Six Changes Product Managers Must Consider When Pricing a SaaS Product
- Many B2B software offerings are evolving from on-premises to software as a service (SaaS), enabling the low cost of entry, upgradability and scalability that buyers seek
- The increased importance of customer retention and lifetime value in a subscription model means pricing and packaging must be more value focused and responsive than ever
- With these metrics in mind, suppliers moving from an on-premises to a SaaS offering should consider six areas when pricing and packaging the product
So, you’ve decided to move from an on-premises software offering to software as a service (SaaS)… and now you’re wondering how to price it. Do you price on a monthly basis? Annually? How many different packages should you offer, and what pricing model should you use? What strategies will ensure strong customer retention and lifetime value (LTV)?
Organizations that are moving their software from an on-premises offering to a recurring revenue, as-a-service offering now have much more latitude with their pricing models and offering packages – as well as the benefit of user feedback and engagement. When developing pricing and packaging for the new offering, product managers should consider the following six key changes:
- The customer’s value equation has changed. In a SaaS model, tangible and intangible costs have shifted to the supplier, meaning the value customers receive differs from the value of an on-premises model. Costs previously assumed by the buyer, such as IT infrastructure and hardware, are now borne by the supplier. Additionally, SaaS customers no longer need to worry about upgrades – and the downtime they often cause – and can have peace of mind knowing they always have access to the latest version of the offering.
What does this mean for pricing and packaging? This increase in customer value delivered – from tangible and intangible benefits – should be covered with the pricing of the new offering over the customer’s lifetime. Ensure customers are aware of these cost shifts and understand how it affects their cost of ownership.
- A new pricing model is necessary. With on-premises offerings, buyers generally purchase licenses upfront and the software is installed on servers configured for this use. This model doesn’t work for software that isn’t installed. With SaaS offerings, adding users is much easier, providing more flexibility for the customer and the seller.
What does this mean for pricing and packaging? Sellers must now identify the pricing metric – the chargeable unit (e.g. per user) – that drives value for the buyer and ensures account growth for the seller.
- You’ve entered into a long-term relationship with your buyer. Unlike the on-premises, perpetual model, a SaaS-based business rests on a long-term flow of subscription revenue vs. a one-time payment. A key success metric is the ability to maximize customer LTV.
What does this mean for pricing and packaging? Product managers must continually identify and meet new customer needs with new capabilities and features. They also must ensure they package the offerings with clear upgrade pathways that foster customer growth.
- The SaaS environment allows for data collection, learning and flexibility. Because of their increased proximity to the SaaS user (vs. the on-premises user), suppliers can learn much more about how their customers use their offerings – especially their feature and function use and where they are seeing the most value.
What does this mean for pricing and packaging? Consider the SaaS environment as an opportunity for continuous learning about customer needs and what drives value for each one. Share the data collected with sales and marketing to develop a constantly improving and well-used product, as well as an evolutionary plan for pricing and packaging that drives retention and growth.
- Because SaaS offerings tend to be more dynamic, so should pricing and packaging. On-premises product pricing typically increases once a year or every two years, corresponding to major product updates. SaaS offerings, however, have ongoing updates, with new features and functionality being introduced quarterly, monthly or even daily. Because SaaS offerings are continually improving to provide additional value to customers, pricing should follow suit.
What does this mean for pricing and packaging? While informing customers of every product improvement isn’t necessary, communications about new features or functions that increase the value of the offering demonstrably can foster customer retention and set the stage for future price increases. Establish a cadence of major and minor price changes that can be executed by the selling organization and the channel.
- Specific retention strategies are necessary. In addition to LTV, customer retention is a key focal point for SaaS-based companies. When customers don’t renew, all of the investment devoted to acquiring them is wasted.
What does this mean for pricing and packaging? Pricing and packaging strategies such as term lengths that ensure the buyer can recognize value, multi-year pricing, clear upsell paths and early renewal incentives go a long way toward bolstering retention. To make sure buyers can use the SaaS offering to its full capability, many suppliers also include basic training as part of their offering package.
Price isn’t the only thing that changes when organizations move from on-premises to SaaS. Given the importance of retention, suppliers need to focus on more than just the product itself. Elements such as customer support and speed of response to customer problems become more important than ever. A high-quality offering, exceptional customer support and informative user communities are some of the key elements that drive offering retention and recurring revenue success.
For more tips on making the move from on-premises to SaaS pricing and packaging, click here.