on-demand pricing discussions recently. Those conversations must remain confidential but I can say that without careful attention to detail, it is very easy for SaaS vendors to get into a pickle.
On the one hand, I find it hard to believe it is possible to create a profitable business by $5 a month business services subject to two caveats. The service operator:
- Is the number one player and has achieved breakout momentum -e.g. Salesforce.com
- Is providing important but limited capability to a niche that will buy into its model and and which can in turn support a small development team – e.g. Freshbooks (now 135K users registered) and Charlie Wood. (check SpanningSynch’s Blog for price reaction – 106 comments but Charlie assures me he’s doing well.)
Business applications offered as services take time to develop. Winweb has been around for many years. Twinfield has been in business since 2000. Salesforce.com, the poster child for on-demand has been around since 1999. Those costs take some recovering. On the other hand, taking on multiple services can quickly add up to a lot of moolah for the SMB audience.
It therefore came as something of a surprise to see Salesforce.com pitching its forthcoming AppSpace at $995/month for up to 200 users. While this meets my $5 a month criteria if all users are on the system, this comes on top of paying a minimum of $65/user/month with small teams of up to 5 coming in at $695pa for the very basic service. So this is clearly not aimed at the small business. Michael Hickens at internet.com notes:
Project management applications available on AppExchange, Salesforce.com’s application marketplace, have an enterprise cost; others are paid for on a per user basis, which could boost costs significantly if every customer using the portal were counted as a user for those purposes.
Collins said the application is only being released to select customers, who will have to sign up online and then contact a live Salesforce representative, so that those kind of issues can be worked out before it goes into general release.
According to Denis Pombriant, managing principal at Beagle Research, $995 is “just the tip of the iceberg” when it comes to the cost of running something like AppSpace.
“$995 is pretty cheap [for an enterprise application] but you have to invest in building and growing a community and ensuring that you get good participation on the part of the community, and that means someone dedicated full-time or at least part time to community-based activity,” he told internetnews.com.
Yes – and pretty much a fixed price tax. This runs counter to the way in which Phil Wainewright references Treb Ryan, CEO at OpSource:
Success-based pricing: “Based on customer adoption not consumption of resources.” In the traditional hosting model, vendors charge according to bandwidth, disk and processor consumption, he said. In the on-demand world, customers should only be expected to pay for successful use of the application. It’s up to the vendor to bear the cost of the infrastructure until customer usage scales up.
What are the cost implications for those customers in an AppSpace environment? As a sales person, I’d want to expose a lot of information to customers and possibly a lot of functionality – like self-serving customer details, maybe online promotion interactions. Further down the track, I might well want to serve debtor alerts for field service and customers. Quite how much Salesforce will charge for these services doesn’t appear to have been thought through.
But there is another interpretation. If an AppSpace ‘organization’ is deemed to include customers, then it would be worth thinking about taking a number of AppExchange services onboard and simply paying the AppSpace tax. The total cost is unlikely to be much more than $25,000 pa and even if it climbs to $30K, this is still competitive for a 5 person supported sales team *plus* customer group.
This is but one example of how price interpretation can quickly lead to a muddled picture.
This issue is not going away. Neither is it being effectively addressed by the vendor community. Successfully resolving this question for everyone’s benefit will mark out the truly innovative vendors. There is very good reason for clarity right now. SaaS price transparency is one of the key differentiators to more enterprisey applications. List price is meaningless and as Vinnie Mirchandani and Jason Busch are quick to explain, pricing is a complex business. The SaaS vendors are not making it any easier.
Technorati Tags: pricing strategies, salesforce.com
