Startups listen up: you've got a pricing problem

Startups listen up: you've got a pricing problem

Summary: Just about every new product coming to market is being offered as a service rather than packaged software. But pricing remains something of a mystery.

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Just about every new product coming to market is being offered as a service rather than packaged software. But pricing remains something of a mystery. A while back, I started a spreadsheet that plots price points for different saas accounting offerings. At the time I concluded that no-one has figured out a viable model that could be generalized for the whole market. Despite it is far from complete and out of date, I believe the same still holds true.

What's more, economic factors will bring the topic into sharper focus as the anticipated recession forces enterprises to evaluate capital IT investments. Check out what happened to SAP earlier today to get a feel for what is happening. That should be good news for saas vendors but is it?

Phil Wainewright speculates that Zoho may have developed a model that allows it to take advantage of the freemium approach such that it can outgrow Salesforce.com. In one sense that doesn't surprise me. The SMB market at which Zoho is aimed is huge and in marked contrast to the upper mid-tier and above that, until recently has been Salesforce's focus. Its pricing reflects its focus with the professional edition coming in at $65/month/user for basic SFA, call center and 10 custom tabs.

At first glance that sounds enticing but a number of customers have told me that to get 'real' value, they need to be paying upwards of $100/month. Even then that doesn't sound bad compared to enterprise on-premise pricing which can easily run the equivalent of $200/month for the license fee and then a further $44 for maintenance and support for CRM packages. On that basis, the saas solution is still cost effective after three and a half years before tasking into account data center and infrastructure costs.

That argument doesn't take into account the relative simplicity of today's saas offerings compared to their more mature on-premise cousins. That's an argument for another day. For the purposes of this discussion, I am assuming relatively straightforward functionality for an SME. In other words, the vast majority of the market by volume. Back to the plot.

But then along come companies like Method Integration telling me they can offer CRM style integration to QuickBooks as a service for $45/month for the first user and $20/month for subsequent users. That's a pretty good deal but I still think it needs to come down. QuickBooks can be readily be used by companies trading up to $20-25 million a year without much trouble and has the benefit of a low cost add-in payroll. But adding in say 20-30 sales people using Method is going to add $425 to $625/month to the customer's bill. Less than Salesforce.com but will this type of business fork over these amounts of scarce cash? I doubt it.

Just as the number of even $10/month /user services can rise rapidly when scaling to hundreds or thousands of users, this form of flat pricing seems doomed to survive except for all of the smallest or niche saas offerings. Price breaks will have to be metered into the charging equation at the very least.

Already we're seeing pressure build. Only today, Caspio, which provides a 'do-it-yourself database for rapid web application creation' announced an effective 50% price reduction, starting at $39.95/month for small businesses. From the release: "Unlike other offerings which charge per user and create a formidable cost to businesses, Caspio allows any number of employees, partners, members or customers to access web applications at no extra charge."

On-demand/saas systems are opening up a world of opportunity for both buyers and sellers. Custom apps at affordable prices and a cornucopia of choice upon which the SME can gorge are but two of the alluring factors that should drive growth. But when it all comes together, if the cost is too high in aggregate then those same SMEs will make the same tough choices their larger brethren are making. That's why prices need to come down further.

The volume is there for any entrepreneurial vendor to have a good shot at achieving decent market share. But it will require invention in business models and a willingness to trade something other than direct cash.

Topic: Enterprise Software

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

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5 comments
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  • RE: Startups listen up: you've got a pricing problem

    Yes, most startups are struggling with a SaaS pricing model. They need to walk the tightrope between appealing to the customer (reasonable price) and making money -- or they won't survive. The freemium model is appealing because it lets the customer try things out without commitment or cost. Try that with SAP.
    amywohl
  • DO Like we do....

    We cap the fees to max per month.
    Of course we have written VERY efficient software.
    After all the effect of 1 user to 200+ users per company has marginal effect on CPU usage.
    As we get more Companies using our SaaS expanding the servers is minor (if you ASP and Windows).
    dragon@...
  • I think we've fixed it, thanks

    Our answer? Metered Software. No monthly charges, no user charges, no free version, no premium features, no tricks, no catches.

    You get access to everything we've developed and we just charge for what you use. It's a bit like Amazon's Cloud, but at a different altitude: they are up near the stratosphere offering raw storage and processing power, whereas we are just above ground level storing operational data and delivering business information, so that's all we charge for, with a monthly statement that can be drilled-into to show which user did what whent to incur each increment of charge.

    Clear, simple and controllable. Just the way the business like their costs to be.
    quentin.bailey@...
  • Pricing is the symptom, not the problem

    <p>I think this article hits the mark on the impact the recession will have on prices, but the solution won't be found in a vendor's pricing. In the end, the vendor has no control over price, only costs and the product offered. Price is determined by what people are willing to pay. A <a href="http://chaotic-flow.com/2008/11/19/software-as-a-service-success-monetize-creatively/">creative pricing model</a> may help, but it will not fix this problem. Only doing the <a href="http://chaotic-flow.com/2008/11/17/saas-success-the-top-ten-dos-and-donts/">things you need to do</a> to change the underlying cost structure of your business or the differentiation of your product will. Then, you can meet the price that the customer is willing to pay.</p>

    <p>If SaaS vendors are going to fix their pricing problem, they need to focus on their cost and product problems that are creating it.</p>
    <p><ul><li> Most SaaS companies have not brought down acquisition and support costs through economies-of-scale and automation in the same way they have brought down technology TCO so their cost structure cannot support their current prices, let alone lower ones</li></ul></p>
    <p><ul><li>Most SaaS companies are building commodities that are far simpler than their licensed fore bearers (as you point out). They are not creating differentiation that would demand higher prices through the one thing that makes them different: they are part of the Web.</li></ul></p>
    <p><ul><li>The cost advantage of SaaS will tap out at a certain scale and complexity. It is built into the economics, because at some point variable costs trump fixed costs. The only way to fix this is to return to a) & b). Lower your cost structure or create something cool that can only be done on the Web.</li>
    </ul></p>

    <p>by <a href="http://www.crunchbase.com/person/joel-york">Joel York</a></p>
    <p>at <a href="http://www.chaotic-flow.com">Chaotic Flow</a></p>
    york_joel
  • RE: Startups listen up: you've got a pricing problem

    The guys add Method add so much more than CRM, though. The fact that you can pay for only one license of QuickBooks and do all your accounting through Method, PLUS get CRM, make it a steal. It saved us from going to QuickBooks enterprice. Love Method.
    shears