Pricing for Services (SaaS)

Transcription

1 Pricing for Services (SaaS) Presented By: Alain Meloche, MBA, B.Sc. Managing Partner, (SPMG) Strategic Pricing Management Group "Price is the most important statement you make about your product November 29th Dec 2011 Strategic Pricing Management Group, All rights reserved worldwide.

2 Section 1 Review of Four Methods of Pricing 2

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 3. Value - Based Pricing 4. Performance - Based Pricing 3

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. Price = ( 1 + target margin ) x ( product cost ) 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 4

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). Price = { 1 + ( target premium or discount ) } x ( competition s price) 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. 5

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. Incremental Price = some fraction of ( savings vs. best alternative ) 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 6

7 $ Millions Performance-Based Pricing 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 Advanced Solution Total CURRENT customer cost 8.00 Total product cost New Product Cost Total cost if all savings accrue to customer 7.25 Distribution cost 5.6% Product savings Customer efficiency savings Guaranteed savings Other nonguarante ed savings to customer Cost to customers after guaranteed share of savings Supplier share of savings Total NEW Cost to customer after its share of savings 7

8 Section 2 Basic Principle for Services Pricing 8

9 Connection to Value Low High Services Price Metrics. Two key Drivers 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? LOW Risk to Supplier HIGH 9

10 Connection to Customer Value Services Pricing Structures: For the 2 Drivers Risk to Supplier Low High Low High Output-based Gain/risk share Hybrid -fixed + variable Fixed-price Fixed-price Time and materials Hybrid -fixed + variable Fixed -at higher margin to capture risk premium Time and materials Fixed -at higher margin to capture risk premium 10

11 Two key questions: 1. How much? 2. What structure? 11

12 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

13 How Much? Incrementa l revenues Incremental Lower TOC Increased number of customers Increased sales/ customer Ease of transactions Broader range of product offerings etc Reduced development and test of systems Lower hardware replacement costs Faster problem resolution Lower software reimplementation costs Price Bandwidth: How much of this will you invest in order to: Enter a market Compete Meet corporate objectives Current Benefits Level 13

14 How Much? Establish Objectives Translate into Strategy Convert into Plans Monitor Adjust Key Activities Collect data on performance Incremental Value Added Reduces work needed to combine data on performance with metrics Estimated $ Value Revenue Cost Large Small Large Small Person-days: All-in cost/day - - $375 $375 Incremental Benefit: - - $3.75 K $3.75K Review performance relative to metrics defined in Planning Trend analysis Analyze cause and effect Reduces time required to demonstrate and build buy-in to cause and effect analyses Minimizes response time thereby minimizing lost revenues Person-days: 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 $12.5 K 14 14

15 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

16 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 3 Tier 2 Tier 1 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 Risk to Supplier Connection to Customer Value SaaS Pricing Structures: For the 2 Drivers Low High Low High Tiered subscription Apps-based Subscription Pay-as-you-go Apps-based Tiered Subscription-at higher margin to capture risk premium Pay-as-you-go Tiered Subscription -at higher margin to capture risk premium 17

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 18

19 Contact Us ZOLTAN LORANTFFY Global Director, Business Development & Corporate Training Phone Strategic Pricing Management Group: Pittsburgh / Chicago / Toronto / Mexico City Rio De Janeiro / Paris / London / Hamburg / Budapest Jakarta / Singapore / Moscow / Victoria 19