Acceleral

Unless you've been hiding under a rock, if you sell software you will have heard of Software-as-a-Service (written SaaS and typically pronounced as 'sass'). Indeed, it's most likely that your customers have been asking whether you offer it or not, and if your traditional pricing model is license fee plus maintenance plus implementation, then you've probably had some robust arguments with the CFO about pricing. Which is to be expected, because SaaS changes the rules and that's a hard lesson to learn when you have an incumbent revenue stream and associated business model.

So is there a way to keep both the CFO and your customers happy?

Undoubtedly, but only if you start with a clean slate!

That, in a nutshell, is it.

[Right, that's a short article, I can pack up my keyboard and go home now...]

As if.

Nothing ignites passion like a pricing conversation, and some of the most interesting ones pit the traditional revenue stream - the one that built the company - against an upstart business model like SaaS. It really is a clash of the old and the new, and in many cases properly implementing SaaS represents a leap of faith that the Senior Executive quite legitimately cannot make.

So let's think through what SaaS actually means in practical terms and then we can compare to the traditional sales method and try for some sort of reconciliation.

First up, SaaS is delivered over the Internet, which means you need to host your application somewhere and take care of all the backup, maintenance, security, patches, bandwidth, storage etc that underpin the server infrastructure. Hmmm, what's all that going to cost?

And because it's a "service", customers resist being locked into multi-year contracts with SaaS. So you can't even guarantee your revenue over the usual depreciation period for all that expensive server hardware. (Though it is worth keeping in mind that unless your SaaS offering is a trivial application, satisfied customers are not likely to invest in the training and business disruption required to jump ship to a competitor, so churn is probably not going to be much higher than usual.)

Another consideration is that SaaS assumes you can scale your user base without a linear scaling of your infrastructure cost. So the more customers you can load up on the same infrastructure, the lower your per-unit cost is and the better your profit margin.

BUT...your application has to work in this one-to-many infrastructure model or the management overheads will come back to bite you big time.

Along with the expectation of short term contracts, SaaS is typically billed in shorter, recurring periods than your traditional software sale. In many cases, the billing is charged to a credit card on a monthly basis. Which means that as you scale, you need an automated billing system because manually charging credit cards is a way to lose money.

Finally, physically adding new customers to the service should be as automated as possible, because having staff in the loop does not scale and is another great way to lose money.

As a practical comparison, let us say that your typical sale is along the lines of:

License Fee =  $100,000
Annual Maintenance = $20,000
Implementation = $100,000

That's $220K revenue in the first 12 months (and usually a lot quicker than that) plus $20K annually for the duration of their love affair with your software. Plus any customisations, upgrades and add-ons along the way.

So, what is the appropriate SaaS price equivalent?

In most cases, the first offering from the CFO will take your $220K typical revenue, divide it by 36, add a $25K Setup Fee and let you "sell" your new SaaS product line for $31,500 in the first month and $6,500 per month thereafter with a committed term of 36-months, plus any extra professional services for implementation.

And you'll hit the market with this and get bounced on the first prospect because they can buy a competitive offering without the committed term of 36-months. At which point you'll have a barny with the CFO, who'll accuse you of being a poor sales person and you'll accuse the CFO of being a bean counter and after everyone simmers down the concession might be to reduce the committed term to 18 months, but increase the Setup Fee to $35,000. Which you might sell, if the prospect likes your product...or you might not.

Now, in point of fact, a committed term of 18 months for a complicated software product is actually not that hard to sell because having made a decision on your features and functionality and industry expertise and cultural fit, the customer CIO is not going to rip everything out in 18 months and start again. They know that and you know that.

But really, all you have priced up is a leasing matrix that you are calling SaaS. And it's a leasing matrix where you are covering the cost - and risk - of finance.

So how can you really price up a competitive SaaS offering?

Be prepared to invest. SaaS ERP industry leader NetSuite Inc took years before it was generating an operating profit. Now you are not likely to have such deep pockets, and if you plan well you won't need them, but you are not going to deliver SaaS on a shoestring...unless your product has shoestring like features, in which case it's going to be ripped off in a heartbeat (or more likely, you are already gehind your competitors)!

Minimise your feature set. It is typical of product experts to need just one more thing in the product before it's ready for market. Resist feature creep. Start with the absolute minimum set of features you'll get away with and build out in the future. In fact, consider starting out with less than what you think is needed and see what the response is.

Maximise Automation. Think this through carefully because every staff member involved in the process is an overhead that is likely to scale with the number of customers. If you can work out how to be very successful without going broke paying salaries then you are ahead in the SaaS game.

Trade Price for Volume. The objective of SaaS is to sell more with less overheads. That might be more into your current geographic region; or it might be into new geographic regions; or it might be into new market segments. Wherever your growth comes from, your aim is to make your service ubiquitous and pervasive. So consider aggressive pricing that positions your offering as the compelling one to try.

Eat Your Young. This wonderfully colourful phrase basically means do anything to ensure your SaaS survives. And in particular, if you are converting an existing product to SaaS, consider releasing a radically different offering to what you've been selling before. If you don't it is highly likely that your new SaaS offspring will be starved of oxygen and fail.

Figure out the Comms Plan. If you were a Rep and had the option of commission on $220K now, or a slice of a much, much smaller monthly amount over a couple of years, what would you sell? Remember, your sales people will follow the money, so make sure you've covered what's in it for them before you roll out this fantastic new offering.

Be Pessimistic. If your Product Manager/Sales Person/Marketing Director/Janitor has a history of correctly estimating customer uptake, revenue mix and profitability give them a pay rise and lock them in with share options because they are gold. What's more typical are optimistic forecasts that wildly miss the mark on the revenue side and ignore costs on the expense line. So assume you're going to make less and spend more with your SaaS product and plan accordingly.

Whatever you do, don't make the mistake of thinking that SaaS is just another way of selling your traditional wares. For software vendors, SaaS is a game changing play, and the ones that do it well will profit nicely. And of course, the ones who do it badly...won't.