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Saas pricing debates

by Dennis Howlett on February 18, 2009

AccountingWEB’s discussion about saas/on-demand pricing has attracted a good set of comments that look at the model from a number of angles. I made the point that ‘per drink’ style pricing might be one option as compared to the plan usage patterns I usually see. However, there are occasions when you can take it too far. This from LessEverything (including LessAccounting) makes the point very well:

Although you’ll never know for sure if your pricing is right, I can give you one example of a pricing model that is wrong. There is an online invoicing application that recently sent an email to all it’s users asking what they thought of being charged based on how much they invoice. I became very excited when I heard this because it meant that Less Accounting would be getting a whole new group of customers. Here’s what they suggested:

  • $6/mo
    • $1,000 invoiced or
    • 320 hours tracked
  • $12/mo
    • $2,500 invoiced or
    • 800 hours tracked
  • $25/mo
    • $5,500 invoiced or
    • 1,600 hours tracked
  • $45/mo
    • $9,000 invoiced or
    • 6,400 hours tracked
  • $75/mo
    • $15,000 invoiced or
    • 16,000 hours tracked
  • $125/mo
    • $25,000 invoiced or
    • 32,000 hours tracked
  • $200/mo
    • unlimited amount invoiced and
    • unlimited amount hours tracked

I agree with the authors. Such bands are stretching credulity beyond any tolerable limit. Even so, the general principle of ‘per drink’ pricing has much to commend it. That way, customers know they are paying for metered usage the same as other utilities. You can argue that is a fair distribution of the imputed cost at the supplier’s end of the supply chain. The downside is that unless you can accurately predict what you’ll be doing, it is hard to know what your cost commitment might look like.

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Tagged as: Freelancer, LessAccounting, Zoho Office Suite

  • Dennis, I agree that this model has much to commend it in principle, but my experience from years in the software industry is that customers will look at the model, but almost always end up opting for a predictible payment/month or year, instead.

    As you say they are used to consumption based pricing in utilities, and even in areas like outsourced payroll (£x per member of staff) but I guess they are easier to predict. The challenge is that when you ask them how much they will use a system, by virtually any measure (time, transactions, value of transactions) they just find it very hard to estimate.

    Even if they can, there is a suspicion that if they effectively pay a % of revenue / transaction value or similar, they will end up 'over-paying' if their business picks up. In other words, they want all the 'upside' if their business slows down, but not the other way round...

    I've always thought this model would take off, but I'm not sure it
  • chris Jangelov
    If this would be fair sharing the "right" price would be for a medium volume alternative. At high volumes profit would be higher, and the customers business hopingly thriving, but at low volumes you would get more functionality "than you pay for".
    I don't think that will happen.
    So most customers would pay more than they do today and that is a nice business model. For the industry.
  • Dennis,

    seems the SaaS crowd is trying the old trick that's used by Telecoms, Insurance and others to retain customers: What Dilbert termed as "Confusopolies", the natural next step after the outlawed "Monopolies" and "Oligopolies" :)
  • Will people never learn?

    The temptation to carefully sculpt your pricing to optimize revenue always seems to afflict the inexperienced.

    Pricing should be fair, simple, and understandable. Anything beyond that confuses the customer and negatively impacts revenues.
  • I like the monthly SaaS pricing systems (and I've seen a lot of them having just put together a blog post on accounting and invoicing apps!), it makes things much more palatable for my cashflow system but I do find it confusing when there's a lot of different options offered.

    Companies like FreeAgent and Tactile CrM have got it right in my book, their prices are based on the type of company you operate rather than the number of invoices you send.
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