IP Applications Billing and Payments blog

Subscription services pricing strategies is a topic I have been asked to write about for an e-magazine article, but before I complete the article I would like to gather some opinion from business executives like you on how your pricing strategies are supporting your customer adoption and revenue.

Personally I like to think about the classic mobile phone plan as my idea of the standard to which we might all compare ourselves to and here's why.

A mobile phone plan, although rather complex in its execution, is actually pretty easy to understand and it accomplishes two major goals I think are absolutely key:

Number 1: Mobile phone plans virtually eliminate all barriers to adoption, by providing a pricing plan for every size of potential user.

• For the very smallest customer there is the prepaid card plan. You put as little or as much as you want on a card, use your phone and when you have used up what you paid for you can choose to add more funds to the card or not.
• With creative bundling and the use of a la carte menus there is a plan that will fit in to every users need and budget.
• As a result mobile phone adoption is amazingly high with some countries having adoption rates higher than 1 phone plan per capita.

Number 2: Mobile phone plans capture every penny of revenue by employing complex yet easy to understand and fair pricing strategies.

• You can choose from any number of bundles designed to target different user requirements and size of need. In addition you can select service upgrades from an a la carte menu, to get exactly what you want instead of being forced to pay for services you don't want or need.
• Most of the services come with a set amount of included usage (phone minutes, data plan, # of txt msg's), however you are never limited to how much you can use (exception being prepaid). You simply use what you want and get billed for the overage, maximizing revenue from customers who opt for lower cost plans as an entry point (remember with a higher entry point you might never have gained that customer in the first place).
• Mobile phone companies offer incentives (or is it higher prices) depending on the time of day or day of week you use the services. You pay a monthly fee for free evenings and weekends. This seems like a great deal to you but at the same time it is enabling the mobile service provider to shape usage patterns in order to spread the load out over their systems thereby saving them on infrastructure costs while still charging you for time that would otherwise have much less usage.

Subscription services pricing plans especially in SaaS vary significantly from company to company. My pet peeve is with the companies that have pricing entry points that assume consumption that is 10x greater than I can use. Why not give me a plan that suits my consumption of the services, capture my business and let me grow with you.

I would really like to hear your thoughts and opinions on this subject, so as an added incentive, I will select 5 responses at random and send those 5 a $20 U.S. Starbucks card.

To respond please follow this link to leave your comment on my blog (preferable), or e-mail me directly at klennox@ipapplications.com. Because of my submission deadline, I will select the 5 responses from those received by midnight Wednesday February 4th 2009.

I look forward to hearing from you.

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The overwhelming predictions among SaaS writers is that companies replacing outdated software or implementing new software capability will seriously consider SaaS alternatives. One big reason in 2009 will be to avoid large capital outlay.
 
According to a 2008 survey released by Softletter, 55% of SaaS companies sell their licenses as yearly or multi-year paid in advance subscriptions.  From a cash flow perspective that's great, but many of the prospects you are likely to work with in 2009 will be directed to conserve cash. As a result charging annually in advance may not be a good customer acquisition strategy.
 
Consider your prospects decision criteria in an uncertain cash is king environment. Their thought process is probably something like this:

• Do we need this or can we do without it? See our blog entitled The Economic Downturn and SAAS Companies.
• If we need it.
• What companies can provide the solution we need?
• What will it cost?
• What am I committing to?
• What if I need more or less of this service throughout the term?
• What are the payment terms?
• Am I comfortable with how and what I am being charged?

If all else is reasonably equal (product functionality, vendor viability, total cost, contract terms etc.) your prospect will surely prefer a monthly or quarterly payment option or some form of value / usage based pricing.
 
In SaaS, customer retention, renewal and growth are what drives continued revenue and profit. Your products and value based pricing is what attracts them and helps retain them. If you are one of the 55% asking for annual payments up front you may want to reconsider or at least keep a close eye on your prospects buying (or lack of buying) habits in 2009. If you are one of the 45% offering subscription flexibility with pay for use or monthly or quarterly payment structures, 2009 is the time to herald that advantage just as loudly as you can.
 
2009 could prove to be a pivotal year for those SaaS companies that are able to match the purchasing and payment criteria of their prospective customers.

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In the past month, I attended 3 SaaS industry events (Softletter's SaaS University, Salesforce.com's Dreamforce, and SIIA's On-Demand conference) to keep up with what is happening in SaaS and Cloud Computing, and to investigate new partner channels for IP Applications on-demand subscription billing and payments platform.

A key message at all three events was how channel partners and VAR's played a key role in almost every SaaS and Cloud infrastructure vendors' strategy. This was especially gratifying to hear because a couple of months ago I wrote a blog article  challenging the wisdom of a significant analyst group that had suggested SaaS companies would not go to market with partners.

