Pricing for Services (SaaS)...• Service pricing should be based on the value of the attributes of...
Transcript of Pricing for Services (SaaS)...• Service pricing should be based on the value of the attributes of...
Presented By: Alain Meloche, MBA, B.Sc. Managing Partner, (SPMG)
Strategic Pricing Management Group
Pricing for Services (SaaS)
647-349-2060
www.spmgpricing.com
Dec 2011 © Strategic Pricing Management Group, All rights reserved worldwide.
"Price is the most important statement you
make about your product“
November 29th 2011
2
Section 1
Review of Four Methods of Pricing
3
Four Methods of Pricing
There are four methods that typically have been used to price a product
or service.
1. Cost - Based Pricing
2. Competition - Based Pricing
4. Performance - Based Pricing
3. Value - Based Pricing
4
1. Cost – Based Pricing
Cost-based pricing is perhaps the oldest form of pricing. It involves adding a
fixed mark-up to a product's cost to ensure a target margin.
Common when difficult to know the competition’s price
Relatively easy to implement and use on a day-to-day basis
Effective at ensuring the product is sold at the target margin
May not be effective at ensuring the product achieves other
important objectives
Problem when launching new products
Price = ( 1 + target margin ) x ( product cost )
5
2. Competition – Based Pricing
Competition-based pricing sets a product’s price by adding a set premium –
or discount – to the price of a competing product (or basket of products).
Common in environments where the competition’s price is very visible
and/or rapidly changing
• Often called “reference” pricing
Relatively easy to implement and use on a day-to-day basis
Effective at ensuring the product is sold at the target premium or discount
May not be effective at ensuring the product achieves other important
objectives.
Price = { 1 + ( target premium or discount ) } x ( competition’s price)
6
3. Value – Based Pricing
Ties price to the attributes that customers use when determining the benefits that
a product or service may provide them. For example:
• use of a product or service may provide dollar savings
• incremental price compared to competitors would then be based on some
fraction of the incremental savings relative to the best available alternative on
the market.
Common for new product pricing – especially in the case of
very innovative products
Not an approach that can be implemented rapidly; requires
careful consideration of alternatives and their pros and cons
Not always effective at ensuring the product achieves its
objectives
Incremental Price = some fraction of ( savings vs. best alternative )
7
4. Performance-Based Pricing
Total cost if all savings
accrue to customer
Total product cost
Distribution
cost 5.6%
Total CURRENT
customer cost
8.25
8.00
7.75
7.50
7.25
Product
savings
New Product
Cost
Customer
efficiency
savings
Total NEW
Cost to
customer
after its
share of
savings
Other
non-
guarante
ed
savings
to
customer
Advanced Solution
Cost to
customers after
guaranteed
share of savings
$ Millions
Supplier
share of
savings
Guaranteed
savings
Total cost if all savings
accrue to customer
Total product cost
Distribution
cost 5.6%
Total CURRENT
customer cost
8.25
8.00
7.75
7.50
7.25
Product
savings
New Product
Cost
Customer
efficiency
savings
Total NEW
Cost to
customer
after its
share of
savings
Other
non-
guarante
ed
savings
to
customer
Advanced Solution
Cost to
customers after
guaranteed
share of savings
$ Millions
Supplier
share of
savings
Guaranteed
savings
Though it could be considered a subset of value-based pricing, since the price
obtained is directly proportional to the benefits that accrue to the buyer, it is
worth noting separately, as it is becoming more important.
Price = Base +some fraction of benefits( eg. savings)
• Useful when performance level is uncertain (eg. New product)
• Ensures that seller does not undercharge buyer
• Buyer receives insurance that will not be overpaying
• Buyer and seller need to agree to metrics and they must be measurable
Example
8
Section 2
Basic Principle for Services Pricing
9
• Is the value to the customer known?
• Has that value been communicated?
• Is value assignable to the offering?
Do conditions favor being able to deliver
against requirements on time, on budget,
and to a high degree of quality?
Co
nn
ecti
on
to
Valu
e
LOW HIGH
Risk to Supplier
Low
Hig
h
Services Price Metrics. Two key
Drivers
10
• Output-based
• Gain/risk share
• Hybrid -fixed + variable
• Fixed-price
• Hybrid -fixed + variable
• Fixed -at higher margin
to capture risk premium
• Fixed-price
• Time and materials
• Time and materials
• Fixed -at higher margin
to capture risk premium
Risk to Supplier
Lo
w
Hig
h
Connection to C
usto
mer
Valu
e
Low High
Services Pricing Structures: For the 2
Drivers
11
Two key questions:
1. How much?
2. What structure?
How Much?
