Startups listen up: you've got a pricing problem

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 Despite it is far from complete and out of date, I believe the same still holds true.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.