When researching to support my argument I came across Intacct, a SaaS company with what appeared to be a mature partner strategy. So at the SIIA On-Demand conference I was not surprised to see Daniel Druker, Intacct's SVP of Marketing and Business Development lead a panel of SaaS executives in a discussion on the importance of channels and VAR's to all of their businesses.

The point is that the SaaS industry from a partnering perspective is no different than the traditional on-premise software business. Software companies, whether on premise or SaaS, still need to develop new markets, deliver vertical expertise and service their customers and channels.VAR's will play a big part.

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I recently read an article by a keen observer of the software industry advising SaaS vendors to sell direct and avoid traditional VAR channels and partners.  His premise was that building channels is difficult and that SaaS limits the value proposition for the SI and ISV community.

Given our own experience with SaaS channels, I did a little research on SaaS providers and found lots of evidence that channels and partners are alive and well in the SaaS world. There are many examples, but Intacct, (www.Intacct.com) in particular struck me as having a strong partner program as explained in a series of announcements on their website. I also attended an OpSource/Softletter webinar that provided a sneak preview of their 2008 SaaS Survey (download at www.saasuniversity.com under their resources tab). The survey indicates that 53% of the SaaS companies responding either use VAR's today (35%) or plan to use them (18%).

I've talked to a couple of software vendors that have the view that SaaS provides a limited value proposition to VAR's.  One company has consciously avoided the SaaS model altogether for fear of alienating their current plentiful VAR relationships.  Only time will tell if they're right, but the downside to being wrong is nasty.

Looking from a VAR point of view, VAR's understand that customers want choices, and in fact part of their role is providing just that. As more enterprises choose on-demand over on-premise solutions, incumbent VAR's will have to respond or lose their position.  While large implementation-training-maintenance contracts are attractive, VAR's will grow to appreciate the value of a recurring revenue stream of their own.

The 2008 SaaS Survey also indicates that VAR's can expect to earn around 20% of the ongoing services revenue, a handsome reward for their efforts. So, it's better to arm a VAR with your on-demand product then have them go out and find competitive products to fill that need.  After all, while the SaaS paradigm emphasizes ease of use, risk-averse enterprise customers still demand on-site training, integration with other systems and other services provided by VAR's. A VAR's professional services and domain knowledge extend a SaaS providers reach and credibility with enterprise buyers; it's a win-win relationship.

So I believe that most successful SaaS businesses will need and want partners. It's only a matter of time, so plan for them from the start.

Even if you don't agree now, you can increase your options and lower your risk if the systems you use to manage your SaaS business give you the flexibility to include channels and partners in your sales eco-system if you make that decision down the road.

There are a myriad of things to plan for to ensure that the systems you select to manage your SaaS business elevate your ability to sell instead of weighing you down with restrictions.

If you want help thinking this through I invite you to download our complimentary capabilities matrix. There you will find a thought inspiring list of important features regarding channels and partners and everything else you are likely to need as you grow your SaaS business.

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Should I start with the personal stuff?  Sure why not!  We're all humans here!  My name is Kevin Lennox, I am 48 years old as of this post. I am happily married for 28 years, 3 kids, (all grown up), 1 grandson. In my spare time (and I do enjoy my spare time) I like to see friends, I Iike cars (fast cars mainly), I love to play soccer which I do all year round (when I am not down and out with an injury as in right now).  Oh yes, I like to head up to my log cabin on a lake in the interior of our beautiful province (British Columbia) where I fish, boat, relax, chop wood or do whatever projects my wife or I conjure up which are plenty.

I've been the Director of Sales for IP Applications for about a year and I love my job. That's because we're taking a very proven piece of technology that's been in use for ten years into a new market, specifically the SaaS and Cloud computing markets. It's exciting because it's about selling something that works extremely well, does pretty much everything an on-demand billing and payment system should do, and comes complete with an impressive customer list (what more could a guy in sales ask for... oh yes more customers of course). So with all the development heavy lifting behinds us,  it's more about all the things we need to do to introduce ourselves to a new market (yes like blogging about it) which is where I get to play.

Before IP Applications, I spent 26 years or so growing up in the technology business. I started out with a solid grounding on the technology side doing onsite repair work in the early 80's for Dictaphone and Texas Instruments. Then I moved on to a large independent national tech support firm where I traded in my hands-on technical skills for new skills in service management, then business management and eventually sales management. That track lead me to senior roles in national sales management and product development with MCI, then WorldCom and then EDS. A call from a recruiter led me to a startup during the dot-com bubble first as VP of Services and ultimately VP Sales.  We grew the business to 22 Million in annual revenue very quickly but we ran into trouble when the bubble burst. From there short stints in high end surveillance systems and technology project management culminated in my move to IP Applications.

The technology industry has been my turf for a long time now.  Like the rest of the IP Applications team, I've got lots of experience bringing a wide range of technologies to market.  This one's going to be fun!

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