Considerations:
• Minimize cannibalization between hosted and boxed versions of software
• May not be issue, if alternative is loosing a customer to an SaaS offering
anyway
• Keep boxed software priced competitively, compared to boxed competitors
• Keep your SaaS priced competitively, relative to ASP competitors
• Maintain a fair ratio between initial set-up/installation/customization fees and
hosting/maintenance/licensing fees
• Revenue recognition changes as upfront license agreements are recognized
upfront but SaaS revenue recognized as earned
• Many SaaS are offered at a low price point for an initial test; but conversion,
upsell and add-on rates are variable
12
How Much?
• Increased number of
customers
• Increased sales/ customer
• Ease of
transactions
• Broader range of
product offerings
• etc
Current
Benefits
Level
Incrementa
l revenues
Incremental
Lower TOC
• Reduced development and
test of systems
• Lower hardware
replacement costs
• Faster problem resolution
• Lower software re-
implementation costs
Price Bandwidth:
How much of this will
you “invest” in order
to:
• Enter a market
• Compete
• Meet corporate
objectives
13
How Much?
• Reduces work needed to combine data on performance with metrics
• Reduces time required to demonstrate and build buy-in to cause and effect analyses
• Minimizes response time thereby minimizing lost revenues
Key Activities Estimated $ Value
Incremental Value Added
Revenue Cost
Large Small Large Small • Collect data on performance
• Review performance relative
to metrics defined in Planning
• Trend analysis
• Analyze cause and effect
Establish Objectives
Translate into Strategy
Convert into Plans Monitor Adjust
$12.5 K
14
Person-days: - - 10 5 All-in cost/day - - $375 $375 Incremental Benefit: - - $3.75 K $3.75K
Person-days: - - 10 7 All-in cost/day - - $375 $375 Incremental Benefit: - - $3.75 K $2.63K
Person-days: - - - - All-in cost/day - - - - Incremental benefit: $5K $2K - -
TOTAL: $5K $2K $7.5K $6.38K
14
What Structure?
Multiple Plans (Tiered) • Need to segment market
• Small, medium, large enterprises
• Open and proprietary software vendors
• Goal:
• Charge more to customers who use your services more
• EXAMPLE: (for a project management solution)
• Segment target audience either on company size or number of projects
• (companies often experiment with the most low end plan before solution is judged
fit for entire company)
• EXAMPLE: GitHub-segments different business sizes and offers free plan only to
open source projects.
15
What Structure?
Tiered plans
• May require that services that are infrequently used or on which low value is
placed, be acquired.
• May work better for larger enterprises with broad range of users.
• Smaller and medium sized enterprises may not need and place value on all
services lowering uptake and revenues.
• Pricing structure may be more appropriately based on apps model.
$0
Tier 1 Tier 2 Tier 3
Basic Services/Apps Apps: • # of users • usage
When more apps required, major jump
occurs in price
More like a pay-as-you-go
model, where only apps
that are used, are paid for 16
17
• Tiered subscription
• Apps-based
• Subscription
• Apps-based
• Tiered Subscription-at
higher margin to capture
risk premium
• Pay-as-you-go
• Pay-as-you-go
• Tiered Subscription -at
higher margin to capture
risk premium
Risk to Supplier
Lo
w
Hig
h
Connection to C
usto
mer
Valu
e
Low High
SaaS Pricing Structures: For the 2 Drivers
18
Take-Aways
• Service pricing should be based on the value of the
attributes of the software
• The value of the attributes depends on the user segment
• Consequently, the market needs to segmented
• The more you can break your SaaS into its component
parts, the more closely you can price to match the value
ascribed to the SaaS by your different buyers
• The structure of the Cloud permits this granularity
19
Contact Us
ZOLTAN LORANTFFY
Global Director, Business Development & Corporate Training
Phone 647-349-2060
Email [email protected]
Strategic Pricing Management Group:
Pittsburgh / Chicago / Toronto / Mexico City
Rio De Janeiro / Paris / London / Hamburg / Budapest
Jakarta / Singapore / Moscow / Victoria
www.spmgpricing.com